The leading provider of wireless communication services in South Korea, SK Telecom Corp. (SKM - Analyst Report) has reported third quarter 2012 results. Quarterly consolidated net income plunged 54% year over year to KRW 175.6 billion (approximately $158 million).
Increased investments in advanced wireless networks, marketing expenses and tariff cuts were largely responsible for the decline in the quarter.
Driven by higher smartphone penetration and rising LTE subscriber base, consolidated operating revenue inched up 2% to KRW 4,126 billion ($3.7 billion).
Mobile service revenue dropped 1% year over year to KRW 2,689 billion (approximately $2.4 billion). Interconnection revenue declined 16% to KRW 252 billion ($226 million) while new business and other revenue was down 17.4% at KRW 157 billion ($141 million) from the year-ago quarter.
Operating Income & Expenses
Operating income fell 46% to KRW 301 billion (approximately $271 million) in the third quarter, resulting in operating margin of 7.3%, down 660 basis points. The decline was mainly due to higher marketing expenses and investments in LTE networks.
Operating expenses rose 9.8% year over year to KRW 3,825 billion (approximately $3.4 billion). Marketing expenses rose 32.5% year over year to KRW 1,035 billion ($931 million). Marketing to sales ratio increased to 33.4% from 24.4% in the year-ago quarter.
Subscriber, ARPU & Churn
During the third quarter, subscribers increased 1.3% year over year to 26.78 million with a net addition of 357 customers.
Average revenue per user (ARPU) fell 0.6% year over year to KRW 40,265 (approximately $36.24) owing to cuts in monthly mobile service rates while the churn rates increased to 3.0% from 2.9% in the year-ago quarter.
SK Telecom exited the third quarter with KRW 1,688 billion (approximately $1.5 billion) of cash and marketable securities on its balance sheet compared with KRW 2,758 billion (approximately $2.5 million) in the year-ago quarter. Debt-to-equity ratio was 60.7% compared with 46.7% a year ago. Capital expenditure increased to KRW 788 billion (approximately $709 million) from KRW 552 billion (approximately $497 million) in the prior-year quarter.
The company targets to achieve 7 million subscribers under its LTE network coverage. In addition, the company expects to achieve 80% or more growth in its B2B business, which is one of its primary growth drivers.
SK Telecom continues to lead the domestic wireless market through successful smartphone offerings as well as the expansion of its 4G LTE service. Moreover, 3G network expansion, Apple Inc.’s (AAPL) iPhone offerings, cloud computing and mobile software businesses should boost the company’s long-term prospects.
However, increased promotional expenses and heavy handset subsidies may hurt the company’s earnings in the near future. SK Telecom is continuously investing to improve its network visibility that would also restrict its future earnings. Further, we remain cautious on tariff reductions, intense competition from its biggest rival KT Corporation (KT - Snapshot Report) and heavy regulation by the Korean ministry.
We are currently maintaining our long-term Neutral recommendation on SK Telecom. For the short term (1–3 months), the stock retains a Zacks #1 Rank (Strong Buy).