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

[Foreign Language] [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 2023 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 2023 first quarter earnings results by LG Uplus.

[Foreign Language] [Interpreted] Good afternoon. I am [ Sunghyun Mo ], Head of IR at LG Uplus. We would now like to begin with the first quarter 2023 earnings presentation. Please refer to our first quarter earnings presentation and note that revenue breakdown of each business and details of operating expense are on the basis that excludes LG HelloVision for the benefit of ease of comparison. As a disclaimer, all of the projections we are providing today may change subject to macroeconomic and market backdrop. We will also be providing consecutive interpretation for the benefit of our overseas investors. We will first begin with Q1 performance highlights followed by a Q&A session. Without further ado, I will turn it over to our CFO, Yeo Myunghee, who will run through Q1 2023 earnings and business results.

[Foreign Language]

[Interpreted] Good afternoon. I'm Yeo Myunghee, CFO at LG Uplus. Thank you to analysts and investors for joining LG Uplus' Q1 2023 earnings conference call. Thanks to sustained top line growth from all business segments, particularly centering on mobile business and cost efficiency efforts, LG Uplus achieved steady operating profit in the first quarter. From new business segments, we speeded up production of original content and quickly carried forward with platform businesses, which include commerce and advertisement business. Mobile business saw basic fee revenue grow on the back of 5G customer expansion and rise in high-value subscribers, which started to ramp up in year 2022. At the same time, churn rate declined year-over-year, enabling a sustained qualitative growth and continuing high growth of revenue and MVNO subscribers and improvement in roaming revenue from increase in cross-border travelers, Q1 '23 mobile service revenue was up 3.2% year-over-year. Smart Home business revenue was up 2.2% year-over-year on the back of rise in Giga subscriber count and IPTV ARPU, while B2B infrastructure business posted 1.7% year-over-year growth, driven by robust growth from enterprise line and steep growth from the IDC business. And since launching its first entertainment content last December, we've been ramping up original content production with the release of 3 additional titles in the first quarter, which include Sometimes, Edu K dol and Our Game. Uplus Kok, company's data commerce service, recently went above 5 million cumulative users whilst Sporki, which is a comprehensive sports platform, surpassed 10 million users on a cumulative basis in just 5 months since its launch as of end of April, attesting to a fast-paced growth of the platform business. Also, last December, we released carbon neutral rate plan, where eco-friendly gift is given out to subscribers who actually practice on carbon neutrality. And to improve convenience and save paper for the benefit of environmental protection and to reduce carbon emissions, we adopted online dividend information service in April, further bolstering ESG management. Not only that, to help foreign customers use services of LG Uplus, we're supporting customer service, chatting service in 4 different languages so that we may live up to our social responsibility. Now, on to financial highlights of the first quarter 2023. Q1 consolidated service revenue was up 1.8% on year to KRW 2,824.3 billion, while stand-alone service revenue reported KRW 2,612.9 billion, posting 2% year-over-year growth. Consolidated Q1 operating expense was up 4.2% year-over-year and down 1.3% Q-on-Q, reporting KRW 3,281.1 billion. Marketing expense was down 9.2% on year and 6.8% on quarter to KRW 534.3 billion, with a focus on efficient spending continuing. Consolidated Q1 operating profit was down 0.4% year-on-year to KRW 260.2 billion. While on a separate basis, operating profit increased 0.1% to report KRW 257.1 billion. Consolidated Q1 EBITDA was up 0.9% year-over-year to KRW 879.6 billion, sustaining the trend of operational cash flow improvement. Consolidated Q1 net profit was down 9% year-over-year and 2.7% Q-over-Q to KRW 155.1 billion with CapEx at KRW 519.2 billion, which is up 43.6% year-over-year. On a consolidated basis, as of the end of the first quarter, total asset is KRW 20,017.8 billion, total liability, KRW 11,589.1 billion and total shareholder equity was KRW 8,428.7 billion. Debt-to-equity ratio increased by 3.5 percentage points year-to-date, and net debt ratio went up 2.2 percentage points. This ends the briefing on business and financial performance, we will now move on to breakdown of results and outlook by business.

