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Ace South Korean telecom firm SK Telecom Corp. (SKM - Analyst Report) reported third quarter 2013 results. Quarterly consolidated net income shot up to KRW 502.0 billion (approximately $451.8 million) from KRW 176 billion (approximately $158.4 million) in the year-ago quarter aided by a strong contribution from SK Hynix and gains from the sale of LEON Entertainment Inc.

Consolidated operating revenue grew 1.0% to KRW 4,125 billion ($3.7 billion) in the third quarter driven by growth in ARPU and new business that includes B2B services.   

Segment Revenues

Mobile service revenues increased 2.9% year over year to KRW 2,768.0 billion (approximately $2.5 billion). Interconnection revenues declined 8.1% to KRW 231.0 billion (approximately $208.0 million), while new business and other revenues were up 42.8% year over year at KRW 224.0 billion (approximately $201.6 million).

Operating Income & Expenses

Consolidated operating income grew 33.2% to KRW 551.4 billion (approximately $496.3 million) in the third quarter as a result of deeper focus on service-oriented marketing and reduced subsidy-based activities. Operating margin was 13.4%, up 620 basis points.

Operating expenses fell 5.8% year over year to KRW 3,573.2 billion (approximately $3.2 billion). Also, marketing expenses decreased 20.0% year over year to KRW 827.0 billion ($744.3 million) thanks to the company’s focus on promoting services through advertising instead of subsidy-based marketing.
    
Subscriber, ARPU & Churn

During the quarter, subscribers increased 1.6% year over year to 27.2 million with net addition of 71,000 customers.

Average revenue per user (ARPU) went up 6.2% year over year to KRW 42,780 (approximately $38.5) on increased LTE subscribers. The churn rate decreased to 2.25% from 3.0% a year ago as the company is seeking customer retention through its marketing initiatives.

Liquidity

As of Sep 30, 2013, SK Telecom had KRW 1,937.0 billion (approximately $1.7 billion) of cash and marketable securities on its balance sheet compared with KRW 1,688.0 billion (approximately $1.5 billion) in the comparable quarter last year. Debt-to-equity ratio was 49.1% compared with 60.9% in the prior-year quarter. Capital expenditure decreased to KRW 418.0 billion (approximately $376.2 million) from KRW 788.0 billion (approximately $709.2 million) in third quarter 2012.

Our Analysis

Looking ahead at the balance of 2013, SK Telecom’s focus on developing LTE-Advanced technologies as well as deploying 5G Wi-Fi hotspot routers is encouraging. Further, introduction of services, investment in high-speed Wi-Fi and data femtocell, foray into mobile software businesses and various collaborations are expected to boost the company’s long-term results.

SK Telecom currently retains a Zacks Rank #1 (Strong Buy).

Other Stocks

Other stocks worth considering are Orange (ORAN - Analyst Report), Vodafone Group Plc. (VOD - Analyst Report) and Shenandoah Telecommunications Co. (SHEN - Snapshot Report). All these stocks also carry a Zacks Rank #1 (Strong Buy).

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