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Edited Transcript of 032640.KS earnings conference call or presentation 9-Aug-19 6:00am GMT

Q2 2019 LG Uplus Corp Earnings Call

Seoul Aug 19, 2019 (Thomson StreetEvents) -- Edited Transcript of LG Uplus Corp earnings conference call or presentation Friday, August 9, 2019 at 6:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Hyuk-Ju Lee

LG Uplus Corp. - CFO, VP & Director

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Conference Call Participants

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* Hoi Jae Kim

Daishin Securities Co. Ltd., Research Division - Analyst

* Hong-sik Kim

Hana Financial Investment Co., Ltd., Research Division - Analyst

* Jong In Yang

Korea Investment & Securities Co., Ltd., Research Division - Analyst

* Taewon Kim

UBS Investment Bank, Research Division - Director and Research Analyst of Internet and Gaming

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Presentation

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Operator [1]

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(foreign language) Good morning, and good evening. First of all, thank you all for joining this conference call. And now we will begin the conference of the fiscal year 2019 second quarter earnings results by LG Uplus. This conference will start with a presentation followed by a 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. (Operator Instructions)

And now we will begin the conference of the fiscal year 2019 second quarter earnings results by LG Uplus.

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Unidentified Company Representative, [2]

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[Interpreted] Good afternoon. I am the Head of IR at LG Uplus, and my name is (inaudible). We would now like to begin 2019 second quarter earnings presentation by LG Uplus.

For those of you joining us this afternoon, please refer to the consolidated statements that we circulated previously. And since we have investors from both home and abroad, the conference call will be interpreted consecutively. Also please note that all the forecast that we are sharing with you today are subject to change in accordance with macroeconomic and market backdrop.

We will begin with highlights on our business result as well as financial results for the second quarter, which will be followed by business highlights from each -- presented by each of the management team, and we will entertain your questions.

With that, I would like to invite our CFO and Executive Vice President, Lee Hyuk-Ju, to walk us through the business highlights and as well as the financial results.

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Hyuk-Ju Lee, LG Uplus Corp. - CFO, VP & Director [3]

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[Interpreted] Good afternoon. I am CFO, Lee Hyuk-Ju. Thank you for joining LG Uplus' 2019 Q2 Earnings Conference Call.

I will first begin with Q2 business highlights followed by our financial results. During the second quarter, LG Uplus further enhanced competitiveness of its 6 core 5G services and expanded 5G customer experience through unrivaled marketing. Also we expanded 5G network coverage early on and achieved highest base station speeds through optimized cell designs and application of 5G core technologies. We also enabled stable 5G services in highly dense areas. And we focused on building infrastructure, superior in both technology and quality for service optimization for 5G 2.0, which is scheduled to be launched in the second half of the year.

Since commercialization on April 3, user views and number of viewership for games and AR/VR as well as other 5G contents have been on the rise with average monthly data usage of 31 gigabyte, which is 3x that of the high-end LTE customers. With such positive changes, market share in 5G was 29% higher than LTE share of 24% as of Q2. And we recovered from negative ARPU trend with wireless services revenue of more than 2% year-over-year and Q-on-Q, signaling a start of a meaningful turnaround and growth indicators.

Meanwhile, thanks to media contents like the U+tv Kids World, which ranked #1 in customer satisfaction for 3 consecutive years, and Netflix service, which we offer exclusively, in Q2, IPTV continued a solid revenue growth of 21.3% year-on-year, contributing to Smart Home business' outperformance in achieving KRW 1 trillion revenue.

For B2B business, we won the smart station project for subway line #2 from Seoul transit corporation and ranked #1 in technical assessment for Korea Post's next-generation infra network project. As such, we achieved meaningful results for future growth business, underpinned by best technical capabilities in 5G service public application.

Next is on financial results. Second quarter operating revenue was up 1.5% year-on-year and 2.8% Q-on-Q to KRW 2.378 trillion on improved wireless service revenue and robust growth from Smart Home business. As of the first half of the year, there was 1.7% year-over-year growth, and we expect to reach annual guidance of 2% growth with no difficulties, considering higher 5G penetration and steady growth in Smart Home business expected in the second half of the year.

Operating expense was up 10.2% year-over-year and 8% Q-on-Q reporting KRW 3,051.1 billion. This is mainly due to increases in A&P expense for 5G service promotion and SACs, subscriber acquisition costs, as well as higher handset sales, which was up 10% year-on-year. Depreciation following 5G investments and higher 5G-related operating expense also had an impact.

