LG Uplus Corp. (A032640) Earnings Call Transcript & Summary

[Interpreted] Good morning and good evening. First of all, thank you all for joining this conference call. And now we will begin the conference of fiscal year 2020 second quarter earnings results by LG Uplus. [Operator Instructions] Our call is being webcasted on our homepage so that you can follow this conference simultaneously. Today's conference call will be presented for 1 hour. [Operator Instructions] And now we will begin the conference of the fiscal year 2020 second quarter earnings results by LG Uplus.

[Interpreted] Good morning. I am [indiscernible], Head of IR at LG Uplus. We would like to begin second quarter 2020 earnings release for LG Uplus. For those of you joining us today, please refer to our Q2 earnings presentation. And please also note that we are providing consecutive interpretation. All the projections we are providing today subject to change from both macroeconomic and market situation. The earnings document we've circulated is based on consolidated basis, including LG HelloVision. And as of August 1, P&Ls related to payment gateway business is presented under P&L from discontinued operations. And for your benefit, we've presented the breakdown figures of each business and operating expense without including LG HelloVision. Starting this quarter, we made changes to business classification to better reflect the growth trend and for comparability purposes. Internet telephony previously under consumer Smart Home and B2B and international telephony under B2B is now under telephony business and B2B lease line is now under B2B infrastructure. We will begin with Q2 business and financial highlights and business outlook and end with a Q&A session. Just to note, once again, that all projections are subject to change based on changes in macroeconomic backdrop. I would now like to invite, Hyuk-Ju Lee, CFO and Executive Vice President of LG Uplus, who will run through our overall financial and business results.

[Interpreted] Good morning. This is Hyuk-Ju Lee, the CFO. Thank you to our analysts and investors for joining LG Uplus's Second Quarter 2020 Earnings Release Conference Call. I will begin with the second quarter financial results first. Q2 consolidated service revenue was up 14.2% year-on-year and 1.8% Q-on-Q to KRW 2.619 billion on balanced growth from mobile, Smart Home, consumer business, IDC solutions and B2B infrastructure. Consolidated basis, service revenue, excluding LG HelloVision business, reported 4.5% cumulative half year growth, subduing the impact of COVID-19. Consolidated operating expense for Q2 on a consolidated basis was up 2.3% year-on-year, but this is due to the inclusion of LG HelloVision in the consolidated statements. Taking this impact aside, operating expense was down 6.3% on year and 1.7% on quarter to KRW 2,777.8 billion. Q2 consolidated operating profit reported KRW 239.7 billion, up 59.2% year-on-year and 9.1% on quarter. OP margin against the service revenue was 9.2%, up 2.6 percentage points on year and 0.6 percentage points Q-on-Q. Net profit improved 52.9% year-on-year and 1.2% Q-on-Q, reporting KRW 150.6 billion. Q2 EBITDA was up 27.4% year-on-year and 2% Q-on-Q, reporting KRW 828.6 billion, with half year figure coming in at KRW 1.64 trillion. In Q2, CapEx spend was at KRW 625.3 billion with cumulative spending at KRW 1 trillion and implementation against CapEx guidance was around 40%. As of Q2 end, our total asset is KRW 18,277.4 billion with liability total at KRW 10,808.7 billion, with debt-to-equity ratio and net debt ratio reporting 144.7% and 68.9%, respectively.

[Interpreted] This ends the Q2 financial highlights. We will move on to presentation by each business division. Please refer to the earnings deck for the breakdown.

