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

[Foreign Language] Good morning, and good evening. Thank you all for joining this Conference Call. And now we will begin the Conference of the Fiscal Year 2022 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 home page so that you can follow the conference simultaneously. Today's conference call will be presented for 1 hour. And due to schedule, we would appreciate if questions are limited to 2 per person. And now we will begin the conference of the fiscal year 2022 first 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 the first quarter 2022 earnings presentation of LG Uplus. Please refer to our Q1 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 projections cited today may change subject to macroeconomic and market backdrop. We will also be providing consecutive interpretation for our overseas investors. We will first begin with Q1 performance highlights followed by a Q&A. Without further ado, I would like to turn it over to our CFO, Hyuk-Ju, who will run through Q1 2022 earnings and business results.

[Interpreted] Good afternoon. This is CFO, Hyuk-Ju. I would like to thank analysts and investors for joining LG Uplus' earnings release call for the first quarter of 2022. In the first quarter, LG Uplus continued its quality-driven growth in terms of reduced churn rates and acquisition of high-value subscribers by offering differentiated customer experience. Driven by 5G quality improvements with a clear priority set on customer value innovation, higher penetration, stronger pricing benefits and innovative viewing experience, consumer business continued its up trend by growing 3.5% year-on-year as we solidified basis for qualitative growth through stronger content offerings for different customer segments. For the B2B infrastructure business, IDC business sustained solid growth and in step with the growth of enterprise messaging market, we launched a new and differentiated services, receiving positive reception from our customer base. We were also the first to launch PQC, post-quantum cryptography-based dedicated line services and continue to place efforts behind new businesses, such as cooperations in autonomous driving. As a result, our B2B infrastructure business recorded 6.7% year-over-year growth. In content business, our cumulative export posted $24 million, comprising XR content and solutions. We plan to provide, not only XR content across countries around the world, but also 5G immersive media content, mostly around K-pop, which has become a global cultural phenomenon. 2022 will also be a year for the company to develop and execute specific strategies for its non-telco businesses. We have recruited experts from outside in order to focus our endeavors around DX, which is digital transformation, data and content so that we may speed up growth of ads and content business by leveraging such data, and we'll continue to explore new business opportunities. In the meantime, our ESG efforts are continuing, thanks to energy savings and greater use of renewable energies in an effort to respond to global climate crisis, we were given the top A rating from CDP, Carbon Disclosure Project, which is a nonprofit international organization as announced in their 2021 CDP climate response evaluation. With that being said, let's move on to Q1 '22 financial highlights. The company's Q1 consolidated basis service revenue was up 3.1% year-over-year and down 1.8% Q-on-Q, reporting KRW 2,774.2 billion, while separate basis service revenue came in at KRW 2,560.4 billion, up 3.6% year-on-year. Progress against the beginning of the year guidance of 5% stand-alone basis was 24% on par with the progress rate of Q1 of last year. First quarter consolidated operating expense was up 0.2% year-on-year and down 8.8% Q-on-Q to report KRW 3,148.7 billion on the back of efficient spending. Consolidated Q1 operating profit was KRW 261.2 billion, down 5.2% on year and up 65.1% on quarter and is 26.7% of last year's full year operating profit of KRW 979 billion. Consolidated basis EBITDA for Q1 was up 0.1% year-over-year and 11.3% Q-on-Q to KRW 871.6 billion, and EBITDA margin against the operating revenue has increased, driving sustained operating cash flow improvement. Consolidated basis net profit for Q1 was down 15.2% on-year, but up 67.4% on-quarter, reporting KRW 170.4 billion. And Q1 CapEx came in at KRW 361.6 billion. Financial position as of end of the first quarter on a consolidated basis are: total assets at KRW 19,166.3 billion; total shareholder equity of KRW 7,976 billion; total liability of KRW 11,190.3 billion. Liability ratio on the back of decline in liabilities and increase in capital improved by 3.1 percentage points from 143.4% end of last year to 140.3% as of end of Q1 this year. [ To sense ] the part on business and financial highlights, we now move on to individual business earnings and outlook.

