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 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 1 hour. [Operator Instructions] And now we will begin the conference of the fiscal year 2022 third quarter earnings results by LG Uplus.

[Interpreted] Good afternoon. I am Sung Hyunmo, Head of IR at LG Uplus. We would like to start with LG Uplus' Q3 2022 earnings presentation. Please refer to our Q3 earnings presentation and note that revenue breakdown of each business and details of operating expenses 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 overall macroeconomic and market backdrop. Please also note that we will providing consecutive interpretation for the benefit of our overseas investors. We will first begin with our Q3 performance highlights, then move on to the Q&A. With that said, I will now turn it over to our CFO, Lee Hyuk-Ju, who will run through Q3 2022 earnings and business results.

[Interpreted] Good afternoon. I'm CFO, Lee Hyuk-Ju. I would like to thank the analysts and investors for joining third quarter 2022 earnings release for LG Uplus. Over the years, LG Uplus focused its efforts behind its core telco business, driving high level of profitability. We also endeavored to provide clearly distinct customer experience and now we are ready to embark a new plus 3.0 as we transition to the platform business. The aim of LG Uplus 3.0 is to transform ourselves into an innovative digital company, extending new digital experiences to users and broadening business and service scope underpinned by data. By expanding digital customer touch points and based on deep understanding of customers underpinned by data, our vision is to create a platform where users come and stay for longer. To that end, we plan on setting up 3 new businesses, which are Lifestyle, Play, Nurture & Care and the fourth platform of Web 3.0, representing future-proof technologies so as to lay the basis for customer experience innovation. First and foremost, through the Lifestyle platform underpinned by telco services that enrich our customers' everyday life, we can acquire customer data on the individual's interests and lifestyle patterns and build a connection with key services that millennials and Gen Zs appreciate embodied in keywords such as subscription and routine services. The Play platform will comprise of services of various formats that people can enjoy during their leisure time, offering expanded OTT lineup and content. We plan on developing a solution that will completely innovate viewing experience by integrating real-time Uplus TV channel and the OTT data. Also for the Nurture & Care platform, we will be upgrading the Kids World, which is Korea's top service for families with young children into a mobile-based kids OTT. And we plan to explore new business models that can offer tangible value and benefits to users for each of the platform based on next-generation technology of Web 3.0. Next is on Q3 '22 financial highlights. Q3 consolidated service revenue was up 2% on year to KRW 2.840 trillion, while standalone service revenue reported KRW 2.639 trillion, up 1.7% year-over-year. Consolidated Q3 operating profit was up 3% year-on-year and 14.8% Q-on-Q, reporting KRW 285.1 billion, with cumulative operating profit as of Q3 reported KRW 794.7 billion. Q3 consolidated operating expense was up 0.5% on year and 2.6% on quarter to KRW 3.2161 trillion. Consolidated Q3 EBITDA was up 4.4% on quarter to KRW 895.2 billion and EBITDA margin against operating revenue dipped by 0.2 percentage points year-over-year and up 0.2 percentage points Q-on-Q, recording 25.6%. Consolidated Q3 net profit was down 19.1% on-year and up 5.5% Q-on-Q to KRW 170.8 billion and Q3 cumulative CapEx spent recorded KRW 1.5917 trillion. In terms of consolidated basis financial position as of Q3, total asset was KRW 19.378 trillion; total liability, KRW 11.0647 trillion and total shareholder equity of KRW 8.3133 trillion. A lower liability and increase in earnings surplus, debt-to-equity ratio improved by 10.3 percentage points from 143.4% end of last year to 133.1% end of Q3. So this ends the report on the business results and financial performance. We now move on to earnings and outlook for each of our businesses.

