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 third 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 home page so that you can follow the conference simultaneously. Today's conference call will be presented for one hour. And due to schedule, you would appreciate if questions are limited to 2 per person. And now we will begin the conference of the fiscal year 2021 third 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 our third quarter 2021 earnings call for LG Uplus. For those of you joining us today, please refer to our Q3 earnings presentation. And for your benefit, we presented the breakdown revenue figures of each business as well as for operating expense without including LG HelloVision. Please note that all projections are subject to change based on changes in macroeconomic and market conditions. And we will also be providing consecutive interpretation for the benefit of our investors abroad. We will begin with the presentation on Q3 results, which will be followed by a Q&A. I would now like to turn it over to our CFO, Lee Hyuk-Ju, our Executive Vice President of LG Uplus, to present on the business results and financial highlights for Q3 2021.

[Interpreted] Good afternoon. I'm Lee Hyuk-Ju, the CFO. I would like to thank the analysts and investors for joining LG Uplus' earnings release call for the third quarter 2021. Under the company's Customer First business focus, LG Uplus sustained its business growth from consumer and B2B infrastructure on the back of new business initiatives for future growth and brought customer service improvements and stronger content differentiation for each segment. In particular, we were selected as the exclusive IPTV provider for Disney+ in Q3 and are in the process of setting up rate plans for Disney+ in time for its launch on November 12. We will be presenting an extensive media library, which includes Disney's 6 major services, i.e., Marvel, Pixar, Star Wars, National Geographic, Star, as well as Disney+ original domestic content to the users of Uplus TV, Uplus mobile TV and HelloTV, which will further boost competitiveness of our media platform. Going forward, Disney+ will bring innovation in creating new value in the kids and family segment, underpinned by LG Uplus' capabilities in operating a media business and Uplus Kids will service coupled with Disney's exceptional content offerings. B2B infrastructure business saw a solid growth in underlying revenue from IDC, enterprise line and messaging. And since we won Korea's biggest CITS project and since there were increases in smart factory solutions, we saw a double-digit growth. Under the B2B business, we will expand the supply of smart solutions that help to enhance safety and environment, creating a smart environment on the factory premise. Also, based on the success of proof-of-concept testing for MEC-based cloud robots, we were pushed forward with commercialization of auto-guided robotic service. And in collaboration with Korea Transport Institute, we will update our autonomous driving technology and services and make greater contribution in building smart cities. With that, I will move on to Q3 financial highlights. Q3 service revenue was up 5% on-year to KRW 2,783.1 billion on the back of growth in 5G penetration, MVNO business and solid growth from Smart Home and B2B infrastructure. On a cumulative basis, there was 5.1% growth with revenue reporting KRW 8,241.7 billion. On a separate basis, Q3 cumulative service revenue was KRW 7,573.1 billion, with KRW 10 trillion guidance well within sight. Q3 consolidated operating profit was up 10.2% on year to KRW 276.7 billion, driven by service revenue growth and lower marketing spend and efficient cost controls, generating a record high quarterly performance since the merger in 2010. Operating profit on a cumulative basis was KRW 820.8 billion and an improvement from core business margin, OP margin reported 10%, up 1 percentage point from last year's 9.1%. Q3 EBITDA was KRW 895.5 billion, up 7.1% year-over-year, with cumulative figure coming in at KRW 2,637.2 billion, as we continue to see operating cash flow improvement. Q3 consolidated net profit was KRW 211 billion, down 47.7% year-over-year. But excluding KRW 230.5 billion of gains from discontinued business, Q3 last year, there was actually a 22% improvement. Net profit on a cumulative basis was KRW 622.4 billion, outperforming last year's net profit. CapEx spend in Q3 was KRW 600.5 billion, within the annual CapEx plan. Total assets reported KRW 18,681.2 billion. Total shareholder equity was KRW 7,902.6 billion. Total liability was KRW 10,778.6 billion, with liability ratio at 136.4%, improving 3.4 percentage points year-to-date. This ends the business and financial highlights. And we now move on to individual business performance and outlook.

