July 25 (Bloomberg) -- SK Telecom Co., South Korea's largest mobile phone operator, reported its first profit increase in five quarters, beating expectations as its marketing costs fell.

Second-quarter net income rose 56 percent to 467 billion won ($459 million) from 299 billion won a year ago, the Seoul-based company said in a regulatory filing. Operating profit climbed 54 percent and sales gained 6 percent. Eight analysts surveyed by Bloomberg News had expected a median of 435 billion won in profit.

SK Telecom and other South Korean operators are scaling back promotional expenses to generate profits because subscriber growth is slowing in a country where three out of four people own a mobile phone. Cost cuts in the industry may lure investors such as Chung Doo Sun to buy telecommunications shares.

``The earnings help improve the outlook on the telecom sector,'' said Chung, who manages the equivalent of $295 million at Wise Asset Management Co. in Seoul. ``Earnings looked good mainly because of marketing costs.''

Chung said he may increase his holdings in telecom stocks if earnings growth continues in the third quarter.

Operating profit rose to 713 billion won, the highest since the third quarter of 2003. Sales increased 6 percent from a year ago to 2.5 trillion won, driven by a 43 percent rise in wireless Internet sales, according to the company.

SK Telecom was projected to post second-quarter operating profit of 654 billion won, and sales of 2.5 trillion won, according to the median estimate of the analysts surveyed by Bloomberg.

Shares of SK Telecom rose as much as 1.1 percent to 189,000 won as of 9:02 a.m. on the Korea stock exchange. The Kospi index gained 0.2 percent to 1076.68.

Market Share

Marketing expenses declined 23 percent to 442 billion won in the three months ended June 30, in line with the 440 billion won projected by analysts surveyed by Bloomberg.

KT Freetel Co., the No. 2 mobile-phone operator, and LG Telecom Ltd., the smallest among South Korea's three mobile phone operators, are projected to report higher profit gains than the industry leader following market share gains.

KT Freetel will probably report on July 29 net income tripled to 131 billion won from 43 billion won a year earlier, operating profit doubled, and revenue climbed 1.2 percent to 1.5 trillion won, according to the Bloomberg survey.

LG Telecom is expected to report on July 27 net income of 35 billion won from a year-earlier loss of 27 billion won, a more- than-tripling in operating profit, and a 6.4 percent increase in sales, according to the Bloomberg survey.

SK Telecom has lost market share to its smaller rivals for a fifth month after rule changes allowed customers to switch services without changing phone numbers.

Overseas Plans

Customers of LG Telecom have been allowed since January to switch services offered by SK Telecom or KT Freetel, marking the third phase of so-called number portability. SK Telecom customers have been allowed to switch services since January last year and KT Freetel subscribers have been allowed to switch since July 2004.

Shares of SK Telecom have fallen 5.1 percent this year, lagging a 20 percent rise in LG Telecom's stock and a 0.4 percent gain for KT Freetel.

To sustain growth, SK Telecom is looking overseas and at acquisitions. The company is in talks with Tata Teleservices Ltd., Bharti Tele-Ventures Ltd. and other Indian telecom companies to tap a market where more than nine out of 10 people don't have a mobile phone. India had the fastest growth in mobile-phone subscribers in Asia-Pacific last year, according to a June report by researcher IDC.

Content

SK Telecom is also buying content providers to broaden its range of mobile-phone services. In May, the company said it would purchase a 60 percent stake in YBMSeoul Records Inc., a local music distributor.

Still, the extent of SK Telecom's market share decline has slowed. The company's market share this year has slipped 0.2 percentage point, less than the 3.2 percentage points lost last year.

Competition from ``number portability is stabilizing and our efforts to maximize the efficiency of our expenses were the biggest reasons for the second-quarter earnings improvement,'' SK Telecom Chief Executive Kim Shin Bae said in a press release.

(SK Telecom will conduct a conference call to discuss its results at 10 a.m., Seoul time. The call can be accessed at http://www.sktelecom.com/korean/company/ir/ir_activities/conferenc e/index.html)

To contact the reporter on this story: Young-Sam Cho in Seoul at ycho2@bloomberg.net

Last Updated: July 24, 2005 20:05 EDT