[Foreign Language]

[Interpreted] First, on mobile division. I'm Lee Jae-won, Head of MX Innovation. Q1 mobile service revenue was up 3.2% on year to report KRW 1,478.7 billion. Sustained mobile growth is attributable to increases in MNO high-value subscribers, qualitative growth of MVNO subscribers and recovery in roaming revenue following the rise in cross-border travelers. Total mobile subscriber count was up 11.3% year-on-year, reaching 20,555,000, of which 5G subscribers were up 27.5% year-over-year to 6,419 000, accounting for 54.8% of the total handset subscriber base. Number of MVNO subscribers was up 41.2% year-on-year to reach 4,343,000, continuing on a steeper uptrend. As mentioned at the beginning, during the first quarter, LG Uplus launched 3 original content titles. Sometimes is an audio drama about a story of romantic relationship between him and her, which uses voiceover of actors and actress. Edu K dol is an entertainment content featuring K-pop idols in which they are taught and cared for so that they can level up their knowledge. While Our Game is a sports documentary on year '22 season of LG Twins. Also, Sporki, a comprehensive sports platform, became very popular, offering most up-to-date news on sports leagues, both Korean and global across different sports and popular YouTube videos as well and aired live broadcasting of 2022 Qatar World Cup games and 2023 WBC Championship and more. Sporki [ rated ]more than 10 million cumulative subscribers in just 5 months since the launch, and unveiled AI forecasting feature for KBO League effectively fulfilling the needs of the sports fans. LG Uplus is also seeking to expand MVNO-plus, which is an offline store, specializing in consulting across the entire nation. Following the opening of the first store last January at [ Hapjeong-dong ], we plan to add 7 more outlets in Incheon, Daegu, Busan, et cetera. MVNO-plus will drive our MVNO business and make bigger contribution to the thriving of small to midsized MVNO players. Until the end of this year, we will endeavor to speed up 5G transition and drive up data usage on the back of rollout of new platforms and create competitive original content so that our mobile business can continue on an uptrend in top line revenue and bottom line profit. [Foreign Language] [Interpreted] Next is Smart Home, and I'm [indiscernible], Head of [indiscernible]. First quarter Smart Home revenue was up 2.2% on year to KRW 594.3 billion. Q1 IPTV revenue was up 0.3% Y-o-Y to KRW 333.6 billion, while broadband revenue posted 4.7% year-over-year growth, reaching KRW 260.6 billion driven by Giga subscriber growth. Due to last year's efforts behind scaling up the quality of our subscriber base, IPTV subscriber count was down by 0.8% year-on-year, but we saw an increase of 0.3% Q-over-Q, reaching 5,368,000 subscribers. Internet subscribers were up by 3.3% year-on-year, reaching 4.98 million. In November, LG Uplus focused on diversifying content offerings following the launch of OTT TV, which services tailored content recommendations and provides convenient viewing experience. This March, we carried out a revamp of OTT lineup, allowing people to watch Tving, which is an OTT service, over our IPTV platform. And we also rolled out a Tving exclusive rate plan as well. So now LG Uplus can offer many popular original content from Tving through a large TV screen. And aside from diversifying the IPTV content pool, we also placed traction behind the platform business, which is the company's new growth engine. The company also executed a business partnership with the biggest cable TV operator in the metropolitan area, D'Live, to activate advertisement media sales and to broaden our coverage. Starting July, over Uplus Ad, which is LG Uplus' ad servicing platform, we will start transmitting the live advertisement. This has further expanded LG Uplus' advertisement coverage by additional 50%, making the company a #1 pay TV platform in the metropolitan area. And we will provide effective marketing services to our customers and deliver hyper-personalized and tailor-made ads to the viewers as we continue to innovate customer experience. Company's Smart Home business, as such, will ride the tide of the changing global content market whilst exploring new engine for growth in order to drive profitability.

