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

Good morning, and good evening. Thank you all for joining this conference call. And now we will begin the conference of the Fiscal Year 2024 Third Quarter Earnings Results by LG Uplus. [Operator Instructions] Our call is being webcasted on our homepage so that you can follow the conference simultaneously. Today's conference call will be presented for 1 hour, and due to schedule, we would appreciate if questions are limited to 2 per person. Now we will begin the presentation on LG Uplus third quarter of fiscal year 2024 earnings results.

[Interpreted] Good afternoon. I am Sangheum Mun, Head of IR at LG Uplus. Let us begin the third quarter 2024 earnings presentation. Please refer to our third 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. Also 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. So with that, we will begin with the third quarter performance highlights, and it will be followed by a Q&A. Without further ado, I will now turn it over to our CFO, Yeo Myunghee, who will run through the third quarter 2024 earnings and business results.

[Interpreted] Good afternoon. I'm Yeo Myunghee, CFO of LG Uplus. Thank you, everyone, analysts and investors for joining our third quarter 2024 earnings release. During the third quarter, we accelerated digital transformation to reinvent ourselves as AX company, a company that brings innovation to customer value as we harness AI technology, applying it to our core businesses to offer differentiated customer experience. In our mobile business, we introduced ixi-O, which is a call agent powered by AI, as a way to deliver new value to customers by innovating the way we use voice call services. ixi-O offers innovative customer experience through differentiated services like making summaries and recording telephone conversations, generating real-time captioning, AI voice reply and warning messages for voice phishing scams. Once we integrate with third-party services and expand the service scope, ixi-O will evolve into AI service that brings greater convenience to everyday life of users. Enterprise Infrastructure business announced AI-centered growth strategy under the catch phrase of All in AI, which was launched in July, in order to spur innovation across infrastructure, platform and data domain as we scale up AI applied services. Thanks to these efforts, we saw solid growth across IDC solutions and enterprise line, posting a steep growth of 8.6% year-over-year. As such, we are channeling all our capabilities behind harnessing AI to enhance customer experience and drive top line revenue growth. We will continue to secure distinctive competitiveness across all our business domains powered by AI and will work to deliver greater value to our customers. With that said, let's take a quick look at our financials for Q3. LG Uplus' Q3 service revenue reported a growth of 2.9% on a consolidated basis and 3.5% on a stand-alone basis year-over-year. Cumulative separate basis service revenue was up 2.7% year-over-year as of the third quarter, overachieving the guidance. Consolidated third quarter operating profit was down 3.2% year-on-year to KRW 246 billion, while net profit declined 13.9% on year, coming in at KRW 134.9 billion. Consolidated third quarter EBITDA was up 2.4% year-over-year, reaching KRW 920.5 billion, underpinning an improvement in operational cash flow generation. That was a brief report on business highlights and the financials. Let's now move on to each of the earnings and outlook for each business.

[Interpreted] First on the mobile business, I am Lee Jae-won, Head of MX Digital Innovation Group. Mobile service revenue for Q3 was up 2.6% on year, recording KRW 1,546.5 billion. Total mobile subscription count was up 17% on year, reaching 27,873,000 subscription lines, out of which 5G handset subscription count was 7,686,000, which account for 70.2% of total handset subscription. MVNO subscription count was up 40.3% year-over-year to 7,753,000, sustaining a steep upward trend. Third quarter's marketing expense increased 0.5% year-over-year to KRW 556.1 billion. And LG Uplus in Q3 expanded offerings of benefits to strengthen customers' convenience. LG Uplus ran a promotion on roaming pass sharing plan that travelers can use to enjoy roaming services at reasonable cost when traveling overseas by sharing the roaming plan with their travel buddies. We also offer discounts on travelers insurance for Roaming Pass customers, helping them benefit from enhanced convenience and safety. We also released a bundle package combining YouTube Premium and Netflix offering a good discount for the most popular service for users and lessened the cost burden for subscribers enjoying their content. We also strengthened customer convenience through U-doc Pick2, which can be subscribed inside the U-doc app, broadening the scope of media service offered and expanding the live coupon lineup. Our subscription service, which are U-doc and Uth, which is a brand for people in their 20s, have both received this year's brand awards. The fact that we put customer at the center when developing the subscription model, offering the benefit most wanted by the users was the lever behind the increase in brand loyalty and preferences among the Gen Zs and millennials. We will continue to strengthen communication with customers to precisely identify what customers need so as to deliver distinct value offerings to customers.

