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

[Interpreted] Good morning and good evening. Thank you all for joining this conference call. And now we will begin the conference of the fiscal year 2021 first quarter earnings results by LG Uplus. This conference will start with a presentation followed by a divisional 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. [Operator Instructions] And now we will begin the conference of the fiscal year 2021 first quarter earnings results by LG Uplus.

[Interpreted] Good afternoon. I am [indiscernible] , Head of IR at LG Uplus. Let's begin Q1 2021 earnings release for LG Uplus. For those of you joining us today, please refer to our Q1 earnings presentation and also note that earnings breakdown of each business and details of operating expense are on a basis that excludes LG Hellovision. All the projections we are providing today are subject to change in line with changes in macroeconomic and market situation. We will -- and we will also be providing consecutive interpretation for the benefit of investors from both home and abroad. We will begin with Q1 performance highlights and end with a Q&A. I now invite our CFO and Vice President, Lee Hyuk-Ju, to present on Q1 '21 business and earnings results.

[Interpreted] Good afternoon. I'm Lee Hyuk-Ju, the CFO. I would like to thank, first of all, our analysts and investors for joining LG Uplus' Q1 2021 Earnings Release Conference Call. In Q1, LG Uplus saw improvements in bottom line across all businesses from well-balanced growth of both existing and new businesses. Consumer business, which places foremost priority on customer value innovation, saw higher 5G penetration and Smart Home revenue growth, which drove 6.8% year-over-year consumer business growth. And by strengthening content which is tailored to each of our customer segments, we were able to strengthen basis for qualitative growth. Beginning of the year, we launched Together service, which is a bundling product for friends and families, which led to higher bundling rate of households with more than 4 members, in turn, driving improvements in down-selling and churn rates and a positive impact on ARPU. Also through upgraded customization using DX technology and innovations in the distribution channel, consumer business, through agile deployment, continued to gain true fans of LG Uplus, which helped to stabilize marketing spend and improve bottom line of our businesses. B2B infrastructure business saw 9% year-over-year revenue growth and margin improvements on the back of additional revenue growth from new business solutions, such as factory and logistics robots, switchboard diagnostics solution as well as growth from existing businesses like IDC and messaging. Our enterprise line business was up 7.9% on year, creating a new source of momentum in the post-COVID market. As such, we reported record-high operating profit in the first quarter with earnings per share of 35% on year, which further enhanced our corporate value. Now moving on to our financial performance for the first quarter. Consolidated service revenue was up 4.7% on year to KRW 2,691.9 billion on balanced growth across entire business line. On a stand-alone basis, service revenue was up 6.2% to KRW 2,472.4 billion, which is 24.7% of the KRW 10 trillion annual guidance. Consolidated operating profit on lower marketing spend improved to 25.4% on year and 57.1% on quarter, coming in at KRW 275.6 billion, while operating profit margin improved to 10.2%. Separate basis, operating profit was up 26.4% on year and 55% on quarter, reporting KRW 266.7 billion. Consolidated net profit was up 35% on year and reported a Q-on-Q turnaround, coming in at KRW 200.9 billion. On a stand-alone basis, net profit improved 38.1% year-on-year to KRW 201.2 billion. Q1 CapEx spend was KRW 380 billion, a marginal increase year-over-year. In terms of financial position, as at Q1 end, our total asset is KRW 18,297.2 billion; total liabilities, KRW 10,643 billion; and liability ratio and net debt-to-equity ratio were 139% and 68.5%, respectively. This has been the highlights for business and financials. We now move on to earnings and outlook for each of our businesses.

