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

Good morning and good evening. Thank you all for joining this conference call. And now we will begin the conference for the fiscal year 2021 f fourth 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 for the fiscal year 2021 fourth quarter earnings results by LG Uplus.

[Interpreted] Good afternoon. I am [ Song Hyun-moo], Head of IR at LG Uplus. We would like to start with Q4 2021 earnings presentation of LG Uplus. Please refer to our Q4 earnings presentation and note that revenue breakdown of each business and details of operating expense are on the basis that excludes LG HelloVision which we are presenting for the benefit of ease of comparison. As a disclaimer, all of the protections -- projections cited today may change subject to macroeconomic and market backdrop. We would also be providing consecutive interpretation for our overseas investors. We will begin with fourth quarter performance highlights, followed by a Q&A. Without further ado, I would turn it over to our CFO, Lee Hyuk-Ju, who will run through our Q4 and 2021 earnings and business.

[Interpreted] Good afternoon. I'm Hyuk-Ju, the CFO. I would like to thank the analysts and investors for joining LG Uplus' earnings report for Q4 2021. Under our vision of becoming a digital innovation company bringing fun and exciting changes to customers' daily lives, we endeavored to redefine ourselves with an unswerving focus on customers. Our keyword in 2021 hence was hardcore fans. And by acquiring such true deal fans, we lowered churn rate and drove ARPA up, bringing qualitative growth. To be a company with a genuine focus on customers, we notched up our understanding of customers and fought fiercely to achieve 0 pain points for our customers. As a result, we saw fundamental scale-up in our ability to understand our customers and improved quality-related processes, which led to a significant decline in complaints in terms of customer service costs. In services, since November, we've been exclusively offering Disney+ on our IPTV platform. Many pricing scheme options were provided at launch, enabling customers to enjoy the new OTT service without feeling the cost burden. By offering Disney's 6 major content from the likes of Marvel, Pixar, Star Wars, National Geographic as well as Disney+'s domestic original content, we were able to strengthen competitiveness of LG Uplus' media platform. In Q4, we executed an MOU with KidZania, which is a work experience theme park for children, to start building out metaverse platform for kids in which children can experience many jobs in the virtual reality. We also signed an MOU with Unity Korea, a company owning Unity, in order to develop a virtual office, a company which is a global platform for real-time 3D content development, in an effort to expand the metaverse business. LG Uplus also saw its ESG efforts come to fruition. We were awarded integrated A rating, 2 notches up versus last year, in the 2021 ESG valuation published by Korea Corporate Governance Services. Our ESG management efforts were highly regarded, and we received governance award during the award ceremony held in December by KCGS. We will continue to listen carefully to the voices of our stakeholders for a new and a better growth and will honor sustainable ESG management commitment. Let me now run through financial highlights for Q4 and full year 2021. Company's consolidated Q4 service revenue was up 2.8% on year and 1.5% on quarter, reporting KRW 2,826.1 billion while full year service revenue was up 4.5% year-on-year to KRW 11,067.8 billion. On separate basis, full year service revenue came in at KRW 10,166.5 billion, outperforming KRW 10 trillion annual guidance. Consolidated Q4 operating profit was KRW 158.2 billion, with full year operating profit up 10.5% year-on-year coming in at KRW 979 billion. Excluding one-off labor costs in Q4, consolidated operating profit was above KRW 1 trillion. Consolidated Q4 EBITDA was up 1.2% year-on-year to KRW 782.9 billion while per annum EBITDA was up 5.2% year-over-year, coming in at KRW 3,420.2 billion, sustaining the uptrend in operational cash flow. Q4 net profit on a consolidated basis was KRW 101.8 billion with net profit for 2021 improving 51.5% on year to KRW 724.2 billion. Cash dividend per share in '21, including the interim payout, was KRW 550, which is KRW 100 higher versus last year, with payout ratio being 35%. CapEx for 2021 was KRW 2,345.5 billion, meeting the guidance of year-over-year reduction. Financial position as at '21 end on a consolidated basis show total assets of KRW 19,370.5 billion; total shareholder equity, KRW 7,958.6 billion; total liability, KRW 11,412 billion. Liability ratio on the back of increased payables for spectrum increased 3.6 percentage points year-to-date with net debt ratio making a slight improvement of 0.2 percentage points. Now that was business and financial highlights. We will now move on to each of the business lines' performance and outlook.

