Edited Transcript of 032640.KS earnings conference call or presentation 8-May-20 6:00am GMT

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Seoul May 9, 2020 (Thomson StreetEvents) — Edited Transcript of LG Uplus Corp earnings conference call or presentation Friday, May 8, 2020 at 6:00:00am GMT

LG Uplus Corp. – CFO, VP & Director

Daishin Securities Co. Ltd., Research Division – Analyst

[Interpreted] 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 2020 first quarter earnings results by LG Uplus. (Operator Instructions)

Our call is being webcasted on our home page so that you can follow the conference simultaneously. Today’s conference call will be presented for an hour. (Operator Instructions)

And now we will begin the conference of the fiscal year 2020 first quarter earnings results by LG Uplus.

[Interpreted] Good afternoon. I am (inaudible), Head of IR at LG Uplus. We would now like to begin Q1 2020 Earnings Presentation for LG Uplus. For those of you joining us today, please refer to our Q1 earnings presentation. And please also note that we are providing consecutive interpretation. All the projections we are providing today are subject to change from macroeconomic and market situation.

The earnings document we’ve circulated is based on consolidated basis, including LG HelloVision and the payment gateway business, which is scheduled for sale as of June 1 is presented under P&L from discontinued operations. Please refer to the stand-alone basis documents for detail on each business breakdown and operating expense.

We will begin with Q1 business and financial highlights and business outlook and end with a Q&A session. Just to note once again that all projections are subject to change based on changes in macroeconomic backdrop.

Now I would like to invite our CFO, Hyuk-Ju, Executive Vice President of LG Uplus, to walk over financial performance as well as sales results.

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

[Interpreted] Good afternoon, I am Hyuk-Ju, the CFO. Thank you to our analysts and investors for joining Q1 2020 Earnings Release Call for LG Uplus.

In Q1, we’ve set up plans for inclusive support for small subcontractors and businesses suffering from the fallout of COVID-19 pandemic, enjoying the social compact to overcome the crisis by expanding the Uplus road to activate small/medium business ecosystem.

COVID-19 dampened the real economy. And as social distancing was put in place, handset sales declined, leading to lower off-line revenue. However, we saw LTE and 5G subscriber net additions drive handset ARPU growth. And thanks to Smart Home business reporting #1 in net addition, service revenue on a stand-alone basis increased 5% year-over-year, and consumer business recorded a solid growth of 6.7% year-over-year.

And as indoor activities increased from COVID-19, we saw increases in VOD use, smart home training and number of users and purchases for AR shopping.

Competitiveness of our 5G services was acknowledged by the global market as we started exporting 5G contents to Hong Kong operator PCCW and Japan’s KDDI and further solidified strategic partnership with Google in mobile and smart home service, thereby offering YouTube Premium and Google One to 5G subscribers who show high demand for cloud and Google services.

In the second half of the year as well for mobile and home service, we plan to lead to the growth in 5G and home market by offering seamless Google Assistant services, among others.

In B2B, we expanded into solutions for 5G smart power plants and SsangYong Motor’s connected car service that uses AI solution as we broadened our business scope to smart factory and mobility. And by partnering up with a global AR company and a venture company that has essential technology in 5G remote control, we sped up application of 5G to different industries.

In Q1, we officially launched Uplus home service, which is a subsidiary charged with home media customer service, triggering the start of home service innovation, including IPTV, Internet, AI and IoT. LG HelloVision, which was consolidated as our subsidiary last year, launched Kids World and Giga Internet service, driving up the share of high-value subscribers as well as ARPU.

Now on the financials of the first quarter.

Q1 consolidated service revenue was up 15.2% year-on-year and 8.7% Q-on-Q to KRW 2.5715 trillion driven by growth from mobile and Smart Home consumer businesses posting a progress rate of 24% versus the guidance.

Consolidated basis operating expense was up 11.9% year-on-year and 2.5% Q-on-Q to KRW 3.669 trillion on normalization of marketing spend and efficient cost management.

