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 the fiscal year 2020 fourth quarter earnings results by LG Uplus. This conference will start with a presentation, followed by Q&A session. Our call is being webcasted on our homepage so that you can follow the conference simultaneously. Today's conference call will be presented for 1 hour. And due to schedule, we would appreciate if questions are limited to 2 per person. And now we will begin the conference of the fiscal year 2020 fourth quarter earnings results by LG Uplus.

[Interpreted] Good afternoon. I am [indiscernible], Head of IR at LG Uplus. [Interpreted] Let us begin Q4 2020 earnings release for LG Uplus. For those of you joining us today, please refer to our Q4 earnings presentation and also note that we are providing consecutive interpretation for investors from both Korea and overseas. All the projections we are providing today are subject to change in line with the shift in macroeconomic and market situation. [Interpreted] And for your benefit, the document that we've circulated is presented -- is presenting the breakdown revenue of each business as well as operating expense without including LG HelloVision. [Interpreted] We will begin with Q4 performance highlights and 2021 business outlook and then end with a Q&A. Please note once again that all projections are subject to change based on changes in macroeconomic and market conditions. [Interpreted] I would now like to turn it over to Hyuk-Ju Lee, our CFO and Executive Vice President of LG Uplus to present on Q4 2020 business results and financial highlights.

[Interpreted] Good afternoon. This is CFO, Hyuk-Ju Lee. Thank you to our analysts and investors for joining LG Uplus' Q4 2020 Earnings Conference Call. [Interpreted] Let me first begin with Q4 business highlights. [Interpreted] With heightened social distancing and quarantine measures, work-from-home and online schooling has become a norm in the COVID era and increased use of digital devices per person and platform-based streaming services all signaled a transformation towards a telecommunication environment. [Interpreted] Our home as a daily space is expanding its function, leading to greater demand for smart home connectivity based on AI and IoT. And so we've seen faster growth of 5G services penetration compared to the start of the year and also saw growth in home IoT customers. [Interpreted] Last year, LG AI Research Institute was launched initiated by LG affiliates, including Electronics and Chemical, and we expect development of innovative DX service to accelerate as we are able to secure source technologies for AI, big data and conduct data analytics. [Interpreted] In Q4, in terms of customer services, by reorganizing channel, rate plans, content, we diversified core services that will enable qualitative value-seeking and solve customers' pain points. [Interpreted] And to stay ahead of the trend toward customers looking for rational consumption, we beefed up our service offerings by introducing MVNO plus SIM-only rate schemes as well as bundled discounts and online-only 5G direct plan. We also plan to expand Uplus kiosk self-activation service across hypermarkets and convenience stores to further enhance customers' convenience. [Interpreted] In terms of content and data services, we brought differentiation to the service portfolio, centering around K-pop idols and educational content sought after by more customers in the contact-free world. And also, through targeted marketing for segments and seamless service connections between home and mobile, we were able to improve on convenience. Also, we completed world's best 5G network coverage, significantly improved download speed for data compared to the first half of the year, building out optimal data environment for an immersive 5G services. [Interpreted] Uplus also continued to live up to its social responsibilities by donating its telecom services and also by engaging our customers. [Interpreted] With telecom service underpinning broader part of people's daily lives, like education and security, we conducted social corporate responsibility activities around digital education. We also provided free of charge [ My Home Keeper ], which is a security service for homes to the underprivileged class and developed a donation rate plan for MVNO phones joining in on social efforts to help out in times of hardship brought on by COVID-19. [Interpreted] For Q4 B2B infrastructure business, there has been speedy progress on the smart city project to work on MEC technology-based 5G self-parking, environmentally friendly, self-driving electric bus and command and control platform technology. Also, we brought meaningful results from smart factory and other new business projects. [Interpreted] Now I will present on financial results for Q4 and 2020 full year. [Interpreted] Q4 consolidated basis service revenue was up 16.3% on year KRW 2,750 billion. [Interpreted] On a standalone basis, driven by growth from consumer business of 8.1% year-on-year, to report KRW 2,514.5 billion. [Interpreted] Full year 2020 standalone service revenue was up 5.1% year-on-year to KRW 9,637.9 billion, outperforming 5% annual growth guidance. [Interpreted] Q4 consolidated operating profit was down 3.7% on year to KRW 175.5 billion, driven by iPhone 12 launch and higher marketing spend on the back of increase in 5G net additions. Full year operating profit was up 29.1% on year to KRW 886.2 billion on service revenue growth and stabilization of marketing costs. [Interpreted] Q4 consolidated net loss was at KRW 224.7 billion on higher nonoperating expense, including one-off impairment loss from intangible assets. But full year net profit came in at KRW 478.1 billion, up 8.9% year-on-year. [Interpreted] Cash dividend per share for 2020 was resolved by the February 2 BoD meeting, KRW 51 higher than the previous year at KRW 451 was disclosed and payout ratio is 43.4%. [Interpreted] 2020 full year CapEx spend was KRW 2,380.5 billion, which was 95.2% of the full year guidance of KRW 2.5 trillion. [Interpreted] In terms of our financial position, total asset is KRW 18,350.2 billion; total liability, KRW 10,699 billion; an increase in shareholders' equity, liability ratio improved 4.3 percentage points year-on-year, reporting 139.8%; and net debt-to-equity ratio increased 2.0 percentage points year-on-year on higher borrowings, reporting 65.8%.