[Interpreted] First is consumer business. I am [ Yu Sung Chang ], Head of Consumer Business, Innovation Group. Q3 mobile business had several factors that could have driven down its top line, such as MNO handset market decline and less business days following the Chuseok holiday. But on higher 5G penetration and increase in high-value customers, there were MNO subscriber mix improvements and MVNO revenue growth as well, with service revenue up 3.6% year-over-year, reporting KRW 1,434.3 billion. And on a cumulative basis, it was up 4.7%, reporting KRW 4,262.1 billion. There were 17,497,000 cumulative subscribers in Q3, which is up 7.6% year-over-year, with 5G subscribers reporting 4,108,000, accounting for 36.1% of handset subscribers, as we are on smooth sales towards 40% year-end target. And driven by 5G subscribers, MNO ARPU reported KRW 30,912, which is a rise both on an year-over-year and Q-on-Q basis. As ratio of online channel took a bigger portion out of total subscription, subscriber acquisition costs stabilized, driving marketing expense down 2.8% year-over-year to KRW 564.7 billion, while cumulative figure was also down 1.4% to KRW 1,679.5 billion, as we continue to play a leading role in bringing a more stable market environment. Known as the company that customers first seek out and under the guidepost of reporting the lowest churn rate, we continued to focus on customer care services in the third quarter. We added MVNO channel on the NH Nonghyup Bank platform. We advanced and upgraded our direct rate plan, offered repair cost support for Apple products and provided long -- care plan for our long-term users, all of which were geared towards our hardcore fans. And as a result, MNO churn rate reported 1.39%, which is down 0.07 percentage points year-over-year. Also, Uplus subscription book, which is a membership-based service, adopting a subscription economy model, has seen continuous uptake in subscription for coupon GS25 Naver Plus and Millie's Books as we expanded the offering to other partners such as Dunkin' Donuts and SOCAR in the third quarter. Our partnership however isn't just confined to channels, but we are the first telco to partner up with Spotify, the world's biggest music platform. Through this alliance, we are servicing 70 million music titles, currently being offered in 178 countries around the world, offering personalized recommendations and free trials, thereby strengthening the user benefit. For 5G, we have expanded online XR immersive concert platform through which fans can communicate in the virtual world. And by linking up to Idol Live, we are expanding the fandom base. Also in Q3, by entering exclusive partnership with Legoland, we will be able to showcase many different experiences that leverage 5G technology, such as the likes of the AR theme park. Now on the Home business. Q3 Smart Home revenue was up 10.5% year-over-year to KRW 568.5 billion, regaining its double-digit growth. And driven by growth in high-value subscribers leading to higher basic fee revenue and on higher home shopping commissions revenue, IPTV revenue was up 12.4% year-over-year, reporting KRW 329 billion. Meanwhile, broadband Internet revenue was up 8.1% on year, reporting KRW 239.5 billion, on the back of sustained rise in Giga Internet users. Subscribers for IPTV and broadband were up by 8.8% and 4.9% year-over-year, with cumulative subscribers at 5,265,000 and 4,693,000, respectively. And with the rise in the take-up of Uplus Together Home package that offers bundling discounts for mobile, home service and other select services, bundling ratio continued to rise. For media content, we launched premium set-top called Soundbar Black, which adopted Dolby's Atmos technology, Dolby Vision, offering best picture quality, as well as the UPlus TV-free #3, which is the highest spec device in the domestic IPTV market. All of which helped to boost up viewing experience at one's own home. As mentioned at the very beginning, through partnerships with Disney+, we will be the frontrunner in differentiating our IPTV content platform following our achievements in Kids World and Netflix. Through the open platform strategy, we will focus on expanding alliances with competitive OTT providers, both domestic and global, and we'll expand on high-quality content offerings. MAU for Kids World continued to display an uptrend. And by collaborating with Kazania, we plan to build experiential Metaverse platform for kids, beefing up content that combined play with education, so that we may eventually evolve into a platform business. In Q4, consumer business will focus on providing optimal data quality and content, strengthen customer benefit, so as to further expand our true fan base.