[Interpreted] Hello. I am [ Park Chan-sung ], SVP of Head of Consumer Business Group. I will run through our Consumer business. Q1 mobile service revenue was up 1.5% year-over-year to KRW 1,431.6 billion, and its mobile subscribers came in at 18,473,000, which is a growth of 8.8% year-over-year. 5G subscribers were up 50.9% year-on-year, reaching 5,034,000, accounting for 44% of total handset subscribers. MVNO subscribers were up 42.8% year-over-year to 3,077,000 as its contribution to mobile service revenue continues an uptrend. Marketing expense was up 7.4% on-year and down 2.9% on-quarter, reporting KRW 588.6 billion as we continue cost savings efforts through reductions in churn. First quarter Smart Home revenue was up 9.7% year-over-year and 2.7% Q-on-Q to KRW 581.6 billion. On the back of rise in basic fee revenue following subscriber growth, IPTV revenue was up 10.6% on-year and 3.3% Q-on-Q, coming in at KRW 332.7 billion. Broadband Internet was driven by sustained Giga Internet subscriber growth, posting a growth of 8.6% Y-o-Y and 1.8% Q-on-Q, reporting KRW 248.9 billion. IPTV and broadband Internet subscribers posted a growth of 6.6% and 5% year-over-year, respectively, with its cumulative subscribers at 5,410,000 and 4,822,000 as we are continuing on with a robust growth. In 2022, LG Uplus endeavored to cater to various different needs of our customers. First, in order to strengthen subscription services, we launched subscription package, which provides YouTube premium and CGV tickets. We are also offering stronger benefits for the online-specific rate plan, which people can join from our official online mall, U+Shop. This direct tariff plan has offered distinct user experiences as we've reflected the feedback of customers offering stronger benefits in terms of OTT service and device. And as a result, daily average subscribers have jumped by more than 10x since the promotion beginning of the year. By strengthening such online dedicated tariff plans, we will continue to provide wide-ranging benefits to customers. Also in line with the MVNO market expansion, LG Uplus has endeavored to acquire subscribers and prosper together with MVNO operators. We launched off-line stores together with mid- to small-sized MVNO operators, expanding the distribution channel. And in order to expand customer touch point, we were the first to open [ MVNO+ ], which is Korea's first MVNO specialized consulting store. And together with Korea Post, we released new rate plans and smartphones that are exclusively delivered via the Korea Post in order to facilitate off-line sales of mid to small operators as we broaden our business domain. LG Uplus' efforts continued in bringing innovation of IPTV experience in the living rooms of customers. In January, we launched the UHD4 set-top box that supports the sound, which is most optimized for the space and the type of content that is being played. Equipped with high-performance AI chip for the first-time in IPTV, we can offer the most up-to-date high-quality sound even for older TV models, while processing speed was also enhanced, which will allow faster and more stable OTT services, including for YouTube, Netflix and Disney+ in the living rooms of our customers. We also released shopping at a glance in order to offer innovation and experience for home shopping customers. One can basically see products that are, were and will be on air at a glance without needing to pay additional costs and easily be connected to the mobile page to make the purchase, which will eliminate inconveniences experience by customers and promote the use of home shopping services. In Q1 '22, mobile handset subscribers turned to a positive net addition trend. Going forward, net add subscribers, adding on to the base and higher mix of high-value subscribers will all drive greater revenue growth as we come closer to the end of the year. And with steep growth that we are seeing from MVNO subscribers, there will be greater contribution made to the overall top line. In the remaining of the year, the consumer business will continue to invest to enhance data quality, source variety of content to innovate customer experience, bringing quality-driven improvements in subscribers, which will drive up growth potential of our businesses. We will also expand into non-telecom domain in order to gain future growth engines, such as in subscription, content platform, digital transformation and data businesses so that we may meet the expectation of the market. Thank you.