[Foreign Language]

[Interpreted] Next is B2B infrastructure, and I'm Lim Jang-hyuk, Head of New Enterprise business. Key highlights for Q1 are as follows: Q1 B2B infrastructure business was up 1.7% year-over-year, growing to KRW 368.4 billion on growth of its IDC business. Q1 IDC business was up 19.9% year-over-year to KRW 76.6 billion, continuing a steep uptrend while enterprise line revenue came in at KRW 188.6 billion, growing 0.7% year-on-year. But for the solutions business on traffic decline from broadcast messaging, which formed part of the solutions business, revenue dipped 7.2% year-over-year to KRW 103.2 billion. During Q1 of 2023, LG Uplus was able to generate performance from various new business segments. In smart factory, we showcased 5G, AI and IoT-based smart factory solutions at 2023 Smart Factory Automation Exhibition as the only telco participant in the event, receiving great interest from various customers. We also entered into MOU with LS Electric, which is a major smart factory and automation solution provider in Korea, expanding our business domain from large companies to small to mid-tier companies with a view towards building out smart factories that customers practically need. By delivering reasonably-priced solutions that meet the requirements and needs of each factory, we will further solidify our market dominance. Also in mobility, starting with Toyota's RAV4 plug-in hybrid, which was launched February in Korea, we will install Uplus Drive, an integrated infotainment service platform over which weather, smart home, music and video services are provided across all of the Toyota models, including Lexus to be released this year. Underpinned by in-vehicle telecom technology, we will strengthen sports community platform and in-vehicle VOD service and children's content and other media content offering unique car life experience to our customers. This ends the business performance breakdown by each segment. And now our CFO will present on the second quarter outlook.

[Foreign Language]

[Interpreted] During the first quarter of '23, as the requirement for wearing masks has been lifted, overseas traveling came back, triggering changes in customer spending behavior. On rise in cross-border travelers, roaming revenue recovered, reaching its previous levels, and mobile traffic is also uptrending backed by increase in content consumption over the mobile devices. Under such changing environment, LG Uplus continued to provide differentiated experience to customers in Q2, maintaining steady growth in mobile and Smart Home business, while for the B2B infrastructure business, we want to be able to lay down a solid basis for future growth through the increase in reference sites. For the mobile business, we will sustain revenue trend at Q1 level based on acquisition of MNO premium subscribers, volume growth of MVNO subscribers, improvement in churn rates and recovery in roaming revenue. Smart Home will focus on growing high-value customers, driving qualitative growth, while we plan to expand partnerships based on open platform strategy for OTT TV. And for new platform business, including advertisement platform, we plan on enhancing revenue and profit. For the B2B infrastructure business, in addition to steady growth of the incumbent businesses by transitioning SOHO, SME and mobility business into a platform-based business, we will accelerate growth from new business. To improve network quality, we will be making 5G in-building investments and some additional investments to fill in the gaps. We also successfully interlinked standardized open land equipment with Nokia last January. And in March, we decided to embark on a joint research on AI-powered open LAN automation technology with Hewlett Packard Enterprise, which all goes to show our stronger cooperation with technology leaders so that we can deliver the most optimized network quality and stable services. In terms of ESG, we will be bolstering ESG relevant activities across environment, social and governance to broaden the horizon of operational activities and to realize long-term sustainable growth. In Q2, LG Uplus will continue to strive to reach stand-alone service revenue guidance of 4% communicated early this year and generate financial performance that is in line with market expectations. Thank you. [Foreign Language] [Interpreted] This ends the highlight on our earnings. We will now entertain your questions.

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

[Foreign Language]

[Interpreted] I'm Kim Joonsop from KB Securities. I have a question relating to your guidance. And second question on ESG. If you look at your Q1 results, it seems to be slow compared to your separate basis guidance of 4%. Can you shed some color as to what the reason behind this slow earnings is and what your strategies are to catch up with your guidance? Second question is on your ESG. Some of the investors have shown interest, and are curious as to what your ESG target objective and your ESG performance looks like. Can you also elaborate therefore, on what your mid- to longer-term ESG objectives are and what the current performance looks like?

