Performance highlights and Q&A for the First Half of the Fiscal Year Ending March 2017

A look of the Presentation of the Financial Results

In the presentation of the financial results, President Tanaka described two points; "financial results for the first half of the fiscal year ending March 2017" and "promotion of domestic and global business to achieve the new medium-term targets."

1. Financial Results for the First Half of the Fiscal Year Ending March 2017

In the first half of the fiscal year ending March 2017 (from April to September 2016,) consolidated operating revenue was ¥2,301.6 billion. (49.0% progress for the full fiscal year forecast)

Consolidated operating income was ¥532.6 billion, mainly due to the increase of au ARPA revenues and the decrease of the handset sales expense. (60.2% progress for the full fiscal year forecast)

Profit for the period attributable to owners of the parent was ¥326.1 billion (60.4% progress for the full fiscal year forecast), EBITDA was ¥815.5 billion (55.1% progress for the full fiscal year forecast), all results are also going well.

2. Promotion of Domestic and Global Business to Achieve the New Medium-Term Targets

KDDI launched the new tiered data plan "Super Dejira" in September 2016 as part of our domestic telecommunications business to cater to large volume data needs and the new price plan for 4G LTE mobile phones in November 2016. Through an enriched service line-up, we will continue to offer a wide selection of plans selected and preferred by customers.

UQ mobile, inaugurated a full-scale smartphone business in October 2015, they have been focusing their efforts into building up services and sales channels, which have led to a steady increase in the number of subscribers. The Autumn to Winter 2016 models feature an expanded lineup of devices. A new commercial aired from October 25, 2016 as one of their approaches to advance their business by intensifying their promotion to customers who are currently using low-cost competitor smartphones and/or wanting to use smartphones more casually.

In our life design business, KDDI will step of our respective initiatives in the three points: Services, Customer Touchpoints, and Enablers.

First, for Services, in addition to creating synergy with the shopping mall business acquired from DeNA and other product sales business such as au WALLET Market and Jupiter Shop Channel, KDDI aims to widen the user base and the au Economic Zone through a tie-in with au STAR, a membership program for au customers.

Next, for Customer Touchpoints, we will strengthen multi-touchpoints both online and offline. In addition to the au Smart Pass, whose members reached a total of 14.87 million as of the end of September 2016, KDDI seeks to expand the au Economic Zone through increasing new-style direct-operated and owned shops that realize direct communication with customers.

Lastly, for the Enablers, i.e. the settlement platform, KDDI will enhance the convenience of the au Carrier Billing service and au WALLET prepaid and credit cards. In au Carrier Billing, KDDI became the first Japanese telecommunication carrier in August 2016 to support App Store [1] and other services available on iPhone [1]. For au WALLET credit cards, KDDI began supporting Apple Pay [1] on October 25, 2016.

In KDDI's global business, the joint business with Myanma Posts and Telecommunications (MPT) is contributing to the steady increase in the number of mobile service subscribers. Since September 2016, we have also begun selling MPT brand smartphones targeting entry-level smartphone users. KDDI's global ICT business, TELEHOUSE, started the operation of its fourth data center in Docklands, London in August 2016. KDDI also became the first Japanese carrier to provide Amazon's AWS Direct Connect [2] location at Voltaire, Paris. The data center service takes advantage of the high connectivity of the respective areas and offers a higher level of competitiveness through the promotion of collaboration with appealing partners.

• [1]

  "App Store" and "Apple Pay" are registered trademarks of Apple Inc. in the United States and other countries. The "iPhone" trademark is used under license from Aiphone K.K.

• [2]

  Connection to the AWS cloud computing service provided by Amazon Web Services, Inc. of a low-latency and secure closed network that does not pass through the Internet.

• The free cash flow recorded for the first half of this term is 440 billion yen, which already has accomplished this term's planned 350 billion yen target. For what purpose will the subsequent free cash flow be used?