[Interpreted] Next is on the B2B infrastructure, and I am [ Kim Jang Hyuk ], Head of New Enterprise business. I will run through key highlights of our B2B infrastructure business for the first quarter. Q1 B2B infra biz was up 6.7% on-year to report KRW 362.4 billion. Supported by sustained growth in underlying revenue, IDC business was up 13.7% Y-o-Y to KRW 63.8 billion. Solutions business was driven by high-growth from Smart Factory, Smart Mobility and enterprise messaging with revenue reporting KRW 111.3 billion, which is up 14.7% on-year. In the first quarter of '22, LG Uplus continued to place its efforts behind new business growth in the B2B infrastructure domain. In April, we launched world's first PQC line, offering a secure environment where hacking is, in fact, rendered impossible. This is an achievement of 3-year efforts since the commencement of development back in 2019. We expect this solution to form a critical part of security network at financial, military and public institutions, research centers, Internet data center and also create ecosystem of industries and technological environment required to nurture quantum-based telecommunications industry as an essential industry of a state. In Smart Mobility, in cooperation with Korea's top autonomous driving solutions company, we plan to develop next-generation technology that diagnoses problems of such vehicles by using big data and AI with a view towards providing safe and differentiated unmanned driving services. Last year, at the Sejong City, we carried out autonomous driving big data center project, being the basis for big data generation and analytics and entered an MOU in the first quarter with Sejong Technopark and Korea Transport Institute in order to develop new services and upgrade mobility technology so that we can share such mobility data generated from people and movement of goods and develop mobility services, which are demand-responsive. Also for the upcoming 5 years, we will be turning 4 campuses of Pusan University into 5G smart campus. And already, we have completed a build-out of ICT infrastructure, including next-generation fixed and wireless networks, integrated information security solutions and integrated command system and will conduct proof-of-concept tests for various different education models for the future. On top of such new business endeavors, in step with enterprise messaging market growth, we launched U+ Message Hub. We received feedback from corporate customers who said that they found it difficult to effectively deliver information via the current text message format. So by developing the message hub, we are now able to support a single interface for various different messages, including text, push messages from apps and SMS. As such, we at LG Uplus have been developing a myriad of services to offer differentiated services under the current portfolio of businesses, while at the same time, explore new business opportunities in the non-telecom market through MOUs and technology development in order for us to be at the very forefront of the market. In the remainder of the year, we will continue to endeavor to speed up growth from current business domain, as well as new businesses under B2B infrastructure. Next, we will invite back our CFO for his closing remarks and outlook for '22.

[Interpreted] During the first quarter '22, we thought long and hard about what LG Uplus' strategies should look like as a telecom operator in the face of a crossroad between the contact environment and starting of a period whereby we would need to learn to live with the COVID pandemic. While we try to improve convenience of living indoors by leveraging telco services, we now need to start thinking about customers who are returning to outdoor activities. Under our vision of becoming a digital innovation company, bringing interesting changes to customers' daily lives, we continue to work on delivering unrivaled and unique services to customers, while we explore new growth engine that best befits the new upcoming generation. In the remainder of the year, LG Uplus will continue on with its digital innovation endeavors and supported by our core technologies will bring tangible growth from the non-telco business and also will engage in active communication with the market. Underpinned by such strategy, we plan to outperform our guidance of 5% service revenue growth on a stand-alone basis and do our utmost to bring financial results that do not fail on market expectations. We are committed to improving corporate value and shareholder interest, and we live up to our social responsibilities through the ESG management. Thank you.

[Interpreted] That brings us to the end of the earnings presentation. We will now begin the Q&A.

[Interpreted] [Operator Instructions] The first question will be provided by Hong-sik Kim from Hana Financial Investment.

[Interpreted] I would like to ask you 2 questions on the earnings results. Although it was expected, the performance that we are seeing for your Q1 numbers has not been all that great. Looking at the service revenue growth, it was only around 3%. There was a decline in operating profit. Also on a separate basis, net profit has declined as well. Even if you increase the payout ratio for this year, we are, therefore, concerned that the entire payout amount in terms of dividend would -- inevitably would have to go down. So there is that concern. In the presentation, CFO, you have just mentioned that still you expect to achieve that 5% service revenue growth guidance. I would like to understand that as we enter into Q2, what are some of the drivers do you think that would allow you to achieve that 5% guidance target? Because Q1, we've seen a decline in profit. In Q2, do you really believe that your operating profit could start to rise? And second question, the mobile growth rate has been very slow. The revenue top line growth is only about 1%. And since the mobile revenue mix is quite significant out of your total top line, that, of course, if the slow growth is going to have an impact on both the top line and OP as well. So what is the reason behind such sluggishness regarding the revenue growth? And what's your outlook going forward?