[Interpreted] Next is on the B2B infrastructure, and I am [ Ying Zhang Ho ], Head of B2B business. Key Q3 highlights for B2B infrastructure are as follows. Supported by sustained growth from its underlying business, third quarter B2B infrastructure revenue was up 11.3% year-over-year to KRW 369.1 billion. On a cumulative basis, revenue reported KRW 1,094.9 billion, which is up 10.9% on-year, sustaining a double-digit growth. IDC revenue posted 19.6% growth in Q3. And we received ISO 45001 certificate for the Pyeon-chon Mega Center, which was a first for a domestic IDC, as we are offering most optimal data services to Korean and global IDC customers. On the back of rise in messaging revenue, driven by vaccination and payment of government COVID allowances as well as higher revenue from 5G-based new businesses that include Smart Mobility and Smart Factory, Solutions business revenue was up 22.5% on year to KRW 115.5 billion. Enterprise line also posted a steady revenue year-over-year growth of 2.8%. LG Uplus in Q3 yet again showed meaningful and robust growth from its underlying revenue. And we continued to focus on growing reference sites and winning projects in smart factory and 5G-based B2B businesses. We were also selected to partake in the Smart Industry Zone project, which is a 5G-based MEC government-led project, under which, petrochemical complex in Ulsan and Yeosu where we built as smart industrial complexes before the end of the year. Our B2B infrastructure business not only focuses on new business areas, but have launched solutions to support SMEs improve their business environment and productivity. In Q3, in order to support restaurant owners, when they subscribe to My Shop package, which is a product for smaller merchants, we paid out Payming business point, which they can use to pay for Payming delivery, thereby helping out during this difficult time of COVID-19. In the fourth quarter, LG Uplus will expand our underlying revenue and 5G-based new businesses in order to continue to grow our B2B infrastructure and will support smaller merchants along this journey. This ends the earnings highlights from each business. We now invite back our CFO who will provide Q4 business outlook.

[Interpreted] During Q4, we expect to hit 40% 5G penetration by the end of the year following the launch of flagship handsets, including iPhone. With additional growth from Smart Home and B2B infrastructure, we are targeting a sustained profitability improvement and KRW 10 trillion service revenue on a stand-alone basis, as communicated at the beginning of the year. We are currently writing up our business strategy for next year. And our aim will be to discover differentiated value propositions per customer segment and to focus on innovating customer experience to further solidify our subscriber base. For the platform business, we plan to add up new features on our strong content offerings of Kids Family, Idol and Sports, and also showcase original content to further enhance business and corporate value. And to strengthen competitiveness of the service platform, we will produce our own original content in Kids, Idol, Performance, Sports and Entertainment, where we already have an edge. And also, we'll monetize across the value chain in order to build a virtuous cycle. For the B2B business, we plan to focus on smart factory and mobility where there is high potential for growth and where we can leverage our telecom capabilities of the company so that we may expand new business and build a structure with very strong fundamentals. By outperforming our targets in Q4, LG Uplus will continue to enhance corporate value and shareholder return, and through service innovations, will make bigger contribution to the greater society. Thank you very much.

[Interpreted] This ends the presentation. We will be taking your questions now.

[Interpreted] [Operator Instructions] The first question will be provided by Hoi Jae Kim from Daishin Securities.

[Interpreted] I would like to post 2 questions. I'm from Daishin Securities. I would like to first congratulate you on reporting a very good performance over the past 3 quarters. And looking at the current trend, it seems that you would most likely be able to achieve KRW 1 trillion of operating profit by the end of the year. So could you provide some color with respect to what your Q4 outlook is? Second question relates to 2022. If we continue to see such trend in terms of both top line and operating profit, and if that also translates into a higher payout ratio, dividend payout ratio, then I think that that's going to invite quite a bit of interest on the investor community. So could you provide what your outlook is for next year?

