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, 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 homepage so that you can follow the conference simultaneously. Today's conference call will be presented for an hour. And due to schedule, we would appreciate if questions are limited to two per person. And now we will begin the conference of the fiscal year 2023, third quarter earnings results by LG Uplus.

[Interpreted] Good afternoon. I am Sung Hyun Mo, head of IR at LG Uplus. Let us begin the third quarter 2023 earnings presentation. Please refer to our Q3 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 begin with Q3 performance highlights followed by Q&A. Without further ado, I will turn it over to CFO, Yeo Myung Hee, who will run through Q3 2023 earnings and business results.

[Interpreted] Hello, I'm Yeo Myung Hee, as introduced, and I would like to extend my gratitude to analysts and investors for joining the Third Quarter 2023 Earnings Conference Call of LG Uplus. During the third quarter, we as LGU Plus exerted our best efforts to drive quality-centric growth in MNO handset subscribers and acquire subscribers to underpin volume growth for MVNO and IoT services. This effort led to record high wireless subscriber growth of 22.3% year-over-year on the back of IoT subscriber growth, including connected cars, and we expect to see industry's subscriber ranking to change sometime in the near future. We are also working on customer data analytics collected from different types of subscribers, so that we may gain customer insight which we will leverage in offering new platform services. As part of empowering customers' choice through the platform service and to facilitate digitalization of telecom services, we recently launched hyper personalized rate plan called Nerget. It's a digital telecom platform and it's telling customers to get a taste of their own telco world as Ner means you in Korean. It's a play onward. Users can subscribe, change, terminate and receive customer services, all on the digital platform, and it's equipped with user-friendly UI and UX providing ease of use. And we designed the platform based on user experience so that customers can continue to visit the platform and also to provide an opportunity of discovery of customers' preferences. It's a product targeting people in their 20s who are very familiar with reasonable rates and the use of platform, which will later be connected with our platform services as we build out an ecosystem. As noted, LG Uplus is charging ahead with digital transformation in its MNO business with the launching of market-leading innovative rate plan, thereby expanding our online share and creating synergies with our platform business. And last month, we completed the construction of the new IDC center. Pyeongchon 2 Center is LG Uplus' second hyperscale IDC which we will use to nimbly respond to fast-growing customer, corporate customer needs. As companies increasingly adopt hyperscale AI, demand for large-scale IDC is also growing. Hence, we will build out the best quality IDC and research into ways of energy saving so that we may lead the ESG-centric green IDC trend. During the last call, I mentioned JV investment into an EV charging business. We are now in the process of setting up the joint venture entity and under our EV charging brand, VoltUp, we will be setting up 10,000 charging units before the end of the year, mostly at big apartment complexes and office buildings and expand that number to 50,000 by 2026. At the same time, we're expanding the EV charging infrastructure through the execution of MOUs with construction companies. Under the arrangement with Hoban Construction, we will build out and operate charging services inside apartments and with Hanwha's construction arm, we will codevelop ceiling-mounted charging systems, [indiscernible] housing structure and supply such system to newly built apartments. Our plan at LG Uplus, is to prioritize and target slow charger market first and solidify business offering to become a top 3 player in 2 years' time. Next, I will run through the company's Q3 '23 financial results. LG Uplus consolidated Q3 service revenue was up 2.3% year-over-year, reaching KRW 2,905.2 billion with a separate basis, service revenue reporting KRW 2,682.7 billion, up 3% year-over-year. Third quarter consolidated operating expense, was up 3.4% year-over-year and 5.9% Q-on-Q to KRW 3,326.8 billion, while marketing expense was down 2% year-over-year and up 2.5% Q-on-Q, coming in at KRW 553.2 billion. Consolidated Q3 operating profit was down 10.8% year-over-year to KRW 254.3 billion. While on a separate basis, it was down 8.1%, recording KRW 253.5 billion. With Q3 consolidated EBITDA up 0.4% on year to KRW 898.6 billion. We managed to sustain operating cash flow improvement. Consolidated Q3 net profit was down 8.3% year-over-year and 26.6% Q-on-Q, recording KRW 156.7 billion, while CapEx was KRW 524.1 billion, which is a 15.4% year-over-year decline. In terms of financial position, as of end of the third quarter, asset total stood at KRW 20,313.5 billion. Total liability, KRW 11,621.2 billion and shareholders' equity KRW 8,692.3 billion. Net debt ratio inched up 2.1 percentage points year-to-date and debt-to-equity ratio was down 0.3 percentage points. This ends the report on business and financial highlights. And next, we will move on to breakdown of business results and outlook.