[Interpreted] First, the consumer business. I am [indiscernible] , Head of Consumer Business Innovation Group. Q1 mobile service revenue was up 5.4% on year to KRW 1,408.1 billion, continuing a steady revenue growth trend. We continue to be market share #1 in subscriber net additions, securing 329,000 subscribers, which is up 25.1% on year, with cumulative subscribers reaching 16,981,000, up 9.4% on year. 5G subscribers were up 99.5% on year to 580,000 in net addition, while cumulative 5G subscribers were 3,335,000, driving Q1 ARPU turnaround. Now 5G mix against the total handset subscribers was up 5 percentage points on quarter to 29.3%, with 40% year-end 5G penetration in near site. Q1 Smart Home revenue was up 8.8% on year to KRW 530 billion and driven by higher take-up of Prime Lite 17 rate scheme. Basic fee revenue for IPTV was up more than a double-digit year-over-year. But with delay in VOD revenue recovery, total revenue was up 7% on year to KRW 300.7 billion. Broadband Internet revenue was up 11.2% on year to KRW 229.3 billion, an increase in Giga Internet subscribers, smart Internet sales and higher bundling rate for Together rate plan. Smart Home subscribers were up 10.4% and 5.5% on year from IPTV and Internet, respectively, recording 5,076,000 and 4,590,000 subscribers. Also, high-value customer mix was 46.5% in IPTV and 66.4% in Giga Internet. Now looking at some of the details relating to our Q1 performances. First, if you were to look at our efforts around setting our rate schemes back in January, we launched Uplus Together rate plan, a bundling product for friends and families across 5G and LTE, in order to strengthen the foundation for our bundling customers. And we also diversified the lineup of rate schemes that offer reasonable pricing, i.e. 5G Slim Plus at 40,000 one level and online direct plan, which is the lowest-end 5G plan as well as 5G Welfare plan. We also introduced YouTube Premium package in order to secure true loyal fans of Uplus. We opened the so-called untact stores, where people can experience our services and get self-activation services, and have also adopted off-line kiosk stores. And as such, we are diversifying our channel and strengthening convenience for our customers. On top of channel and rate scheme diversifications, we are also widening the scope of content that our customers could enjoy under the 5G environment. First, viewing time for our idle lives in-house developed content brought 40 million cumulative minutes, reporting a steep 25% growth every quarter. In time for the baseball season, we also notched up the fun of watching and listening to baseball games by launching in-room cheering and live strike zone. Also, content produced by our subsidiaries, such as Tomorrow's Hero and Idol Live, added titles to its original entertainment content offerings, which help to build in-house production capabilities and achieved cumulative $22 million from exporting 5G solutions and contents. As such, we continue to focus on strengthening 5G content offerings. And underpinned by our own unique media strategies, we were able to gear up revenue growth for the consumer business. Last April, we were successful in winning the government-led national strategic project named The Age of Light, through which we will be able to propagate Uplus' immersive 5G content more widely. Going forward, by gaining IPs from the XR Alliance, where 10 global companies such as Verizon, Orange Telecom and Chunghwa Telecom are members and where we have the seat as the Chair, we will move ahead of others to source immersive content and quickly broaden the ecosystem for 5G content so as to gain competitive edge unique to LG Uplus. Now for Smart Home, while strengthening the features of Uplus TV free in January, for Kids World service, we distributed free-of-charge worksheets to help home schooling for children in line with the trend of contact-free online world. We also launched UP Pen helping kids to have fun studying as it supports interactivity, voice and motion recognition. We also added Egg School Kindergarten, a home schooling English subscription service, through the release of Kids World 4.0 update in April. This allows for monthly sending of premium textbooks and videos, mirroring the curriculum of kindergartens in 10 major states of United States. Uplus will continue to broaden the scope of content and its rate plans and distribution channel in order to secure true hardcore loyal fan base. And we'll endeavor to deliver services that each and every subscriber will be happy with by further segmenting our customer base.