[Interpreted] First on the consumer business. And I am [ Park Chan-sung ], Head of Consumer Business Group. Q4 mobile service revenue was up 1.9% on year to KRW 1,430.6 billion while full year revenue was KRW 5,692.7 billion, up 4% year-over-year. The growth we've seen in the mobile business in 2021 was driven by growth in high-value subscribers, including for 5G, characterized as qualitative growth; as well as quantitative growth of MVNO subscribers. There were 17,987,000 mobile subscribers, up 8% year-over-year, of which 5G subscribers were 4,626,000, up 67.9% on year, accounting for 40.5% of total handset subscribers. Number of MVNO subscribers was up 49.1% on year to 2,833,000, continuing to support bottom line mobile growth. Marketing expense in '21 declined 1.9% year-over-year to KRW 2,285.7 billion on the back of stabilization of subscriber acquisition cost and efficient spending. Smart Home revenue in Q4 was up 9.5% on year to KRW 566.5 billion with full year revenue coming in at KRW 2,203.7 billion, rising 9.5% versus last year. Q4 IPTV revenue was up 10.6% year-over-year to KRW 322 billion on rise in basic fee revenue from solid subscriber growth. 2021 annual revenue was up 9.6% year-over-year to KRW 1,255.6 billion. Q4 broadband Internet revenue supported by Giga subscriber growth was up 8.1% on year to KRW 244.5 billion. And on a full year basis, revenue reported KRW 948.1 billion, up 9.2% on-year. Subscribers for IPTV and broadband were up by 8.2% and 5.1% year-over-year, respectively, reaching a cumulative subscriber base of 5,348,000 and 4,758,000, sustaining a solid growth trend. Also since last November, LG Uplus has been offering Disney+, and in 2,100 stores nationwide, we set up experience zones where customers can have a first-hand experience of the services that Disney+ has to offer as we continue to engage in activities that will boost IPTV subscribers and revenue. Last December, Disney Learning, which is Disney+'s English education content, was launched on our Kids World platform. We expect to win children's interest by building on the playful element on the back of diverse range of Disney+'s content offerings. We also expect greater synergies between our platform and Disney+ as we go forward. We will continue to strengthen cooperation with Disney+, make service enhancements, thereby providing unique and differentiated experiences for our customer base. We also launched XR, extended reality, content platform called U+DIVE, available to anyone regardless of the carrier they're using or their rate plan. We worked with SM Entertainment to showcase XR shows via U+ Idol Live, offering an immersive experience in the virtual reality, giving people the feeling of watching a real-life show. And supported by competitiveness in 5G content, LG Uplus signed export contracts for XR in Q4 with a Malaysian mobile carrier called Celcom. Bringing our total 5G-related exports to $23 million. Our consumer business will continue to make investments in '22 in order to bring better data quality, expand and improve content offerings, grow high-value customers, enhance ARPA through stronger bundling of services and strengthen long-term customer care so as to lower churn rate and boost potential for our businesses to grow. Also, to secure growth engine for the future, we will broaden the scope of Kids World, Idol Life and sports to develop them into platform businesses, creating a virtuous cycle of user expansion. We will also place our endeavors behind speeding up data, advertisement and content business growth in order to draw synergies with the platform business.

[Interpreted] Next is on our B2B infrastructure, and I am [ Kim Jang Hyuk ], Head of New Enterprise Business. First on key performance highlights, Q4 B2B infrastructure business saw balanced growth from new versus current business segments, posting a growth of 10.2% year-over-year and 7.7% Q-on-Q with revenue reporting KRW 397.7 billion. Full year revenue was up 10.7% on year, coming in at KRW 1,492.6 billion. Driven by sharp growth from messaging, smart mobility and smart factory, annual solutions revenue was up 21.8% on year to KRW 488.6 billion, making a large contribution to B2B infrastructure growth in 2021. IDC revenue was KRW 258.4 billion for the full year, up 13.4% on year, sustaining its steep growth trend. Enterprise line also reported steady revenue growth with rate of year-over-year growth at 3.7%. LG Uplus' B2B infrastructure business sustained robust stability in terms of its underlying revenue while, at the same time, broadened and strengthened references and won 5G B2B projects triggering growth from our new businesses. In Q4, together with Land & Housing Corporation, we made our contributions in improving Korea's construction technologies through the application of 5G smart construction solutions at the site of Sejong national pilot city. We also completed Sejong City's big data command center for autonomous driving vehicles, providing support to data collection and analysis regarding infrastructure, traffic and proof-of-concept stage self-driving cars. Also, LG Uplus' 5G smart port solutions won Minister of Science and ICT Award for being the best case implementation of 5G MEC. As such, we are expanding new references for new B2B businesses that are underpinned by 5G technology. In 2022, we will continue to bring growth by differentiating our current B2B infrastructure business while speeding up growth from new businesses, including smart factory, smart mobility and AI customer service center. This ends the part on business performance. Let me invite back our CFO to share our views on 2022 business target and outlook.

