Performance Highlights and Q&A for the Fiscal Year Ended March 2017

The Presentation of the Financial Results

In the presentation of the financial results, President Tanaka described three points; "Financial Results for FY17.3," "Toward Achieving the Medium-Term Target," and "Financial Forecasts for FY18.3".

1. Financial Results for FY17.3

In the fiscal year ended March 31, 2017, consolidated operating revenue increased 6.3% year on year, to ¥4,748.3 billion. Consolidated operating income was up 9.7%, to ¥913.0 billion mainly due to driving the increase of profit by domestic business.
We plan to raise the year-end dividends per share up ¥5 from the initial forecast, to ¥85 for the fiscal year ended March 31, 2017 (for the 15 consecutive years.)

2. Toward Achieving the Medium-Term Target

To achieve the goals of the medium-term plan, which will continue through the fiscal year ending in March 2019 (and which includes targets such as a 7% CAGR for consolidated operating income, and a dividend payout ratio of more than 35%), KDDI aims to sustainably grow the domestic telecom business and establish new growth pillars based around three strategies, which are to "sustainably grow the domestic telecom business," "maximize the au Economic Zone," and "ambitiously develop global business."

(1) Sustainably grow the domestic telecom business
au STAR, which is an au brand service designed to give preferential treatment to long-term users, aims to increase customer experience value by awarding points every month depending on years of service use and flat-rate data fee, while simultaneously improving the appeal of WALLET points by offering a wide range of products that can be obtained using WALLET points.

Also, in conjunction with the "Super-Dedzilla" high-volume 20/30 GB data plan that was launched in September 2016, KDDI is enriching the range of value-added services that are provided such as video content, in an effort to expand the total ARPA.

Furthermore, in the growing low-price smartphone market, the MVNO service provided by KDDI group companies aim to leverage each of their strengths to maximize the number of mobile IDs.

(2) Maximize the au Economic Zone
To expand business in areas of non-telecom business, KDDI has pursued alliances and investments with the aim of acquiring new expertise and customer bases.

In the commerce business, KDDI acquired a shopping mall business from DeNA Co., Ltd. in December 2012, and launched the new Wowma! shopping mall in January of this year. To bolster the number of stores and the product lineup, KDDI is enhancing measures such as campaigns for store operators, which are aimed at improving the quality of services.

In financial services, KDDI established Jibun Bank (Internet banking service) in 2008, launched the au WALLET Settlement service in 2014, and has been expanding the service lineup through efforts such as the launch of au brand financial products in April 2016.

In energy services, KDDI launched au Denki in April 2016 and started handling new gas services in the Kansai area in April 2017.

In addition, along with the active development of au Smart Pass as a customer touchpoint, KDDI launched au Smart Pass Premium in January of this year. By providing enhanced special offers for members and additional security functions, the service further strengthens au Smart Pass as a customer touchpoint.

Furthermore, in addition to consumer-oriented business, KDDI is developing IoT business for corporate customers. The provided services include solutions that help corporate customers achieve cost reductions. As an example, KDDI offers a service that uses a variety of sensors to enable toilet occupancy management and water-saving management.

(3) Ambitiously develop global business
In the global consumer business, KDDI is conducting a full-scale roll-out of LTE services in Myanmar and Mongolia. For corporate customers, KDDI is providing high-quality data center services centered in Europe, which boast the largest number of connections in the world, while continuing to promote the mobile business in developing Asian countries and the data center business.

3. Financial Forecasts for FY18.3

For the fiscal year ending March 31, 2018, the Company projects a consolidated operating revenue of ¥4,950.0 billion (yoy +4.2%) and an operating income of ¥950.0 billion (yoy +4.1%).
We also plan dividends per share of ¥90 (dividend payout ratio 39.2%, yoy+¥5) for the year as well.
To achieve our medium-term plan toward the fiscal year ending March 31, 2019, KDDI focus on both sustainable profit growth and enhancing shareholder returns.
And the board of directors of KDDI Corporation at its meeting held on May 11, 2017, resolved that we will repurchase its own shares up to 100 billion yen.