[Interpreted] First is on the mobile business, and I am [ Lee Jae-Won ], Head of MX Innovation. Q3 mobile service revenue was up 3.1% year-over-year, reaching KRW 1,507.1 billion. Total handset subscriber count was 23,820,000 , up 22.3% year-on-year, of which MNO 5G subscriber count was 6,819,000 up 19.7% on year, accounting for 61.9% of the total handset base. MVNO subscriber count was 5, 528,000, growing 53.1% and year-over-year, continuing on with its steep growth. As mentioned before, aside from launching Nerget, which is hyper-personalized rate plan, we have expanded our platform business and increased user count within the platform. Udok as UPlus' main subscription service saw sustained uptrend in terms of subscribers and retention rate through the offering of 254 products of 72 partners. We recently strengthened short-term rental service offerings to cater to Gen Zs and millennials who want to try and use the most cutting-edge IT product or rented for only a short trial for a specific purpose. We also plan to diversify product lineup to better offer unique Uplus products and services that customers can't live without. Also, we have a companion animal platform, ForDong whose subscriber count in Q3 reached above 300,000. while [ SNS ] platform BETTER, it places for people to record their daily notes, hit 100,000 downloads in just 6 months since the launch. Sporki, a sport platform saw its cumulative user base surpassed 27 million count, reporting MAU of 4 million on average over the past 6 months. And in time for post baseball season, Sporki introduced real-time prediction feature based on actual baseball game data. We also provide live broadcasting service of all-season professional basketball and volleyball. Despite the challenging business environment facing our mobile business, we were able to drive high MVNO growth and saw recovery in roaming revenue, achieving relatively high growth, and have been expanding the platform business to offer a completely new experience and to gain customer insight from data obtained by being close to the customers' daily activities. We will continue to win subscribers to sustain our mobile business growth and will revamp platform-centric business capabilities by bringing digital transformation to telecommunication services.

[Interpreted] Next is our Smart Home business and I am Park Chan Sung, Head of [ Home universe ] business. I will first begin with the third quarter business highlights. Q3 Smart Home revenue was up 2.8% year-over-year, reporting KRW 607.2 billion. IPTV revenue was KRW 338.1 billion, growing 1.2% year-over-year and Internet revenue, which was driven by Giga subscriber growth, increased 4.9% year-over-year, reaching KRW 269.1 billion. IPTV subscriber count was up 0.3% versus last year, reaching 5,432,000 turning to a net addition trajectory and Internet subscriber count was KRW 5,112,000, up 4.1% year-over-year. In Q3, LG Uplus launched U+tv next 2.0 removing the barrier between VOD and OTT. Our vision of IPTV is one with enhanced convenience, placing the viewers at the center of content and one that supports rational consumption. The new U+tv next 2.0 has evolved into a play platform, bringing innovation to viewing experience by integrating data across VOD and OTT and by providing a stronger diversity and content recovery. This will underpin customer-centric innovation to viewing experience, and we plan on strengthening alliances with major partners in the domain of real-time big data, AI and OTT. LG Uplus has introduced a plan called premium transfer subscription plan, which allows users to enjoy 110,000 content offerings of major TV stations with a single tariff plan. One can enjoy the content from 3 terrestrial channels and 4 channels of master program providers, which enables more affordable viewing experience across TV content spread across different OTT platforms. Also, LG Uplus was the first IPTV provider to partner up with Coupang Play, and viewers can now enjoy most up-to-date content from Coupang Play on a bigger screen. We will continue to collaborate with many other service providers based on the open platform strategy to provide seamless experience across different OTT platforms. Smart Home Business is evolving continuously in step with the fast-changing market as we offer services that best fit each and every individual customers' needs. By building in-home Internet environment, we wish to support ever-growing volume of data usage with stability and speed insured and also innovate viewer's experience with OTTs for greater convenience as more people use such services. In the remainder of time, we'll do our best to achieve both goals of customer satisfaction and business results.

