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 2023 Second Quarter Earnings Results by LG Uplus. This conference will start with the presentation followed by a divisional Q&A session. Our call is being webcasted on our homepage so that you can follow the conference simultaneously. [Operator Instructions]. And now we will begin the conference of the fiscal year 2023 Second Quarter Earnings Results by LG Uplus.

[Interpreted] Good morning. I am Sung Hyun Mo, team leader of IR at LG Uplus. We would like to now begin the second quarter 2023 earnings presentation by LG Uplus. For the benefit of the investors, please refer to the second quarter document that we have pre-circulated. And for the benefit of the investors, the breakdown revenue as well as operating expense details are based on excluding LG HelloVision numbers. And regarding the forecast that the company is making, it is subject to change depending on macro and market environment changes. And also for the benefit of our foreign investors, we will be providing consecutive interpretation. We will begin with the second quarter earnings results, which will be followed by a Q&A session. I would like to first invite our CFO, Yeo Myung Hee, who will walk through the second quarter '23 financial as well as business results.

[Interpreted] Good morning. I'm Yeo Myung Hee, the CFO. I extend my gratitude to analysts and investors for joining LG Uplus' second quarter 2023 earnings presentation call. Thanks to sustained revenue growth from mobile, home, B2B and new businesses and cost efficiency gains, in the second quarter, LG Uplus achieved steady level of operating profit. Through customer experience, innovation, mobile business, [ solar ] expansion and subscribers and 5G penetration, while through collaborations with new service providers from various different domains, we were able to bolster benefits customers could enjoy through our tariff plans. And by introducing mid-segment 5G rate plan to Uplus MVNO providers through a wholesale arrangement, we expanded on customers' choice. Smart Home business saw its up trend continue on RISE and Giga Internet subscribers and IPTV ARPU, and on steep growth from IDC and robust growth from enterprise line business B2B infrastructure reported a steady performance. And in June, we executed a joint venture agreement with Kakao Mobility to secure competitiveness in EV charging business. The new entity to be formed will bring together LG Uplus' telecom infrastructure and operational know-how based on which Kakao Mobility's platform capabilities will be leveraged to provide scaled up EV charging services. Starting this year also, we expanded alliance with Hyundai Motor Company supplying wireless communication circuits across all of Hyundai and KIA models, including Genesis, which drove sizable growth in number of IOT subscribers in Q2. If this trend was to continue, we anticipate it will bring big impact on market share of wireless subscribers of three mobile operators in the future. Also last April, we adopted online dividend inquiry services, enhancing shareholder convenience, as well as reduced paper usage contributing to environmental protection and further fortifying ESG management. Now moving on to second quarter financial performance. Consolidated second quarter service revenue was up 1.6% year-on-year, reporting KRW 2,897.1 billion, while separate basis service revenue was KRW 2,675.3 billion, up 2% year-over-year. Consolidated Q2 operating expense was up 0.2% year-on-year and down 4.3% Q-on-Q, recording KRW 3,141.3 billion. Marketing spend was down 1.9% year-over-year and up 1% Q-on-Q to KRW 539.7 billion, continuing on with efficient spending stand. Consolidated Q2 operating profit was up 16% year-on-year to KRW 288 billion. On a separate basis, OP reported KRW 287.3 billion, up 17.5% and Consolidated Q2 EBITDA was up 6.9% year-over-year to KRW 916.8 billion, showing a sustained trend of operational cash flow enhancement. Net profit on a consolidated basis increased 31.7% year-over-year and 37.5% on quarter, reaching KRW 213.3 billion. CapEx reported KRW 661.3 billion, up 8.2% year-over-year. Looking at consolidated financial position as of end of the second quarter, total assets recorded KRW 20,419.3 billion. Liability total was KRW 11,777.6 billion shareholder equity was KRW 8,641.7 billion. Debt-to-equity ratio increased 2.3 percentage points year-to-date, while net debt ratio fell 1.3 percentage points.