[Interpreted] Next is on B2B infrastructure business. And I'm [indiscernible], Head of B2B New Business Group. I will begin with key highlights of B2B infrastructure business for the first quarter. Q1 B2B infrastructure business was up 9% on year to KRW 341.5 billion on the back of well-balanced growth across the existing business portfolios of enterprise communications and SOHO as well as new businesses. On sustained growth in underlying revenue, IDC revenue was up 8.4% year-over-year, while solutions revenue reported 11.3% on year growth on steady earnings growth from messaging and SME solutions as well as new businesses, i.e. Smart Factory. Also with the spread of work from home and higher online demand, there were capacity additions in circuit lines, driving up enterprise line revenue up 7.9% on year and 1.4% Q-on-Q. At the beginning of the year, we explained how we went after serving untact and online demand in order to enhance value of B2B infrastructure business as is and how we also expanded on new business references, successfully winning government's New Deal project by targeting local government. As a result of these efforts, LG Uplus Consortium was selected as the provider for autonomous driving and big data center as well as platform build-out for Sejong City. And also together with Changwon City, we embarked on a hydrogen industry project in order to explore new business opportunities by bringing together 5G infrastructure as well as smart technologies and are planning on a systems development. Also following last year's efforts, we brought automation solutions to logistics warehouses and remotely controlled cranes used at ports. We also added various solutions to the portfolio, including predictive maintenance provided to industrial complexes and introduced environmental monitoring and surveillance robots in the cities as we were selected as 5G provider for multiple projects that are based on MEC, which we expect will work as a springboard for the company's business expansion. In Smart Factory, we carried out a joint project on 5G-based smart diagnosis solution, offering real-time inspection of switchboards of LS ELECTRIC for overheating and discharge of electricity, which enables fire detection before it actually happens. Also at LGE's new factory in Changwon, we built unmanned logistics robot to deal with the problem of malfunctioning, and as such, we were able to secure references in factory automation. In the construction sector, in cooperation with GS Constructions, we successfully completed proof-of-concept testing on improving safety and productivity based on AI and wireless infrastructure and will begin commercialization before the end of the year. For Smart Factory, we are expanding business scope to core areas of factory operation, including facilities management, quality control and automation. In addition to switchboard diagnosis and preventive maintenance in the first half of the year, we are planning on generating incremental revenue from new solutions, including AI-based vision test, which is used to detect effective product, and auto-guided vehicle robot connected to the 5G network. In Q2, we will increase revenue contributions from new business opportunities and grow top line of existing businesses like the enterprise line by going after demand arising from the untact or online trend so as to sustain B2B infrastructure growth, including the IDC business. This ends the earnings highlight, I will invite back our CFO for Q2 business outlook.

[Interpreted] In the second quarter, we will continue on with steady revenue growth from our consumer and B2B infrastructure businesses. And we'll explore new business opportunities from digital health care, where there is high potential for growth by expanding service and platform references. In terms of customer data quality, we will expand in building investment for 5G coverage and be at the very forefront of investing into base stations of free taxes in the second half of the year so that we may continue to optimize data quality. We will also strengthen ESG activities across environment, social and governance to expand the scope of business activities and realize long-term and sustainable growth. In terms of the environment, we plan to build energy monitoring system in telecom office sites, base stations and IDCs in order to save energy before the end of the year to ensure a more eco-friendly environment. We are also planning to reduce carbon dioxide emissions of the upcoming Tung Chung IDC Center through energy savings, use of renewables and environmentally friendly -- and making environmentally friendly facilities. Also, together with city of Changwon, we've begun 2040 smart hydrogen industry initiative that uses telecom infrastructure and smart technologies, contributing to setting of a smart environment and to actively practice ESG value management. Recently, we set up a ESG committee under our Board of Directors, and we expect the committee to engage in constructive discussions on ways to strengthen shareholder return policy and value enhancement as well as diversification. In Q2, we will continue to bring innovation and secure competitiveness in new business in order to solidify true loyal fan base of LG Uplus so that we may achieve KRW 10 trillion service revenue guidance and bring more enhancements to our shareholder value. Thank you. This ends the earnings presentation, we will now take your questions.

[Operator Instructions] [Interpreted] The first question will be provided by Joonsop Kim from KB Securities.

[Interpreted] I'm Kim Joonsop from KB Securities. Would like to ask you 2 questions. First, you have announced that you will be making JPY 310 billion of investment in IDC. Could you give us some more color as to which areas you'll be -- you are planning to gain an impact from this investment? Just give us an overall picture of what the landscape is like at this point in time. And also secondly, you've reported a quite significant price in your solutions business revenue. I take it that this would have been driven mostly by the 5G edge cloud centers. If you could provide more color, I think that would help with better understanding.

[Interpreted] I am [indiscernible] . I will be responding to your question. I'm in charge of the B2B infrastructure aspect. Responding to your question about this investment on cloud. The overall market backdrop is that there has been a very steep increase in the cloud market -- the domestic cloud market. And with the spread of the untact or the online trend, there's been a significant rise in online traffic. LG Uplus operates Asia's biggest-scale IDC Center at Tung Chung IDC Center, and we actually have economy of scale. And basically, we have business competitive edge, whereby we can provide circuits and lines to the companies in the IDC, which are considered to be essential facilities required in an IDC center. I also believe that we have know-how and operational expertise based on this large-scale IDC center that we have. We've been able to attract and cooperate with major CSPs and online providers over the years.