[Interpreted] Yes, this is the CFO. I will respond to your first question. So each different company, they're going to have a different criteria or different standards when they book their revenue or when they recognize the expenses. So each company has their own basis under which they will recognize the expense and there are quarterly differences, which is attributable to the calendar month. At LG Uplus, we've been quite rigorous in reflecting the valuation losses on the handsets. So at the end of 2020, there were some valuation losses on the handsets that we had actually booked. And last year, Q1, regarding the handset sales, there were reversals or write-backs with respect to such valuation losses. And because of that base effect versus the Q1 of last year, we've seen a figure dip. So all in all, if you look at this year's revenue on a separate basis, we believe that we will be able to achieve the guidance that we have communicated. And if you look at the progress rate of achieving that guidance, as of Q1, it was 24%. So that is about on par with what we've seen in Q1 of last year. So we will do our utmost to make sure that we live up to the guidance that we've set for ourselves. In terms of operating profit last year on a per annum separate basis, OP was somewhere around 9%. This year, we believe we could do a double-digit. Yes, that was OP margin, by the way. And so, we are quite confident that we can achieve a double-digit OP margin. And if we are able to do that, I believe that we could remove any concerns regarding a dividend payout, as you have expressed. Now having said that, there may be some ups and downs depending on the different -- which quarter you're looking at. However, our plan is to make sure that we manage our business so that we can be well in alignment with the target.

[Interpreted] Yes. This is [ Park Chan-sung ]. I am the SVP of Consumer Business Group. I will respond to your question about the slower growth that we've seen in mobile services revenue and the outlook going forward. Now, if you look at Q1, mobile service revenue, it reported a growth of 1.5% year-over-year. So it did slow compared to last year's year-over-year growth of around 4%. And this is attributable to the fact that last year, there was -- in the handset market, there was net reduction. And it's been 2 years since we started providing 5G services. And the mix of handset upgrade within 5G subscribers have significantly gone up, and we think that was one of the key factors that had an impact. And also there was impact coming from increase in SIM-only subscribers, as well as the growth of the MVNO market. But as we came into Q1 of this year, out of all of the 3 telco operators, in terms of the handset subscribers, we were the only one that reported net addition. So as we enter into the second half of the year, we are expecting that there will be a recovery of revenue growth driven by the basic fees. Also, we've seen a significant increase in the high ARPU acquisition, as well as a handset ARPU is also continuing an uptrend. And also, we are seeing a reduction in churn rates and volume growth of MVNO services. So based on the catch-up plan that we've internally developed, we will do our utmost to regain the growth rate that we've experienced last year.

[Interpreted] The following question will be presented by [indiscernible] Investment & Securities.

[Interpreted] I would like to ask 2 questions. First is on LG Uplus' media strategy. Can you provide some color as to what your media strategy, how it looks like? And second question is your strategy and plans going forward for the content business?

[Interpreted] This is [ Park Jun-dong ]. I am the SVP of Consumer Services Group. I will respond to that question on media strategy. Through a very close cooperation with the OTT partners of both domestic and overseas, we plan to bring an innovation in the viewing experience of customers, and we have in place a variety of content, and we also enjoy platform competitiveness. Underpinned by such strength, we are continuously upgrading the viewing experience of our customers, supported by customer data, and we plan to carry on with our platform business with that strong basis. And as of today, same content and same functions and features are provided to the users of IPTV and mobile TV who are the telecom subscribers. But going forward, we will reorganize our business structure in a way that we provide the UI and UX, as well as content that best fit each of the platform segment.

[Interpreted] This is Lee Deok-jae. I'm in charge of -- I'm the CCO. I will respond to your question on content. So as I've mentioned in the previous call as well, the content business of LG Uplus, we are focused on further bringing upgrades to the existing content offerings, as well as broaden the scalability of such content services. So we have Idol Live platform, which is the K-pop Idol-based platform. In order for us to further enhance the immersiveness-based experience, we will be developing and planning various different [ genres ] of content, thereby expanding that, not only for our domestic viewers, but also to gain the appeal -- to provide the appeal to the global fan base. So our strategy for Idol Live is that, so that we can expand into the global market. In Q2, Q3 and Q4, we will be expanding the global services on top of the domestic services. And by the end of the year, we will be making preparations for a very large-scale project that could be showcased in the upcoming year. Also, in order to cater to the trend of the younger generation, we will be developing an original format entertainment content and to be able to expand to the global users, as well as the domestic users and really build on the strong content IP of the company. Although I won't be able to share with you all the details of the strategies, we are focused on bringing the new content that really show the strong characteristics of Korea to the global audience base. And so, we will really focus on thinking differently and preparing differently in order to showcase something that is unique. And in order to achieve our goal, we will make active investments into the relevant infrastructure and building of capabilities. Thank you.