[Interpreted] I will begin with the Consumer business. I'm [ Park Hyun Min ], in charge of consumer planning. Q3 mobile service revenue was up 1.9% on-year to KRW 1.4622 trillion. Mobile subscribers reported 19,473,000 which is up 11.3% year-over-year. Of this subscriber base, 5G subs increased 39.5% on year, reaching 5,732,000 accounting for 50.2% of the total handset subscribers. MVNO subscribers reached 3,602,000, growing 41.4% year-over-year, sustaining the uptrend in volume growth. Although marketing expense was up 2.7% Q-on-Q on the back of flagship handset launch, we continue to make efficient operational spending amounting to around KRW 564.8 billion, which is flat on an year-over-year basis. Smart Home revenue for Q3 was up 3.9% on year and 1.9% on quarter, reporting KRW 590.5 billion. Driven by subscriber growth, IPTV revenue was up 1.5% on year to KRW 334 billion, while broadband Internet was up 7.1% on year, reporting KRW 256.5 billion, on the back of sustained growth of Giga Internet subscribers. Subscribers for IPTV and broadband increased 2.7% and 4.6% year-on-year respectively, reporting cumulative subscribers of 5,407,000 and 4,910,000 sustaining the uptrend. Driven by the strategy to transform LG Uplus into a platform provider moving one step closer into the daily lives of customers, we have embarked on a customer value innovation campaign titled, Why Not since last year. In line with such efforts, in July, we introduced U Doc, offering an elevated and differentiated customer experience for subscription services, completely relieving customers of any inconveniences and extra widening the gap in customer experience against peers. U Doc, the subscription platform, allows people to subscribe to only the services that they want at reasonable price as there is no separate subscription fee. As subscription is made easy, we believe it can create a completely new customer experience. Also in August, to provide more choice and lessen the cost burden, we introduced a variety of new tariff schemes, including a mid-tier 5G rate plan. The new 5G plan is dubbed 5G Simple Plus and it provides 31 gigabyte at monthly fee of KRW 61,000. As such, we will continue to work on ways to further enhance user convenience. Also to better serve increasing number of travelers, we ran a roaming promotion, giving 50% price discount. This promotion was intended to attract first-time roaming users at affordable cost, driving steep year-on-year growth in Q3's roaming revenue, which in turn contributed to mobile service revenue. We also transformed Uplus Idol Live, a specialized media dedicated to idol and artists into K-pop content platform called Idol Plus, releasing a web service supporting 5 different languages, including English, Mandarin, Japanese to gear up for global expansion. We decided to launch the service based on our years of experience in streaming and transmitting different types of concerts and performances abroad, during which we saw clearly global demand for K-pop content, while working together with global service providers. We plan to offer value above and beyond just the idol-related content and provide avenue to global Gen Zs to engage in communications with the idol. Following the Why Not campaign, LG Uplus has been steadfast in innovating customer value and improving their pain points. As a result, we saw a record low churn rate of 1.11% in Q2 and even lower Q3 number of 1%. We have nimbly responded to fast-changing mobile market, sustaining the MVNO volume growth while securing traction for incremental growth through quality improvements and high-value customer growth for the MVNO business. On top of this, by transitioning to an innovative digital company and engaging in platform businesses, we will endeavor to meet market expectations for the consumer business in the remaining year and in 2023.