[Interpreted] First, on the consumer division. I'm [indiscernible] from the Consumer Group. I would like to walk you through business performance from our consumer business. Q2 wireless service revenue was up 4.9% year-on-year to KRW 1,347.5 billion, driven by acquisition of high-quality subscribers, growing 5.5% in the first half, outperforming the 5% annual growth target. Q2 wireless subscriber net addition was up 15.2% year-on-year and 29.4% on quarter, reaching 341,000 subscribers, with the total subscriber base sustaining around 8% growth trends. Q2 5G subscribers were 1,785,000, accounting for 16% of handset subscribers, with total subscribers reporting 15,859,000 as of second quarter end. Smart Home revenue on robust IPTV and broadband Internet subscribers and acquisition of high-value customers, revenue went up 10.5% year-on-year and 1.5% Q-on-Q, reaching KRW 494.6 billion. Despite declines in VOD advertisement revenue, thanks to higher -- acquisition of high-value customers, an increase in the take-up of TV free plans, IPTV revenue was up 12.5% on year, reporting KRW 280.5 billion, sustaining a double-digit trend. Second quarter IPTV net addition reported 130,000 subscribers, which is 42.3% higher on the year. Broadband Internet also posted a growth of 7.8% year-on-year on high-value subscribers, including increased uptake for Giga Internet. In the second half as well, for the B2C business, we plan to offer lively and immersive 5G content, most optimized for the [ untact ] trend. We will be incorporating AR and VR effect to U+ Pro Baseball, Golf and Idol Live in order to deliver lively experience for sports and concerts, and we'll increase AR/VR education content for preschool and elementary students. We plan to broaden co-marketing with game providers for cloud games to start servicing large-scale games and leverage the strategic alliance with AfreecaTV, who has the entire value chain including development and distribution platform. For 5G K content, whose cumulative exports reached $10 million, we plan to beef up K content portfolio, including untact-based concert and entertainment programs featuring popular idols so that it can be an additional revenue source for the company.

[Interpreted] Next is on the B2B infrastructure, and I am [indiscernible], in charge of planning. Q2 B2B infrastructure revenue was up 2.7% on year and 10.1% Q-on-Q, reporting KRW 345 billion. Especially for the second quarter, on the back of the untact trend, driven by network build out, integrated B2B network and higher cloud demand, IDC revenue from large customers and NI revenue both posted a growth. For the 5G-based B2B connected car business, by offering mobility services to Hyundai Motors following April's connected car launch by SsangYong, we were able to build on a solid base. We began Smart Factory commercialization at LG Electronics [ Chengdu ] plant. And for C-ITS and autonomous driving, we were selected to participate in the government-led mobility pilot project last May. We also began the business of LTE-R for 26 stations along the subway line #4. Recent announcement of the New Deal plan of the government is aligned with LG Uplus's future B2B growth areas where through active participation into 5G convergence and AR and VR, we anticipate gaining a solid engine for future growth. In the second half of the year, we will win more Smart Factory and C-ITS projects, and under the digital New Deal initiative of the government, we will grow our new businesses underpinned by our 5G network so as to make a solid basis for revenue growth going forward.

[Interpreted] This has been our business highlight. And now the CFO will present on business outlook for the second half of the year.

[Interpreted] Despite difficulties following the impact of the COVID pandemic, we were able to bring robust revenue growth across the entire business by growing our high-quality subscriber base and improving our profitability. In terms of service offerings, in the second half, we will carry forward with digital channel innovation, where we bolster untact-based sales channel and further upgrade AI, big data, cloud and specialized 5G services, incorporating AR and VR, so that we may cater to the needs of the users in the 5G market and lead at the very forefront of conversions trend, thereby responding to the demand of the industries. In the second half, we will endeavor to continue the growth of our core telecom business, expand high-quality subscriber base in the Smart Home and B2B infrastructure and broaden the base for future growth by winning 5G B2B project so that we may enhance our market value as well as shareholder value. Thank you.

[Interpreted] That ends our earnings presentation. We will be happy to now take your questions.

[Interpreted] The first question will be presented by Hong-sik Kim from Hana Financial Investment.

[Interpreted] I would like to pose 2 questions. Despite such outstanding business performance this quarter, I think your equity price or your share price is not really holding up to that expectation, and I think it's because of the Huawei-related issue. I do understand there are some security-related elements as well as political aspects to it, but market is nevertheless quite concerned about this quite stark conflict that currently exists. So I would like to understand what the management's position is regarding this issue and what types of solutions that you are currently developing to respond to this problem? Second question is that we've seen very good profit numbers come through in the first half of the year. And so the -- on the flip side, there is a concern on where you -- whether you will be able to sustain such high level of profit as we go into Q3 and Q4. There may be a reverse base effect. So do you expect this high growth trend that we've seen in the first half of the year to continue into the second half, thereby achieving a steady quarterly growth as we go forward? And what impact would this have? Or what is your big picture on your dividend payout policy?

