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

[Interpreted] Good afternoon. First of all, thank you all for joining this conference call. And now we will begin the conference [Audio Gap] call is being webcasted on the official website so that you can follow the conference simultaneously. Today's conference call will be presented for 1 hour. [Operator Instructions] Now we will begin the conference of the Fiscal Year 2020 Third Quarter earnings results by LG Uplus.

[Interpreted] Good afternoon. I'm the Head of IR at LG Uplus [indiscernible] I would like to begin Q3 2020 earnings release for LG Uplus. For those of joining us today, please refer to our Q3 earnings presentation. And please also note that we are providing consecutive interpretation for the benefit of investors from both home and abroad. All the projections we are providing today are subject to changes in accordance with macroeconomic and market situation. The earnings document we've circulated is based on consolidated statements that include HelloVision for 2020 and earnings from payment gateway business sold off as of August 1 is presented under P&L from discontinued operations. And for your benefit, details on business revenue and operating expense breakdown is on a separate basis without LG HelloVision. We will begin with Q3 business and financial highlights and share the business outlook and end with a Q&A session. Just to note, once again, that all the projections are subject to change in light of macroeconomic and market backdrop. I would now like to invite Lee Hyuk-Ju, CFO and Executive Vice President of LG Uplus, to run through both business and financial results for the quarter.

[Interpreted] Good afternoon, I am Lee Hyuk-Ju, the CFO. I extend my gratitude to investors and analysts for joining our Q3 2020 earnings release call. With the prolonged COVID-19 pandemic, which drove higher content consumptions and online purchases and popularization of the untapped trend, in Q3, the value of the life platform was greatly accentuated as it offers stable data quality and nimble services. We have placed priority on data service quality improvements for 5G customers, achieving fastest download speed, improved online channel services and benefits for long-term subscribers and through efficient marketing, deployed in collaboration with our MVNO partners, including the 5 main CVSS, offering 24-hour activation services, LG Uplus was able to drive meaningful results in terms of growth and profitability. For 5G, cumulative subscriber penetration increased to 20% of handset subscribers, with ARPU recovering Q-on-Q, expanding 5G contributions to wireless revenue. For home services following Kids World, we launched Elementary Schools in Q3, strengthening our offerings to the Kids Mom segment as well as building on offering for other customer segments, i.e., seniors, single member homes and pet owners. Also by connecting current home product offerings with mobile services, i.e., media, game, smart device and IoT-based 5G Smart Home pack launches, we were able to up-notch the convenience of the platform. For B2B infrastructure business by winning orders on technical prowess, we continue to grow in size and quality as well. On growth in cloud, IDC revenue increased and our new revenue sources, i.e., convergence service, a smart factory, which posted year-on-year growth, there was both growth and bottom line improvements across all businesses. Let me now move on to Q3 financials. Q3 consolidated service revenue was up 14.4% year-on-year to KRW 2,650 billion. On a stand-alone basis, revenue was up 4.9% on year to KRW 2,417.4 billion, meeting the 5% annual guidance. Consolidated basis, operating expense was effectively capped at 3% year-on-year increase, with operating profit improving 60.6% year-on-year, coming in at KRW 251.2 billion. OP margin against service revenue improved 2.7 percentage points on year, reporting 9.5%. On a stand-alone basis, marketing expense showed year-on-year decline for 2 consecutive quarters, with spending stability, operating expense was down 4.8% year-on-year and operating profit up by 52.7% on year and 2% up Q-on-Q, coming in at KRW 234.9 billion. Consolidated net income was up 286.2% on year to KRW 403.4 billion on disposition gains from discontinued operations in Q3. Stand-alone basis, net income stands at KRW 392.6 billion. Q3 CapEx spend was KRW 596.3 billion, with cumulative Q3 figure at KRW 1,596.1 billion, with implementation of 64% against the annual guidance. As of Q3 end, total asset reported KRW 19,135.3 billion. Total liabilities reported KRW 11,263 billion. Liabilities to equity ratio and net debt ratio declined 1 percentage point and 3.4 percentage points, respectively, to 143.1% and 60.5%.

That ends Q3 business and financial highlights. We now move on to line of business presentation on earnings and outlook. And please refer to the earnings document for the breakdown in revenue.