[Interpreted] Next is the B2B infrastructure, and I'm [ Hyeon Jun-Yong ], SVP of New Enterprise business. I will run through the key highlights for B2B infrastructure for the third quarter. Q3 B2B infrastructure business reported KRW 374.5 billion, which is up 1.5% year-over-year. Q3 IDC business revenue was KRW 70 billion, sustaining an uptrend at 2.8% year-over-year growth while Enterprise line business was up 4.8% on year, reporting KRW 194.5 billion. Solutions revenue dipped by 4.8% year-on-year, but we saw growth from new businesses, including smart factory and smart mobility. Based on our experience in building smart ports at Busan Port and Yeosu-Gwangyang since last year, we built integrated command and control system based on the digital twin for the first time in Korea for Hanjin Busan Container Terminal setting up an intelligent port providing real-time safety monitoring of workers. We also executed a memorandum on [ EcoSmart ] port with Busan Port Authority, solidifying our position as a leading provider of 5G smart ports. Also, in order to expand smart factory reference sites, we continued to cooperate with not only large companies, but also SMEs, offering broader solutions. To alleviate SME's burden on making the initial investment for building smart factories, we offer cloud and subscription-based inspection service for factory checkups and expanded solution offerings to include 3 solutions, which are AI vision inspection, motor, diagnostics and predictive maintenance. By using AI-powered analytics for equipment and facilities and for ensuring product qualities, SMEs who lack operational and maintenance know-how can improve their manufacturing quality while enjoying outstanding network security as the factory is directly connected via 5G dedicated line to LG Uplus' MEC Center. We also executed a memorandum with Seoul Technopark in order to drive digital innovation and provide support for smart factories to these mid-tier companies. We expect to showcase our proprietary smart factory technologies to many more SMEs through this MoU, thus providing support for them to innovate their factories and enhance manufacturing competitiveness. As shown through these endeavors, LG Uplus is taking the transition into becoming an innovative digital company in not only B2C, but also in the B2B domain. Since our incumbent business, including IDC, continue to show a solid growth, we will exert efforts behind the growth of new businesses and the overall B2B infrastructure business in the remainder of the year.

[Interpreted] That ends the earnings update on each of the business lines. We will now invite back our CFO for business outlook for Q4 '22.

[Interpreted] Recently, we are seeing dramatic changes, both home and abroad in telecom and the media market. Customers who are now younger and smarter values rational consumption and are excited about differentiated and original content and digital technology more than the incumbent telco services. Thus, we are seeing ever-growing market influence of platform providers and OTTs. So this was the starting point of our thought process, which led us to the transformation of LG Uplus as innovative digital company and a platform provider. Over the long-term horizon, while we solidify the fundamentals of the telco business, we wish to put in place a business structure enabling sustainable growth, offering bigger experiences to our customers, supported by digital technology and rigorous customer data analytics. By bolstering revenue growth and securing profitability from new businesses in both B2C and B2B, we plan to double the non-telco revenue share to 40% by year 2027 and grow our corporate value to KRW 12 trillion. In step with LG Uplus' strategy for future growth for the remainder of the year, we plan to focus on improving our businesses' profitability through differentiated service competitiveness and efficient spending and with unwavering focus on our bottom line, our objective remains unchanged as we strive for outperformance and profit enhancement. We will continue to exert our utmost efforts during Q4 to drive business results as well as enhance corporate and shareholder value. Thank you.

[Interpreted] This concludes the Q3 '22 earnings report. We are now open for your questions.

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

[Interpreted] I would like to ask you several questions. First relates to your Q3 results. Overall, the earnings for Q3 was quite favorable, but still that does not eliminate the concerns that the investors have with regards to the earnings performance for LG Uplus, because previous year, you failed to meet your operating profit target of KRW 1 trillion and we still do have some concerns regarding your Q4 figures. What do you think is the possibility for the company to be able to hit that KWR 1 trillion operating profit target? And second question relates to your CapEx. Where are you mostly spending your CapEx expenditure? I would like to understand where you're focusing your investments on for your future. And thirdly, we've seen a lot of press articles regarding the recent credit crunch that we are seeing in the market. And it's becoming quite difficult for companies to finance themselves. In terms of LG Uplus' CapEx needs, are you comfortable on that front?