[Interpreted] Yes. On Huawei issue, the CFO, myself, I will be responding to that question. With respect to the content of the conference call with the Vice Deputy Secretary, we were aware -- or we have been informed of the, I guess, the information that would be exchanged during the call before the call was made. But we were regrettably quite surprised at the tone and manner the media coverage dealt with this issue. So if the person asking the question really pinpointed or specified LG Uplus, then the person responding to that question would have obviously had to specify that name. But we believe that the Department of State in the United States would have shared the overall strategic approach that they're taking with regards to the clean path. So regarding the adoption of the equipment in question, I felt -- my take was that -- and in listening to the overall conference and the discussions that were taken during that conference, I did not feel that the tone and manner to be all that serious. I would like to echo what you have said. Yes, we are fully prepared and equipped to be able to provide services to our customers and also to deal with the security-related issues. Responding to your second question on the profit growth and whether this trend will continue into Q3 and Q4, my personal approach in managing the business is that basically we would like to ensure structural improvement and also have a solid base of subscribers that would give us a balanced growth in terms of profit growth and growth for future. So looking back at Q1 and Q2, due to the impact of COVID-19, in the market, the overall sales volume had been negatively impacted, which led to a significant improvement in marketing spend, hence leading to a very good performance. Going into Q3 and Q4, with the OEMs shipping out more premium handsets for 5G, we expect market will be more activated. What that means is that basically by acquiring high-quality subscribers, we can expect enhancement in the overall quality. But at the same time, partly, there could be some spending-related burdens. So I have a plan to make sure that we don't overheat the market in this process. And so my take is that I will be -- we will be able to achieve the operating profit level that we've seen in Q1 and Q2, so in the range of KRW 200 billion to KRW 300 billion, that this is a level that is amply manageable and that is the byline based on which we are currently managing the business. So with that backdrop, I would expect that people's expectation on the dividend payment would also rise. If things go as I have projected, then, yes, we will actively review the possibility of uplifting the amount of the dividend payout on an absolute basis.

[Interpreted] The next question will be presented by Jae-min Ahn from NH Investments & Securities.

[Interpreted] My question relates to your B2B business. As you've mentioned during the presentation, B2B is also an element that's included in the government's New Deal plan. What is going to be your focal point in the second half of the year and come next year in terms of the B2B business? And also, could you talk about -- I mean there is a lot of talk about 5G B2B, but what exactly would the impact be on your financial performance? And my last question is, how -- what are the synergies that you are currently looking for in terms of HelloVision and your IPTV business? Because at least from my perspective, I haven't been able to really see that sign of synergy being generated. So how do you envision things are going to go forward?

[Interpreted] I'm the CFO. I will address your question about the synergy with HelloVision. So in terms of the synergy between the 2 businesses, you would have to take a long-term perspective. In terms of the resale of our Giga -- of the Giga product under the broadband services, we are seeing that HelloVision business is gaining momentum and is helping with the acquisition of subscribers. So we are seeing signs of ARPU increases and Q-on-Q turnaround of revenue. On the MVNO subscriber side, according to the track record, the trends that we've seen so far, although it's not up to the level that we had originally forecasted, we still think that there will be opportunities that come our way. We also expect savings on the investment side when it comes to investing into the networks through joint investment. So for HelloVision, they basically have a competitive edge when it comes to procurement of HFC-related network and equipment. On our side, we have competitive edge and procurement edge in optical network. When these 2 strengths combine, we expect there to be a quite significant impact in terms of investment savings as well as from the procurement spending as well in the amount exceeding KRW 30 billion. So just looking at this year alone, for our top line revenue basis, both companies, we expect by the end of the year, will be contributing around KRW 40 billion. And the impact from an investment savings perspective, we expect is going to be much bigger than that. This is year 1. As we move into year 2, we think that there's going to be a cumulative impact which is going to be much bigger as we go forward, and that is how we're going to manage this synergy process.