  

  There are three reasons to why the free cash flow recorded for the first half of this term exceeded the plan. First, the sales cost was unexpectedly low, which contributed to reduced cash-out, and at the same time the au ARPA revenues and the value-added ARPA revenues steadily increased, increasing cash-in, both of which caused EBITDA to exceed the plan. Next, the capital expenditure is planned to have higher weight in the second half of the term in addition to a little delay in its progress during the first half. Lastly, for the 500-billion-yen scale M&As planned for over three years starting from the fiscal year ending March 2017, the relative investment was only about 15 billion yen during the first half of this term.
  As capital expenditure, KDDI plans to open 700 MHz and 3.5 GHz au base stations during the second half. For the delayed base station construction, we expect it to proceed as planned thanks to the establishment of the process that maximizes customers' sensory speed. KDDI has a budget of 170 billion yen for this term's M&A, which we will use for appropriate projects. From what we described above, we foresee that the free cash flow for the second half will decline, while looking at the whole term it will exceed the planned goal, supported by the plan-surpassing EBITDA.
  We have not decided on any matter regarding shareholder returns as of the present date, but with keeping a good balance of growth and strong shareholder returns being our basic policy, we intend to review the shareholder returns based on the cash flow and business performance of the second half of this term.

• The 2Q au ARPA revenues seem low compared to 1Q of the fiscal year ending March 2017. What measures to increase income do you have in mind for the second half and the next term?

  

  The growth in the number of subscribers is stagnant due to the outflow to MVNO; however, we expect progress in increasing IDs on the UQ mobile side in the future.
  On the other hand, we will need to increase both value-added ARPA revenues and other non-telecommunications revenues to ensure a sustainable growth in ARPA. This is our "Life Design Strategy." As preceding index, we are planning a total of 1200 billion yen circulating in the au Economic Zone for the fiscal year ending March 2017. The first-half performance was good, and by expanding the au Economic Zone, we consider it feasible to draw a profitable scenario on the whole.

• Is KDDI not expecting income increase from the new tiered data plan "Super Dejira" over the medium-to-long term?

  

  We are expecting users subscribing an 8GB or heavier plan to switch over to the new plan first, which will initially have a negative effect on income. However, in the next term and on, we expect some revenue increase from 5GB or less plan users upgrading to the new plan.

• The circulation in the au Economic Zone appears to be making a good progress. What measures are planned for the second half and subsequent terms?

  

  Gross merchandise value of the au Economic Zone totaled to 556 billion yen in the first half of this term, and the rate of progress is 46%. The au WALLET credit card service is the driver for maximizing the au Economic Zone. The number of valid credit cards increased to 1.7 million as of the end of 2Q of the fiscal year ending March 2017. As credit cards have a synergistic effect on telecommunications, we are expecting further steady expansion of circulation in the au Economic Zone. KDDI is also showing sound progress in new services, including energy, in addition to au Carrier Billing, which is steadily expanding the range of non-au services that it supports.

• For Global Business, a significant increase in income seems necessary to achieve the goals planned for the term. What is the second-half forecast like?

  

  While the exchange rate showing yen appreciation has had a 20% plus negative impact on the operating income in the first half performance; it is still steadily growing on a local currency basis. We consider it important to ensure growth on a local currency basis in each business area, such the data center business, and we will continue on this path for the second half.

• The mobile telecommunications ARPU from the Myanmar telecommunications business seems stable. Is there any risk of it going down in the future?

  

  We believe that the telecommunications ARPU drop phase has ended on the proliferation of mobile phones in Myanmar, and ARPU will see stabilization in the near future. While this is dependent on competitor activity, as long as there is no excessive competition, we do not expect a significant drop. As a telecommunications ARPU improvement measure, KDDI is promoting the expansion of data communication use, working on enhancing network quality and providing attractive content to ensure convenient use of data communications.

• The value-added ARPA performance for the 2Q of the fiscal year ending March 2017 was 500 yen and is decent. What supported this result?

  

  With the rate of withdrawal from au Smart Pass shrinking and the number of subscribers increasing, as well as the increased use of au WALLET credit cards and au WALLET Market, the value-added ARPA increased by 70 yen year-on-year. The plus 30 yen growth from 1Q primarily owes to the end of free trial period of the subscription services including au Smart Pass in July targeting student users, which possibly increased the subscription services including au Smart Pass sales. We believe that we can achieve the term's planned goal of 500 yen.

• KDDI is opening a number of directly-owned shops with a style different from conventional au shops. What effects can be expected? Also, how is the au WALLET Market at au shops coming along?

  

  As of today, we have opened 7 directly-owned shops. These shops are also targeted at non-au customers, and by offering a variety of trials, we have an increase in sales of goods compared to conventional au shops. We intend to use these results as reference for our future shop development. On another note, while initially the sales of goods at all of 2,500 shops nationwide combined were tough, progress has been steady as of the 2Q of the fiscal year ending March 2017 as per plan. Notably, the sales of water servers are favorable and recurring use is also steadily increasing. We believe that this can also contribute to au WALLET Market earnings.