[Interpreted] Next is Smart Home. I am Park Chan-seung, Head of HomeNiverse Group. I will run through the key highlights of Smart Home business for the third quarter. Q3 Smart Home revenue was up 5.7% on year, reporting KRW 650.9 billion. Q3 IPTV revenue inched down 0.4% year-over-year, but on robust growth of Giga Internet subscribers, Internet revenue posted a growth of 6.7% on year, reporting KRW 287.2 billion. Subscribers for IPTV and Internet both demonstrated a growth trend year-over-year, with IPTV subscribers increasing by 2.2%, reaching 5,554,000, while Internet subscriber count was 5,313,000, up 3.9%. For the Smart Home business, we harnessed AI to improve service quality and strengthen competitiveness while releasing new device to enhance customer experience. We applied ixi-based on-device AI technology, ixi being our proprietary technology and AI agent technology to IPTV, delivering hyper-personalized services, reinforcing our business competitiveness. Also, LG Uplus' flagship IPTV platform, Kids World, also uses ixi to recommend content that is customized for every child. We also launched Soundbar black 2 equipped with strong acoustic feature powered by AI. Starting this year, we are incorporating AI into IPTV services. We are using AI to not only enhance user convenience, but also to solve customers' pain points whenever they need help as we gradually evolve distinctive transformation in the way people use media. We will endeavor to make U+tv take on a positioning as the first screen, a screen of choice for users for their most convenient avenue for enjoying content.

[Interpreted] I'm [ Park Sung Yoo ], Head of Enterprise Business Innovation Group. I will now present on B2B Infrastructure business and its key results for the quarter. Enterprise Infrastructure business saw well-balanced growth across business segments, posting 8.6% year-over-year growth with revenue reporting KRW 428.5 billion. IDC business posted KRW 90 billion in revenue, sustaining high growth of 8.8% year-over-year, while solutions revenue was up 9.6% on year, reporting KRW 129.4 billion on the back of NI revenue growth. Enterprise Line revenue was up 8% year-over-year to KRW 209.1 billion, driven by higher revenue from leased circuits. In Q3, we expanded the market for my shop package AX solution for small-sized merchants, driving additional growth in sales while delivering distinct customer experience. Our plan is to provide my shop AX solution package to 30,000 stores before the end of the year under the goal of achieving KRW 200 billion in revenue in 2027. Our market share in the merchant package service segment moved from 8% in 2021 to 15% in 2023, which was a steep rise. And we plan on digitalizing shops that small-scale vendors operate by applying the AI technology so as to enhance convenience for the merchants while improving customer satisfaction as we spearhead this market. Following the unveiling of All in AI, which puts AI at the center of company's growth strategy, Enterprise Infrastructure business is bringing AI into customer experience as it seeks to scale up our B2B business. During the remaining period, we will accelerate digital transformation of B2B business as we solidify services of established business while making our foray into new business domains. Next, I will invite back our CFO for the fourth quarter outlook.

[Interpreted] In 2024, grounded on stronger fundamentals and our telecom business and its solid infrastructure, LG Uplus achieved growth in service revenue above what was guided. Until the end of the year, we will continue to expand the share of digital channel from fixed and mobile business while operating the business with a focus on profitability. For B2B Infrastructure, we will actively push ahead with businesses that have high potential such as IDC, AX solution for small merchants and AICC business so as to further enhance top line uptrend. We are also planning to make a disclosure on the corporate value-up plan that strikes the right balance between longer-term growth and proactive shareholder return before the end of the year. We will come up with the best way forward for maximizing shareholder return, and we will communicate to the market once the plan is ready. In Q4, LG Uplus will continue to exert its utmost efforts to drive business performance and to enhance corporate value and shareholder return. Thank you.

[Interpreted] That ends the opening presentation. We are now open for your questions.

[Interpreted] [Operator Instructions] The first question will be provided by Hoi Jae Kim from Daishin Securities.

[Interpreted] I'm Kim Hoi Jae from Daishin Securities. I have 2 questions I would like to ask. The first has to do with your profit outlook going forward. Starting last year up to this year, we see that the depreciation has pressured down on your profit. Do you think that by next year, you will be able to regain your operating profit level of KRW 1 trillion? Second question is, I would like to understand the company's approach towards AI. Previously, it seemed that many companies were harnessing AI for the purpose of saving cost. Most recently, we see that many companies are partnering up with global tech companies and entering into alliances in order to be able to generate revenue. What is the approach that LG Uplus is taking?

