South Korea's dominant cell-phone service provider, Motley Fool Global Gains selection SK Telecom (NYSE: SKM), isn't letting up in its pursuit of growth in a highly competitive market. As we outlined in our earnings forecast, SK Telecom has done a good job adding subscribers in a brutally competitive market. But those additions come at a cost.
Quarterly revenues rose to $3.1 billion, 8% higher than last year. Net income rose by the same percentage, to $441 million. Marketing expenses, meanwhile, climbed 19.9% sequentially, as the company went up against a stepped-up marketing campaign from No. 2 provider KT Freetel, a subsidiary of KT (NYSE: KTC). With this increase in expenses, marketing costs consumed 24.7% of revenue in the quarter. Overall, operating expenses increased in line with sales, up 8% year over year.
The company plans to continue its spending binge to maintain its market share and attract subscribers to a new, third-generation network based on a technology called wideband code division multiple access, or WCDMA. The marketing expenses are expected to consume 24% of revenue for 2007, as the operator hopes to achieve 1.5 million subscribers on its new network.
SK Telecom is also investing heavily in opportunities outside its home market, including investments in China, Vietnam, and the United States. While the company still denies an interest in taking control of Sprint Nextel (NYSE: S), it will pump another $100 million into its virtual-operator venture, Helio, that it shares with EarthLink (Nasdaq: ELNK). Convertible bonds the company bought from China Unicom (NYSE: CHU) last year can now be converted into shares, but SK Telecom has not elected to do so yet.
Considerable risk lies in the international ventures, particularly with Helio, which could suffer the same fate as ESPN Mobile and Amp'd, the latter of which will go dark when Verizon Wireless -- a joint venture between Verizon Communications (NYSE: VZ) and Vodafone (NYSE: VOD) -- pulls the plug tomorrow, since the company can't pay its bills. EarthLink also reported that it's concerned with mounting losses and hinted at reductions in spending.
Heavy capital investments in its networks are constraining income, so SK Telecom's core business in Korea will likely show meager growth in the near term. Investors looking for growth in SK Telecom need two things -- a dose of patience and confidence that at least one of its ventures will pay off.
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Fool contributor Dave Mock has four kids younger than 8, needs lots of patience, and hopes that at least one of them turns out normal. He owns no shares of companies mentioned here. Dave is the author of
The Qualcomm Equation. Vodafone is an Inside Value recommendation. The Fool's disclosure policy is paid up in full and therefore will never go dark.
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