• KDDI has released the new tiered data plan and a new price plan for 4G LTE mobile phones, both of which followed competitor moves in the market. Will there be any price measures taken before competitors in the future?

  

  This will require review in accordance with changes in the market. As an MNO, KDDI does recognize the critical importance of suppressing the churn rate. A reduction in the number of IDs can expand the drop-in income simply even if recouping subscribers with MVNO and increasing the number of subscribers. This is why we inaugurated au STAR. Furthermore, users churning out to MVNOs are now mostly the low-end user base, which is a change from the previous concentration on high-end users, and considering the aim to reduce the churn rate, we recognize the need to introduce pricing measures for the low-end users.
  On the other hand, speaking broadly from a telecommunications business perspective, it is meaningless that an MNO is homogenized with MVNOs―KDDI keeps our difference from MVNOs while considering necessary measures.
  Based on this perspective, we are not intending to catch up with competitors in terms of pricing measures, but we are aimed at carrying out timely efforts.

• Can KDDI disclose the communications fee income, number of subscribers, and ARPA for au and UQ mobile combined?

  

  We refrain from providing details. While the number of au subscribers is declining, the number of au and UQ mobile subscribers combined remains mostly unchanged.

• Does KDDI have a plan to operate UQ mobile integrated with au, like SoftBank Mobile and Y!mobile, or develop UQ mobile into a second brand? Also, is there going to be a tie-up or collaborative project with UQ mobile in non-telecommunications domains?

  

  We do not have any plans of integrated operation for UQ mobile. KDDI treats UQ Communications impartially like any other MVNO in terms of services and prices. On the other hand, UQ is a KDDI' consolidated subsidiary―we are willing to pursue UQ Spots and non-telecommunications services on mutual merit between au and UQ mobile depending on cases.

• I can see that there is a high rate of progress in operating income for the fiscal year ending March 2017 and it is forecast to exceed the planned target over the term. Given that KDDI is proclaiming a CAGR growth of 7% in its medium term plan (to the fiscal year ending March 2019), how do you forecast the fiscal year ending March 2018 and fiscal year ending March 2019 performances?

  

  We do not intend to change our operating income goal of 7% CAGR at this point. While we will revise our forecast in 3Q if this term's performance deviates above planned goals, we recognize this period to be a time of transformation into a life design company. What is important to KDDI is whether we can ensure sustainable growth and that we are ready and driving the measures to that end. For that purpose, we wish to operate with an eye to growth in the next and subsequent terms using the excess profits. We also want to disclose the indexes for subsequent terms' growth, but would like to have some more time before we offer more specifics.

• What is the reason behind the falling number of IDs while the unsubscription rate is declining?

  

  There are two types of IDs: accounts and subscribers. In this case, we are referring to the number of accounts, which is the base of ARPA revenues. While the unsubscription rate is held down, feature phone users switching to MVNOs are increasing in addition to the MIC (Ministry of Internal Affairs and Communications) Guidelines that limit activities for acquiring new customer base―which constitute the main reasons for the lower number of new subscribers.

• I would like to know, in the business breakdown of the Global Business segment, the projects that are contributing to the absolute profit figure and/or projects that are expected to drive future growth. Also, does the growth in Global Consumer business include M&A as an option?

  

  The TELEHOUSE brand, which leads the ICT business cored with the data center, is a solid profit base. The Global Consumer business, including the telecom business in Myanmar and Mongolia, is a growth driver. We intend to promote these businesses as two wheels that drive a vehicle. M&A is one of our options for growth, and we will explore different approaches as appropriate.

• As reasons for the increase in Personal Services segment's revenues, 34 billion yen out of the "Other 49.4 billion yen" account for the reduction of handset sales cost―what are the other reasons? Also, what are the factors that will drive the increase in revenues for the future terms?

  

  There was about a 1 billion yen decrease in handset procurement costs and a 6.1 billion yen increase in fixed-line communications revenues. The income from fixed-line communications is showing constant growth, and we believe that this will continue to increase revenues in the future terms. As for the reduction in handset sales costs, KDDI is required by the MIC Guidelines to set floor for sales price of handsets, from which we can expect some cost reduction effects for the futuer terms.