[Interpreted] This ends the briefing on financial and business performance, and we will now move on to each business unit for a breakdown of results and outlook.

[Interpreted] is mobile business, and I am Lee Jae Won, Head of MX Innovation. Q2 mobile service revenue was up 2.5% year over year to KRW 1,494.3 billion, and such continuing growth was attributable to growth from MVNO subscribers and recovery of roaming revenue on the back of rebound in travelers. Total number of mobile subscribers reached 21,677,000, up 14.3% year-over-year, of which 5G subscribers reached 6,679,000 up 24.3% year-over-year, accounting for 57.2% of total handset subscribers. MVNO subscribers were up 47.2% year-over-year reaching 4,878,000, sustaining the elevated uptrend. In April, we launched 5G rate scheme that is well matched to the user's life cycle. To younger generation, we're giving more data, while to the older generation, we provide benefits at more reasonable price, giving more choice to our user base. And for the first time in the telco industry, we offered Uplus MVNO operators with new 5G tariff scheme through a wholesale arrangement. As such, we are continuously finding ways to thrive side-by-side together with MVNO operators and the greater market. Also, a number of mobile activations achieved through Uplus Live which we introduced for the first time in the industry back in 2020 increased 172% year-over-year. This is an outcome of user experience innovation attained via personalized service offerings by coming up with a most optimal curation that best cater to preferences of every customer. We will continue to drive activation, not only through the live commerce channel, but also through various different online channels. Last year, we released Podong, which is a community and a training service for pets that offer counseling services as well, and it gained big popularity, thanks to innovative services offered to families of companion animals. As a result, subscribers reached above 200,000 as it became a service beloved by its customers. Also Sporki, which is a comprehensive sports platform, broke 15 million in cumulative subscribers in just 7 months since its rollout and is continuing on with a growth trend. During Q2, we released two original entertainment content, By My Side and Should've Stayed Home and announced our production schedule for the second half. As such, we are expanding our original content production. And also through collaboration with IP holders of popular music performances in the U.S., we are bolstering LG Uplus' competitiveness in its content offerings. In the remainder of time, we want to be able to provide more benefits to customers by delivering diverse array of services and content that will drive customer experience innovation and accelerate 5G transition in order to drive sustainable revenue and profit growth.

[Interpreted] Next is Smart Home business, and I'm Park Chan Sung, Head of Homeniverse business. We'll first start with key performance highlights of Smart Home business. Q2 Smart Home revenue was up 4% year-over-year to KRW 602.9 billion. IPTV revenue was KRW 336.9 billion, up 2.8% year-over-year and Internet revenue was up 5.6% year-on-year reaching KRW 266.1 billion on Giga subscriber growth. IPTV subscribers on the back of subscriber quality improvements that took place last year were down 0.1% year-over-year, but it was up 0.4% Q-over-Q, reaching 5,392,000 subscribers. A number of Internet subscribers increased 4.9% on year, reaching 5,237,000. LG Uplus will soon launch U+tv next, which is an upgraded version to OTT TV rolled out last year. U+tv next will offer easy viewing experience and recommend personalized content in line with the new paradigm of IPTV transformation. We will enhance viewing experience where in the past, customers had to go after the content into a new paradigm of user centricity. We also brought next-generation MSA microservice architecture technology to IPTV ahead of our industry peers. MSA allows systems to be segmented into smaller units so it is easier to improve services and limit the scope of failure when problems occur. This can help media platform's operational stability and help to quickly resolve customer complaints. LG Uplus will continue to incorporate such cutting-edge technology in order to minimize inconveniences and to innovate IPTV customer experience. Under a fast changing educational environment, Kids World equipped with fun and learning was awarded National Services Grand Prize in Kids Content category for four consecutive years. Kids World as a core LG U+ 3.0 platform delivers premium educational content, and we will continue to work on offering differentiated brand experience and an elevated level of services going forward. Smart Home business of LG Uplus will continue to endeavor to explore new engine of growth in the midst of ever-changing services and content market landscape so as to boost profitability.