[Interpreted] Yes, I understand the previous year the fact that we underperformed that KRW 1 trillion mark had created quite a bit of a disappointment to certain people. Considering this year, I do believe that we do have ample potential to meet that target. Yes, I understand that the reason for such concern is because of the -- on a cumulative basis, as of Q3, the revenue growth rate had been less than what was expected from the market. But if we look into the fourth quarter, I believe that because most of the revenue is quite concentrated from for our B2B business, we are going to be able to see some impact come through from there. And also for our consumer business, we are seeing a sustained uptrend in the number of subscribers, especially the high-value customers. So come Q4 of this year, we believe that we will be able to bring about the revenue growth of around 4% year-end. Regarding the operating profit for the previous year, Q4 of previous year, we were incurring some one-off expenses so that we can motivate our employees and also so that we can prepare for this year's business. But for this year, we -- there's not going to be any such nonrecurring or one-off expenditure items at the end of this year, meaning Q4. So if you were to look at the progress to date, I think that we do have ample signals that help us make more positive projections regarding the operating profit figure at the end of the year. I can tell you that we are committed as it is what we want as a company and what the market expects that we will definitely meet that KRW 1 trillion operating profit mark. Regarding your question on CapEx, I think that your concern arises from the fact that cumulative Q3 CapEx is above the level of the previous year on a year-over-year basis. And that is because of the quarterly impact. But for the Q4 of this year, we are going to -- we are expecting a lower level of CapEx expenditure. So if you were to look at the CapEx figure on a per annum basis, it will most likely be flat Y-o-Y. Regarding next year's CapEx, we're currently in the process of drafting our business plan. So we would have to wait and see regarding the details. But what I can tell you is that the focus of our capital expenditure in upcoming periods will be, number one, making investments into improving the qualities for our customers and also running quality-related tests. We plan to be very precise in running these activities in terms of testing and enhancement so that we could always ensure that we provide the elevated level of quality to our user base. Second point, as I've mentioned during the presentation, we are now living in an age where providing a good customer experience which is underpinned by data is going to be the key for companies like us. Hence, we will be making investment into laying a solid basis and foundation for us to be able to further grow our businesses underpinned by data. Third question regarding the recent financial market turbulences and the potential impact that this could have on companies like us, what I can tell you is that Uplus is in a business area where our business-related beta coefficient is -- does not fluctuate too much, meaning those that actually provide the credit into the market basically consider companies like us in these types of sectors as key priority companies for them to actually extend those credit. Regarding debt, especially on the corporate bond side, everything is well arranged for -- in terms of the fund need of the company. And regarding any debt that we would need for operational purposes, also, we have everything well in control and everything is well arranged. There was a case regarding ABSs, but we've gotten a confirmed answer from one of the anchor investors who actually have a demand and need for ABS instruments. So we believe that regarding the financing and the funding needs, the company does not, at this point, face any particular problems. We expect the current stress level that we are seeing in the financial market, we're probably not just -- even if it doesn't go away in the short term, even if we assume that this situation is going to be prolonged in terms of the financing, because we have already diversified the maturity structure, if you were to compare the amount of obligations that's going to come due next year, it's going to be about the half of size of what we have seen this year. So all in all, as we are a company that's an industry sector where our business actually accompanies relatively lower beta coefficient, we are more likely to receive credit from the credit providers in the financial market. And the second element is that our debt maturity profile is quite favorable for the company. So I can assure you that you need not be concerned.

[Interpreted] We will take the next question, please.

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

[Interpreted] I would like to ask you 2 questions. First, I understand that you recently hired a producer who previously produced episodes and contents like Running Men and I am the Singer. I would like to understand what your content-related investments and content strategies are and what your monetization plans are like? And my second question is with regards to Idol Plus, I understand that you're taking that for global expansion. Can you provide us with an update on that?