[Interpreted] This has been the highlights for the business and the financials. We now move on to earnings and outlook for each of our businesses. Please also refer to the earnings material for detailed breakdown. First, the consumer division. I am [ Sang-In Lee ] and will present on the results of our consumer business. [Interpreted] Q4 mobile service revenue was up 6.7% on year to KRW 1,398.5 billion, posting 5.8% per annum growth, outperforming 5% annual growth target. [Interpreted] Driven by 1.4 million net addition for the year, there was 9.2% year-on-year growth with cumulative subscribers reaching 16,652,000. [Interpreted] The 5G subscribers, there was 50% Q-on-Q net add increase with cumulative subscribers reaching 2,756,000, outperforming our initial expectations and gaining 24.3% of the total handset subscriber base. [Interpreted] The company's cumulative MVNO subscribers continue to support mobile earnings growth at KRW 1,901,000, driven by reasonable service offerings, which we provided in collaboration with MVNO partners. [Interpreted] For IPTV and broadband, cumulative subscriber growth was 10.4% and 5.7% year-on-year, driving Q4 smart home revenue up 7.1% year-on-year to KRW 517.3 billion. Full year smart home revenue was KRW 2,013.4 billion, continuing a double-digit growth. [Interpreted] On sustained growth of high-value subscribers, IPTV reported 10.9% on year growth coming in at KRW 1,145.2 billion. While broadband Internet revenue was also up 8.6% on year to KRW 868.2 billion, driven by wide adoption of smart rate plans and growth in Giga subscribers. [Interpreted] Last year, we combined our mobile and home group, further segmenting customers by household type and was able to bolster competitiveness in our content offerings, focusing on single or 2-member households and on preschool and primary school children for kids services. [Interpreted] In Q4, we updated Kids World 4.0 in consideration of the changing environment for education, such as remote schooling in the midst of COVID, and added content offerings for Uplus Kids library, whose number of views hit 4 million. As such, we have solidified our positioning in remote education and/or at the forefront of this trend in the so-called untapped world. [Interpreted] Also since the outbreak of the pandemic, there has been greater consumption of personalized video content, highlighting the importance and the competitiveness of media platform. As such, we continue to enhance user convenience for Netflix and YouTube, and launched 5G smart home pack, which includes home IoTs like the Google smart display, enabling a seamless service across mobile and smart home. [Interpreted] There's also been outbound export of the company's AR and VR content underpinned by 5G, and we continue to receive a lot of inquiries from global telcos regarding potential partnerships. With the launch of XR Alliance, we've secured a solid basis for sourcing content unique from other CPs and will bolster content portfolios so as to provide Uplus 5G services by leveraging our 5G content competitiveness. Since it's difficult to physically visit stadium because of COVID, we introduced social VR service, where one can enjoy post season baseball games with friends at home at 8K resolution. [Interpreted] In 2021, for the consumer business, we will further make granular our customer segmentation and actively target households by bringing combined offerings of mobile and smart home. For Kids services, we plan to further refine competitiveness in personalized video content and platform so that more households will experience our seamless services, and we continue to attract these households as our customers for bundled services. [Interpreted] We will also improve channel structures, strengthen online channel, like increasing sales from our official online mall, U+Shop, and bolster customer experience from the retail channel and expand into new sales channels that leverage delivery to doorsteps and e-commerce. [Interpreted] Above all, by offering innovative services under our consumer business, we will endeavor to gain real deal, true fan base in 2021. On top of solid content offerings and broadened customer experience, we will focus on improving their pain points and complaints and give more benefit to our long-term customers, which will drive value innovation and help to secure true fan base for LG Uplus.