[Foreign Language]

[interpreted] Well, thank you very much for that question. I will, as a CFO, respond to your question. Now looking at the first quarter service revenue growth on a consolidated basis, we reported 1.8% growth, whilst on a separate basis, we recorded 2% growth. We've seen good performance from our mobile business. On the other hand, for Smart Home and B2B infrastructure, we fell a bit short. Now first, if you look at the mobile business, in terms of the total subscriber base, we were able to sustain the growth at 11.3% year-over-year growth, reaching or surpassing 20 million mark. Our churn rate has improved by 0.11 percentage points. If you also look at our handset ARPU, our uptrend has been sustained, and we were able to drive both improvement in terms of quality and volume. And also, if you look at MVNO subscribers, it posted a quite sizable growth of over 40% on a year-over-year basis, and our roaming revenue has recovered to levels pre-COVID. And hence, if you look at our mobile service revenue, the growth rate since Q4 of 2022, we've been able to sustain the growth at around 3% level. Now but on the other hand, growth from Smart Home business was only at about 2.2%. And if you look at our broadband Internet, driven by growth of our GIGA subscribers, we posted a year-over-year growth of 4.7%. But looking at IPTV, because of a slower VOD revenue, which was due to the growth of the OTT business, our growth rate was relatively low at around 0.3% on a year-over-year basis. Now however, in order for us to further bolster competitiveness of our IPTV business, we released OTT TV at the end of last year, and we are in the process of expanding partnerships with OTT service providers. And we're also improving on the viewing convenience, and we've seen increase in the acquisition of high-value subscribers. And because of these factors, we think that we will start to see improvement start to feed in from second quarter. Now looking at B2B infrastructure business, the growth was 1.7% on a year-over-year basis, which fell short of the expectations. IDC business posted a quite steep growth of around 20% year-over-year. But because of the base effect, as the previous year, there was a high level of broadcast messaging revenue coming from the presidential election, vaccine and disaster text messages. There has been a relative decline, which actually drove down the entire B2B infrastructure growth downward. But on a per annum basis, due to the growth from our existing businesses of enterprise line and IDC as well as higher revenues coming from the new businesses, which include SOHO, SME and mobility, we believe that we will be able to at least meet the growth rate that we've seen previous year. And another thing that I would like to just mention is that in the first quarter, we booked the compensation packages that we had provided in regards to the DDoS network failure. And because of that, we've seen some lower figures in terms of the service revenue growth rate as well as the numbers from this morning. So I ask for your understanding on this point. So as I mentioned at the very beginning, we were very thoroughly implement the catch-up plan so that we can achieve the annual guidance, increase or improve operating profit and also enhance shareholder value. Responding to the second question on our ESG mid- to long-term plan. LG Uplus in December, we joined KRE-100, committing to sourcing 100% of our electricity usage by 2050 through renewable energy sources. And in the first quarter, we developed a sourcing plan for renewable energies and for adoption of photovoltaic equipment. And starting the second quarter, we will fully ramp up in purchasing the renewable energies. And also at this point, we have set up a task force team so that we can build out a photovoltaic facility and in the process of coming up with the details of that. Also, in order for us to save energy, we are looking at different telecom equipment and the other equipment and facilities and various activities are ongoing so that we could save energy as much as possible. And also, we will be able to reduce greenhouse gas emissions by bringing about system improvement and making adjustments on a data basis. And the members of LG Uplus are very actively participating in the corporate social responsibility activities, examples of which has to do with using Kids World, so that we could narrow the gap in the educational levels, working together with local children centers. And we are also planning in the second quarter to provide a playground inside the [ Korea ] University's [ Kudo ] Hospital in partnership with Disney. We will continue to endeavor to further enhance our mid- to long-term corporate value by generating sustainable value and in the process, engaging other stakeholders, all of this underpinned by our ESG commitment. [Foreign Language] [Interpreted] We will take the next question, please.

[Foreign Language] [Interpreted] The following question will be presented by Sun Jung Lee from Bank of America.

[Foreign Language]

[Interpreted] I'm Lee Sun Jung from Merrill Lynch. I have 2 questions. First relates to your platform new business. Compared to what you announced previous year, are there any update? If so, could you please share that with us? Also in terms of business plan on monetization plans, if you have the details, that would also be quite helpful. Second question is, all of the telco providers in Korea, all 3 of them are currently jumping into the UAM business. Any update on your UAM endeavors? And any strength, any competitive edge that you have compared to your peers?