[Interpreted] I'm [indiscernible], in charge of B2B planning. I will talk about our outlook for second half and where our focal point is going to be. Now as was the case in the first half performance, also outlook for second half and early next year, the key drivers behind our top line growth is going to be IDC and leased circuits. But recently, we've seen a lot of positive developments on the -- especially the Smart Factory and smart industrial complex segment of the 5G B2B. So we are now moving beyond a simple use cases, but we are gaining a lot of opportunities for creating sales and winning projects and winning orders. Multiple number of companies have visited our company in order to propose certain partnerships or alliances. Hence, we expect there to be quite a bit of opportunity emerge in the future. As mentioned previously, government-led New Deal is an opportunity for us. And this is not just in terms of the impact it's going to have on this year's revenue but come next year and for 2 years from now. Actually, government has set aside quite large sums of money as their budget, and those business areas overlap with the areas that we have focused on. So that is why we have a lot of human resources as well as other capital resources set aside for this segment.

[Interpreted] The next question will be presented by Taewon Kim from UBS Securities.

[Interpreted] My first question relates to your CapEx. Has there been any changes in the expected CapEx trend as we've seen the subscriber trend early this year and the current service landscape? Are there any changes that we should expect on your CapEx spend going forward? And from a mid- to long-term perspective, what do you expect is going to be the contribution by your Smart Home business to your operating profit? I asked this because your revenue has been quite robust, driven by subscriber base and high-value customers. But also at the same time, there is fiercer competition in the media realm and also in sourcing of the content. So I would like to understand what your mid- to long-term, I guess, target or projection is regarding the operating profit margin of your Smart Home business.

[Interpreted] First, responding to your CapEx question. Our basic stance as of this point is keeping with our previous guidance of KRW 2.5 trillion. As was mentioned in the press coverage, currently negotiation is ongoing amongst the 3 mobile telcos for investing into a joint network, allowing anyone to use that 5G services based off of that common network for cities that are outside the 85 core cities. And so I think there's going to be a positive and reasonable development relating to CapEx investment, particularly the network investment for this year and for several years to come.

[Interpreted] I'm [indiscernible]. I'm in charge of consumer planning. I would address your question on our Smart Home business outlook. If you look at the revenue for Smart Home, we've seen a very robust subscriber uptrend at 10.5% with IPTV revenue continuing its double-digit growth at 12.5%. Now for Smart Home, if you look at the margin, it is showing a sustained uptrend on a year-over-year basis. Going forward, meaning after next year, there is risk that VOD and advertisement-related revenues may decline, but we will be able to sustain double-digit subscriber growth and we will do our best to make sure that the margin growth is also sustained.

[Interpreted] The next question will be presented by Hoi Jae Kim from Daishin Securities.

[Interpreted] My first question, after your agreement or contract with Netflix expires, would you have plans to partner up with domestic OTTs? Second question is on -- what your investment plan is on your 28 gigahertz spectrum? So this question relates to your CapEx investment. And how much of an investment have you made so far on your in-building coverage and what's your plan going forward? And also because of the government-led New Deal plan, would that actually increase the amount of investment that you would be required to invest? And also regarding reallocation of the spectrum, there seems to be some differing views with the government authorities. Do you think that you will be able to strike an agreement or you could actually come to a consensus with the government on this?

[Interpreted] Now responding to your question about Netflix arrangements and our potential partnering with other OTTs. Through Netflix partnership, we are providing to our IPTV users continuous value that they paid for and also, we are providing satisfaction. So based on the experience of entering into a partnership with Netflix, going forward, basically our objective is to make sure that without distinguishing between domestic or global, we are always open to an open partnership method. We will develop our OTT strategy by closely monitoring the changes that take place in the telecom and the media market from service competitiveness perspective, also from providing differentiated viewing experience to our user base and also from the perspective of gaining platform and device leadership.

[Interpreted] Responding to your question about the investment requirement under the New Deal, yes, the New Deal initiative will involve some of the investment from our company, but that investment is going to be well within -- we believe that our current investment guideline is going to sufficiently cover for all of it. Regarding the 28 gigahertz and in-building investment, which relates to CapEx investment. As was the -- as you could see from the result of the recent survey, we have -- we are the company that provided the broadest coverage. And going forward, we will continuously focus on optimization so that we can enhance quality. But having said that, all of this will be within the market guidance that we've set for ourselves.