Next is on B2B infrastructure. I am [ Hwang Sok-Jo ]. I will begin with the Q4 results for B2B infrastructure business. [Interpreted] Q4 B2B infrastructure business was up 5.2% on year and 9.8% on quarter to KRW 366.6 billion. Full year revenue was up 3.5% on year, coming in at KRW 1,359 billion. [Interpreted] Due to the base effect of one-off revenue previous quarter, IDC revenue was down slightly. But with sustained underlying revenue growth, Q4 revenue was up 13.8% on year and full year revenue was up 16.1%, accounting for 16.8% of B2B infrastructure revenue. [Interpreted] Solutions business reported 31.2% revenue growth Q-on-Q. And by winning the LTX project, smart factory pipeline solutions and connected car projects, solutions revenue was up 6.2% on year and 31.2% on quarter, reporting KRW 126.7 billion. [Interpreted] Also, as we were selected the preferred bidder for Sejong National Pilot City project, we were able to speed up smart city development through collaborations in areas such as smart pole 5G based leased line network buildout and 5G-based mobility services. [Interpreted] In 2021, for the B2B infrastructure business, we will strengthen channel and product competitiveness, target untapped related demand and enhance the value of our current business. For the new businesses based on references from LG Group, we will expand 5G private line and plant solutions and secure business opportunities by targeting local governments. And by actively participating in the government's new deal initiatives, we will expand the foundation for meaningful results in B2G as well.

[Interpreted] That was on earnings breakdown. We will now invite our CFO back for business objectives and outlook for 2021.

[Interpreted] Telco market, in general, has been focusing on customer service and market stabilization. However, since the COVID pandemic, we've seen increases in the number of SIM-only customers, subscription-based services and changes in distribution and higher demand for media content. In the midst of the contact-free market changes, we are called upon for a new growth strategy. [Interpreted] In the meantime, B2B market is seeing expansion of smart solutions, driven by government's digital new deal initiatives. And new opportunities are emerging from the move from the fixed line to a wireless environment. [Interpreted] Uplus' consumer business, which is leading the growth in the telco market, will continue to launch high-end devices in 2021. And with 5G market taking off as its pie grows, we project 5G penetration to reach 40% by the end of the year. We also expect increase in the number of bundled customers for home business and recovery of wireless ARPU leading to a growth in service revenue. [Interpreted] For Content and Solutions business, which LG Uplus has a critical edge by offering services that focus around improving intrinsic customer value, we are broadening the base of our true real deal fans. We also shifted the business structure to 1 that solidifies the framework for quality growth and one which is also efficient. As such, we will continue to improve profitability and any additional resource we generate will be used for future growth and shareholder return. [Interpreted] For B2B infrastructure business, as smart factory and smart mobility takes off, there will be contributions made to environment and digital infrastructure. And by collaborating with group affiliates, we will deploy our business with agility with a clear focus on our customers. [Interpreted] Through such efforts, we will target above KRW 10 trillion in service revenue on a standalone basis for LG Uplus, and our annual CapEx will be lower than that of the previous year. [Interpreted] In 2021, LG Uplus will bring tangible results from future growth businesses and achieve our business targets so as to enhance corporate value and grow together with our shareholders. I wish all our investors a fruitful year of making a quantum leap forward. [Interpreted] Thank you.

That ends the presentation. We will now take your questions.

[Interpreted] Now Q&A session will begin. [Operator Instructions] [Interpreted] The first question will be provided by Mr. Kim Joonsop from KB Securities.

[Interpreted] I'm from KB Securities. I'm Kim Joonsop. I would like to ask 2 questions. First, there's been a lot of talk regarding the deals and negotiations with OTT providers, like Disney+. I would like to understand what your LG Uplus' strategy is. Second question could you also provide some color with regards to the business solution aspect of your business in terms of collaborating with Google on your MEC-based services and what level of demand would we be able to see visible top line or earnings impact in 2021.

[Interpreted] Hello. I am [indiscernible] from the Media Content Business division. [Interpreted] Now in terms of our key business strategy, when it comes to the media business, we want to be able to provide distinct and differentiated experience when it comes to viewing. [Interpreted] Now as you know, we were the first in the industry to exclusively provide Netflix services against our user base. And through that process, we were able to offer distinct value. [Interpreted] So as we've repeatedly communicated, starting last year, when it comes to OTT, our strategy is to adopt an open platform based OTT strategy. [Interpreted] Now in terms of the negotiation and talks with Disney, it is currently underway. We have not yet reached any definitive conclusion.

[Interpreted] Yes. I will respond to your question regarding the MEC technology. [Interpreted] Now we did enter into a memorandum of understanding with Google for the MEC solutions. So underpinned by 5G, we've decided that we will collaborate on the MEC services and solutions segment. [Interpreted] Now the 5G and MEC-based converged services basically are currently under preparation, and we are developing this convergence service, and they will be able to apply effectively to smart factory or smart city project. [Interpreted] So most of the convergent solutions on top of 5G is mostly based off of the MEC technology. And in terms of the business top line objective that we set for ourselves, we expect the top line revenue to be around KRW 45 billion, including smart factory and smart mobility. [Interpreted] Now of course, they don't just necessarily solely use MEC technology. But basically, everything is based off of 5G technology. And MEC is utilized in order to further enhance the completeness of the services. Now we will be leveraging the services and solutions that we already own and also bring about further advancement and development to Google's technologies and be able to do a proof-of-concept testing. And based on that, we will be able to provide diversified services to our customers.

