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 2022 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 2022 Second Quarter earnings results by LG Uplus.

[Interpreted] Good afternoon. I am Sung-Hyun Mo, Head of IR at LG Uplus. We would like to begin the second quarter 2022 earnings presentation of LG Uplus. Please refer to our second quarter 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 and ease of comparison. As a disclaimer, all of the projections cited today may change, subject to overall macroeconomic and market backdrop. Please also note that we will provide consecutive interpretation for our overseas investors. We will first begin with the second quarter performance highlights, then move on to the Q&A. Without further ado, I would like to turn it over to our CFO, Lee Hyuk-Ju, who will run through second quarter 2022 earnings and business results.

[Interpreted] Afternoon, I'm CFO, Lee Hyuk-Ju. I would like to thank analysts and investors for joining 2022 second quarter earnings release call for LG Uplus. In the second quarter, to provide differentiated customer experience, we accelerated digital innovation and transformation of LG Uplus as we provided our expertise in many different industry sites, shaping smart infrastructure, which is underpinned by telecom service and digital technologies. We also set up an emissions reduction roadmap in order to convert our electricity source to 100% renewable energy by 2050 in an effort to strengthen ESG management. The consumer business facing customer value innovation as our utmost priority. We enhanced 5G quality and penetration, offering stronger benefits through the pricing scheme in partnership with new service providers from multiple verticals and leverage data to provide personalized content to users, thereby delivering different and distinct customer experience. Thanks to all of these efforts, our Consumer business reported a growth of 3.6% on year, sustaining an uptrend. For B2B infrastructure business, by expanding the order book through winning new projects and double-digit growth from new businesses, we were able to continue on with earnings growth. We also launched solutions that can be used across many industries, and we gained more references through MOUs with new partners, which drove 4.4% year-over-year growth for the B2B infrastructure business. In order to further strengthen MVNO services, with revenue contribution and subscriber net addition is growing on the back of MVNO market growth, we are offering MVNO customer services at Uplus stores located across the nation. We also launched an MVNO brand, which is Plus Alpha and have solidified our business competitiveness and customer convenience while we continue to focus on growing and prospering together with the MVNO players. We at LG Uplus have developed a road map for greenhouse gas reduction to convert our energy source to 100% renewable energy by 2050, in line with ESG management and emissions mitigation goals. To apply the roadmap company-wide, we plan to join Korea RE100 by the end of the year to implement our efforts towards emissions reduction in phases. I will now move on to second quarter 2022 financial highlights. Q2 Consolidated service revenue was up 3% on year and 2.8% on quarter, reporting KRW 2,850.6 billion. While stand-alone service revenue came in at KRW 2,623.9 billion, increasing 3.3% Y-o-Y. Q2 consolidated operating profit was KRW 248.4 billion, down 7.5% on year, but excluding one-off labor costs, the growth was 9.5% versus last year. First half operating profit was KRW 509.6 billion, which is around 52% of last year's full year operating profit of KRW 979 billion. Second quarter's consolidated operating expense was up 1.9% on year and down 0.4% on quarter, reporting KRW 3,135.9 billion on the back of rise and one-off labor cost and seasonality related expenses. Consolidated Q2 EBITDA was down 1.5% on year and 1.6% on quarter to KRW 857.6 billion, and EBITDA margin against the operating revenue was down 0.7 percentage points year-on-year and 0.2 percentage points Q-on-Q. Consolidated second quarter net profit was down 23.1% Y-o-Y and 5% on quarter, reporting KRW 162 billion with Q2 CapEx at KRW 611 billion. Financial position as of end of Q2 on a consolidated basis are: total assets of KRW 19,664.3 billion, total shareholder equity of KRW 8,212.2 billion and total liability of KRW 11,452.1 billion. Liability ratio improved 3.9 percentage points from last year's 143.4% to 139.5% as of the end of Q2 on the back of lower liabilities and increase in capital. This ends the business and financial highlights, we will now move on to each business division and its performance and outlook.