[Interpreted] This is the CFO responding to your question. With respect to the guidance that we communicated in the early -- at the beginning of this year, which is KRW 10 trillion of service revenue and operating profit margin of around 10%, considering the progress that we are seeing to date, I believe that what I've communicated at the beginning of the year can be sufficiently met. Now regarding what I communicated this year, in terms of the service revenue, we've mentioned that we would be seeking to achieve about 5% service revenue growth this year. That's what we communicated. And considering the fact that the overall telco market growth is quite stagnant, that 5% growth is a quite formidable challenge, as mentioned previously. However, we think that considering the current trend, we will be able to amply achieve that target. For next year, although right now, we're in the process of actually writing off our business plan for 2022. And we are -- we believe, and we are trying to bring about that around that 5% growth in terms of top line next year as well. We will endeavor toward that. In terms of the operating profit, we are at this point reviewing many different business management related elements and factors, trying to figure out ways where we could actually bring to you a better scorecard for next year compared to this year.

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

[Interpreted] Based on the announcements that you've made in terms of your earnings results, the performance has been quite good. But so if you look at the stock market, your capitalization is at KRW 6 trillion, which I think is underperforming compared to your performance. And I think there are 2 main reasons behind that. First is the unclear long-term dividend payout policy of the company. Many companies these days have really come out and elaborated and made more clear what their dividend target is and what the overall dividend direction is going to be. However, that does not seem to be the case for your company. The second aspect is that as we live in the age of 5G telecommunications, there's a lot of interest on this very field. But it seems like the company's vision with respect to 5G had been not as strong enough. For instance, if you look at the CapEx into your mobile and wireless, the investment level has been quite low, and it seems to lack, I guess, any engine behind introduction of killer services or a more clear vision. Can you provide what your position is with respect to these 2 questions that I've just raised?

[Interpreted] Now responding to your first question on dividend, this is the CFO. If you look back past several years, our payout ratio had been around 40%. And in my mind, that had always been the guidepost under which I have been managing the company under. With the adoption and introduction of 5G technologies, we weren't all that confident from the very beginning as to how big of an investment this technology would entail. And so we weren't able to very clearly and explicitly share with you what our payout policy is. But I believe come -- early next year, we will be able to clarify our dividend payout policy. And once that time comes, we will make it more explicit. Once again, for the coming years, in light of the performance and the progress that we've been able to achieve and considering the commitment that I have when it comes to shareholder return policy, I think that the level of payout ratio that I've always been thinking of personally, I think that will be well in line with what the investors are expecting of us.

[Interpreted] I am Chen Xiang Gong from the Home and Media Group. I will respond to your question on 5G. Now regarding the 5G investment and any specific plans for developing killer services and the concerns that you have regarding that topic, we internally within the company have been very busy and actively making preparations and developing such services in terms of sports, home training, as well as the future, which is the Metaverse. When we first launched 5G, we offered XR services. And we are at this point combining other very popular content on top of that XR platform so that we may provide a more differentiated content offerings to our user base.

[Interpreted] The following question will be presented by Seung-Hyun Lee from Citi Securities.

[Interpreted] My question is on regulation. The company has been posting very impressive result quarter-on-quarter every quarter. And there seems to be higher visibility of good performance to come going forward as well. What I'm a bit concerned about is that, as we are facing Presidential Election upcoming next year, there may be some political pressure for a rate cut, because that was usually what happened in the past election period as well. So I would like to understand what management's position or view is on this very issue.

[Interpreted] I am Kim Young-Seob in the Business Cooperation Division. LG Uplus, as you know, we are already providing mid- to low-end price services in the MVNO market. And also, we have -- we are providing the together rate plan in the MNO market as well, maximizing the benefit that goes back to our consumers. And so we have been offering very reasonable as well as a more diversified tariff plans depending on different customer segment. We've been endeavoring towards that direction over the years, and we will continue to do so going forward as well. With the government authorities, we will engage in in-depth discussions and carry out the needed discussion as well as agreement in this topic.

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

[Interpreted] I have 2 questions on your media business. First one is, can you share with us some detail on your Disney+ partnership, and what future impact it will have on your business? Second, can you also provide some more elaboration on what your high-level overall media strategy looks like?

