Good morning, and good evening. Thank you all for joining this conference call. 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 webcast 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. Now, we will begin the conference of the fiscal year 2023, third quarter earnings results by LG Uplus.
[Foreign language]
Good afternoon, I am Mo Sang-yeon, 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. Hello, I'm Yeo Myung-hee, as introduced, and I'm the CFO.
I would like to extend my gratitude to analysts and investors for joining the third quarter 2023 earnings conference call of LG Uplus.
[Foreign language]
During the third quarter, we at LG Uplus 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 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.
[Foreign language]
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 Nugget. It's a digital telecom platform, and it's telling customers to get a taste of their own telco world, as "Nal" means "you" in Korean. It's a play on words. 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. 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 twenties who are very familiar with reasonable rates and the use of platforms, which will later be connected with our platform services as we build out an ecosystem.
[Foreign language]
As noted, LG U+ 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.
[Foreign language]
Last month, we completed the construction of the new IDC center. Pyeongchon 2 Center is LG U+'s second hyperscale IDC, which we will use to nimbly respond to fast growing customer, corporate customer needs.
[Foreign language]
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.
[Foreign language]
During the call, 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.
[Foreign language]
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. With Hanwha Construction, Construction Arm, we will co-develop ceiling-mounted charging systems, best befitting Korea's housing structure and supply such system to newly built apartments.
[Foreign language]
Our plan at LG U+ is to prioritize and target slow charger market first and solidify business offerings to become a top three player in three years' time.
[Foreign language]
Next, I will run through the company's Q3 2023 financial results. LG U+'s consolidated Q3 service revenue was up 2.3% year-over-year, reaching KRW 2,905.2 billion, with its separate basis service revenue reporting KRW 2,682.7 billion, up 3% year-over-year.
[Foreign language]
Third quarter consolidated operating expense was up 3.4% year-over-year and 5.9% Q&Q to KRW 3,326.8 billion, while marketing expense was down 2% year-over-year and up 2.5% Q&Q, coming in at KRW 553.2 billion.
[Foreign language]
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 of 0.4% on year to KRW 898.6 billion, we managed to sustain operating cash flow improvement.
[Foreign language]
Consolidated Q3 net profit was down 8.3% year-over-year and 26.6% Q-on-Q, reporting KRW 156.7 billion, while CapEx was KRW 524.1 billion, which is a 15.4% year-over-year decline.
[Foreign language]
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 won. Net debt ratio inched up 2.1 percentage points year to date, and debt to equity ratio was down 0.3 percentage points.
[Foreign language]
This ends the report on business and financial highlights, and next, we will move on to breakdown of business results and outlook.
[Foreign language]
First is on the mobile business, and I am Lee Jae-won, Head of MX Innovation.
[Foreign language]
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-over-year, of which MNO in 5G subscriber count was 6,819,000, up 19.7% year-over-year, accounting for 61.9% of the total handset base. MVNO subscriber count was 5,528,000, growing 53.1% year-over-year, continuing on with its steep growth.
[Foreign language]
As mentioned before, aside from launching Nugget, which is hyper-personalized rate plan, we have expanded our platform business and increased user count within the platform.
[Foreign language]
Yudok, as U+ main subscription service, saw sustained uptrend in terms of subscribers and retention rate through the offering of 254 products of 72 partners.
[Foreign language]
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 products, or rent it for only a short while for a specific purpose. We also plan to diversify product lineup to better offer unique U+ products and services that customers can't live without.
[Foreign language]
Also, we have a companion animal platform, Podong, whose subscriber count in Q3 reached above 300,000, while SNS platform Better, a place 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 surpass 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.
[Foreign language]
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 customer's 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. Next is our smart home business, and I am Park Chan-seung, Head of Home Universe. 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.
[Foreign language]
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.
[Foreign language]
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 5,112,000, up 4.1% year-over-year. In Q3,
[Foreign language]
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 in content discovery. 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.
[Foreign language]
LG Uplus has introduced a plan called Premium Transit 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 three terrestrial channels and four channels of master program providers, which enables more affordable viewing experience across TV content spread across different OTT platforms.
[Foreign language]
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 pla tforms.
[Foreign language]
Modern business is evolving continuously in step with the fast changing market, as we offer services that best fit each and every individual customer's needs. By building in-home internet environment, we wish to support ever-growing volume of data usage with stability and speed ensured, and also innovate viewers' 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.
[Foreign language]
Next is on B2B infrastructure, and I'm Lim Jang-hyuk, Head of B2B New Business Group. I will begin with key highlights for the third quarter.
[Foreign language]
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% year-over-year to KRW 82.7 billion, continuing on with elevated level of growth. Solutions business also recorded 17.5% year-over-year growth, largely influencing the overall top line growth.
[Foreign language]
Enterprise line business, however, dipped by 1.2% year-over-year, reporting KRW 192.1 billion. During the third quarter, LG U+ 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 Research Institute. We also opened the first chain of restaurants under the program of Research Institute of Restaurants, bringing our telco and DX technology for small vendors in collaboration with The Born Korea. We expect to see synergies between LGU+'s telco and DX solutions for stores, in combination with The Born 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.
[Foreign language]
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.
[Foreign language]
As you can see, LG U+ 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.
[Foreign language]
Now that ends the presentation on business breakdown. We will invite back our CFO for outlook on Q4 2023.
[Foreign language]
Since we announced the LG U+ commitment to becoming a digital innovation company in 2023, 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.