[Interpreted] Good afternoon. I'm [ Park Chan-sung ], Senior VP and Head of Consumer Business Group. Q2 mobile service revenue was up 2.6% on year to KRW 1,455.3 billion, while mobile subscribers were up 10.3% on year, recording 18,968,000 users. 5G subscribers was up 44.2% on year to 5,373,000, accounting for 47% of total handset subscribers. MVNO subscribers were up 40.6% year-on-year to reach 3,314,000, growing its contribution to mobile service revenue. On the back of stable subscriber acquisition costs and rise in online channel mix, marketing cost was down 0.3% on year and 4% on quarter to KRW 564.9 billion, in line with our efforts to stabilize spending and [indiscernible]. Second quarter's Smart Home revenue was up 7.6% on year to KRW 579.6 billion. IPTV revenue was up 7.8% on year to KRW 327.6 billion, driven by annual subscriber growth, higher rate plans, such as Disney+ and rising home shopping revenue. While broadband Internet revenue was up 7.3% on year to KRW 252 billion on the back of sustained growth in Giga Internet subscribers. Subscribers for IPTV and broadband were up 4.3% and 4.8% year-on-year, respectively, bringing cumulative subscribers to 5,396,000 and 4,862,000 subscribers as solid growth continues. To introduce innovation in terms of customer value in collaboration with other companies, we launched subscription package for Eli and Hello Rental. We also released a platform called Usubscription, allowing users to subscribe and cancel multiple subscriptions all at once or select only the services they want to subscribe to alleviating inconveniences voiced by existing customers. We also ran a promotion against outbound travelers on the back of recent transition to endemic as more people took trips overseas, offering users roaming services at just KRW 100 and opened customer service center for foreign visitors to help out with the pain points of the inbound travelers as well. We also focused on growing together with other MVNO operators and worked to acquire more subscribers following the growth of the MVNO market. We expanded offline touch points by increasing CS stores for MVNO while launching a partnership program dubbed Plus Alpha to grow together with MVNO operators and offer greater value to the customers. Our efforts continued in IPTV business. Kids World won the iF design award for its children befitting design, having an intuitive and tailored home screen and remote control device specifically designed for kids. Also, in partnership with child care and learning platform for toddlers and kids, we expanded the learning program of Kids World to offline, bringing innovation closer to customer experience. We recently launched portable IPTV service called TV Free to embrace today's viewership trend and its subscribers are now more than 200,000. We also introduced Internet product for a single member household. As such, we are using data to analyze customers' emerging needs and incorporated such insights into offering innovation to users. On the back of elevated growth of MVNO subscribers, Q2 '22 mobile subscribers sustained an uptrend, growing its contribution to overall mobile service revenue. Also, as we remove pain points for users, after which the churn rate fell, reporting a record low churn of 1.11% in the second quarter. We believe growth in mobile subscribers and lower churn rate will make greater contribution to earnings growth in the second half of the year. In the remainder of the year, Consumer business will provide bespoke services and content underpinned by data to incorporate and strengthen innovation for customer experience, and we will expand into platform, digital transformation and data business to secure an engine for future growth in the second half as part of our efforts to meet market expectations.

[Interpreted] Next is on B2B infrastructure, and I am [ Kim Jang Hyuk ], SVP of New Enterprise business. I will run through the key highlights of the B2B infrastructure business for the second quarter. Q2 B2B infrastructure business recorded a growth of 4.4% on year, coming in at KRW 403.2 billion. On the back of sustained trend in underlying revenue, IDC business was up 3.7% on year to KRW 69.1 billion. Solutions business was driven by sustained growth from Smart Factory, Smart Mobility and Enterprise Messaging with revenue up 1.9% on year to KRW 134 billion. Enterprise line was also up 6.5% on year, reporting KRW 200.1 billion. In Q2, thanks to steady growth of underlying revenue, we once again became confident on solid earnings stability while we work to expand reference site and win more 5G-based B2B projects, including projects for Smart Factory. Also, in step with the COVID endemic and to support small vendors regain their footing as well as to help activate the SOHO market, we launched this book products for SOHO as part of the efforts to bring growth from our incumbent business. For SMEs, who are hesitant to adopt Smart Factory due to initial investments required and lack of operations and maintenance know-how, we launched cloud-based subscription. We also won a Smart Factory project for an SME for the first time that will leverage deep learning-based AI technology and plan to reach completion of the project before the end of the year. We also entered into an MOU for an integrated command system for Smart Factory management with Hanjin Busan Container Terminal to prevent and have preparedness against serious disasters, which has become a societal issue of recent dates. We are also zero of 3 private sector equity investors in Sejong Smart City Inc., the entity, which was set up on May 26. Through the Sejong entity, we will build and offer various convergent services, which include fixed and wireless network, Smart IoT and Smart Home business. We also formed a consortium to take part in proof-of-concept project for a grand challenge for Korea's UAM, which is an initiative seeking to commercialize urban air mobility in Korea. We also entered into an MOU with Busan Metropolitan City to nurture the ecosystem and facilitate early activation of UAM. As the only telco taking part in the Smart Station construction project, we completed the build-out of Smart Stations for subway line #8, following 51 stations for subway line #2. By building Smart Stations, we removed blind spots via the use of intelligent closed circuit TVs to detect accidents of passengers, supporting enhancement of the overall passenger convenience. As such, we are developing various different services for our enterprise customers, providing them with distinct and bespoke service offerings from our incumbent business. We are also engaging in partnerships in order to bring new business growth from non-telco segment while we continue to endeavor to be at the forefront of technology development. In the remainder of the year, we will continue to work to accelerate growth of both our incumbent and new business for B2B infrastructure and will gain many more reference sites in the process. Now the outlook for financial year 2022 will be presented by our CFO.

