Ace South Korean wireless communication service provider, SK Telecom Co. Limited (SKM) reported its second-quarter 2014 results. Quarterly consolidated net income improved 6.4% year over year to KRW 497.6 billion (approximately $497.6 million). Revenue growth and reduced marketing expenses were partially offset due to the carrier’s exchangeable bond valuation.
Consolidated operating revenue grew 4.6% to KRW 4,305 billion ($4.3 billion) in the second quarter driven by a growing Long Term Evolution (LTE) subscriber base, new businesses, earnings growth of subsidiary companies and PS&Marketing’s acquisition of retail business.
Segment Revenues
Mobile service revenues increased 0.2% year over year to KRW 2,794 billion (approximately $2.8 billion). Interconnection revenues improved 11.4% to KRW 241 billion ($240.0 million), while new business and other revenues were up 11.9% at KRW 229.0 billion ($229 million).
Operating Income & Expenses
Operating income improved a mere 0.1% year over year to KRW 546.1 billion (approximately $546 million) in the second quarter due to reduction in marketing cost, resulting in an operating margin of 12.7%.
Operating expenses rose 5.3% year over year to KRW 3,759.3 billion (approximately $3.8billion). Marketing expenses decreased 3.3% year over year to KRW 825.0 billion ($825 million) owing to suspension of business. Increase in labor cost was offset by reduction in advertisement cost and leased line expenses.
Subscriber, ARPU & Churn
During second-quarter 2014, subscribers grew 2.8% year over year to 27.9 million with a net addition of 76,000 customers. The number of LTE subscribers reached 15.4 million at the end of the second quarter constituting almost 55% of SK Telecom’s subscriber base.
Average revenue per user (ARPU) improved 5.5% year over year to KRW 44,217 (approximately $44.20) in the second quarter owing to growth of LTE service, while the churn rate decreased to 1.9% from 2.3% a year ago.
Liquidity
SK Telecom exited 2014 with KRW 1,652.9 billion (approximately $1.6 billion) of cash and marketable securities on its balance sheet compared with KRW 1,765.1 billion (approximately $1.6 billion) at the end of 2013. Capital expenditure increased to KRW 517 billion (approximately $517million) from KRW 293 billion (approximately $293 million) in the prior year.
Other Stocks
Among other foreign telecom firms, Telus Corporation (TU) is expected to release its second quarter results on Aug 7, while China Unicom Inc. (CHU) will release the same on Aug 14.
Our Analysis
We believe strong smartphone offering, 3G network and Long Term Evolution (LTE) expansion bode well for the company’s growth. SK Telecom’s focus on developing LTE-Advanced (LTE-A) technologies coupled with the rollout of LTE-A smartphones should further drive subscriber and ARPU growth even in a mature wireless market. However, a mature mobile market, increased competition and regulatory upheavals persist as obstacles in the growth trajectory of the company.
SK Telecom currently carries a Zacks Rank #3 (Hold). Another stock worth considering is Philippine Long Distance Telephone Company (PHI) which has a Zacks Rank #2 ( Buy).
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