[Interpreted] Next is on B2B Infrastructure, and Lim Jang Hyeo, Head of B2B New Business Group. I will begin with key highlights for the third quarter. Q3 B2B infrastructure business saw a 7.9% year-over-year growth, reaching KRW 404 billion, driven by growth from IDC and Solutions business. IDC business in Q3, was up 18.2% on year to KRW 82.7 billion, continuing on with elevated level of growth, and Solutions business also recorded 17.5% year-over-year growth, largely influencing the overall top line growth. Enterprise line business, however, dipped by 1.2% year-over-year, reporting KRW 192.1 billion. During the third quarter, LG Uplus was able to drive visible results, not only from existing B2B infrastructure business but also from new businesses. We also opened our first chain of restaurants under the program of Research Institute of restaurants, bringing our telco and DX technology for small vendors in collaboration with Theborn Korea. We expect to see synergies between LG Uplus telco and DX solutions for stores in combination with Theborn Korea's expertise in restaurant operations and content planning know-how. We are also expanding our robotics business from serving bots to logistics robots. Leveraging our smart factory experience, we will be able to implement logistics automation based on a stable telco network whilst enhancing user convenience by developing and delivering command and control platform for robots. Meanwhile, we started to tap into freight forwarding business by launching Freight Go, which is a one-stop DX platform for the entire process of forwarding and delivering of cargoes. We plan to quickly grow the platform by partnering up and entering strategic relationships with many parties to build out a nationwide logistical platform. Through Freight Go, which is both a portal for freight information as well as a strong DX platform, we will create an ecosystem for freight handling and lead logistics innovation in the analog market. As you can see, LG Uplus is exploring new business domains at this juncture of digital transformation seen across our business portfolio. In the remainder of time until the end of the year, we will speed up digital transformation of our B2B infrastructure business and also strengthen DX solutions and other new businesses, including robotics.

[Interpreted] Now that ends the presentation on business breakdown. We will invite back our CFO for outlook on Q4 '23.

[Interpreted] Since we announced the LG Uplus commitment to becoming a digital innovation company in '23, we have worked on many aspects to offer innovation-based platform services and have done things that will enable distinct and unique customer experiences as we believe customer experience sits at the very center of platform service expansion. In the fourth quarter, we will strengthen our competitive advantage through meaningful activities and various campaigns that accentuate originality of LG Uplus services on top of flagship handset launch and the Nerget plan offering data benefits to the young people. Upon the buildup of subscriber data, we will be able to broaden our business scope, launch platform services, which will lead to visible subscriber growth and scale up the business model, which will lead to enhanced profitability. Also, in the midst of growing importance of AI technology, we will also develop telco specialized AI to notch up our service competitiveness and will upgrade our AI technology and capabilities through collaboration with LG AI Center and Global big techs. This will form the basis of both DX solution initiative for small merchants, and highly promising AICC business within the B2B market. LG Uplus will do its utmost to generate tangible business results and enhance corporate value and shareholder value during the fourth quarter. Thank you.

This ends the presentation on the earnings, I would like to now receive questions.

[Operator Instructions] [Interpreted] The first question will be provided by Seung Woong Lee from Yuanta Securities.