[Foreign Language]

[Interpreted] Well, thank you for that question. I will provide you with an update on the platform business. As you've mentioned, last September, we announced our future growth strategy, which is dubbed Uplus 3.0. And since then, under our vision to become a digital innovative company, we've been expanding our services and business domain, which is underpinned by data so that we can provide a new digital experience to our customer base. Based upon that vision, we are in the process of further strengthening and leveling up our services that is representative, and that is expressed through our 3 new business areas and Web 3.0 and 3 new business areas, which include life, play and care and nurture. First, if you look at our telecom Life platform, what we did was we released a social media service dubbed better. Basically, this is a tool through which people could actually write down their routines and set their daily objectives. Now for the play platform, which has to do with the offering of content, we made improvements from IPTV to OTT TV. So our viewers can view all of the content in one place. And by leveraging the metadata of the OTT companies, we were able to provide a very easy search feature across all of the OTTs and are in the process of improving customer experience. And in terms of producing such content, our Studio XplusU is playing a key role, and we've been able to release 5 original content. And on the sports side, under Sporki, we added a feature of a real-time broadcasting of the sports games through which we've been able to further differentiate the content offerings and tailor the content for our viewers. And all of these efforts are ongoing to further scale up the services. Now for the growth and care platforms, after we released the mobile version of Kids World, we've been providing more interactive content so that we could give fun factor as well as education. And some of the examples are touch books and 3D books. And thanks to these efforts, we were able to further expand our paying user base. In terms of more updates and any additional services that's in the pipeline, we will be able to regularly share those news with you during the quarterly earnings call. Now regarding the question on UAM, together with GS Construction and Kakao Mobility, we formed the consortium. We are now participating in a [ MoliD-UAM ] proof-of-concept project that is called KUAM grand challenge. So the parties to the consortium, we will first look at GS Construction, they will be in charge with developing the very parts. Kakao Mobility will be in charge of the operation of these air vehicles and Uplus will play its role as a provider for the ITS, the integrated traffic management platform. We will do our utmost to make sure that the UAM is operated at the most rigorous safety levels, and we plan on providing the integrated transportation management system as well as very steady telecom services. We also executed an MOU with Busan City in July of '22, really having a strong foothold on our local pilot projects. And in February, for the first time in Korea, we entered into an MOU with a company called [ Plana ], who is the only hybrid-based UAM aircraft developer. Through these MOU executions, we've been able to strengthen our platform. And LG Uplus, based upon its on-land telecommunication service capabilities will be able to provide a most utmost or highest level of quality up in the air as well. We will be showcasing soon Korea's best UAM ITS system upon which UAMs could be observed and controlled on a real-time basis. We will take that final question before we close.

The last question will be presented by Seung Woong Lee from eBest Investment & Securities.

[Foreign Language]

[Interpreted] My question relates to CapEx. I see that in Q1, we've seen quite significant increases of CapEx on a year-over-year basis. Can you provide some details on that? And does this signal a yearly rise in CapEx? Or is it because of an over concentration during Q1?

[Foreign Language]

[Interpreted] Now typically, if you look at our CapEx curve during Q1, it is comparatively lower, and then it shows an upward trajectory as we go into the year. But this Q1, what we did was we've made more investments into improving the quality. So we're under the view of utilizing the 3.5 gigahertz spectrum that we, last year, have been additionally allotted. That is why on a quarterly basis, we've seen a little more than 40% rise in CapEx. But on a yearly basis, we believe that for this year, the CapEx spend is going to be flat on a year-over-year basis. And also going forward, we will make more investments so that we can strengthen our data protection, but we will also be very efficient in managing these investments so that on a per year CapEx basis for 2023, we will see more or less the same level as we've seen in the previous year. [Foreign Language] [Interpreted] This brings us to the end of the first quarter 2023 earnings conference call for LG Uplus. Thank you very much for joining us today. And if you have further questions, feel free to contact us at the IR team. Thank you. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]