[Interpreted] Next is on B2B Infrastructure, and I'm Lim Jang Hyeo, Head of New Enterprise business. I will start with key results of B2B infrastructure business for the second quarter. On the back of continuing uptrend in IDC business, Q2 B2B infrastructure business was up 1.1% on year, reporting KRW 409.4 billion. IDC business in Q2 was up 15.5% year-over-year, reporting KRW 79.8 billion, continuing on with a high growth, while Enterprise Line revenue was KRW 200.8 billion, up 0.3% year-over-year. But for the solutions business on traffic decline from broadcast messaging, revenue fell 5.1% year-over-year, reporting KRW 128.8 billion. B2B infrastructure business during second quarter of '23 brought tangible results from different domains of new businesses. Woori cards customer service center uses AI voice bot powered by LG Uplus' AI technology. And high-frequency work can now be handled 24/7 without the need for a wait time. By using AI language model and actual customer service data, AI voice bot help to significantly improve voice recognition and the response rate. We plan on further improving convenience based on customers' needs and feedback to provide better services going forward. In Smart Factory, we executed an MOU with Glassdome Korea and Nuvix who are companies with solutions that help relieve environmental regulatory burden off customers regarding ESG and emissions reduction. We also have business arrangements with access control and security solution company called Platformbase as well. We are planning to actively provide various smart factory solutions so that our factory customers can enjoy greater efficiency in running their businesses. In Smart Mobility, we were selected as research institution for autonomous driving development and innovation projects sponsored by MOLIT and entered into an MOU as well. This R&D project's objective is to complete the foundation for commercialization for Level 4 plus autonomous vehicles, and under the initiative, we will further scale up foundational technology, including remote control, real-time command and control solutions. With the rollout of UVERSE, Korea's only Metaverse platform specialized for university campuses, we held various events inside UVERSE in collaboration with The Born Korea. Starting with Sookmyung Women's University, we're collaborating with Yonsei University as well, building a virtual service where students can take lectures inside the Metaverse. LG Uplus will expand a number of universities in the UVERSE platform and continue to introduce fun and useful content to students. As can be seen, LG Uplus continues to develop customer-friendly service and solutions to provide differentiated and diverse array of service offerings to its B2B customers in the current business segments. And for new business growth, we will develop market leading technologies to enter into various business arrangements. And for the remaining months of 2023, we will endeavor to gain various different reference sites so as to speed up growth from current and new businesses of B2B infrastructure.

[Interpreted] This ends business breakdown. And I will invite back our CFO to walk through second half business outlook.

[Interpreted] During the first half, LG Uplus continued to endeavor to explore and provide services that will innovate customer experience while trying to identify a new growth engine for the future. In the second half, we expect 5G penetration to expand following the launch of flagship handsets. And under this environment, we will drive customer experience innovation and improve customer pain points to trigger higher growth and bring lower churn rates in order to attain sustainable profit growth. Based on customer experience built over the years and sophisticated customer analysis process, LG Uplus will bolster competitiveness in the digital channel. And underpinned by internalized core technologies, we will generate tangible results from new areas, including platform, SOHO and robotics. We anticipate expanded growth of IoT subscribers including for connected car service to become another growth engine for us. And once the approval process by the authorities on the EV charging joint venture with Kakao Mobility is finalized, we will set up the entity and fully enter into the EV charger business. Supported by such strategies, we will continue to provide differentiated services to customers, and all of our business units will do their utmost to achieve financial performance on par with market expectations. We will drive bottom line growth from the telco business, as well as new business segments in the second half to enhance shareholder return and to make bigger societal contributions through service value innovation. Thank you.

[Interpreted] This ends the presentation, we will now take your questions.

[Operator Instructions] [Interpreted] The first question will be provided by Jee Su Jong from Meritz Securities.

