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 Second 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 Second Quarter Earnings Results by LG Uplus.

[Interpreted] Good afternoon. I am Nose Ban, Head of IR at LG Uplus. We would now like to begin second quarter 2021 earnings release for LG Uplus. For those of you joining us today, please refer to the second quarter earnings material, which we have previously circulated and also note that we're presenting our revenue and operating expense breakdown without including LG HelloVision. All the projections we are providing today are subject to change in line with changes in macroeconomic and market situation. And for the benefit of our foreign participants, we will be providing consecutive interpretation. We will first begin with the presentation on our earnings, and then we will conduct the Q&A. Now I would like to turn it over to our CFO and Executive VP, Hyuk-Ju Lee, to go over the financial performance as well as provide us with the performance update.

[Interpreted] Good afternoon. I'm CFO, Hyuk-Ju Lee. I would like to thank our analysts and investors for joining LG Uplus Second Quarter '21 Earnings Release Conference Call. During the second quarter, LG Uplus played a very important role in laying down eco-friendly smart infrastructure that leverages telco services and digital technology in many different industrial sites and have made service and solution proposals to enhance business environment for small-to-mid businesses as part of our efforts to strengthen ESG-centric management. Also, for the first time in the company's history in Q2, we acquired KRW 100 billion of treasury shares and set in place an interim dividend program to diversify shareholder return policies and to enhance shareholder value. Interim dividend has been set at KRW 200 cash dividend per share during yesterday's BOD meeting, which is around 44% of last year's dividend payout. Now to second quarter business results. In Q2, supported by high-quality subscriber growth on the back of the company's key focus on customers and true fan base of LG Uplus, service revenue was up 5.6% on-year, sustaining the uptrend. Despite termination of 2G services and contraction of the MNO handset market, consumer business saw 8.4% subscriber growth accompanied by churn rate improvements with first half wireless service revenue posting cumulative growth of 5.2%. For the new businesses through business partnerships and equity investments, we bolstered competitive edge of U+ Kids World platform business and also expanded media content distribution using PPs and took on online concert and performance business and continued to drive up user views of Idol Live and XR Services. For the MVNO services, where subscriber net addition and revenue contributions are growing on the back of the growing market, we expanded self-activation channel, enhanced customer service quality, including offering free data with a view to building basis for inclusive growth with MVNO operators. For the B2B business, in Q2, we expanded eco-friendly management and smart infrastructure build-out that leverages digital technology, focusing on creating an ESG-centered business environment at different industrial sites. B2B infrastructure business has recorded a double-digit growth year-on-year as of the first half of the year and on increase in orders we are winning from new businesses and revenue growth supported by good performance from enterprise line and the IDC business, triggered by the online demand, Q2 Solutions business posted meaningful results underpinned by SME Solutions revenue growth and B2B new business expansion, leading to more than 30% Solutions business growth both on a year-over-year and Q-on-Q basis. In the meantime, last June, LG Uplus declared its plans to evolve into a digital innovation company. We've been quick in making investment decisions and expanding equity investments into non-telecom businesses in order to gain revenue sources and made concrete collaborations with other group affiliates as well. We've recently made equity investments into a security technology company called CryptoLab, which will help upgrade information security of LG Uplus' entire commercial network and through applications in various different industries, we plan to make contributions to the greater society. Now moving on to Q2 financials. Q2 consolidated service revenue was up 5.6% on year to KRW 2,766.7 billion, driven by across-the-board growth from all of the businesses. Stand-alone cumulative service revenue for the first half was up 6.5% on year to KRW 5,013.4 billion, which is 50.1% progress against the JPY 10 trillion annual guidance. Q2 consolidated operating profit was up 12% on year to KRW 268.4 billion on the back of service revenue growth. First half cumulative operating profit was up 18.4%, reporting KRW 544 billion, while operating profit margin improved by 1.1 percentage points, reaching 10%. EBITDA also came in at KRW 1,741.7 billion as of the first half, which is up by KRW 100.8 billion year-on-year. Consolidated net profit for Q2 was up 39.8% on-year and 4.8% on quarter, reporting KRW 210.5 billion, while on a first half cumulative basis, it was up 37.4% year-on-year, reaching KRW 411.4 billion. Total assets as of end of Q2 was KRW 18,634.3 billion. Total liabilities, JPY 10,783.5 billion, while liabilities ratio was 137.4% and net debt-to-equity ratio reported 64%, which are 2.5 percentage points and 1.8 percentage point improvement, respectively. That was business and financial highlights. We will now move on to each business division for its business performance and future outlook.

