Operating profit of mobile carriers to go down…Further market environment to be ‘cliff’
Jong Ye Lin | yeslin@ | 2018-05-08 10:44:26

Operating profit of three mobile carriers decreased in the first quarter. The decrease is due to the adoption of the new accounting standard `K-IFRS 1115` from this year. It also cannot ignore the impact of wireless earnings deterioration due to the selective discount rate increase.

The problem is that this is the beginning of the three mobile carriers. The number of subscribers to select contracts and the reduction of elderly service charges are spreading. There are many factors that will put burden on the earnings throughout the year until the 5th generation mobile communication (5G) investment and the universal charge system.

All companies, SK Telecom, KT and LG U plus revealed sales and operating profit of KRW 4.18 trillion, KRW 325.5 billion, KRW 5.71 trillion, KRW 397.1 billion, KRW 2.99 trillion and KRW 187.7 billion, respectively, in the first quarter. Revenue is comparable to the same period last year. But, operating profit fell by 20.7%, 4.8% and 7.5%, respectively.

The sharp decrease in operating profit was determined through applying the new accounting standard. The subsidized subsidy and discount rate will be considered as one and will be reflected in the consolidated results in a way that will be distributed according to the ratio. The marketing costs that have been processed once are also distributed according to the subscription period of the user in the new accounting standard. The industry is expected to have an impact on operating profit for the next two to three years. In the case of SK Telecom, which suffered the biggest drop in operating profit, operating profit fell by KRW 85 billion on new accounting standards.

Meanwhile, the worse for the three leading companies is the deterioration in earnings. The Korean government has also been influenced by regulations on cuts in mobile carriers’ costs. The company increased its discount rate from 20% to 25%, and the number of subscribers increased at the discount rate this year in September last year. Especially, a 25% reduction in the discount rate to subscribers with contract terms of less than six months had a big impact. In case of SK Telecom, which has the largest number of subscribers at present, the proportion of subscribers with a 25% option contracted to the half of the total, which was the biggest burden. Also, KT was able to raise the discount rate to 25% in the case of KT was last contracted in March, regardless of the remaining contract period. Therefore, the burden of mobile telecom carriers will be further burdensome as the proportion of 25% selective subscriber additions will continue to increase.

On the other hand, there are more factors that diminish the earnings estimates of carriers. Mobile carriers are expecting to reduce their tax cuts from KRW 400 billion to KRW 900 billion due to the government`s reduction in tariffs on mobile carriers. In the case of the universal fare system, which the government is pursuing and is pursuing, goes through the National Assembly in June, the red light is expected to be bigger on the carrier`s earnings. According to the National Planning and Advisory Committee, mobile carriers’ costs will be reduced from KRW 1 trillion a year to a maximum of KRW 2.2 trillion once the universal charge system is introduced. An SK Telecom representative mentioned, "If the universal service plan is implemented, 60% of the three operating profits will disappear."

Meanwhile, mobile carriers are offering self-help measures to overcome these pressures, and the cost is too high. They reorganized the no-show system and suspended the refund of choice contract discounts in this year. Some mobile carriers reorganized their roaming plans and eliminated membership limits. We are also considering launching a lower rate plan.

There is also a burden of 5G investment. The start of the 5G frequency auction in June is about KRW 3.3 trillion, which can be higher based on the auction situation. Big investment is also required to build equipment including 5G base stations. The industry estimates the investment cost of 5G networks is two to three times that of fourth generation mobile communication (LTE), which was between KRW 15 and 17 trillion. KT must pay for the use of essential facilities in case of SK Telecom and LG U plus. It will not be easy this year," a specialist at a mobile carrier company stated. "We believe the mobile carrier investment capacity will be reduced at the time of securing 5G competitiveness."

By Jong Ye Lin yeslin@

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