[Interpreted] The following question will be presented by Seung Woong Lee from eBEST Investment & Securities.

[Interpreted] My question relates to shareholder return policy and your ESG endeavors. Last year, you've diversified your shareholder return approaches. You've done share buyback and paid out interim dividend as well. And also you've upped your payout ratio beginning of the year. What are your plans for this year in regards to dividend? Second question is the role of your ESG Committee. It seems like the ESG Committee role has become more important. You've also made a decision on interim dividend payout through the ESG Committee. Can you provide any update on ESG Committee activities?

[Interpreted] This is the CFO answering your question about shareholder return. Last year, yes, we had the share buyback. We paid our interim dividend, and we've increased the payout ratio. So this year, rather than adding something new and additional to that dividend plan, I believe that the focus should be on growing the profit, maximizing the profit so that we can actually pay out more in terms of shareholder return so that we could grow the size of the dividend. I think that's where the focal point for us lies this year. So we are planning to also pay out interim dividend this year as well. And also, we'll make sure that it is in no way less than what we've seen in consideration of the payout ratio, as well as the amount of dividend that was paid at the beginning of the year. The ESG Committee has played an important role. The ESG Committee, one of the key items that it deliberates on is the shareholder return related aspect because that forms a key part of our governance. They listen to the views of the executives, as well as the ESG Committee, the outside directors. And that's why we've decided for the first-time to payout an interim dividend at the group level. And going forward, the ESG Committee will also be playing an important role in terms of, not just shareholder return, but regarding the environmental-related issues, which has become a very important global issue. Now, that does not mean that we're going to disregard the social element or the governance element under ESG. It's just that the environmental issue, there is a significant responsibility that all of us are facing in terms of use of renewable energies and energy savings. Now, environmental element under ESG, if you look at the current situation in advanced countries like in Europe, the percent of renewable energies that we see there are 3 to 4x higher compared to Korea. And in Europe, the generation cost for renewable energies is lower and they utilize various different energy sources. But if you look at Korea, that generation cost is higher and the mix of renewable energy sources is also low. Hence, there is more burden placed on the companies for them to actually consider many different options and to select them and implement them. So those are some of the aspects that our ESG Committee is currently reviewing.

[Foreign Language]

[Interpreted] There is one person waiting to ask question.

[Interpreted] Yes. So that will be the last question that we take today.

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

[Interpreted] This is Kim Joonsop from KB Securities. I just have one question on your B2B infrastructure and solutions business. I understand that your Smart Factory and Small Mobility business is growing quite quickly. Can you share with us and provide some color on what your plans are in these business areas?

[Interpreted] I am [ Kim Jang Hyuk ] from the B2B New Business Group. In Q1, if you look at our Smart Factory business, against our target, we've achieved 117%, while for Smart Mobility, we achieved 110% against our target, which is a testament to the fact that our B2B business is on smooth sail. Now, for 2022, we will be exploring very competitive solutions and also finding success cases and expand to other industry sites and in the meantime, accelerate the business growth of Smart Factory. And also for Smart Mobility, we have an objective of achieving more than 30% growth by 2025. In order to do that, we are currently enhancing our competitiveness in our ability to gain and win orders. Now to that end, we are currently providing wireless telecommunication network to domestic automakers like Hyundai and Kia Motors and global OEMs as well. And through these efforts, our plan is to become #1 in terms of market share by 2026. Also for in-vehicle content, we are continuously exploring new business models, and our plan is to provide the content to both the domestic and overseas OEMs. In order to identify such new growth opportunities, we will be quite active in entering into partnerships, making equity investments and doing acquisitions, and we will continuously internalize the required technologies so that we may further enhance our competitive edge.

[Interpreted] That brings us to the end of the first quarter 2022 earnings conference call for LG Uplus. For more information, please do not hesitate to contact us at the IR team. Once again, thank you very much for joining us today. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]