Q1 consolidated basis operating profit improved 11.5% year-on-year and 20.7% Q-on-Q, reporting KRW 219.8 billion, while EBITDA posted a growth of 17.7% year-on-year and 10.2% Q-on-Q, coming in at KRW 812.3 billion, coming closer to KRW 3 trillion annual EBITDA projections.

Q1 CapEx spend was KRW 374.6 billion, 15% implementation against KRW 2.5 trillion annual guidance.

As of Q1 end, total asset was KRW 18.599 trillion; total liabilities, KRW 10.7403 trillion; and liabilities to equities ratio and net debt ratio were 146.7% and 69.6%, respectively.

This ends the business and financial highlights. We now move on to individual lines of business. Financial for each business is on a consolidated basis, excluding LG HelloVision.

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Unidentified Company Representative, [4]

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[Interpreted] First, the consumer group. I am the Head of Consumer Business Group, (inaudible). I will start with the mobile business.

Driven by 7.8% subscriber growth, Q1 mobile business was up 6.2% year-on-year and 2% Q-on-Q to report KRW 1.336 trillion of service revenue, outperforming 5% growth projections.

In Q1, especially amid shrinking MNO market and the company’s efforts on marketing cost savings, we achieved meaningful outcome of more than 30% in new market share and overwhelming net additions. Q1 revenue growth, we believe, has been driven by balanced subscriber growth across the overall market.

Also, MNO ARPU compensated for 6% ARPU decline last year. And on a handset ARPU basis, there was sustained growth, both on a year-over-year and Q-on-Q basis.

Q1 cumulative subscribers were 15.519 million. For the MVNO subscribers, on the growth of — on the growth in KB, [Live M] subscriber growth and LG HelloVision channel additions and support for Uplus MVNO partners, there was 38% year-on-year growth, also making contributions to revenue growth.

Meanwhile, despite lower handset sales, 5G subscribers increased 0.3% versus last quarter, reporting 291,000 net additions. 5G subscribers cumulative share out of the handset subscribers was 13%, which is up 3 percentage points Q-on-Q.

We were able to overcome the crisis brought on by COVID-19 outbreak by offering differentiated 5G content. 5G is now at its first year anniversary since its commercialization and has broadened into areas of our daily lives, touching on content, smart home training, AR shopping, cloud games, et cetera. By expanding on customer value, we are focusing on service upgrades around AR/VR and are currently preparing to launch 5G version 3.0.

In the second half of the year, we plan to launch 5G 3.0 service to offer high-quality services so that we may come closer to users’ daily lives.

Next is on the Smart Home business.

Q1 Smart Home service revenue was KRW 537.8 billion, which is up 8.1% year-on-year on the back of high-quality subscriber growth.

IPTV service revenue was KRW 281.1 billion, up 12.4% year-on-year and 2.4% Q-on-Q, driven by increases in revenues from basic fee, VOD and home shopping on greater untapped based consumption.

Despite contracting net adds market, thanks to our bundled products and service competitiveness, we were #1 in market share for IPTV and broadband Internet net addition, which led to cumulative market share increases. High-value customer share also went up, driving profitability enhancements for Smart Home business and higher ARPU.

For the Smart Home service, we launched smart Internet tariff plan that combines broadband Internet and AI and also launched pet plus bundle for 10 million households that have pets, strengthening our customized services.

For educational content, we exclusively provided English egg, which is premium English educational content on the Kids World platform, filling in for off-line classes that couldn’t be offered because of the pandemic impact. As we increased sourcing of high-quality educational content in time for school openings for elementary, junior and high schools, we also actively participated in narrowing the digital educational divide by offering remote solutions for classes and network capabilities free of charge.

Going forward, we will see incremental VOD revenues from delays in screening of blockbuster film titles in the theater in the first quarter. And with gradual normalization of advertisement market on recovery of consumption, we expect annual service revenue to continue its more than double-digit growth year-over-year.

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Unidentified Company Representative, [5]

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[Interpreted] Next is on the B2B business, and I am (inaudible), in charge of B2B planning.