[Interpreted] I am Seung Woong from Yuanta Securities. I would like to ask two questions. First is that I see that your profit has underperformed market expectations as well as the guidance that you have previously shared. Would like to get some color as to why that is. And also, will that have any impact on your dividend payout . Second question relates to AI. The company has recently announced your three key AI-related strategies. Within the scope possible, can you share with us an update?

[Interpreted] This is the CFO, I will respond to your question about the operating profit for Q3 and our annual guidance and also the reason or the explanation as to why the situation is. I'd like to first talk about why in terms of operating profit, we underperformed like consensus. First, if you look at our top line revenue on mobile service revenue on a Q3 cumulative basis, we reported 2.9% growth, so we were close to 3% growth and we outperformed the growth rate that we've seen from our industry peers. But compared to the mid-single-digit objective that we had for Smart Home and B2B infrastructure, the growth of Smart Home was 3% and B2B infra was 3.5%. As such, overall, our top line growth rate had slowed. And also on the operating expense side, starting the end of last year, there's been a 3 hike in the electricity tariff. So we've seen Y-o-Y and Q-on-Q increase in energy cost. And also last year, we acquired 220 megahertz spectrum in order for us to further enhance the 5G network quality and they were ensuing amortization of such intangible assets which also drove up that operating expense. As a result, all in all, our Q3 operating profit reported a KRW 254.3 billion, which was a decline on a Y-o-Y basis. No. But if we look at what's upcoming in the fourth quarter, there will be a release of flagship handsets for the mobile business. And with the very steep growth of MVNO and roaming revenue, we will be able to sustain the 3% growth rate. And also for B2B infrastructure business, there is high seasonality in Q4, showing a tendency towards a higher top line revenue growth during the fourth quarter. And hence, we think that we will be able to achieve that per annum mid-single digit growth rate. So if we see some improvements from mobile and B2B infrastructure revenue during the fourth quarter, and if we are able to successfully control and rigorously control our cost basis we believe that we will be able to comply with the market consensus in terms of the operating profit per annum basis. And also lastly, on a cumulative basis, as of Q3, the net profit was up by 8% year-over-year. So we're continuously increasing distributable income. And also the top management has a very clear commitment in wanting to further expand progressively increase the dividend per share. And with regards to specific amount as of end of '23, what the total dividend payout would be, at this point, we won't be able to share with you the specifics. But once our earnings are concerned by the end of the '23, we will then share with you that specific figure. Once again, the company and the management will do our best to further enhance shareholder value and to continuously create positive business results.

[Interpreted] I am the [ CSO ], [indiscernible]. I will provide you with an update on LG Uplus' AI initiative. LG Uplus has been developing its own AI engine internally and have been leveraging off of that AI engine in carrying out its business, and at this point, we are providing timely tuning of generative AI models to provide and meet the customer needs, which is quickly and very quickly evolving. So under that big AI strategy, the three major strategies that we've set for ourselves, the key pillars are the first one is LG AI research centers, hyperscale model, EXAONE and the second is ixi-GEN, which is our Uplus tuned up a AI model And the third is the use of the models provided by the big techs, such as Google and Microsoft. Now for the AICC business, where the market is at this point, growing quite quickly. LG Uplus has used LG AI center model, EXAONE, leveraging that into making into a subscription-based AICC model and launching that in the month of September for the customers in the logistics, finance and manufacturing sector. So the customers who make use of these models need not make any upfront investment, but they can easily enjoy and benefit from cobots as well as and receive services such as real-time summarization and categorization and recommendation based off of such generative AI model. And this program or this service is receiving quite positive response from our customer base. Internally, we're making use of our AI model, ixi-GEN as well as the models provided by the big techs in developing our chat agents. And we've taken that module and apply that to our subscription platform, Udok. So customers can very naturally converge as if they're talking to a CS agent receive product recommendations and ask questions as well. And also, we've taken and applied this AI model to Uplus' own services such as Sporki, especially the prediction model for which team is going to win and have also applied that to our advertisement production model as well. And as we continue to use more of such AI models, I believe that the model itself is going to be further scaled out. LG Uplus is going to make yourself this hyperscale AI model EXAONE and also underpinned by immense amount of customer data that is generated across all of the platforms of LG Uplus, we will be able to further fine-tune more personalized and customized AI services for our customers. And we believe that, that will help us further broaden our market position. We will move on to the next question.