[Interpreted] Hello, I am the CCO in charge of content, I am Lee Deok-Jae. When it comes to the content business, the key capabilities and competencies lie with the people, the people's capability to actually plan and produce good content. So under our CCO, we have actually set up a production center. It's headed by [ Shin Dong-Soo ]. And also, we have hired people and we have put in place the team leaders such as [indiscernible] and [indiscernible]. So we have put in a lot of efforts to really come up with the most optimal organization. And the people that we are onboarding are not just people who previously had successes, but their vision and their spirit of challenge is well embedded in their DNA and it is well aligned with what we as a company are seeking. Together with these leaders, we wish to create a culture of content creation within LG Uplus and we want to be able to be well recognized for that by our users through which we eventually would want to further enhance the corporate value. Just to provide a little more elaboration on the overall content business direction and we have released this information to the market as well, within CCO, we've set up a studio brand called Studio X+. And the meaning of this brand name basically embodies and reflects our commitment to be able to produce and create great content, thereby providing enjoyment and good experience to the users. Through the use of this studio, we wish to provide fun, empathetic, innovative and scalable content and be able to not just produce them or distribute them and end there, but try to connect that with other value-added services, especially even going into the overseas and global IP business, through which we wish to further enhance the ROI of our content business. Basically, our key target is going to be the millennials and unlike what the legacy media provide, we would be innovating different types of content and we will be providing those such contents to our target base. And these contents will not just be for the use of our internal platform, but we would also seek synergies with other LG group affiliates. And basically, under this strategic approach, it is essential for us to collaborate with companies whose strategies aligned with our views and we are open to partnering up with any such company. With regards to more specifics about the strategies, we will come back to you once we have them well lined up. Responding to your second question about Idol Plus. Currently, this Idol Plus supports multiple languages, including English, Japanese, Mandarin, Thai and Indonesia and also the portion or the share of overseas customers account -- users account for 60% of the total user base. One of the key indicators that I can share with you is that although temporarily mid-October, we hit 5 million MAU figure. The most important element about idol platform is providing a platform for marketing for the artists and their fandom and the management companies that actually manage and plan and provide support to these artists. So because of that, we would like to develop and grow Idol Plus into a fandom-based community platform. And if we were to think about the future direction, we are looking at developing business models where we could run advertisement or provide other overseas services supported by this platform.

[Interpreted] We will take the final question due to the time constraint.

[Foreign Language] The last question will be presented by Sean Lee from Citigroup.

[Interpreted] I just have one question on your new business. If you look at your earnings presentation, you talk about the future growth strategies around these 4 platforms. Since you announced this plan, I would like to understand what's been going on. Can you provide us with an update? And when can we expect more specific business model? And when can we see revenue flow through? And what are your plans under these initiatives?

[Interpreted] Hello, I am CSO, I am Kwon Yong-Hyun. To update you, since the plan was announced in September, we were in the process of setting up organizations that will be powering such long-term efforts in our process and in our efforts to develop business models. So as mentioned during the presentation, there are these new business endeavors that we have been putting our effort behind since some time, which includes content as well. And also there are new business areas under the 4 major platforms. So in order to eventually make these new businesses independent at this point, what we are doing is we are hiring the relevant experts, POs and developers so that in the process of making this organization more precise. So under these 4 platforms, there are different types of businesses. Basically, some businesses have been ongoing for some time. So the progress is quite advanced, while some other businesses, we have to start fresh and start from new. So one of the example is under the Nurture & Care platform, Kids World already was in operation. So there is a business model that we can adapt and make more upgrades under the kids OTT initiative. So based on our existing experiences, we can diversify that and think of many other new types of business models. And under the Lifestyle platform under subscription, for instance, U Doc service was a service that was already in place. So we will be continuing on with that. At the same time, we will look at and trying to explore -- we'll try to explore new business models relating to subscription. You also asked about when we would be able to see some tangible revenue results. It will differ depending on which platform you're talking about. For instance, the Play platform, like the Idol Plus and other content businesses, of course, I would have to come back to you with more specific plans as we develop them, but we will be able to see revenue being generated starting next year. But then for subscription and routine services, we're looking at more towards second half of next year. So on these 4 platforms, once we develop more detailed plans, we will come back to you and share with you as to how -- what their impact will be in terms of subscriber numbers and also its impact on our user base.

[Interpreted] So this ends the Q3 2022 earnings presentation of LG Uplus. If you have more questions, please feel free to contact us at 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.]