[Interpreted] 2021 was second year into 5G commercialization, a year in which we witnessed a big change in consumer behavior on the back of prolonged COVID-19 pandemic. We saw growth in SIM-only and MVNO subscribers while there were explosive demand for media content services, calling upon telco players to think hard and explore new strategies for growth. LG Uplus, which led core telco business growth, will explore ways to bring qualitative subscriber growth in '22 while delivering differentiated experience that truly cares for and hence, moves our customers and at the same time, implement specific growth strategies for our non-telco business. We will also internalize core technologies in order to drive digital innovation and evolve our services into platforms and will strengthen organizational capabilities to develop data, advertisement and content businesses. To this end, we recruited CCO, a chief content officer; and CDO, chief data officer, from outside the company, taking active steps to boost new business growth. Under this strategic direction, LG Uplus' business objective for year '22 is above 5% growth of service revenue on a separate basis. Also, with a view towards strengthening shareholder return policy and to enhance shareholder value, dividend payout policy for 2022 was adjusted from 30% of stand-alone net profit to more than 40%. And in tandem with dividend policy changes and market communications thereof, we will continue to bolster sustainable management and improve visibility on shareholder returns. Over the course of this year, we will solidify competence to drive digital innovation and bring steady growth across all of our businesses, which will drive up corporate value and shareholder return as we endeavor to live up to our social responsibilities. Thank you. This concludes our Q4 earnings report. We are now open for Q&A.

[Foreign Language] [Operator Instructions] The first question will be presented by Joonsop Kim from KB Securities.

[Interpreted] I am Kim Joonsop from KB Securities. My first question relates to your B2B business. You've mentioned the new B2B business. As well as the -- and also, I have a question relating to your content business. But with respect to the update that you've provided on your Sejong City project, I would like to understand if -- compared to your initial 5G-related plans what is the progress like. Has there been any changes in the direction of this project? If there was, could you provide some color there? Second question. As the CFO mentioned, you're recruiting new content experts from outside. I would like to understand, with the onboarding of experts in the content domain, are there any changes to your overall strategy or any impact to your business as well as any financial implications?

[Interpreted] So I'm [ Kim Jang Hyuk ]. I'm the Head of the New Enterprise Business. I will respond to your question about our B2B business. During 2021, we focused our growth efforts behind the selective domains within the B2B business such as smart factory, smart mobility, et cetera. And first, looking at smart factory, we were able to have a meaningful acquisition of major customers, and we were also able to build on the domain reference, thereby growing that business double-fold. Also, looking at smart mobility, with the growth in the demand for connected cars and infotainment, we strengthened our service offerings and we won multiple number of projects, thereby significantly growing our market share and as well as growing the overall business. And we were able to report a significant rise in the size of the business. Now this year, in terms of the B2B business and in order for us to continuously develop the future growth engine, we will continuously explore new opportunities and develop them into businesses through partnerships, equity investments and acquisitions if necessary so that we may newly develop new solutions so that we can acquire those technologies or either internalize them.

[Interpreted] I am CCO, Lee Deok-jae. I've joined the company as of January. Including myself, we are seeing series of content experts come onboard to LG Uplus organization. And I understand your question to be what potential strategic changes could there be or what impact they will have on the business. I will respond to that question. So as of January, I have completed the overall review of the content business as is, and based upon that understanding, we are in the process of developing strategies with a view towards business potential for growth as well as scalability. We will further take the idol, sports, kids content and further upgrade them. And at the same time, supported by the content we and the community thereof, we're going to take a step further from growing just the viewership. But based off of the fandom that we create, we want to expand into, for instance, B2B2C as well as subscription-based B2C domain. So I have defined my role within LG Uplus as really implanting a DNA of creativity within this organization. By bringing together new technologies and the content, we want to grow our potential customers or potential fans to superfan base, providing a very immersive content experience so that we can truly establish a content-based community. So in order to realize these objectives, we will be building out the overall personnel organization system as well as the organizational cultural aspect as well, and I hope to see some visible results as we enter into second half of this year. And also, through these endeavors, I hope to also contribute to broadening the customer base for LG Uplus and also bring about meaningful result and performance from a fandom-based business from both domestic and from the overseas market. I will exert my ultimate efforts.

[Foreign Language] The next question will be presented by Hong-sik Kim from Hana Financial Investment.

[Interpreted] I would like to pose 2 questions. First, I'd like to first preface by saying that we thank you for increasing the payout ratio upward to 40%. There's a bit of a confusion or mix-up so I just wanted to clarify. So if you look at last year and 2 years ago, looking at the payout ratio, based on 2021 figures, can we expect bigger DPS increase as opposed the rise in EPS? So basically, can the gain -- DPS gain be more than -- above and beyond what we've seen on EPS increase? Second question can be a bit sensitive. I understand that you've applied for the additional allocation of 20 megahertz spectrum. Some are concerned of the potential cost burden while others have positive expectations towards improving quality. What is the company's assessment with regards to this issue?