[Interpreted] First, the consumer group. I'm the Head of Consumer Business Group, [indiscernible], I represent on the Consumer business. Q3 mobile service revenue was up 5.4% year-on-year to KRW 1,381.6 billion, with 5.5% cumulative growth outperforming the 5% annual target. Q3 mobile net addition was up 51.8% on year and 19.2% on quarter, reporting record high quarterly figure of 406,000, driven by high-quality subscriber growth, mobile cumulative subscriber number was up 8.7% on year, recording 16,265,000, with total 5G subscribers at 2,173,000, accounting for 19.2% of total handset subscribers. Company's MVNO cumulative subscribers were up 41.6% on year and 11.8% versus the previous quarter to report 1,469,000, driving mobile revenue growth and simultaneously enabling growth together with the MVNO partners. Meanwhile, cumulative subscriber growth for IPTV and broadband was 11% and 5.9% year-on-year, respectively. And accordingly, Smart Home revenue increased 12.5% on year and 4% on quarter to report KRW 514.3 billion. On recoveries from VOD and ad revenue from the subdued level in first half due to COVID impact as well as higher basic fee and home shopping revenues, IPTV revenue was up 13.2% on year and 4.3% on quarter to KRW 292.6 billion. Broadband revenue growth was double digit at 11.6%, supported by smart rate plan penetration and increase in Giga subscribers. We at LG Uplus have endeavoured in this untapped environment to bring innovation to customer experience. We continue to strengthen 5G content, including Idol live, Pro Baseball, GeForce cloud game services and have commercialized AR glass for the first time in the world. Also, we are a member of the XR alliance, a global telco alliance, including the likes of Qualcomm. And as the first chair company, we are dedicated to creating an ecosystem on expanded supply-demand dynamics for AR and VR. In terms of the distribution channel through sales channel innovation, we improved the untaxed-based buying process, spanning from purchasing a phone to activation of services. We also did live shopping via Yu Shop Live, Korea's first telecom-based live commerce and also introduced U+ Kiosk, enabling self-activation as well as providing delivery services. For Smart Home, during Q3, we continued to broaden into product segments that meet the needs of different households. To respond to the rising trend in video content, we launched display-installed Smart Home speaker package in collaboration with Google. And also to cater to the security needs, we launched Home Keeper, the easy version which is a package of Smart Home devices and fire theft insurance, which supports reporting to the authorities when there is a breach and have been able to increase subscribers and support bottom line improvements. For the IPTV services, following the launch of Kids World, which was -- which has driven auto growth and bundling, we also launched Uplus Elementary School World, an education app for school kids so that we will be at the very forefront of digital education. We continue to bolster content offerings so that customers can use our services seamlessly in their daily lives. We will do our best to build out on tech-based lifestyle platform for our consumer business based on our service capabilities as we enter into Q4 and into 2021, and we'll continue to strengthen content offerings for each of the customer segments.

[Interpreted] Next is on B2B infrastructure. And I am Ki Sup Sung, in charge of B2B planning. Let me begin with B2B infrastructure's Q3 performances. Q3 revenue for the business was up 2.7% on year and down 3.2% on quarter to KRW 334 billion. Amidst COVID-19 pandemic, we saw higher demand for circuits coming from B2B customers and with growth in the SoHo businesses, B2B infrastructure revenue was up year-on-year. But due to the base effect of NI revenue in Q2, revenue declined versus the previous quarter. For Q3, B2B infrastructure business also focused in expanding its service scope, leveraging its current services as well as 5G. We leveraged 5G and high-precision positioning technology, providing 5G autonomous robot, which conducts surveillance rounds inside large factories. And in logistics, by utilizing low-latency 5G technology, we plan to enter 5G-based unmanned forklift business as part of the automation of logistics center and plan to conduct proof-of-concept test within the year. We have plans to increase references in new business areas and grow the top line revenue. And in line with the government's new deal policy direction, we will find opportunities in not only the B2B segment but also in B2G market so that we may sustain the growth trend for the business. Next, we will invite back our CFO for his views on Q4 outlook.