[Interpreted] I will respond to your question about reallocation of the spectrum. I'm [indiscernible], in charge of the overall CR. Currently, the government is undergoing a process to set that -- the reallocation cost and it will probably be decided end of this year or early next year. We will do what we can and do our best to make sure that, that level is reasonable.

[Interpreted] [Operator Instructions] The next question will be presented by Seyon Park from Morgan Stanley.

[Interpreted] I have a hypothetical question relating to the Huawei issue. If the U.S.-China conflict continuously escalates and if we decide to move on to SA and if there's a problem in the supplier -- regarding -- or interruptions regarding -- or issues regarding Huawei equipment supplies, what is going to be your -- how are you going to respond to this? Do you have a countermeasure in place?

[Interpreted] This is the CFO. Relating to this matter, unfortunately, there is no one single answer to that question. Regarding the SA, basically, we are already making preparations for that business. But with regards to the exact timing of the actual implementation, we do not know at this point. We have -- we are open to many different options. We are considering different approaches. With respect to this business specifically, basically, our position is that we will make sure that we operate our business in an efficient manner and make sure that we do not create any problems or issues when it comes to service offering to our customers.

[Interpreted] [Operator Instructions] The next question will be presented by Soonhak Lee from Hanwha Investment & Securities.

[Interpreted] I would like to ask a question about your sales channel and marketing spend. During the presentation, you mentioned that in the second half of the year, you're going to be innovating your sales channel. So how would that transformation look like? And what are some of the positive impacts that we can expect out of it? For instance, would there be a positive impact on marketing cost spending? We've seen good marketing spending figures from Q1. Do you expect this trend to continue going forward?

[Interpreted] I'm from the consumer division, responding to your question about the sales channel. In line with the untact environment, we are making different preparations, for instance, allowing same-day activation, providing U+Shop and premium deliveries as well as self-activation by using kiosks. From a short-term perspective, these channel, I guess, changes or innovations are not going to directly impact marketing expense. But from a long-term perspective, through these innovative attempts, we will be able to save on marketing cost. And with that fund, we will be making investments into new business areas.

[Interpreted] I'm the CFO, adding on to that. This whole transformation into a contactless channel is going to be a long and arduous process as we have to really overhaul the overall telecom business structure of Korea. But we believe that is the direction for us going forward and we will be opening a flagship store in the second half of the year. This will be a place where customers can come and really experience the service that we provide. And this whole transformation into an untact-based channel is definitely going to take some time, but it would be a meaningful effort. In terms of the marketing expense, previous year, we've seen overspending, and we are now moving away from that -- I guess, that arrangement. So in the second half of the year, just as we've done so in the first half, we're going to manage well the marketing spend practices. And currently, the marketing spend is 23.3% in terms of its percentage against the base, and we think that we will be able to further improve on the marketing spending going forward.

[Interpreted] The next question will be presented by in Eun Jung Shin from DB Financial Investment.

[Interpreted] My question relates to your 5G B2C services. What were your performances in the first half of the year and what are your plans going forward?

[Interpreted] I'm Hojoon Lee from [indiscernible]. So in the first half of the year, we exported our products like Idol Live and AR/VR, which contributed to our business performance. And we also opened -- we started servicing cloud games to IPTV and PC users. And basically, the user base is continuously going up. So in the second half of the year, we expect there is going to be more demand for AR/VR and highly immersive content on the back of the untact culture and we think there will be market opportunities in education as well as in performances. And so we are going to further strengthen our capabilities in these segments. And also in the second half, for the game content, by leveraging our partnership with AfreecaTV, we are going to further beef up the services, especially the eSports. So AfreecaTV is -- has its user base. It has production capabilities and also distribution capabilities of the content titles. So we will be able to, over their base, be able to provide differentiated services. For our LG Uplus subscriber base, we would provide them with the so-called QuickView, where people will not have to watch any advertisement inserts for 6 months.

[Interpreted] Okay. Thank you. This ends the Q2 2020 earnings presentation by LG Uplus. If you have more questions, please contact our IR team, and we will respond accordingly. Once again, thank you for joining us. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]