The Three Major Telecom Companies' Q2 'Recession-Type Surplus'... Darker Outlook for the Second Half

Expected Q2 Sales and Operating Profit
Impact of Reduced Marketing and Facility Investment
Projected 2-12% Increase Compared to Last Year
51.2 Billion KRW Fine for Violation of Mobile Device Distribution Act
Reflected in Q3 Performance
Paid Broadcasting M&A Synergies Also Accelerate

[Asia Economy Reporter Koo Chae-eun] The three major telecom companies are expected to post a 'recession-type profit' in the second quarter, which is not a cause for celebration. Compared to the massive 5G marketing expenses in the second quarter (April to June) of last year, the first year of 5G commercialization, offline marketing costs and facility investments have significantly decreased this year due to the COVID-19 pandemic. The 5G facility investment, which was a major burden on performance, has also come to a complete halt due to COVID-19, leading to a recession-type profit driven by cost reduction rather than revenue growth.

Second Quarter Recession-Type Profit

According to FnGuide on the 24th, the combined expected sales of SK Telecom, KT, and LG Uplus for the second quarter are estimated at 14.0057 trillion KRW, an increase of around 2% compared to the same period last year. The total expected operating profit for the three telecom companies is projected to be 839.5 billion KRW, a 12% increase. SK Telecom's expected sales for the second quarter are 4.5883 trillion KRW, up 3.4% from last year, with an expected operating profit of 293.6 billion KRW, a 2.05% increase year-on-year. KT's expected sales for the second quarter are 6.0533 trillion KRW, a 0.7% decrease from last year, but operating profit is estimated at 336 billion KRW, a 16.5% increase over the same period. LG Uplus's expected sales for the second quarter are 3.3641 trillion KRW, up 5.1% from last year, with an expected operating profit of 209.9 billion KRW, a 41.25% growth.

Overall, operating profits increased year-on-year due to reduced marketing expenses at distribution sites and lower facility investment costs caused by COVID-19. SK Telecom's narrower operating profit growth among the three companies is attributed to its higher operating profit of around 320 billion KRW last year. KT heavily invested in marketing costs during the early phase of 5G service commercialization last year to gain an initial advantage. This base effect led to a relative increase in operating profit in the second quarter this year. LG Uplus is expected to achieve an 'earnings surprise' with over 40% operating profit growth in the second quarter, thanks to steady growth across wired, wireless, and media sectors in addition to last year's 5G marketing effects. 5G revenue continues to increase, and subscriber churn in paid broadcasting was defended through Netflix.

The Second Half Is More Problematic

The problem lies in the second half of the year. The impact of COVID-19 continues, and the growth rate of 5G subscribers is slow. According to the Ministry of Science and ICT, as of the end of May, there were 6.87 million 5G subscribers in South Korea. Compared to LTE service, which was commercialized in 2011 and gathered 8.662691 million subscribers in the same period, surpassing 7 million within a year, the 5G growth rate is slower. Additionally, the three telecom companies must reflect a 51.2 billion KRW fine imposed by the Korea Communications Commission earlier this month for violating the Act on the Improvement of the Distribution Structure of Mobile Communication Terminals (the Device Distribution Act) as 'non-operating expenses' in the third quarter. SK Telecom will reflect 22.3 billion KRW, KT 15.4 billion KRW, and LG Uplus 13.5 billion KRW in their third-quarter results. The 5G facility investment issue is also expected to continue to burden performance.

However, there are positive factors such as increased online activity and OTT demand due to COVID-19, growth in IPTV bundled subscribers, revenue from COVID-19 notification messages, and increased traffic demand. M&A activities in paid broadcasting, such as Hyundai HCN, are underway, and synergies from completed mergers like 'T-Broad + SK Broadband' and 'HelloVision + LG Uplus' are expected to fully materialize in the second half. Choi Kwan-soon, a researcher at SK Securities, noted, "The favorable environment being created in the paid broadcasting market is also worth paying attention to."

Creating new revenue models is also crucial. Risks such as 'net neutrality regulations' need to be reduced, and based on infrastructure evolution like Standalone (SA) standards, revenue models should be found in B2B services. Professor Shin Min-soo of Hanyang University said, "For 5G to translate into telecom companies' profits, uncertainties in regulatory issues such as network slicing must be reduced so that aggressive entry into the B2B market is possible." Kim Hong-sik, head of Hana Financial Investment, said, "Although telecom companies recorded decent results in the second quarter, considering the 5G effect, they did not meet market expectations. As 5G services evolve in the second half, a rebound is worth aiming for."

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