[Interpreted] Driven by higher 5G penetration following the iPhone launch and wireless ARPU rebound compared to previous year and incremental growth from Smart Home and B2B infrastructure business, there is greater visibility on meeting the 5% annual growth target we communicated beginning of the year. In terms of the bottom line, we are targeting OP improvements versus last year. We are currently developing strategies for next year, and the overall direction will be towards differentiating content offerings for individual consumer segments and focusing on seamless services that connect mobile with home and speeding up quality-based growth as a life platform provider, best aligned with media content consumption underpinned by better data quality. We will also better engage in communications with Generation MZ. Our flagship [indiscernible] store opened in Q3, offering a place to share the culture that Generation MZ aspires to. And by partnering with trendy brands and offering services and experience, we are in the midst of creating a fandom for LG Uplus. For the B2B business, we will expand on new businesses, i.e., convergence and smart factory business and will explore growth opportunities in segments that have bearings to government's new deal direction and initiative. In the upcoming fourth quarter, LG Uplus will do its best to bring growth from the core telecom business and build on a foundation for future growth to further enhance market value and shareholder returns. Thank you.

[Interpreted] That ends the questions -- now we will take your questions.

[Operator Instructions] [Interpreted] The first question will be provided by Sean Lee from Citigroup.

[Interpreted] I see that you have once again for Q3 reported a quite good performance and financial results and the elements that make up those performance is also quite positive. So you've been posting good performance across the year. But still, your share prices are quite muted. And I think one of the reasons is because of the uncertainties that are posed relating to the Huawei issue. I would like to understand what the management view is on this Huawei issue. Second question, your competitor last month launched a low-end tariff scheme, 4 5 and 6 9 rate plans. From a competitive landscape perspective, what is your response to that? And do you also have plans to introduce similar rate plans?

[Interpreted] This is the CFO. I do also feel that the Huawei issue is negatively impacting our equity prices. This issue actually has been triggered because of the conflict between the U.S. and China, and it is taking the form of a demand for a clean pass. However, with respect to LG Uplus, the coverage that is relevant to Huawei equipment is about 30% of our geographical coverage. And we have already completely built out that coverage. And we also have secured inventories that will be required for ongoing maintenance purposes. So we believe that in terms of the service offerings, we believe that there will be no impact on the services that we provide. There could be potential impact on 28 gigahertz and the next-generation technology. But even these 2 factors, in terms of this being materialized, it will be something that will happen from a very long-haul perspective. So I won't be making any specific comment on those 2 areas. In terms of the low-end tariff scheme that was launched by our competitor, I mean, last year, LG had already launched the 4 5 rate plan. In terms of of KT's 4 5 and 6 9 rate plans, I think it's more appropriate to see this introduction more as a way to provide momentum for migration of LTE subscribers to 5G subscribers, which currently account for upper teens and early 20s for all the mobile operators rather than a move to cut the rates. In terms of the possible new rate plan introduction, and we will always look at as the most important factor the benefits that it will provide to our subscribers. And we think that there will be very limited cannibalization in terms of this new rate plan. So once again, this type of a lower -- low-end rate plan has been implemented with a view, I believe, to actually give momentum to the migration of LTE subscribers to 5G. And we believe that in terms of any erosions to our ARPU cannibalization that, that impact will be very much limited.

[Interpreted] The next question will be presented by [indiscernible] Securities.

[Interpreted] During your first half earnings presentation, you mentioned that if you continue to generate profit in the second half of the year, you will consider your dividend plan and even think of increasing the dividend on an absolute basis? Could you share with us what your plans are at this point in terms of dividend payout? Second question, we've seen ARPU growth on a Q-on-Q basis. You've previously said that the IoT lines have had an effect of actually capping that ARPU growth. But it seems now we are seeing with 20% of 5G subscribers, ARPU is now starting to rebound. Could you provide some color as to what your outlook is for Q4 and next year?

[Interpreted] In terms of the dividend plan, it is correct that our -- the size of our profit as a going concern company is increasing. So it is quite natural for market to demand certain dividend-related, I guess, levels of dividend payout. I can tell you that we are seriously reviewing and internally considering changes to our dividend stance. And I can say that, that change is towards a positive direction. Although I cannot specific provide -- I mean, I cannot specifically provide you with the details, I want to say. And I can say that our thoughts and our consideration on the dividend is more towards a positive direction. Now responding to your question on ARPU, we believe that second half of last year was actually the bottom. And since then, there has been some up and down fluctuations. But from a secular perspective, it -- we believe that it had actually achieved a turnaround. And for Q4, we expect that, that trend will continue. But the -- if you look at the ARPU numbers that we present, it's not just the handset subscribers, but we expect the M2M business expansion is going to entail not such a steep ARPU rise but a more gradual ARPU growth.

[Interpreted] We'll move on to next question.

[Interpreted] The next question will be presented by Joonsop Kim from KB Securities.