[Foreign language]
In the fourth quarter, we will strengthen our competitive advantage through meaningful activities and various campaigns that accentuate the originality of LG U+ services on top of flagship handset launch and the Nugget plan, offering data benefits to the young people.
[Foreign language]
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.
[Foreign language]
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 Research and global big techs. This will form the basis of bold DX solution initiatives for small merchants and highly promising AICC business within the B2B market. LG U+ [Foreign language] LG U+ will do its utmost to generate tangible business results and enhance corporate value and shareholder value during the fourth quarter. Thank you!
[Foreign language]
This ends the presentation on the earnings. I would like to now receive questions.
[Foreign language]
Now, Q&A session will begin. Please press star one, that is star and one, if you have any questions. Questions will be taken according to the order you have pressed the number star one. For cancellation, please press star two, that is star and two on your phone.
[Foreign language]
The first question will be provided by Lee Seung-woo from Yuanta Securities. Please go ahead with your question.
[Foreign language]
Thank you. I am Lee Seung-woo from Yuanta Securities. Thank you for taking my question. 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?
[Foreign language]
This is a 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 market consensus.
[Foreign language]
First, if you look at our top line revenue, on mobile service revenue on a Q3 cumulative basis, we reported 6.29% 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 on 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 year-over-year and quarter-on-quarter increase in energy costs.
Also last year, we acquired two hundred and twenty megahertz spectrum in order for us to further enhance the 5G network quality, and there 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 KRW 254.3 billion, which was a decline on a YOY basis. Now, if we look at what's upcoming in the fourth quarter, there will be 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. 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 improvement 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.
With regard to specific amount, as of end of 2023, what the total dividend payout would be, at this point, you know, we won't be able to share with you the specifics, but once our earnings are confirmed by the end of 2023, 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.
Foreign language.
Hello, I am the CSO, Kwon Yong-hyun. I will provide you with an update on LG Uplus' AI initiative.
[Foreign language]
LG Uplus has been developing its own AI engine internally and have been leveraging off of that AI engine in carrying out its business. 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.
[Foreign language]
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's hyperscale model, EXAONE, and the second is ixi-GEN, which is our Uplus' tuned-up AI model, and the third is the use of the models provided by the big techs, such as Google and Microsoft.
[Foreign language]
Now, for the AICC business, where the market is at this point, growing quite quickly, LG U+ 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 call bots as well as, and, and receive services such as real-time summarization and categorization and recommendation based off of such generative AI model. And this as, program or this service is receiving quite positive response from our customer base.
[Foreign language]
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. We've taken that module and applied that to our subscription platform, Yudok. So customers can very naturally converse as if they're talking to a CS agent, receive product recommendations, and ask questions as well. Also we've taken and applied this AI model to U+'s 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. As we continue to use more of such AI models, I believe that the model itself is going to be further scaled up.
[Foreign language]
LG U+ is going to make use of this hyperscale AI model, EXAONE, and also underpinned by immense amount of customer data that is generated across all of the platforms of LG U+. 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.
[Foreign language]
We will move on to the next question.
[Foreign language]
[Foreign language]
Thank you. I am Kim Joon-sup from KB Securities. My question relates to your IDC and the recent rate plan that you introduced called Nugget. First, relating to IDC, would like to understand what LG U+ 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 would like to understand as to what your projection is in terms of this longer term, mid to longer term demand dynamic, if for the data centers. And also, when would we see increase in the utilization of your IDC data centers, and when do you think that they will start to make contribution to your top line revenue?
Second question is on this very hyper-personalized tariff plan called Nugget 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 do what would be the the impact that this new rate plan will have on LG U+'s, for instance, wireless ARPU, subscriber and revenue?
[Foreign language]
I will respond to your question on the IDC, and I am Lim Jang-hyuk. I'm the Head of the B2B New Business.
[Foreign language]
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 2026, we think that there will be oversupply versus demand.
[Foreign language]
The Pyeongchon 2 Center is 90 MW size, and we completed the construction back in October. That 90 MW 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 2 Center is, at this point, fully booked. 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.
[Foreign language]
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.
[Foreign language]
Yes, I would. I will respond to your question on the expected impact from the new rate plan, Nugget. I am Lee Jae-won. I'm the head of the MX Innovation Group.
[Foreign language]
This Nugget rate plan is actually a new category of tariff plan, offering flexible choice from 1 GB up to unlimited data usage with different speed combinations.
[Foreign language]
So subscribers can very freely change their rate plan, can terminate, or can receive a refund, depending on the remaining amount of data and the remaining days of subscription. So this actually, it befits a very free lifestyle of our customer base.
[Foreign language]
This is a key characteristic of the Nugget 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.
[Foreign language]
Another key characteristic of Nugget is that it has enhanced the convenience, whereby subscribers can use it anytime, anywhere through their mobile application.
[Foreign language]
So this Nugget rate plan allows for people to use small amount of data, and we have intentionally targeted people in their twenties and Millennials and Gen Zs, as it is well aligned with their lifestyle patterns. We expect that going forward, we will be able to lock them in as our core base of users.
[Foreign language]
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.
[Foreign language]
Just as we've done for the Nugget rate plan, LG U+ will continue to prioritize customer value when it develops and designs products, so that we may offer differentiated experience to our subscriber base. Thank you.
[Foreign language]
[Foreign language]
[Foreign language]
If there are no further questions, we would like to close LG U+'s Q3 2023 earnings conference call. For additional questions, please send them through the IR team. Once again, thank you very much for joining us.