[Interpreted] Yes. This is the CFO. I will respond to your dividend question. Well, as a CFO, I personally always wish I could further up our payout ratio. But having said that, LG Uplus being the third player in the market in terms of the network quality that we offer, we are at a position and a bit of a disadvantage compared to the first and -- #1 and #2 player in regards to maintaining the network quality. Now with the cash flow that the company generates, some portion, of course, is used for the employees of the company. And of course, there's quite a significant portion that should be used to return to the shareholders. And also, we need to retain certain level in order to make investments for the future. So for the time being, we've made the decision of payout ratio at 40%. And I also thank you for considering that meaningful. So as a matter of principle, I do believe that the DPS growth rate should supersede the EPS growth rate in terms of shareholder return. But as you've mentioned, if you look at our dividend payout ratio during the times of 2020 and '21, you may see some of a mixed or confusing picture. But the reason is because previous years, there were some nonrecurring items that impacted the fluctuation aside from the operating profits that we were making. So that's why 2 years ago, it looks like our payout ratio was around 35%. So as we decided on KRW 551 per share, that decision at the working level, we thought deep and hard, and our BOD has also made full consideration -- deliberation on this aspect. So it is somewhat regrettable that we had to decide that level as per the -- compared to 2 years ago. But from my perspective, my role, what I would like to see going forward is the absolute dividend amount actually increasing as well as the baseline for the payout ratio going up.

[Interpreted] Responding to your next question on the allocation -- additional allocation of the spectrum. My name is [ Park Yong Jung ], in charge of CR policy. First, we believe that there's going to be positive impact in terms of the user convenience aspect as there will be improvement in the 5G service quality. And in regards to the overall competitive landscape, we believe there is a bigger positive impact. Also, currently, 3 mobile carriers are all engaged in a joint build-out of 5G network, especially in the rural areas. And once we are granted the spectrum, we believe that we will be able to provide a same level quality 5G services to all of the people around the nation without any discrimination or differences between urban cities and rural towns. Hence, our wish is that this 20 megahertz 5G spectrum, the additional allocation decision on that and granting of it, we hope to see that as quickly as possible.

[Foreign Language] The next question will be presented by Seyon Park from Morgan Stanley.

[Interpreted] I would like to ask 2 questions. First, looking at your Q4 performance data, you -- I guess you underperformed the expectation slightly because in the -- during the third quarter, we felt that you would be able to easily meet that operating profit target of KRW 1 trillion. Why were -- why did you fell short -- fall short of that -- of target? Were there any specific one-off factors in Q4? Second question, you've provided guidance of 5% service revenue growth. Can you also provide some more color with respect to margin or profit?

[Interpreted] This is the CFO. I will respond to that question. In terms of Q4, on a nonrecurring basis, labor costs, we saw about KRW 65 billion of labor costs. And if I may provide you with the process behind that. Last year, there was a very fierce competition within the ICT sector, companies all vying to recruit developers. There was a scouting war, and the wage levels of the developers have gone up quite significantly. So ICT companies, in effect, had to fight a wage war. And that impact cumulated, and we saw that come into play as of the -- in the numbers of Q4 because we've been posting very positive quarterly performance. And there were also, at the same time, expectations of our employees growing at the same time, and we had to really consider a good balance between the 2. So from the company's perspective, we had to retain our top talent. We had to defend them in this serious recruiting war. And also, we felt that it would be appropriate to share in on the benefit of the performances, the positive ones, that the company was generating. And so yes, we did think long and hard about not being able to meet that KRW 1 trillion. We fall -- did fall short of that KRW 1 trillion mark. But in order for us to actively conduct business this year and also, at the same time, to motivate and incentivize our employees, we've made the decision as such. In terms of the margin for the business, please understand that I won't be able to specify that figure. In terms of the top line revenue, as I mentioned during my presentation, our target will be to bring revenue growth of about 5%. Regarding the operating profit margin, we will strive our best to bring better op margin on a year-over-year basis. And in order to realize that at this point, we are internally revisiting different factors and different items and working together with the business units as well. In terms of the Q4 operating profit, the fluctuating impact, we will make sure we contain that as we go forward. Regarding the labor cost surge, we think that the strong wave of wage upward movement that we've seen last year has more or less passed. And we will do our best to make sure, and we believe it is possible, to contain that rate at about a single-digit increase.

[Interpreted] If there are no further questions, we would like to close LG Uplus' 2021 Q4 Earnings Conference Call. For additional questions, please send them to our IR team. Thank you. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]