I will first start with key Q1 highlights.

Q1 B2B revenue was up 0.4% year-on-year and down 9.5% to KRW 380 billion.

Q-on-Q decline is attributable to the base effect of one-off solution revenues, which was concentrated during the fourth quarter of last year and lower revenue from international voice wholesale.

However, on a year-over-year basis, despite declines in marketing via messaging by business customers on the back of COVID pandemic and dampened sales activities against SMEs, there was marginal revenue growth, which was quite meaningful.

IDC revenue was up 32.6% year-on-year, reporting KRW 51.8 billion on increases in demand for cloud and higher traffic on the back of COVID-19. And by offering highly competitive solutions, we built out back office system for a large bank and won new businesses in international private circuit, which all drove up further top line revenue.

During Q1, we also continued to prepare for the 5G B2B market. To commercialize ultra-low latency video solutions, we entered into an agreement with [Kopin], a technology company, to make private — to make equity participation. And with GS EPS, we entered into an MOU on 5G smart power plant solutions in order to broaden the application of 5G network and to gain B2B references.

Going forward, in the second quarter, in the B2B market, we will continue to upgrade our technological capabilities, which will be leveraged to win orders, and we will continue to add on new use cases to explore new markets for 5G-based B2B business, which we foresee will become a growth engine for us in the future.

I will now invite back our CFO for his views on the business outlook.

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Hyuk-Ju Lee, LG Uplus Corp. – CFO, VP & Director [6]

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[Interpreted] During the first quarter, despite the difficulties we faced from COVID-19 outbreak, we were able to overcome crises and bring growth from our core businesses.

We are, therefore, taking a conservative stance for the second quarter as well. But based on our profit-focused business management, supported by our service competitiveness and efficient cost spending, we are sticking to our original business targets and profit improvement objectives.

We will closely monitor the COVID situation and create opportunities to develop sustainable business opportunities in the age of the unpacked culture through innovations and services.

LG Uplus will continue to bring market-leading performances so as to bring enhancements to market and shareholder value.

Thank you.

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Operator [7]

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[Interpreted] That ends the presentations. We will now take your questions.

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Questions and Answers

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Operator [1]

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[Interpreted] (Operator Instructions) The first question 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 [2]

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[Interpreted] I see that this quarter’s earnings results are quite good. One — also, another encouraging factor is that HelloVision had posted KRW 7 billion of profit. The market was a bit concerned that after the acquisition, there will be increases in spending, but fortunately, that wasn’t the case. I would like to understand whether you think that this type of a trend could continue as we go into second quarter and onwards.

And also, another question is that your 5G subscriber traction has recently slowed. So I’m wondering whether you would need to downgrade your 5G subscriber target. And also, I’m wondering whether, in the second quarter, we would be able to see good trends continue in terms of the ARPU because the ARPU figure for first quarter was quite good. So can this continue? And also, what is your projection for 5G subscriber going forward?

So all in all, for the entire year of this year, I think that your performance will not be all that bad. However, the market had always had the concern about your dividend for this year. I’m wondering whether you will be able to stick to at least the level of dividend payout you’ve given out to the market, the level of last year, whether you’ll be able to keep to that level.

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

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[Interpreted] Yes. I’m the CFO. I will respond to the many questions that Mr. Kim Hong-sik had just presented.

Now in terms of the dividend, as I have continuously communicated, we will make sure that we, in no way, undermine or compromise the absolute amount of payout that is given out to the market. And also, I believe that if we are able to generate good outcome, good earnings from the company, we will, of course, consider the payout ratio and make sure that our approach is towards a direction where we further enhance shareholder value.

Tackling your last question first. You’ve asked about LG HelloVision and asked about the outlook for this company’s earnings going forward. It is correct that in Q1, we posted KRW 7 billion of operating profit. And you’ve mentioned that, that is quite encouraging, but I have to say that we’re still hungry for more.