[Interpreted] I'm [ Chen Xiang Gong ] from the Home and Media Group. One key characteristic that stands out from our partnership with Disney+ is that we have exclusive arrangements not just on the mobile side, but on the IPTV as well. And I think one meaningful aspect from this alliance is that we will be having a very superior positioning in the minds of customers' awareness as Disney equals Uplus with respect to all of the other OTT services. We are at this point developing our rate plan for Disney+ and also developing various different programs. With regards to details, because it is currently under development, we will set aside a separate occasion so that we may inform you of the details. When it comes to the Disney+ services, we believe that we will be able to develop a very differentiated customer experience as well as a customized rate plan that best benefit our user base. Hence, we believe that this will have a positive impact behind the growth of our mobile and IPTV business. You also asked about our high-level media strategy. In line with the growing consumption of content as well as trend around the streaming service providers, we will adopt an open platform strategy when it comes to OTT services and will offer various different types of content and will partner up with many potential partners, both domestic as well as global, and really provide high-quality content. In terms of the Platform business, we already have a very strong competitiveness in Kids and Family segment, Idol and Sports services. So we will be adding new function and features as well as producing our own original content. And based on the subscriber data that we are able to acquire in this process, we will leverage that data and expand to other areas such as advertisement and commerce, which all in all will have a positive impact on improving our corporate value. And when it comes to developing and producing our own content, rather than investing into areas such as feature films and drama production, which entail a high level of investment and which have quite a bit of -- which has quite a bit of uncertainties embedded in it, we would like to play off of the service platform where we already have a very solid fandom established. And we will focus our efforts in developing original content based off of those such platforms. And once they are produced and developed, we will utilize our value chain and develop a business model or a structure so that we may very effectively monetize from these contents.

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

[Interpreted] I'm from KB Securities. I'm Kim Joonsop. My questions relate to your IDC and Solution business. What is the total market size of this business? And also, what are your strategic targets when it comes to the customer segment? And compared to last year, has there been any change in the way you view these businesses, namely IDC and Solution?

[Interpreted] I'm Ying Zhang Ho from B2B business responding to your question. IDC, we plan to continue to grow and develop this business. In line with the continuous growth of the global CSDs, there is going to be a continuous growth in the demand behind cloud. So we believe that we would be able to continue to see a maximized level of growth from IDC, and we will fully leverage that trend. And in terms of solution-based B2B new business, we are at this point very much focusing our key capabilities in areas such as Smart Factory and Smart Mobility where there is high potential for growth. In terms of Smart Factory, we will leverage off of the synergy that we can get from the LG Group. We will continue to add on new reference sites and best practices and success cases. So that would be our key strategy, to actually broaden the target of our business. And also for mobility, we will be in line with the growth in terms of market need and demand regarding the infotainment services for connected cars as well. So we were really focused on strengthening our services and winning projects in the Smart Mobility segment. If you look at Q3 Smart Mobility revenue, it was up by 4x compared to previous year. And within the Solutions business, the new business revenue posted around twofold growth compared to the previous year. And also, we successfully completed our proof-of-concept testing for cloud guided robotics, which is guided by 5G MEC. And we have completed an equity investment during the third quarter that will help us expand our mobility business. So as such, we will continue to endeavor towards expanding the basis for our new business, B2B new business.

[Interpreted] The last question will be presented by David Gambrell from [ NT Asset ].

And congratulations on a very good quarter yet again. The question is a simple one, just about the taxation rate. For the first 9 months, your tax rate has been around 20%, which is below the standard corporate tax rate of 25%. So I'm just wondering if you can please explain why the tax rate is that low? And also whether that is sustainable in the fourth quarter and into 2022 and 2023?

[Foreign Language]

[Interpreted] This is Kim Yong-Jun. I'm in charge of accounting with the company. Basically, the projected corporate tax rate for 2021 is around 21%. And the reason why our corporate tax rate is lower than the 25% that you've mentioned is because of the investment-related credit. And for 2022 onwards to '24, it will be lower than 25%, but we believe that the tax rate is going to be higher compared to the 2021 rate.

[Interpreted] Well, thank you. That brings us to the end of the earnings release call for third quarter 2021. If you have further questions, please do not hesitate to contact the IR team. Once again, thank you very much for joining us. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]