• For the fiscal year ending March 2018, what are the anticipated costs for enhancing customer retention through services such as au STAR?

  

  The anticipated costs are approximately 25 billion yen.

• For the fiscal year ended March 2017, the handset sales cost reduction was 85 billion yen. What is the anticipated handset sales cost reduction for the fiscal year ending March 2018?

  

  For the Personal Services segment, the anticipated sales cost reduction is approximately 25 billion yen.

• The aim of one of the key performance indicators (KPI) is to expand the number of mobile IDs. However, the overall growth of the mobile communications revenues is dependent on the increase in the number of MVNO subscriptions in this fiscal year. Could you explain whether the priority is to expand the number of mobile IDs, or to expand the growth of mobile communications revenues?

  

  The approach of maximizing the number of mobile IDs x ARPA has not changed, but the current market trends indicate a decreasing number of MNO IDs, and an increasing number of MVNO IDs. The au ARPA is expanding steadily, so we hope to maximize the mobile communications revenues based on the number of mobile IDs x ARPA.

• Could you provide a breakdown of the amounts of the Gross Merchandise Value of au Economic Zone for the fiscal year ending March 2018?

  

  The details of the forecast for the fiscal year ending March 2018 are 970 billion yen for au WALLET Settlement, 360 billion yen for au Simple Payment, and 370 billion yen for other services (product sales, energy, financial services, etc.).

• Can you also provide a breakdown of the Gross Merchandise Value of au Economic Zone for the fiscal year ended March 2017?

  

  The details of results for the fiscal year ended March 2017 are 723 billion yen for au WALLET Settlement, 324 billion yen for au Simple Payment, and 233 billion yen for other services (product sales, energy, financial services, etc.).

• If the operating profit forecast of 950 billion yen (+4.1% compared to the previous period) is achieved for the fiscal year ending March 2018, a 7% growth in operating profit will be required for the fiscal year ending March 2019. What segments are expected to contribute to the increased profits?

  

  To achieve growth in the coming periods, a strategic investment totaling approximately 50 billion yen will be implemented for the fiscal year ending March 2018, with approximately 25 billion yen going toward enhancing customer retention through services such as au STAR, approximately 15 billion yen going toward reorganizing channels such as au shops, and approximately 10 billion yen going toward expanding the life design business. By expanding the life design business through the customer base of au and others, we would like to aim for the 7% CAGR in operating profit that is set as a medium-term target. The details of this will be provided in the next period.

• What are the forecasts for the fiscal year ending March 2018 regarding each of the previous acquisitions of Jupiter Shop Channel, BIGLOBE, and Wowma!, and regarding the results of the 50 billion yen strategic investment?

  

  Although we are unable to provide the exact figures, Jupiter Shop Channel was able to achieve a profit increase for the fiscal year ended March 2017, due to lively purchasing demand from seniors. Continuing into the fiscal year ending March 2018, we expect to be able to secure steady profit increases and to expand business. Regarding the synergy between au and Jupiter Shop Channel, they conducted a large promotional campaign for the fiscal year ended March 2017, and au was able to forward some customers to them. The synergistic effects between the respective customer bases are expected to continue into the future.
  A portion of the strategic investment for expanding the life design business has been designated to go toward increasing the number of Wowma! member stores. Part of the investment was implemented starting in March, and the number of newly registered member stores more than quadrupled compared to the previous month. The expansion of the mall business is recognized as the most important factor in the expansion of the life design business, and we view the current period as a business expansion phase.
  As for the synergy with BIGLOBE, we expect the expansion of BIGLOBE sales due to the mutual exchange of customers between BIGLOBE and au and to the provision of life design products to BIGLOBE customers. We also expect a reduction of the outflow of cash from the KDDI group due to the improved efficiency of the au and BIGLOBE networks.

• What is the approximate amount of BIGLOBE profit contributions in the company plan?

  

  BIGLOBE was only recently integrated in January 2017, and although some calculations have been considered into our plan, we are currently unable to provide the details.

