SK Telecom's Profit Climbs - Analyst Blog

SK Telecom Corp. Ltd. (SKM), a leading South Korean telecom operator, declared fourth quarter and fiscal 2010 results. Net income shot up 48% year over year to KRW 361.4 billion ($318 million) in the fourth quarter attributable to a healthy growth in smartphone subscribers. Fiscal 2010 net income grew 9.5% year over year to KRW 1.41 trillion ($1.23 billion).

Revenues

Revenues spiked 2.3% year over year to KRW 3.172 trillion ($2.79 billion) in the reported quarter. Total cellular service revenue grew 2% year over year to KRW 2.89 trillion ($2.54 billion) and interconnection revenue slid 16% to KRW 283 billion ($249 million).

In 2010, revenues upped 3% to KRW 12.46 trillion ($10.84 billion) boosted by solid smartphone growth and wireless Internet revenue in spite of the introduction of pay-per-second billing. Total cellular service revenue grew 3% year over year to KRW 11.23 trillion ($9.77 billion) and interconnection revenue dropped 0.5% to KRW 1.2 trillion ($1.04 billion).

Wireless Internet revenue for the fourth quarter was KRW 863.5 billion ($759 million), up 22.4% year over year. Fiscal 2010 wireless Internet revenue expanded 13.2% to KRW 3.01 trillion ($262 billion) from the prior year on account of the booming smartphone market. Wireless Internet accounted for 30% and 27% of overall cellular revenues in the fourth quarter and full year 2010, respectively.

Operating Income & Expenses

Operating income climbed 2.3% to KRW 453.1 billion ($399 million) from the year-ago quarter, resulting in operating margin of 14.3%, down 200 bps year over year.

In 2010, operating income declined 6.6% year over year to KRW 2.035 trillion ($1.77 billion) due to steep depreciation and higher fees in connection with improved structure of handset installment receivables. Operating margin contracted to 16.3% from 18% in the prior year. Total operating expense increased 5% year over year to KRW 10.42 trillion ($9.06 billion). Marketing to sales ratio was 24.2% in 2010, compared with 24.7% in the prior year.

Subscriber, ARPU & Churn

For the full year, total subscribers grew 5.9% year over year to 25.71 million with a net addition of 1.4 million customers. ARPU (average revenue per user) fell 2.6% year over year to KRW 41,374 ($35.99) and churn rate was 2.7% compared with 2.6% in the prior year.

Liquidity

At the end of the fiscal 2010, SK Telecom had KRW 8.57 trillion ($7.46 billion) of cash and marketable securities on its balance sheet. Debt-to-equity ratio improved to 34.9% from 40.3% in the previous year.

Capital expenditure rose 4% year over year to KRW 1.84 trillion ($1.60 billion) owing to increased investments in 3G and Wi-Fi networks.

Our Analysis

SK Telecom continues to invest in new areas of growth such as VoIP calls (m-VoIP) and wireless Wi-Finetworks, advanced mobile network services, 3G network expansion, introduction of 4G Long Term Evolution (LTE) networks, smartphone service and mobile software business. These are expected to boost long-term growth for the company.

Further, the new regulation imposed by the Korea Communications Commission (KCC) is expected to reduce competition and marketing expenses going forward. We are currently maintaining our long-term Neutral recommendation on SK Telecom.

Despite being the leader in the domestic wireless market, SK Telecom is facing greater challenges in retaining its market position. SK Telecom continues to spend heavily as the carrier is boosting its promotional efforts to contain customer churn amid stiff competition from rival KT Corp. (KT), which is aggressively marketing Apple Inc.'s (AAPL) iPhone since November 2009. Hence, for the short term (1–3 months), we are recommending a 'Sell' rating with the Zacks #4 Rank.

 
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