[Interpreted] This is the CFO. I will respond to your question about next year's profit, basically first talking about this year's annual yearly profit. And although our business planning has not yet been finalized, we would also provide a bit color for the projections going forward. First of all, if you look at on a cumulative basis, the service revenue up to the third quarter, we were able to report 2.7% growth, overachieving the initial year guidance of 2% growth. And on a per year basis, we believe that this trajectory will continue. Now because we released mid- to low-tier rate scheme and also on back of that, we've seen some slowing of the top line revenue growth, basically, we were unable to cover the increases in fixed cost that's inclusive of labor cost and depreciation. So on a year-over-year basis, we see that the trajectory is towards a downward trend, but we are planning on improving this through reducing the variable cost, also by improving the profitability from each of our businesses. Also, if you look at the cash flow for this year, per annum free cash flow we expect is going to improve. And we believe, therefore, we will have some leeway in employing different options that will help us improve on the shareholder value and shareholder value from a longer-term perspective. So because we're right now in the process of developing our business plan, we won't be able to provide you with a definitive guidance, but we think that this year is going to form the bottom and come 2025, we are looking forward to a top line growth above what we've seen for this year. Basically, for the B2C business, we are going to use personal agents that is powered by AI technology for us to expand our subscriber base and strengthen retention. On B2B side, we will expand not just the [ AIDC ] business, but by providing an AI total solution, we would like to secure long-term growth. Also, we are going to power through with digitalization of telecommunications, which will help us save on marketing spending and also maximize productivity through the application of AX and also by gaining cost efficiencies. We will make sure that we can attain a turnaround in operating profit next year. So for -- once our business plan is complete, we will come back to you with more detail beginning of next year during our fourth quarter earnings release.

[Interpreted] Hello. I am the CSO, Kim Ji-hoon. I will respond to your second question. So regards to the question that you have posed, basically, the core of the LG Uplus' AX strategy lies in the growth based off of our customers. And we are well aligned with the growth in terms of our customer base, and we are seeing it having a positive impact on generating the revenues from our business and also improving the capabilities of the members of the company as well. So first, looking at B2C agent service under the name of ixi-O, we are at this point very much focused on making sure that this service actually enhances customer value and that it is well embraced and accepted by the user base. And whilst we focus on that, we believe that this will lead to a greater number of subscribers as well as higher level of usage of such services, which will then trigger a top line growth. In terms of the direct revenue that's going to be generated from this service, we will first see that come through from AI data center and AICC business, which are the B2B businesses. AI application is also helping us improve the productivity of our employees and the works that they do. And one of a very good case in point is the AX transformation that we are seeing in our customer service centers, the CS centers. So for instance, the CS agents or the advisors, whilst they're counseling the customers, they are able to double check on the information by receiving support from speech to text technology. And after they complete a call and counseling with the customers, then the AI program will help them basically summarize what had been counseled and also summarize with the categorization of the service code. And because we were able to apply this, we were able to reduce the time that was spent by these advisors. Also, we are expanding the application of such AI technologies out on the field as well and applying that to operating our network as well.

[Interpreted] The following question will be presented by Aram Kim from Shinhan Securities.

[Interpreted] First question is a follow-up to the previous question. So are you saying that for your AI strategy, you're not focused on monetization, but focusing more on creating customer experience? Is my understanding correct? Second question is, as you've mentioned during the opening presentation, you will soon be presenting your value-up program. Can you tell us as to when specifically the time line this would be? And what are some of the details that will be included in your value-up plan?

[Interpreted] This is the CSO again, providing you with some additional information. You are correct. Our priority is placed on innovating customer value. But just to elaborate a little more, in order for us to create that customer experience, we are leveraging our competitive edge, which is based off of what we call a small language -- sLLM, which is our proprietary language model under the name of ixi-GEN. Basically, it is a generative AI model that was researched and developed by LG R&D center. It is a domain-specific small language model, sLLM, that has both economic feasibility as well as very strong features in terms of security. And as we announced yesterday, ixi-O is going to be a technology that's going to be mounted on the device, the handset device, which will help with speech to text conversion as well as provide different features, for instance, identifying potential signals for phishing scam, for example. So all these features will be supported, thanks to ixi-O. So it is a lightweight language model, and we will be applying that firstly to ixi-O, which is in the B2C segment. We will start off with mobile device and expand it to media and also different things within one's household, connecting different devices. And eventually, it will evolve into a personal AI. On the B2B domain, we are the only company that is providing the AI data center to all of the big techs in the market. And also, we have [ ixi Enterprise ], which is the AI solution that we are expanding to various different verticals, including AICC. So through harnessing this technology, we are going to internalize these AI capabilities and also further expand our partnership with big tech companies.

[Interpreted] This is the CFO responding to your question on value up. Our peers, KT and SKT, they've made relevant disclosures yesterday and the day before. And we at LG Uplus were also in the process of preparing that plan. So we have prepared the value-up plan to quite a significant extent. But the reason why compared to our peers, we are running a little behind is because we wanted to first finalize on our business plan, based upon which we will be able to provide you with more specific goals in regards to enhancing the corporate value. So in the meantime, we will go through the deliberation by the BOD. And once we receive approval of our BOD, we will come back to you with the disclosure. So whilst coming up with this plan, we're very closely monitoring and observing different market measures as well as listening to the market feedback. We will make sure that our direction is set in well -- in good alignment with what the market is expecting in regards to improving our long-term financial standing and also enhancing shareholder value.

[Interpreted] Thank you. Since we do not have any additional questions, we would like to close the third quarter '24 earnings presentation by LG Uplus. If you have any unanswered questions, please 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.]