[Interpreted] I am [indiscernible] from the B2B New Business division. In terms of the significant growth behind our solutions business in Q1, previously, there has been about 11.3% growth. Basically, this is attributable to the coming of the untact or online trend following the COVID pandemic. Due to this new market that we are facing in terms of our existing product offerings, such as messaging and SMEs, the online solutions for these types of product categories have posted quite a bit of an increase. And at the same time, there are new business areas such as Smart Factory, which is underpinned by our 5G infrastructure. And over the years, we have been conducting proof-of-concept testing as well as supplying such solution based off of the former LTE infrastructure. Due to the accumulation of such experiences and expertise, we were able to bring about a revenue increase of about 120% on a year-over-year basis. Going forward, we will continue to expand on our Smart Factory-related solutions provision based off of 5G infrastructure in the areas of safety inside factories -- factory-related facilities as well as automation.

[Interpreted] The following question will be presented by Sean Lee from Citigroup.

[Interpreted] I would like to ask you questions on dividend and shareholder return. LG Uplus, compared to your peers, seem to be more a pure telco-based company. Traditionally, what investors seek from a pure telco provider, telecom provider is very steady earnings and significant amount of that profit given back to the shareholders in the form of shareholder return. Company has been posting quite positive profit over the years, and I expect that it will do so in the future. But compared to that, your shareholder return spend seems to be relatively weak compared to your peers, even comparing to your competitors who are making significant investment into non-telco business. So would like to understand that in terms of your payout ratio and cancellation or share buyback, do you have plans to further strengthen your dividend payout position? And if you are planning to continue on with the current stance in terms of paying out a shareholder return, what are the reasons behind that position?

[Interpreted] Frankly, that's a quite difficult question to tackle. Yesterday, we had a BOD meeting. And during that BOD meeting, we set up a -- established an ESG committee, and it will be within that committee that the BOD would deliberate on our shareholder return policy. Now before we deployed investment into 5G technology, I would admit that in terms of the size of the investment, we had felt quite a bit of burden. However, having said that -- and you've mentioned that our payout amount is relatively small compared to others. I do admit that our stance in terms of dividend payout had been weak compared to others. Hence, going forward, we will quite proactively review and revisit possible ways to further enhance shareholder value. Responding to the last part of your question as to the reasons behind our stance is, admittedly, things were a bit too difficult for us. But going forward, I would admit that we will go towards a direction that is expected and desired of us. But I believe that we would first would have to have our ESG Committee members deliberate on this issue, and they would definitely come up with a position. But I can tell you that for the time being, I can tell you that, that would be the direction that we will be going forward. But once again, we will be able to come back to you after the deliberation and discussions by the ESG Committee. I will make sure that we can come back to the market with a good result or good news so that we can communicate that to our shareholders as well as the investors.

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

[Interpreted] I'm Kim Hoi Jae from Daishin Securities. We've seen 2 consecutive quarters improvement in your wireless ARPU. Could you provide some color on the future outlook and guidance for your wireless ARPU? And is there any unique elements that differentiate your tariff plan compared to your peers? Especially during the presentation, you focused on the Together rate plan. Has that really supported ARPU improvement?

[Interpreted] I am [indiscernible] from the Consumer Business Group. In terms of the improvement in the MNO ARPU, it's attributable to a faster penetration and expansion of 5G services and also the positive impact that we are getting from the Together rate plan, which is a bundling product. We've seen increases in the number of customers taking out this bundled product, which had an impact on lowering the churn rate and down-selling of the rate plan. And hence, we have seen that having a positive impact on driving up the ARPU level. Just for your information, it's just been 4 months since we first introduced the Together bundled product. Compared to the previous bundling packages, basically, we see higher percentage of households with more than 4 members. And as such, we were able to see that there were -- and also, if you look at the Internet service, the take rate of Internet product above 500 mega has also gone up, which is quite encouraging. So for these households that have taken out the Together bundling package, usually, if you look at their churn rate as well as down-selling rate, in terms of those factors, it's quite encouraging for the company. But having said that, it's only been 3 months in terms of the data. So I think come next IR meeting, we will be able to provide you with a more definitive and clearer picture.