First is consumer business. I am [indiscernible], Head of Consumer Business Innovation Group. Q2 mobile service revenue was up 5% on-year to KRW 1,415.1 billion. On a first half cumulative basis, mobile service revenue reported to KRW 2,823.2 billion, which is up 5.2%, sustaining a steady growth trajectory. Just made a correction in Korea. On a first half cumulative basis, the revenue reported KRW 2,823.2 billion, which is up 5.2%. In 2021, we adopted [ 2 Fan ] strategy and under the objective of keeping the lowest churn rate, we focused our efforts. And as a result, our Q2 MNO churn was 1.28%, which is down 0.15 percentage points on-year and 0.11 percentage points on quarter. On a first half basis, churn rate was 1.33%, which is down 0.1 percentage points year-on-year. Supported by such trends , as of end of Q2, there were 17,198,000 cumulative subscribers, which is a 8.4% year-over-year growth. In Q2, there were 392,000 5G net add subscribers, up 18.9% on year with cumulative subscribers at 3,727,000. 5G now accounts for 32.9% of the handset subscribers, and we are well underway to meet 40% penetration by the end of the year. MNO ARPU was KRW 30,802, up 1.1% on year, sustaining the year-over-year growth for 3 consecutive quarters since the turnaround in Q4 of 2020. Moving on to the Home business. Second quarter Smart Home business revenue was up 8.9% on year and 1.6% on quarter to KRW 538.7 billion. On a solid subscriber growth, IPTV basic fee revenue is trending up with total revenue up 8.4% on-year to KRW 303.9 billion. Broadband Internet revenue was up 9.6% on-year to KRW 234.8 billion on the back of Giga Internet and smart Internet, taking a bigger share of total sales. For the smart home business subscribers, IPTV and Internet posted year-over-year growth of 9.4% and 5.1%, respectively, with cumulative subscribers of 5,173,000 and 4,637,000, respectively. With the release of U+Together Home pack that offer bundling discounts across mobile, IPTV, Internet and selective home services among friends and families, we increased share of bundling as well. LG Uplus has been nimble in responding to changing marketplace and focused on services that customers like and which Uplus has the edge. In the saturated MNO market, while focusing on customer value propositions, we lowered the churn rate to improve profitability. While in the MVNO market, which is expanding, we sought after alliances with different partners in the market and drove growth through product introductions. Supported by these activities, we were able to continue steady revenue growth of the mobile business as well as sound subscriber growth. We also strengthened customer value propositions in the second quarter through membership benefits and made upgrades to U+MVNO partners 2.0 services. We added Neighbor Shopping and Milly's books on the new subscription section of My [indiscernible] Service, which we are offering to Uplus membership customers. We offer subscription for things that people like the most and have added practical benefit. And in 2019, we introduced MVNO Partners 1.0 in order to support small to midsized partners. With the upgrade to Version 2.0, we will continue with customer-centric product innovations, convenience enhancements and help our partners strengthen their competitive edge. Through such efforts, we will seek to support the growth of MVNO subscribers using the pay later billing and will offer programs to enhance the CS channel as well. On the content offering side, we conducted updates to Pro Baseball and Golf, where LG Uplus has competitiveness. And last May, XR Alliance launched Episode 2 of Space Explorer, which is a virtual reality content filmed actually in the outer space and announced that U.S. AR company called Trigger will join the Alliance. As such efforts are being made to be -- as such efforts are being made to be at the forefront of the so-called age of Metaverse. Kids World, which is our flagship service, saw its cumulative user number rise above 45 million and by actively embracing customer feedback, we've made many enhancements, which is a key driver behind the user growth with active users using the service more than 5 days on average per month, growing above 5%. Going forward, for the U+ Kids World platform, we made equity investments together with kids content production houses and will use such IP to strengthen competitiveness of the platform and we'll explore and try different revenue models. In the second half of the year, Consumer business will do its best to continue its revenue growth by employing flexible strategies in the fast-changing 5G market, and we'll seek qualitative growth on the basis of thorough understanding of our customer base.