Despite recoveries in wireless service revenue and growth in Smart Home revenue, Q2 operating profit was down 29.6% year-over-year and 23.7% Q-on-Q, reporting KRW 148.6 billion, an increase in operating expense and was down 13.9% on a half year basis.

Q2 CapEx was up 181% year-over-year and 163.7% Q-on-Q to KRW 730 billion on 5G investments. CapEx spend was around KRW 1 trillion up to the first half of the year. Total assets and liabilities as of the end of Q2 were KRW 14,749.3 billion and KRW 7,837.6 billion. Total shareholders' equity was KRW 6,911.7 billion. And due to the adoption of the lease standards, debt-to-equity ratio was up slightly to 113.4% with net debt ratio at 37.4%.

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Unidentified Company Representative, [4]

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[Interpreted] That ends the report on Q2 2019 business and financial highlights. We now move on to earnings results and outlook for each business line.

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Unidentified Company Representative, [5]

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[Interpreted] First is Wireless business. I am (inaudible), Head of Product Planning and Strategies. In Q2, LG Uplus acquired 1,023,000 new mobile customers, which is a growth of 14.5% year-over-year and 13.3% Q-on-Q. With the rebound in wireless service revenue in Q2 -- in Q1 in the second quarter underpinned by KRW 1,284.7 billion in wireless service revenue, we drove 2.2% year-over-year and 2.1% Q-on-Q growth.

First, in subscriber acquisition, we achieved superior performance in net additions in the MNP market, recording 57% share of net adds, which is driving 7.4% per annum subscriber growth. We were able to achieve Q-on-Q ARPU rebound earlier than planned and brought on positive changes in reducing the extent of year-over-year ARPU decline. Especially, with KRW 80,000 and above take-up rate in Q2 at 26% and its share against the cumulative number of subscribers increased more than twofold year-over-year, which led to higher share of HVC, the high-value customers.

In terms of the rate plans last July, we launched 5G platinum plan as well as KRW 40,000 Youth Plan and Senior Plan that best fits the usage patterns of different age groups. And with easy family bundle plan, members of a family can share 50 gigabyte of data every month as we sought to further enhance value for money for our 5G customers.

In services, by offering U+ professional baseball, Idol Live, esports game and other multi-channel services as well as immersive 3-dimensional AR/VR service and world's first VR cloud game, we provided 5G services that are very distinct to LG Uplus, helping us to gain a competitive edge in the market. We are sourcing killer content through in-house VR/AR content productions and exclusive arrangements and are entering into alliances with #1 domestic and foreign solution providers to source major content in the 5G market, including esports broadcasting and cloud VR game.

In Q3, professional baseball content will evolve into an 8K services and through MLB broadcasting and AR multi-angle broadcast, we plan to upgrade our multimedia services. And by offering a completely different genre of AR/VR and esport services, we will further up the speed of 5G penetration and convenience.

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Unidentified Company Representative, [6]

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[Interpreted] Next is Smart Home business, and I am (inaudible) in charge of planning. With 4.24 million cumulative IPTV subscribers and 4.17 million broadband customers, Q2 Smart Home revenue was up 13.7% year-over-year and 1.6% Q-on-Q reporting KRW 505.7 billion coming closer to achieving KRW 2 trillion annual revenue generation.

Revenue growth of Smart Home business is driven by higher take-up of high-end rate plans above KRW 14,000 and growth in UHD set-top customers and increases in VAS revenue, including home shopping commissions, which all drove more than 20% year-over-year growth for IPTV business. Broadband service also saw greater take-up of giga rate plans above 500 megabyte, which drove up basic fee ARPU, leading to 11% year-on-year revenue growth.

Home IoT services, such as the air quality alerts and home keepers, are setting itself apart as value-added home services in areas that are close to our daily lives, relevant to customers' health and safety. As a result, its revenue was up by more than 20% year-over-year. And with higher practical usage rate, a sound growth in revenue stream is being secured.

Last May, we also launched Avengers AI speakers, featuring Marvel's characters. And this was very well received by its fan base. We also took part in community care project ran by Ministry of Health and Welfare so that we can make contributions through the technologies we own in IoT and AI for the benefit of the society.

By expanding high-value customers through Kid's World 3.0 launched in August and through Netflix, which we will continue to grow our home media business in the third quarter. We will also expand Google Assistant's connectivity to IoT, following its application on U+tv, thereby enhancing convenience and prevalence so as to keep growing the Smart Home business.