[Interpreted] Under the vision of becoming a digital innovator who brings fun changes to customers' lives, we continue to explore services that can bring innovation to customer experience while at the same time, we are looking to find new growth engine for the future. In the second half against the backdrop of higher 5G penetration and handset sales, we will be releasing flagship handsets, bringing innovation and customer experience and removing user pain points to drive up growth and lower the churn ratio that we may continue on with steady earnings growth. We plan to add new features to kids, family, Idol sports services and solidify original content offerings and build a structure where customers can truly feel the convenience and value through experiencing AI-powered products and services. B2B business, we're focused on growing new businesses that have potential for growth and where we can leverage our capabilities in telecom. And by collaborating with many other service providers, we will be able to gain additional references and build a business portfolio with strong fundamentals. Based on the customer experience built over the years, we will work harder to achieve digital transformation and leverage our core technologies to bring growth from the nontelco business. In the second half, we will be able to share with you more details on the company's mid- to long-term growth strategy. Based on such strategies, we will do our utmost to provide services that are original and unsurpassed whilst all the business units work towards bringing financial performance on par with market expectations. Also to enhance shareholder value, we decided on an interim payout of KRW 251 per share, which is 25% higher versus last year. Going forward, we will yet again endeavor to meet market expectations and enhance visibility on dividend payout. LG Uplus will work to bring meaningful earnings growth from both that help telecom business and nontelco businesses and enhance both corporate value and shareholder return as we make greater social contribution through service innovation. Thank you. We will now move on to the Q&A.

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

[Interpreted] I would like to ask you questions. I actually asked this question during the second quarter earnings call. This has to do with the revenue from your mobile services. In Q1 -- in Q2, the growth seemed to have been a little better versus the first quarter, but it's still underperformed expectations. I would like to understand what your take is for your outlook relating to the second half of the year. If you look at the handset, it's still in a net reduction position, and I see that the subscriber acquisition is taking place more for MVNO services rather than MNO subscribers. Hence, it seems like the quality is deteriorating. And going forward, there is also a talk of a market share MS regulation for the R2 phones upcoming in the future. So that's my first question. And second question, it's happy to hear that you have increased your dividend payout. However, the overall profit picture does not seem all that rosy for the first half of the year. And it does not seem very optimistic for second half either because there may be some expense related pressures as we enter into the second half of the year. Would you be able to achieve year-on-year operating profit for FY '22?

[Interpreted] Yes. This is the CFO. I will respond to your second question first. So beginning of the year, the guidance that I communicated was a revenue growth of around 5%. On a separate basis, as of today, that percentage is 3.3%. So yes, there definitely exists a gap compared to the 5% guidance. Now as we enter into the second half of the year, for our B2B business, we usually have seasonality where we see more orders and more projects through, and we also see more revenue come through, both our enterprise business. On the home side as well, we are working hard to make sure we bring about a rebound in the second half of the year. So we may be a little shy of that 5%, but we are endeavoring to make sure we bring more than 4% growth. So that was an answer relating to the overall top line revenue trend. You also mentioned that there is concern that we may be exposed to some expense or cost pressures in the second half of the year and a more smaller distributable profit. For our company, unless we see any particular one-off factors that we've seen in the second quarter, our expense structure is such that it is quite evenly spread across the year. So I can tell you for certain that you need not be concerned about the cost aspect. So based on the assumptions that we bring about around 4% service revenue growth on a separate basis, and in light of the trends that we are currently seeing, we believe that we can bring and we plan to bring double-digit operating profit margin. So on the basis on the premise that we will bring operating profit growth, and also since we have adjusted the payout ratio from 35%, which was the beginning of the year figures, we've changed that to 40%. So in light of profit growth as well as the increasing of the payout ratio, we can be sure to see an increase in dividend payout.

[Interpreted] I'm the Head of Consumer Business Group. I will respond to your question about the MVNO market share regulation and the service revenue. If you look at our second quarter mobile service revenue driven by increases in handset, high-value customer subscription and continuing MVNO subscriber growth as well as lies in the roaming revenue, we were able to bring 2.6% growth year-over-year and was since able to display improvement. However, in the first half of this year, the mobile growth speed had slowed, and that is, first of all, because of the high base effect of very high growth last year as well as the net reduction that we've seen in the MNO handset market. And also since it's been 2 years since the start of the 5G services, we see that the -- in the first half of the year, there's been some increases in the handset replacement or handset upgrade demand, and we think that, that had an impact. However, out of all of the 3 telcos, we believe that for the handset subscribers, the net reduction extent is going to be the smallest in our company. And as we move into the second half of the year, we're going to see recovery in the basic fee revenue and also increases in roaming revenue on the back of the vacation season. Also during the second quarter, we've seen a significant increase in the acquisition of high ARPU subscribers, which is driving up the overall handset ARPU, and we are also the record lowest churn ratio of 1.11%. As such, we are with also the volume growth of our MVNO services and through a catch-up plan that we have internally, we will do our best to regain a growth rate on par with what we have reported in the past. Now regarding any possible market share regulations for MVNO handset, we will update you if there are any additional direction and any finalization of this regulation. In the meantime, we will do our best to grow together with our MVNO partners.