[Interpreted] Next is B2B Infrastructure, and I am [indiscernible], the Head of B2B's new business. I will walk you through key business results for the second quarter. Q2 B2B infrastructure revenue was up 12.7% on year and 13.9% on quarter, reporting KRW 388.8 billion on the back of strong performances across all businesses, including IDC and solutions business. Cumulative first half revenue was KRW 730.4 billion, which is up 10.9% year-on-year. Solutions revenue was up 34.3% on-year and 35.8% on quarter on the back of SME and Network Solutions growth and monetization of new businesses. Also, IDC business on the basis of underlying revenue, which was up more than 20% in the first half as well as new orders, IDC revenue was up 5.7% on year and 18.7% on quarter reporting KRW 66.7 billion. Enterprise line was also up by 3.3% on year and 0.8% on quarter driven by steady revenue growth. By building out hyperscale eco-friendly Pyeongchon IDC Center that can house more than 100,000 servers, and that which can reduce 65,000 tons of carbon emissions through energy savings and use of renewable sources, we plan to offer customizable services equipped with security, safety and user convenience to proactively respond to businesses, cloud migration needs and online service demand. Also, we won Gangneung City's ITS, Intelligence Transit project, Busan New Port project, Gwangyang Smart Port Project and Yeosu Petrochem Smart Industrial Complex project on the basis of 5G MEC technologies, thereby expanding smart infrastructure at different industrial sites. We are also working with a chemical company, BASF Korea to build out smart factories equipped with location-based, real-time monitoring of workers for safety purposes. By collaborating with capable and tested partners, we continue to explore new solutions that workplaces need such as switchboard, electrical switchboard, diagnostics, AI-based facility monitoring and quality inspections. We have also been focusing on commercialization of the next-generation business called Quantum Cryptography. Last June, together with CryptoLab and Coweaver, we were the first in successfully applying PQC, which is post-quantum cryptography to telecom equipment. Following Proof-of-concept testing in the industrial and medical domain as part of government's digital new deal initiative, we plan to also run pilot of quantum cryptography communication infrastructure in both the public and private sector, so as to protect intellectual property, prevent cyber attacks and provide security to areas under access control. These efforts will help beef up information security in many industries, and we will be making bigger contributions to this cause. For the Smart Factory business, LG Chem and other chemical plants have adopted atmospheric diagnostic solutions, which provides real-time diagnosis of emissions and spread of atmospheric pollutants. We expect this will help set in place ESG-centered environmental management in the industrial workplaces and will help drive additional revenue for the company's solutions business. Lastly, we launched U+ My Shop Package back in July, catering to the needs of small restaurant operators to help them respond quickly to rising demand for online delivery since the outbreak of the pandemic. We offered 9 essential solutions, which include services like tax filing, delivery and hiring free of charge for up to 12 months in order to help small vendors better operate their businesses. Thanks to such genuine efforts and specialized service offerings, we help to enhance operational efficiency and improved value of customer services. We will continue to bring growth to our core underlying businesses and expand 5G-based new businesses targeting B2B clients and local government, so as to drive sustained growth of our B2B infrastructure business. That was on the key earnings highlights. I will now invite back our CFO for second half business outlook.

[Interpreted] Consumer business in the second half of the year is expected to show continued uptrend in 5G penetration on the back of new handset releases. And on growing number of projects in IDC and Solutions Business and Media Platform growth, we expect non-telecom business revenue to also rise as we go forward. The company, under the objective of expanding the share of its non-telecom business to 30% of total revenue by 2025, will continue to focus on strengthening our competitiveness in the new business areas. For the consumer business, we will expand strategic alliances and equity investments in new business -- in new business areas of mobile and smart home and will further make investments into original content, which will add value to the current platform. Also for B2B new businesses, we plan to proactively expand partnerships with group affiliates and industry's leading players. In terms of new businesses, i.e., smart factories, my mobility and AI call centers, we plan to leverage capabilities of our group affiliates such as LG Electronics, LG Chem and CNS. And by actively seeking partnerships with industry-leading players, we will increase revenue contribution from such new businesses and be nimble in carrying out businesses so as to achieve our vision of becoming a digital innovation company. As we move into the second half of the year, LG Uplus will continue to generate earnings in both telecom and non-telecom businesses with a strong customer focus, and we'll be agile in responding to market changes so that we may achieve our annual guidance and enhance shareholder value. Thank you. We will now take your questions.

[Interpreted] The first question will be provided by [indiscernible] Securities.

[Interpreted] I'm [indiscernible]. My first question relates to your dividend. You've made the decision to pay out an interim dividend. In light of the absolute size of the dividend payout, it is not that significant, but is it okay for us to presume that going forward, you will be increasing your payout ratio as well as the absolute amount of dividend payout in light of the improving earnings of the company. And also, if you look at the wireless service revenue, it is improving, but the ARPU growth is not as satisfactory. Could you elaborate as to the reason why that is the case? And can you share with us any details on the collaboration that you are currently engaging in with Disney+?