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Unidentified Company Representative, [7]

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[Interpreted] Next is B2B business. I am (inaudible), in charge of planning. Due to one-off revenue declines in ESS business and lower e-payments revenue as large portals adopted direct franchise models, second quarter B2B revenue was down 8.6% year-over-year but was up 6.6% Q-on-Q, reporting KRW 491.2 billion.

As we've seen higher demand for data and cloud and with Pyeongchon ICT center monetization in Q2 and increase in CDN traffic from existing customers like the game companies and new revenues from broadcast and media customers, IDC revenue was up 38.2% year-over-year and 54.1% Q-on-Q, increasing its revenue contribution in the B2B business.

In 5G B2B, we are materializing our 5G business model for smart station, self-driving cars and other smart transportation modes and smart factories, thereby securing a growth engine for the future. For smart factory, we entered an MOU with Korea SMEs and start-up agency on 5G-based smart factory testbed as a way to expand the smart factory into the SME sector, following large corporations, and were trained and nurture experts in smart manufacturing so as to build on the ecosystem and to create 5G B2B business climate, which will help establish 5G smart factory as a new growth business model.

In smart transportations, we plan to have C-ITS, which is short for Cooperative Intelligent Transportation Systems, which includes the likes of prioritized signal technology for emergency vehicles, such as ambulances and fire engines. We plan to start proof-of-concept stage service for Sejong City's smart transportation city initiative and provide essential 5G networks in highly sophisticated command-and-control system for the smart driving city.

Also we will strengthen collaborations with S1 in developing converged services, like the intelligent CCTV package with a dispatch security, so as to further solidify our B2B customer base. And we will also broaden our sources of earnings growth in the second half through innovative technologies and value creation for our business customers.

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Unidentified Company Representative, [8]

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[Interpreted] This ends the earnings highlights. We now ask our CFO to present on the second half outlook.

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Hyuk-Ju Lee, LG Uplus Corp. - CFO, VP & Director [9]

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[Interpreted] Over the second quarter, we focused our capabilities around 5G services and securing premier-quality network infrastructure and through a marketing that seeks out customers and adoption of performance management system, which improved sales productivity. And by operating a 5G-dedicated customer center, we were able to bring convenience for customers and improve business results. As a result, we expanded on growth both year-over-year and Q-on-Q basis in terms of new subscriber acquisitions and net additions, further strengthening the growth gap with our competitors.

In the second half, with additions in the handset lineup and LG Uplus' strength in network operational technologies and solutions, we will be introducing a totally new VR game format, which no one has yet experienced and which will help build on our leadership in 5G. In terms of content, we are preparing for a premium service by collaborating with companies like Kakao and other domestic VR content providers by partnering up on technology and content. And through a service launch with global partners like Google and NVIDIA, we plan to offer an additional 15,000 content within the year.

We hope to successfully close CJ Hello acquisition and wish to lead fair competition and differentiation in the media platform business, underpinned by our competitiveness in media content. In B2B 5G, we will increase 5G proof-of-concept state businesses -- proof-of-concept stage businesses in smart driving, smart factory, industry IoT in order to explore new business models so as to bring meaningful outcome in 5G. Through such efforts, we will identify growth momentum to be led by Uplus in the 5G market driving subscriber and market share growth. And in so doing, we will continue to enhance our market value as well as shareholder value.

Thank you.

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Unidentified Company Representative, [10]

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[Interpreted] This now concludes our Q2 2019 earnings presentation. We will now open the Q&A session.

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Questions and Answers

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Operator [1]

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(foreign language) (Operator Instructions) (foreign language) The first question will be provided by Jong In Yang from Korea Investment & Securities.

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Jong In Yang, Korea Investment & Securities Co., Ltd., Research Division - Analyst [2]

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[Interpreted] I would like to pose two questions. The first question relates to your 5G services. We've seen a very serious competition amongst 3 telco operators. Could you provide us with some color as to what your outlook is in terms of the number of subscribers and penetration of 5G for this year and next year? Second question is on ARPU. You were able to achieve 0.4% Q-on-Q increase in ARPU. What is your projection for the second half as well as for next year?

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Hyuk-Ju Lee, LG Uplus Corp. - CFO, VP & Director [3]

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[Interpreted] This is the CFO responding to your first question. On 5G subscribers, as of end of June, we have about 390,000 subscribers. And as of this moment in time, we've seen that figure go over 500,000 subscribers. In light of the current trend, we expect that by the end of the year, we will see around 10% of 5G subscribers against the total MNO subscriber base.