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

[Interpreted] I have a follow-up question. This question was asked previously. But if you look at last year, I think the payout ratio was around 42%. And the question that we're getting a lot is that -- I think for last year, you probably consider other one-off factors. And for this year, even if the profit actually goes up, the official payout ratio would still be hovering around 30%. So there is concern that there will not be any increases in the payout of dividend. So is that a possible and a feasible scenario? Second question is you've emphasized the setting up of ESG Committee. In the previous conference call, I think I asked questions about the treasury share buyback-related plans. So setting up of a control tower in ESG management and buying back of treasury shares, are they in any way related to one another? Would like to gain some understanding there as well. And also compared to other indicators, your MNO subscriber trend does not seem to be overly good. Now do you think that this current trend is going to be long term? Is it going to be secular? Or in the Q2 and Q3 of this year, can we expect your net addition figure to start to go up?

[Interpreted] Yes. I'm the CFO. I will respond to your first question. For us, the basic foundation and bedrock of our business operations is to generate performance that's better on a year-over-year basis and return back to our shareholders better results. So for this year, we have focused on and we plan to generate better for performance compared to the previous year. And also in terms of dividend payout on a year-over-year basis, we wish to provide a better results back to our shareholders. That is our plan. So I can tell you that we will not be -- or the level of dividend will not be lower compared to that of last year. And also, our ESG Committee have plans to review this very issue.

Yes. I'm the Head of the Consumer Innovation Group. You asked a question about somewhat of a sluggish performance from our MNO business. Basically, our company's strategic direction is that we were really focused on providing benefits at the household level and to be able to convert these users into our true loyal and hardcore fans. And there are different roles that will be played by the MNO and MVNO services. But at the end of the day, they are pursuing a same objective. In terms of the performances based off of the MNO handset, we will maintain the mix at 1/3, and we will make sure that we continue to drive qualitative performance improvement. And I mentioned that MVNO and MNO have their own respective roles, which means that MVNO will be serving people who require reasonable pricing by providing variety of options at mid- to low end of the product. While for MNO, we will be offering a tariff plan, such as the Together bundling rate plan as well as rate plans that's based off of very strong benefit offerings. So through the cooperation between these 2 areas, we will trigger qualitative growth and in so doing, will build out a firm base of our true loyal fans.

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

[Interpreted] Would like to first congratulate you on a good performance for the Q1. Since Q1 performance was great, can you -- do you think that you can sustain this trend until -- into the second half of the year? And also, could you elaborate on what your outlook for '21 is? And also provide some color on what your media strategy is.

[Interpreted] This is the CFO responding to your first question. If you look at the consumer business, as our Head of the Group has mentioned, from a top line perspective, we are seeing very positive results on the back half gaining of 2 loyal fans as well as introduction of the Together bundling plan. Also in terms of 5G subscriber, the progress is better than what we had planned for. By end of the year, we've originally said our target is 4.5 million, but we think we can outperform that objective. So in the consumer side, we can amply expect an improvement in mobile ARPU as we go forward. Also for B2B business, on the back of the untact and online trend, we've seen the contributions from the solutions business to the top line quite robust. And also thanks to a very strong internal operations, we've seen our B2B businesses margin improve as well. So in terms of the top line, we're expecting very positive direction going forward and also is going to show a very stabilized trend. So we do not believe that the acquisition cost related -- war that actually took place in the beginning of 2019 when 5G was first launched and any repercussions or negative impact will all be gone by the second quarter. In the subscriber market, we will make sure that we exert our all utmost efforts to make sure that there is market stabilization, and we look forward to your support in that process.

[Interpreted] I am [indiscernible], the Head of the Media Content business. I will respond to your question on our media strategy. Now we've been offering a differentiated product and service offerings to our subscribers, first for -- on the wireless-based 5G, as well as fixed line-based IPTV. So there were some positive outcomes, results we were able to derive out of these very different service businesses. But in the past, they were simply focused on core technologies. But going forward, we want to evolve this into a core service-based service offerings. We want to focus on differentiating ourselves against our peers by offering interactive services based on AR and VR and bring about unique competitive edge in the content offerings so that we can deliver a unique and original experience to our customers. Now the content we deliver across our service platform comprised of our in-house-developed original content as well as content that we source from outside. Now we had recently co-produced content called Tomorrow's Hero, which features the female golfer, Pak Se-ri, which was a big of a success. Based on such practices, going forward, we will collaborate with other content production houses so that we can cooperate in different areas, such as performances and also cooperate in developing contents together with those studios.

[Interpreted] Well, this brings us to the end of the earnings release call for Q1 2021. We would like to now close the session. If you have any further questions, please contact our IR team. 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.]