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

[Interpreted] I would like to ask you 2 questions. First, you've mentioned during the presentation that you expect your 5G penetration to meet around 40%. Can you also provide some color in terms of the profit aspect? So when do you think will be the timing for you to actually turn around? So last year, all of your financial performances were up to par in terms of our expectation. So for this year as well, when it comes to 5G, not only the top line revenue, but do you think that it would be possible for you to actually generate profit? And second, we would always have to think about the opportunity cost that are involved. Considering your borrowing rate, I think that, also, in considering that you have also acquired HelloVision, there is a possibility for you to make further share buybacks going forward. So 1 way for you to actually think of and use the strategy, in terms of shareholder return, will be to lower the distributable -- lower the number of the -- lower the number of equity shares and actually use your funds to make treasury share purchases. What is your view on this?

[Interpreted] So this is the CFO responding to your 5G breakeven point-related question. As I've mentioned throughout my previous calls, I have said that at about 5 million-subscriber number, we will be able to achieve breakeven point. Based on my calculation, I think on a per annum basis, on average, if we have about 5 million subscribers, I believe that we will be able to generate profit. [Interpreted] So the basis for my calculation is, first, looking at the 5G subscriber ARPU level as well as their contribution rate and also in consideration of all the fixed cost items related to the network, like the depreciation on our tangible assets as well as depreciation on the spectrum and the allocation of the overhead cost, if we take into consideration all of these factors, we think that on average, per year, if there's about 5 million subscribers, we will be able to attain breakeven point on an annual basis. I have that confidence. [Interpreted] In the fourth quarter, with the launch of the Apple's iPhone, we've seen a significant rise in the number of 5G subscribers compared to other quarters. So by the end of 2021, if we think about the device line of handset lineup, we expect that we will be able to reach 4 million in subscriber number. At the working level, they are telling me that by mid next year, we will be able to actually increase that figure. But for me, if I were to think of this more conservatively, I think by the second half of next year, we may be able to start to talk about meeting the BEP breakeven point. [Interpreted] And for this year, if we take a look at what our top line and bottom line picture will look like as we go forward, I think what's important is sustainability of these figures. Last year, as -- on a standalone basis for LG Uplus, if you were to look at our guidance, we believe that there's been meaningful development for us to actually attain top line revenue of above KRW 10 trillion, so we have that basis in place. And also, in terms of the service revenue, last year, the growth rate was 5.1%. This year, we will exert our outmost effort make sure they repeat that growth rate. Even if we don't beat that, we would definitely be very much close to that. [Interpreted] Now in terms of profit, I mean, we will be happy to be able to do top line revenue of above KRW 10 trillion and also hit above KRW 1 trillion in profit. That is definitely our hope. However, as a person managing the business, I would have to be mindful of both growth and profitability and be very much well aware of the forward-looking aspects. So I need to strike a good balance. So I will not go overboard, but make sure that we make all our efforts to make that improvement so that come early next year, in terms of the dividend payout, I do look forward to being able to look forward to more positive message and more positive nuance and we'll make sure that we manage our business toward a direction where we could further enhance our shareholder value. [Interpreted] The third part of your question on the possible share buyback. If you look at the recent trend of interest rate backdrop, a very low interest rate backdrop, and at our credit ratings, a 3-year dated funding cost for us is around 1.16%. And if you look at the dividend ratio at a market value basis, it's at around 4%. So if we look at all of these economical values, there is positive treasury share buyback seems to be a factor for us to positively consider. [Interpreted] So I will definitely take accordingly.

[Interpreted] We will take the next question please. [Foreign Language]

[Interpreted] I would like to also ask you 2 questions. As we enter into 2021, we see a slew of mid- to low-end rate plans being introduced into the market. I would like to understand what the responses or the reaction of your customer base is? And who are you specifically targeting? I would assume that there will be some existing customers who would downgrade to lower-end rate plans. Or are you really [ certain with ] your 5G ARPU? Second question is, in 2020, due to the COVID pandemic, the outbreak, obviously, there's been a constraint on your marketing activities. What do you project for 2021? Since now the iPhone has also launched, do you foresee more active level of marketing activities as we go forward, also in light of the handset lineup that you have in mind? So for the first half of this year, should we expect higher level of marketing activity compared to the previous year?