Now in terms of the operating profit for LG HelloVision, basically, over the past several years, we have really focused our company’s capabilities around conducting M&As. And as a result, admittedly, we had to compromise a little bit when it comes to really boosting up our internal operational capabilities when it comes to the multiple businesses that we operate. In that sense, I believe that we really now need to also focus on the structural improvement of enhancing the quality of our subscribers. So I think when it comes to the operating profit for LG HelloVision, we are planning to keep to the level that we have generated in the first quarter while we further solidify and bolster the company’s fundamentals.

And looking at the win-win strategy and synergy between the 2 entities, we will utilize our company’s differentiated service offering capabilities that we have in IPTV. And also, we need to focus on really boosting the core competitiveness of the cable TV business at LG HelloVision.

Also in terms of the network, because we at LG have a very strong network base, we are coming up with many different plans in trying to bringing about synergies with the network that we have and through various different bundling efforts. So in that aspect, I think there will be much opportunity for us to leverage, including providing TPS and also bundling the services and even on the rental and home care service side as well.

So as we keep to the operating profit level that we posted in Q1, as we sustain that trend and, at the same time, really solidify the business — overall business configuration and structure of LG HelloVision, I think that there will be positive impact on both of the companies.

Now in terms of our outlook for 5G subscribers at the end of the year, we’re currently thinking around 25% to 25% share of 5G subscriber as end of this year against the total.

So just to provide some more color, basically, this level is slightly lower than what we had projected previous year.

And you also asked about whether we can continue this earnings trend as we go into the second half of the year. If you look at the impact from COVID-19, it is true that telcos are less impacted. Having said that, there still is a real and definite impact. For instance, people who used to have multiple number of handsets are getting rid of many and are just holding on to 1. And also some users are downgrading from the tariff scheme. So if you look at the trend for subscribers who have actually terminated their services, March was the peak. And since that point in time, we’ve seen improvement in that measure. And also subscribers who are downgrading in their tariff plan, we’re very much managing and controlling that trend.

And also, we’re closely monitoring potential lease-related risk that can arise because of the lower creditworthiness of our users and subscribers. But we’re looking at those indicators, but we aren’t seeing that big of a fluctuation in that measure by — in that measure. But yes, there is structural and economical pressure that is pressuring on the earnings of the company, but we are very committed to closely monitoring and tracking that situation so that we can truly achieve the top line and op target that we have previously set for ourselves.

So the ARPU, on a Q-on-Q basis, marginally rose, while year-on-year, it did slightly dip. But if you look at the handset-based ARPU, the Q-on-Q trend is definitely an up trend. So ARPU as a whole is being dragged down because of all the activities that we’re taking on the B2B side and M2M. But if you look just at the handset-based ARPU, it’s definitely on an up trend.

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Operator [4]

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[Interpreted] The next question will be provided 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] With the upgrade in the [SE]-related disclosure criteria, there is concern that market is going to overheat again. What’s the current marketing-related status? And do you think there’s possibility that it will — marketing competition will overheat in the second half of the year?

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Hyuk-Ju Lee, LG Uplus Corp. – CFO, VP & Director [6]

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[Interpreted] Well, we’ve entered into a quite stable phase, but with COVID-19 and things starting to normalize, I mean, there’s always a possibility that competition could once again reignite. So from the sales perspective, there may be — people may be tempted to engage in such competition. But from the CEO, from the executive’s perspective, because there is the carryover impact from the expenses that we’ve inherited from last year, it will not be easy for the management to just let it play out.

Now LG Uplus, I can tell you, we are very closely monitoring, on a daily and weekly basis, the market trend with regards to this competition and the spending that is being used up in the market. So we are going to do our utmost to make sure that we don’t let there be an overheating of competition.

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Operator [7]

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[Interpreted] Currently, there are no participants with questions. (Operator Instructions)

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Unidentified Company Representative, [8]

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[Interpreted] Now thank you. That brings us to the end of Q1 2020 LG Uplus’ Earnings Release Call. Thank you for joining us today. And if you have further questions, please do contact our IR team. Once again, our deep gratitude to our investors and analysts for joining us. Thank you.

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

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