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

I am Kim Joonsop from KB Securities. My question relates to your IDC and the recent rate plan that you introduced called Nerget. First, relating to IDC, I would like to understand what LG Uplus' take is in regards to the overall demand and supply dynamic of the IDC and the data centers within the Korean market. Recently, some of other service providers have completed the build out their data center, but some had failed attempt in building out the data center. So I would like to understand as to what your projection is in terms of this longer to -- mid- to longer term, demand dynamic for the data centers. And also, when would we see increase in the utilization of your IDC data centers? And when do you do your top line revenue? Second question is on this very high proportionalized tariff plan called Nerget that you recently introduced. I think that this rate plan provides a myriad of benefits to the users and you're allowing even the users and subscribers of other telco services to take out this rate plan. So what will be the impact that this new rate plan will have on LG Uplus', for instance, wireless ARPU subscriber and revenue.

[Interpreted] I will respond to your question on the IDC and I am [ Lim Jang Hyeo ]. I'm the Head of the B2B new business. So domestic IDC market, driven by expansion of the AI business, we expect that there's going to be a higher level of demand compared to the past. However, come next year, there's going to be many number of data centers that are going to be newly opened. So either come 2025 or '26, we think that there will be oversupply versus demand. The Pyeongchon IDC center number 2 is 90-megawatt size, and we completed the construction back in October. And that 90-megawatt is based off of KEPCO's dispatch basis. We are seeing increase in demand for such highly dense and high-spec IDC and the 12 IT sections within the Pyeongchon center number 2 is at this point, fully booked. And we are in the process of discussing with these future customers. And also we'll be able to provide more phased services that is well aligned with the demand of our customers. As such, we think that starting first half of next year, we will start to book revenue and sales in a phased manner. Now in terms of building another IDC, basically, our objective is to set up a new IDC by 2027. So at this point, we're looking at different candidate sites but we haven't made a final decision yet. We're looking for an IDC site that will help us respond to even an explosive growth in demand.

[Interpreted] Yes, I would. I will respond to your question on the expected impact from the new rate plan Nerget. I am [ Lee Jae Won ], I'm the Head of the MX Innovation Group. So this Nerget rate plan is actually a new category of tariff plan offering flexible choice from 1 gigabyte up to unlimited data usage with different speed combination. Subscribers can very freely change their rate plans, can terminate, or can receive a refund depending on the remaining amount of data and the remaining days of subscription. So this actually fits a very free lifestyle of our customer base. So this is the key characteristics of the Nerget rate plan. Basically, it allows for various different combination of choices and so the subscribers are doing it themselves. It's a DIY plan, and it provides greater choice to our users. Another key characteristic of Nerget is that it has enhanced the convenience whereby subscribers can use it anytime, anywhere through their mobile application. So this Nerget rate plan allows full people to use small amount of data and we have intentionally targeted people in their 20s and millennials and Gen Zs as it is well aligned with their lifestyle patterns. And we expect that going forward, we will be able to lock them in as our core base of users. Now regarding your question about the impact that it has on the number of subscribers and ARPU because we have only at this point, began this rate plan, we would have to wait and see a little more to see what the impact could be like. This as we've done for the Nerget rate plan, LG Uplus will continue to prioritize customer value when it develops and design products so that we may offer a differentiated experience to our subscriber base. Thank you.

[Interpreted] If there are no further questions, we would like to close LG Uplus' Q3 2023 Earnings Conference Call. For additional questions, please send them through 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.]