Now if we look further out into next year, because the coverage of 5G is going to expand to 85 different cities as well as the district levels and also in light of the more handset lineup, which is more optimized for 5G services, we believe that the onboarding of 5G customer and the speed of that onboarding is going to accelerate. Now because if you look at the share of our company as against the total LTE subscribers, our share is quite strong and it is quite high. So we think that we have a solid base for our subscribers who could migrate to 5G services.

As was mentioned by the members of our management team in each of the businesses, we are making a lot of preparation for additional 5G-based services. So if you were to consider that, I think that by next year in terms of 5G penetration, we could -- we would be able to without much difficulty achieve a penetration level that is above the level of our peers.

Now responding to your question on ARPU. Fortunately, we were able to see turnaround on ARPU in Q2 on a Q-on-Q basis. Currently, if you look at our high-end subscriber, the high-value subscriber, our traction rate is continuously in an upward trend. And we expect the impact of certain rate schemes, such as revenue discount plans, will actually -- and the trends with respect to that were slow. So on a quarterly basis and in light of the trends that we were able to witness the previous year, we think that in the fourth quarter, the ARPU trend will once again be recovering.

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Operator [4]

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(foreign language) The next question will be presented by Hoi Jae Kim from Daishin Securities.

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Hoi Jae Kim, Daishin Securities Co. Ltd., Research Division - Analyst [5]

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[Interpreted] I would like to pose two questions. During the presentation, you mentioned that you're going to break free from the very entrenched market share split that we've seen in the wireless market with the coming of the 5G era. How do you see -- what are your strategies that would enable you to achieve this objective?

And in order for you to actually increase your share in the market, that will entail additional marketing-related or other types of investment cost. How are you going to manage the profit aspect, therefore, with respect to these cost burdens? And in light of your profit and your P&L situation up until the first half of the year, can you provide some color as to what your dividend policy will look like as we go forward?

Second question is with respect to the performance of Netflix, can you share with us any specific figures and numbers that could give us some better understanding of its contribution in your IPTV business? And also are you considering to add on any additional global OTTs, such as Disney+ channel?

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Unidentified Company Representative, [6]

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[Interpreted] I am (inaudible) in charge of Smart Home planning. I will respond to your Netflix question. You've asked for some specific indicators or measures relating to the impact of Netflix. Since the offering of Netflix channel last November through our IPTV platform, we believe that there were positive impacts in terms of the new subscriber growth as well as net addition and also in terms of defending against the churn rate.

So in terms of Netflix' impact on the subscriber side, we've seen positive impact on, first, on the churn side. If you look at the Netflix subscribers' churn rate, it's about 50% of the other general subscribers. So it is effective in defending churn. Also when we ask questions on the new customers as to their intention to subscribe to such services, Netflix actually ranks at the top of the list. So we believe that, that also has a positive impact in terms of new subscriber acquisition.

You also asked about any other potential cooperations with other global OTTs. At this point, with the cooperation with Netflix, we are able to offer differentiated contents that's very unique from what our peers are doing. We plan to further enhance customer value through strengthening our collaboration with Netflix as we go forward. Now having said that, we do not have any detailed, I guess, things that are going on with respect to engaging other global OTTs and engaging them as our partners or entering into any alliances at this point in time.

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Hyuk-Ju Lee, LG Uplus Corp. - CFO, VP & Director [7]

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[Interpreted] I'm the CFO, and I will respond to your first question on the market share of 5G. In Q2, as previously mentioned, we achieved 29% share in the market. And I'm sure you will be fully aware of the current market situation. After the adoption or the implementation of 5G services, the market is in a state where things have been quite abnormal from a business perspective.

So with the 5G subscriber acquisition cost rising up quite -- up to a quite extraordinary level, as a person in the business -- in the executive team, this really is an item that I really do mull over and I spend a lot of time thinking about vis–à–vis its relationship with the LTE subscribers that has a significant impact on our bottom line.

So I'm currently of the mindset we may need to shift the course and place a focus slightly different on the way from having to excessively focus on the share aspect -- the market share aspect for 5G. As a member of the management team, I think it is one of my key duty to make sure that, together with the top line growth, that we have a very solid and sound bottom line basis.

So we're also very closely discussing different aspects with the business units as well. We will be looking at both of the 3 pillars, the one in the share aspect, the market share in the 5G market, but at the same time, the acquisition of high-value customers, which also includes the LTE subscribers as well, as well as the final outcome of those factors, which will be shown in terms of our top line and bottom line. So those 3 factors will be closely considered in our business decision-making process.