[Interpreted] Responding to your question first on dividend. This is the CFO. I will respond to that question. As I have communicated during last conference call -- earnings conference call and in light of the proposals that we've gotten from the market. And also after we've gone through internal review, our ESG Committee as well as our BOD have resolved on the dividend issue and have made the resolution to pay out interim dividends. So the interim dividend amount of KRW 200 per share may not seem that big. It is a small amount. But on a year-over-year basis, this is basically paying out 40% of our dividend payout that we've done compared to the previous year. This decision was made so that we could further encourage the investment activities of our shareholders. And on an absolute basis and per annum basis, in light of the progress of top line revenue and operating profit, earnings growth that we are seeing versus the previous year, we think that the size of dividend payout on an absolute basis, it will probably go up as well. That is our expectation at this point in time. In terms of the payout ratio, in our guidance, we communicated that we will be paying out about 30%. We've set that as a guidance of a payout ratio. But if you look at the actual payout that was made over the past 2 to 3 years, actually, we hovered around 40%, if you do the calculation. So as we've done in the past, for next year dividend, which will be based off of the performance of this year, aside from the payout ratio that we've included in our guidance, we will be very progressive in paying out and setting the payout ratio. We really listened to the feedback the market had given us and what you've told us in our last conference call with regards to the interim dividend, and we've made that decision accordingly. In terms of the payout ratio, we are open to suggestions and we will be actively listening to the feedback of the market. So I can say that there are room -- well, there is room for us to actually increase that payout ratio as we go forward. So I did take to my heart the feedback that you've given me last time, and I will continue to do so. I will respond to your question about the wireless ARPU in the second quarter. Because there were no launches or new releases of flagship handset and also we've seen net addition decline or actually there was a handset net reduction, because of these 2 drivers ARPU growth has been less than satisfactory. Now having said that, with the introduction of the Together rate package, which we launched in the first half of the year, we've seen higher take-up of high-end rate plans. And on a year-over-year basis, ARPU growth has been showing a continuous uptrend over 3 quarters. So what we are hoping for is that as we enter into the second half with the release of Galaxy and iPhone, which are the flagship handsets, we believe that there is ample possibility that ARPU would start to show a robust trend and especially the Together rate plan that we've introduced, we believe, can actually defend the erosion of ARPU. So with these factors, I believe that as we enter into the second half and to Q3, we will be able to see the ARPU growth trajectory come back to the ordinary level.

[Interpreted] I'm from Home Media Business Group. I am [indiscernible]. I will respond to your question on Disney+. Currently, we are in discussions and negotiations with Disney. However, nothing has yet been finalized. Now having said that, we are quite positively, I believe, assessed. And the fact -- by Disney and the fact that we provide customer convenience and the fact that we have competitive edge in the IPTV set-top box, which is based off of Android operating system. And second, the target group for our services which is mostly in the -- for people in their 20s and 30s and single member households as well as kids, mothers, kids mom -- people who have children, basically, the target group with Disney actually is also quite well aligned and we can boast of some success cases in marketing collaboration with overseas global service providers. So those actually work as a positive strength for us in this negotiation process. And both companies will do what we can, and we'll do our best to bring about a good outcome from these discussions. Next question, please.

The following question will be presented by Soonhak from Hanwha Investment & Securities.

[Interpreted] I am Soonhak. My question first relates to your MVNO strategy. Unlike your peers, you have been bolstering your MVNO strategy, and that has translated into a accelerated end flow of net additions. What is your rationale behind maintaining such MVNO strategy? And also recently, your competitors are strengthening their MVNO pricing schemes as well. How do you plan to respond to that? What is your differentiating point? Second question. Your competitors have shown quite elevated share prices recently because of their focus on their non-telco businesses while LG Uplus continue to focus on your core telecom business. But having said that, you've announced that you will expand your non-telco business to 30% going forward. I would like to understand in more detail what are the business areas that you plan to actually grow? Could you be a little more specific on this point.