• Is the strategic investment the reason for the modest 5 billion yen profit increase that is forecast for the Value Services segment for the fiscal year ending March 2018?

  

  The Value Services segment would experience a double-digit profit increase for the fiscal year ending March 2018 without the strategic investment, but it will be used to cover the necessary costs for future growth in subsequent periods.

• Can you explain the distribution of free cash flow for the fiscal year ending March 2018, as well as the areas that will receive the growth investments?

  

  The free cash flow for the fiscal year ending March 2018 is expected to be 480 billion yen, with approximately 220 billion yen used for dividend payments, and 100 billion yen used for repurchase our own shares. The plan for the remainder allows for a certain degree of freedom. Also, growth investments will be implemented in areas of the non-telecom business, including in IoT, as well as in global business.

• Can you give a full-year overview of the forecast for the MVNO net additions and au ARPA for the fiscal year ending March 2018?

  

  For the fiscal year ending March 2018, the net additions of MVNOs provided by KDDI group companies are expected to be 910,000, with much of that attributed to UQ mobile. However, the au ARPA will see +1.2% growth, while value-added ARPA will see +9.8% growth. Mobile communications revenues, which is based on the number of mobile IDs x ARPA, is expected to see +0.5% growth, but since we do not have a clear understanding of the degree of MVNO market expansion in some areas, we are planning conservatively.

• Can you provide the future forecast for the net additions of au and MVNOs provided by KDDI group companies?

  

  For the fiscal year ending March 2018, the number of au subscribers is expected to decrease, and the number of MVNO subscriptions is expected to increase. The target for the number of MVNO subscriptions (15 million) established by the Ministry of Internal Affairs and Communications has nearly been achieved. However, there is research suggesting that continued expansion will occur, so we cannot accurately forecast the number at the moment.

• Considering the breakdown of the 50 billion yen strategic investment, the costs appear to be continuous rather than temporary. Is it OK to assume that the investment will not contribute to the profit increase for the fiscal year ending March 2019?

  

  First, the customer retention enhancement will expand the number of au STAR subscribers, so the associated costs will continue to be generated. Second, the channel reorganization will be concentrated for the fiscal year ending March 2018. Third, the expansion of the life design business will expand the business foundation for the fiscal year ending March 2018, so we assume that the costs will be concentrated in this period.

• What are the reasons for the decrease in free cash flow for the fiscal year ending March 2018, compared to the previous period?

  

  Regarding the fiscal year ending March 2018, the plan is to have an investment cash flow of 170 billion yen. This is equivalent to one-third of the 500 billion yen M&A amount, which is the cumulative total for the third stage of the medium-term target. However, for the fiscal year ended March 2017, KDDI conducted M&A activities that exceeded the 170 billion yen in investment/finance cash flow. As for the finance cash flow, KDDI paid off the 43 billion yen in interest-bearing debt held by the acquired BIGLOBE, resulting in a positive contribution to free cash flow. Considering this, the free cash flow is recognized as equivalent to that of the previous period.

• In the medium-term target, a dividend payout ratio of over 35% is set. However, due to the 100 billion yen repurchase of company shares in the current period, the total return ratio is 50% to 60%. Could you clarify the shareholder return policy again?

  

  The total return ratio for the fiscal year ending March 2018 is 56.8%. The basic policy for shareholder returns is to achieve continuous dividend increases, but when it comes to repurchasing of our own shares, factors such as the stock price level and total return ratio are comprehensively considered and responded to in an agile manner.

• The total return ratio for the fiscal year ending March 2018 is higher than that of NTT DOCOMO. Also, the dividend payout ratio for the fiscal year ending March 2018 is 39.2%, which exceeds the "above 35%" amount set as the medium-term target. It appears that shareholder returns are ahead of the medium-term target and progress is being made, but has the shareholder return policy changed?

  

  The dividend payout ratio for the fiscal year ending March 2018 is expected to be 39.2%. The policy is not to decrease dividends, and we strive to achieve continuous profit growth while strengthening the shareholder returns.