Over the past 4 months, we've experienced and experimented with a competitive landscape in 5G, which one cannot say was all that normal. And we believe that soon, that course will turn into a normal course. So if so, in light of the services that we have prepared up to date as well as other new services that are currently in the pipeline, we believe that as things go to a more normal business-as-usual situation, we will see more positive impact feed in.

So over the past 4 months, I've characterized it as experimental and some extraordinary market backdrop, I do admit, was some pressure on our bottom line. But I can assure you and commit to you that we will do our utmost to maintain the DPS level in terms of the dividend payout policy of the company.

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Operator [8]

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(foreign language) The next questions will be provided by Hong-sik Kim from Hana Financial Investment.

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Hong-sik Kim, Hana Financial Investment Co., Ltd., Research Division - Analyst [9]

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[Interpreted] I have a follow-up question relating to a previously raised question. Your second quarter performance is quite interesting. You've spent a high level of marketing expense, so your operating profit was not very good. But in terms of the wireless revenue, the mobile revenue, the performance was good, which actually drives up the expectation for your future performance. Operating profit will seem to go down slightly. But can you give some color on what your view is on the third quarter number? Do you believe that operating profit will go down lower from the current level?

And my second question is LG Uplus has showing a quite positive market share figure in the 5G segment. If on the assumption that your operating profit does not further decline and given the fact that you are seeing onboarding of high-quality subscribers, I believe that the current intensity of marketing activities is not that excessive. What is your strategy around these points?

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Hyuk-Ju Lee, LG Uplus Corp. - CFO, VP & Director [10]

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[Interpreted] This is the CFO. On the operating profit of the second quarter, I have to say that I am quite devastated to be sharing with you a scorecard with that level of operating profit decline. Once -- we'd like to, however, emphasize that this outcome is not attributable to any of the company's operational problems, but it is actually dependent or attributable to the difficulties that we face in the market. Under the current accounting standard, what's very different from the previous accounting basis is that the subscriber acquisition commissions and costs are capitalized.

So what has happened over the past 4 months? I believe that going forward, it will have certain negative impact during the depreciation duration of that cost being capitalized and being amortized. So going forward, if we see continuous -- continuously quite strong, obsessive drive behind 5G and also market share-driven competition, we cannot rule out the possibility that the operating profit could be further undermined due to additional rise and generation of new types of costs.

However, having said that, I am relieved to see that, other companies included, after we've seen the second quarter performance, the entities are trying to adjust the framework of their business operations in 5G. So once that happens, although what had happened in the past is already done and there will be some negative repercussions from that, but you've also mentioned on the top line side with the acquisition of the high-value customers, I believe, and we will do our best to make sure that we maintain the bottom line to at least the level that we've seen in the second quarter.

And I just want to be very frank and candid that we at LG Uplus, myself included, will try to change our mindset. But I would also like to say that everyone participating in this space should basically give up their compulsory obsession about this whole 5G initiative. As we see a more solid basis for our bottom line as well as top line in terms of our financial position and in light of all the services that is in the pipeline undergoing preparations for launch, I believe that from the market share side as well, things are not going to be all that negative for us.

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Operator [11]

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(foreign language) The next question will be presented by Taewon Kim from UBS.

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Taewon Kim, UBS Investment Bank, Research Division - Director and Research Analyst of Internet and Gaming [12]

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[Interpreted] As we are seeing a very fast and steep growth for 5G subscribers, I would like to understand whether you're contemplating any changes to your previously communicated CapEx guidance? I asked this question because obviously with that fast growth, this will require better quality of 5G as well as better coverage. What is the company's stance on this?

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Hyuk-Ju Lee, LG Uplus Corp. - CFO, VP & Director [13]

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[Interpreted] The overall level of investment is going to be around the level that I have previously communicated at another occasion. We've developed our network deployment plan based on a very steep subscriber growth assumption. So I do not see any significant change on the CapEx guidance.

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Operator [14]

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(foreign language) Currently, there are no participants with questions. (Operator Instructions)

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Unidentified Company Representative, [15]

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(foreign language)

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Operator [16]

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(foreign language)

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Unidentified Company Representative, [17]

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[Interpreted] If there are no additional questions, we would like to now close LG Uplus' 2019 Second Quarter Earnings Conference Call. If you have further questions, please do contact our IR team and we'll be more than happy to answer them. Thank you once again for joining us.

[Portions of this transcript that are marked Interpreted were spoken by an interpreter present on the live call.]