[Interpreted] Jong Jee Su from Meritz Securities. I would like to ask you two questions. First question relates to your annual guidance. Can you provide some color as to what your expectations are for this year? Second question is on your IoT business. What is the driver behind the subscriber growth of your IoT business? And what is your outlook?

[Interpreted] yes, this is the CFO. I will respond to your question on guidance and IoT subscriber growth. We've originally guided that our annual guidance will be about 4% growth. On a cumulative basis for the first half of the year, service revenue posted a growth of 2% on a year-over-year basis. If you look at mobile, service revenue growth on a first half basis. Basically, the growth rate was plus 2.8%, which was quite positive. But if you look at the cumulative growth rate of the Smart Home and B2B infrastructure, the growth rates were, respectively, 3.1% and 1.4%, underperforming. And hence, that was the key reason behind -- the reason why we see that our service revenue had been below what we have previously guided. So the reason why we've seen some slower growth from Smart Home is because of lower VOD revenue on the back of OTT growth, as well as lower home shopping commission revenue. On the B2B infrastructure side, due to the lower level of messaging traffic, we've seen a decline in the broadcast messaging revenue. Those were the key reasons. Now however, if you look at the mobile service revenue, on the back of continuing growth of MVNO as well as increase in the roaming revenue, we expect that in the second half of the year we would be able to maintain the current level of growth. Now for the smart home business, the VOD revenue has been quite slow recently. But with the coming of the summer holidays and the Chuseok, the Korean thanksgiving season, where there will be a number of AAA titles that will be showcased, we are expecting for a rebound in top line revenue. And also with the introduction of a new monthly subscription plan, we expect that we will be able to bring about a mid-single-digit growth going forward on a per annum basis. Now for the B2B infrastructure business, there's a seasonality factor whereby we see a revenue growth in the second half of the year. And once the new IDC center is complete, we are expecting to see improvement in the growth rate. Hence, on a per annum basis, we are expecting a mid-single-digit growth. We will do our utmost to make sure that each of our business units actually achieve the annually planned objective and also to drive revenue from our new business endeavors so that we may achieve our service revenue guidance. From a bottom line perspective, we will make sure that our business operation is focusing on the profitability aspect so that we can maximize shareholder return. And once again, we commit to you that we will do our best in the remaining months of 2023. Your second question was on the reason why or the key driver behind the continuous IoT subscriber growth. If you look at our Q2 home IoT subscriber, that included in the entire IoT subscriber base, we saw a growth of 39.2%, which was a quite steep growth. One of the key drivers behind this IoT performance was a connected car. Starting this year, we've become an exclusive supplier to Hyundai, KIA and Genesis. All of the models -- to all of the models, we are the exclusive supplier of wireless telecommunication services. Thanks to that, we've seen our first half IoT subscriber number rise quite significantly. And this broader base of subscribers will help us expand our interface to our customers and grow into an infotainment market by providing in the future, the platform, the content, as well as the solutions. And we believe that this will be able to drive further growth in the in-vehicle data usage, as well as our ARPU. Also, we are planning to provide an infotainment system to all of the Toyota models that will be released into the market this year. All of these aspects will bring LG Uplus's growth and by 2024 we expect that we will become #1 market share company in Korea's connected car market. And going forward, we will closely collaborate with third parties so that we can strengthen our media content capabilities and also develop specialized solutions. That is, for instance, connected with insurance products or that will support in-vehicle payment. As such, we will be able to provide -- we will be providing a differentiated car life experience to our customers. On top of this, and from the new markets of EV charging and kiosk business, we are seeing that being a very strong momentum behind the IoT growth. And due to the broader base of IoT subscribers, we are expecting to see a higher mobile revenue contribution going forward. And the rise of such IoT subscribers, we expect will also have an impact on the market shares of 3 companies, the 3 mobile operators/subscribers. So going forward, our plan is to grow the sales of IoT across many different industry domains. We will do our best to make sure that we not only grow the volume or increase the ARPU, but also bring about qualitative growth as well.