[Interpreted] This is the CFO, I will respond to your first -- second question, actually. So if you look at the non-telco businesses that our competitors are engaging in, I understand that those areas of business are quite different or completely different from the telco business, which makes their underlying business. For us, of course, we are open to various different ideas, but based off of the competitive edge that we already wield, we will be entering into relevant non-telco business areas that actually extend from telecommunications. As we've mentioned during the opening presentation on the B2B side, one of the key strengths that we have is that we have subsidiaries who actually have 70 different industrial workplaces whereby we could actually lay the basis for smart factory. So ahead of the every body else and to a very high level of quality, we are able to secure good references across all of these industrial applications. Aside from our group affiliates, we also have power generation companies and smelting, steel companies who actually require smart factory infrastructure. So we believe that based off of the strong reference that we build, we will be able to expand into those other customer base. Also on the public side, we believe that there is great opportunity for us to enter with respect to smart industrial complexes. And also within the LG Group, we recently launched the AI research center and they are making very meaningful progress as we speak. And we have CNS which has SI system integration capabilities. So there are many areas that we could actually expand into, for instance, like smart cities and intelligence traffic like ITS transportation services. So based off of such a strong competitive edge, we believe that we could create new sources of revenue for us. And in particular, these days, the very significant trend has to do with data as well as cloud migration. We think that there is also a greater business opportunity for us in the IDC business whereby companies would have to actually go through the businesses or use the services that we provide in our business to actually have an effective -- and receive services from our IDC business. Also, after we acquired HelloVision, we now have a subscriber base of 8 million, which is quite significant. And supported by this platform, we believe that we will be able to discover new business opportunities. And also because we have a very strong capability in terms of digital education because we have a flagship product called Kids World, we believe that there is a bigger opportunity for us on the digital education side as well. And so in light of that 8 million subscriber base and if we think about that addressable TV, basically, there's also opportunity in terms of advertisement revenue. And I think if we are to leverage this addressable market very effectively, we will be able to bring about additional advertisement-related earnings as well. We have a very strong experience in successful partnerships with the #1 industry providers. And I believe that if we are able to discover these business opportunities and expand into new areas, we could fully leverage their capabilities and entering into partnerships and alliances with other industry-leading players. And if need be, as I've mentioned during my opening presentation, we are also open to the idea of making equity investments or even M&As. Responding To your question about MVNO, over the past 2 to 3 years, we've been focusing on improving our competitive positioning in the market. So if you look at the key growth drivers that were employed, we were able to secure online partnership channels, just like with [ Coupon ] and eBay. And we started self-activation services, which increased the share of online sales in terms of distribution. We've also on-boarded KB and LG HelloVision, strengthened our partnerships with mid- to small operators, and we opened -- or we've started working with new business operators as well. So such co-marketing strategy, I think, was quite valid. We've provided a self-activation channel -- we've provided support to self-activation channel. And gave 150 gigabytes of data on top of what is supposed to be given to them, and we were able to really enhance service that we provide to our customers, and that had an important impact on growing the subscriber base. And as you know, the size and demand for the MVNO handsets are actually growing. And if you look at the MVNO market, there is an uptrend in the 5G subscriber number so the quality of the market itself is obviously enhancing as well. So LG Uplus' MVNO service actually satisfies the customer needs who want value for money and play an important role as a growth engine for the company. So we see that there is a continuous uptrend in terms of MVNO net addition and its share out of the total revenue. Our company has large partners like KB, HelloVision and Media Log, but we also have partnered program for small-to-midsize partners. So we continue to make sure that we gain and we improve our competitiveness. In terms of our response to the rate plans of the peers, because it's only been about a week, we are at this point really monitoring what the indicators or what the numbers tell us, and based on that we will be conducting discussions and will come up with appropriate measures. And when that time comes, we will soon share that with you as well.

[Interpreted] The following question will be presented by Ahn Jae-Min from NH Investment & Securities.

[Interpreted] My question relates to your marketing spend. Your absolute amount of marketing spending has not gone up significantly, but still compared to your peers, it seems that in Q2, it seemed to have inched up. In the second half of the year with the launch of new handsets like Galaxy Fold and Flip slated for August, what is your projection for marketing expenditure for the second half of the year?

[Interpreted] I'm the CFO, I will respond to that. Now 2 years ago, when 5G was first launched, there was an excessive level of competition across 3 telcos, and there was a significant amount of marketing spend, and that repercussion continues. So basically, that impact continues, and we've seen deferred expenses be actually reflected on the numbers of the marketing spend. Probably that impact will continue to Q3 of this year. Overall, second half, even with the introduction of new flagship handsets, we believe that the 3 companies because they are mostly focused on profit-centered or margin-centered business, at this point in time we do not foresee there to be an excessive competition on excessive spending for marketing purposes. So against the total service revenue, the current level of spend is about 22%, and we will do our best to make sure that we can continue on at that level.

[Interpreted] So with no further questions, we would now like to close LG Uplus Second Quarter '21 Earnings Presentation. If you need further information, please contact our IR team. Once again, thank you for joining us today. Thank you. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]