"Not a Corona Safe Zone" Telecom 3 Companies Face Dark Clouds Over Q1 Earnings

Disappearing 'Admission Boom'... Poor Q1 Operating Profit for 3 Major Telecoms
Offline Stores Virtually 'All Stop' with 8.6% Decrease in Q1 Operating Profit
5G Investment and Distribution Network Support Costs Burden... Difficult Outlook for Second Half

[Asia Economy Reporter Koo Chae-eun] The operating profits of the three major telecom companies in the first quarter are expected to decline by up to the 10% range due to the impact of the spread of the novel coronavirus infection (COVID-19). The disappearance of the 'enrollment boom' led to a decrease in new device sales such as the Galaxy S20, and roaming demand was hit directly. With face-to-face sales virtually 'all stopped' due to COVID-19, and demand for new devices, device upgrades, and number portability also declining, operating profits are expected to decrease simultaneously.

Telecom Companies' Operating Profit Decreases by 8.6%

On the 14th, Asia Economy analyzed the earnings forecasts (estimates from three or more securities firms) of the three telecom companies commissioned from FnGuide. The combined expected sales of SK Telecom, KT, and LG Uplus for the first quarter are 13.8506 trillion KRW, a 5% increase compared to the same period last year, while the combined operating profit is forecasted at 839.6 billion KRW, a decrease of 8.6%. An industry insider noted, "Expenses related to COVID-19 support funds such as those for retail agencies or small business owners are all deducted from operating profits, so actual results could be worse than consensus." Poor sales of the Galaxy S20, the decision to invest 4 trillion KRW in 5G networks in the first half of the year, and the expected imposition of fines related to violations of the 5G Device Distribution Improvement Act by the Korea Communications Commission in the second quarter are also clouding the outlook for operating profits in the first half.

Looking at each company, SK Telecom's first-quarter operating profit is expected to decrease by 6.8% to 300.7 billion KRW. Although SK Telecom's 5G subscribers reached 2.4 million in February, driving an increase in average revenue per user (ARPU), continuous 5G investment costs are analyzed to have caused the operating profit decline. SK Telecom launched and expanded its roaming service 'Baro,' but the overseas travel demand slump due to COVID-19 dealt a direct blow to the related business segment.

KT's first-quarter operating profit is estimated at 358.7 billion KRW, a 10.8% decrease from the previous year, marking the largest drop among the three companies. Although 5G subscribers increased to 1.62 million in February and the media and content business grew steadily, the subsidiary BC Card and others suffered revenue declines due to COVID-19, and combined with 5G investment costs and poor roaming business revenue, a double-digit decrease in operating profit is expected.

LG Uplus's first-quarter operating profit is estimated at 180.2 billion KRW, down 7.4%. LG Uplus, which does not have 3G, has the highest proportion of 5G customers (1.33 million in February) and showed the largest sales growth among the three companies, but operating profit is expected to decline by 7%. While IPTV subscribers increased due to maintaining a partnership with Netflix, the burden of 5G network investment costs is expected to reduce operating profit.

Is a Performance Rebound Possible in the Second Half?

Experts expect the operating profits of the three telecom companies to turn around only in the second half of the year. The issue remains with facility investments such as 5G in-building investments, and the cost of supporting distribution networks in response to COVID-19 also burdens performance. Early last month, the three telecom companies announced support funds of up to 100 billion KRW for coexistence and cooperation funds to respond to COVID-19. SK Telecom provided a total of 113 billion KRW to nationwide distribution networks and network partners, KT supported monthly rent of 5 billion KRW for about 2,500 nationwide agencies, and LG Uplus urgently supported operating funds of 2.5 billion KRW to about 2,000 nationwide agencies and increased support for small and medium-sized partners to 105 billion KRW.

5G subscribers surpassed 5 million only by the end of February this year, but the growth rate is not fast enough to quickly raise ARPU. While increased online activity and OTT demand due to COVID-19 have led to increases in IPTV bundled subscribers, revenue from COVID-19 notification messages, and traffic demand, these positives are outweighed by the negative factors such as 5G facility investment costs. Kim Hyun-yong, a researcher at eBest Investment & Securities, said, "In addition to the decline in Galaxy S20 sales, the impact of COVID-19 is expected to result in fewer net 5G subscriber additions in February, making it inevitable that the telecom companies' performance improvement will be delayed by at least one quarter or more."

This content was produced with the assistance of AI translation services.