Performance Highlights and Q&A for the First Quarter of the Fiscal Year Ending March 2018

The Presentation of the Financial Results

In the presentation of the financial results, Executive Vice President Morozumi described two points; "Financial Results for the First Quarter of FY18.3," and "Toward Achieving the Medium-Term Target."

1. Financial Results for the First Quarter of FY18.3

For the first quarter of the fiscal year ending March 2018 consolidated operating revenue increased 6.0% year on year, to ¥1,198.7billion.
Consolidated operating income was up 2.3% year on year, to ¥281.4billion, mainly due to the revenue increase of mobile communications revenues and value-added ARPA revenues and profit increase of the Business services segment, no matter the strategic cost increase of promoting measures for growth next year and beyond.
Profit for the period attributable to owners of the parent rose 3.8% year on year, to ¥173.5billion.
We have achieved 29.6% of our consolidated operating income target for the full fiscal year, meaning that we are well on progress.

2. Toward Achieving the Medium-Term Target

In our domestic telecom business, the number of "mobile IDs," which is the sum of the number of "au accounts" and "MVNO subscriptions," was 26.03 million as of the end of June (+1.1% year-on-year). "Mobile communications revenues" saw a year-on-year increase of +1.3%, out of which "au ARPA revenues" also increased compared to the figure from the previous term. "au ARPA" is growing stably at 5,970 yen (+2.8% year-on-year) with the expansion of high-volume data needs.
KDDI aims to increase customer experience value by promoting the "au STAR" membership program along with the new price plans, "au Pitatto Plan," "au Flat Plan," and "Upgrade Program EX" to support the long-term use of au customers.

In the life design business, "gross merchandise value in the au Economic Zone" amounted to 406 billion yen (x1.5 year-on-year) along with "value-added ARPA" of 560 yen (+19.1% year-on-year), demonstrating significant growth. As primary growth drivers, the combined number of "au Smart Pass" and "au Smart Pass Premium" memberships reached 15.29 million (+4.4% year-on-year) and 21.30 million of "au WALLET prepaid cards and credit cards" have been issued and valid (+12.7% year-on-year) as of the end of June, both seeing steady growth. The merchandise value in the shopping mall service "Wowma!" increased 2.8 times compared to the previous term. The number of subscriptions to "au Denki" is also steadily increasing.

In the global business, the total number of subscriptions in the Myanmar telecom business has reached approximately 24 million, four times over the three years since KDDI entered into a joint operating agreement with Myanma Posts and Telecommunications (MPT) in July 2014. MPT recently acquired a new license for the 1.8GHz bandwidth to launch LTE services in three large cities at the end of May. The current plan is to expand this service to cover more than 30 cities by the end of September. The introduction of the 4 X 4 MIMO technology has actualized a maximum communication speed of 150Mbps, which is a part of our achievement in business promotion to be carried on into the future.

• The "au Pitatto Plan," "au Flat Plan," and "Upgrade Program EX" all have different targets: respectively, the low-volume data users, high-volume data users, and user retention. From when can we except benefits from the new rate plans?

  

  A comparison of the initial figures from two weeks from the launch of the new rate plans and previous figures demonstrates a certain control on churn. Notably, we see some restraints on churn out to MVNO and Y!mobile at this point of time. Looking at the over-450,000 subscriptions to the new rate plans during the first two weeks, the churn rate will show improvement—on which we base our expectations for better performance thanks to an increase in the number of subscriptions.

• The strategic cost for the fiscal year ending in March 2018 is 50 billion yen. How is KDDI considering the scale and effects of the strategic cost in the life design business?

  

  The breakdown of the 50-billion yen strategic cost for the fiscal year ending in March 2018 is 25 billion yen for improving retention in "au STAR," etc., 15 billion yen for channel structure reform, and 10 billion yen for expanding the life design business. The benefits it brought to the life design business include 406 billion yen in gross merchandise value in the au Economic Zone in the first quarter, which is a 23.9% progress toward reaching our term target of 1,700 billion yen. Overall this is showing steady expansion. The 1Q performance of value-added ARPA is 560 yen, which shows a stable growth of +19.1% year-on-year. While we recorded an operating income of 26.3 billion yen in the Value Services segment for 1Q, a +3.6% year-on-year increase, there is an over +10% basic profit excluding strategic cost.

• What is the current state of UQ Mobile? How does it compare with independent MVNOs and Y!mobile?

  

  To expand its services, UQ Mobile is working on raising market awareness, and now it has exceeded 80%. The sales channels for UQ Mobile are primarily mass retailers, but the expansion of UQ Spots―dedicated UQ shops―has contributed to a steady increase in this business line. While we cannot comment on comparison with competitors, we believe we are managing stable operation.

• What are the factors behind the increase in au ARPA revenues after it dropped in the previous terms?

  

  While the efforts directed at increasing the number of IDs are not progressing well, au ARPA is growing, which is owed to a rise in the composition ratio of Kakeho and Super Kakeho calling plans, an increasing number of high-volume data plan subscriptions, and a steady growth in Data Charge use (including use on tablets.) On the other hand, while the au Smart Value discounts have some impact, the operations to control Monthly Discount are working well. The totality of such factors has amounted to a solid growth in au ARPA revenues. The specific individual factors of income will remain undisclosed.

• The value-added ARPA in 1Q of fiscal year ending in March 2018 is 560 yen, already reaching the term's target. What are the factors behind this good performance?

  

  In addition to the increase in au Smart Pass memberships, the expansion of commerce business―one of our future growth drivers―and the sustainable growth of settlement business that supports the life design business strategy have also contributed to the +90 yen year-on-year increase.

• Looking at the quarterly value-added ARPA performance, we can see a continuous and constant growth. Can we expect this trend to continue on through fiscal year ending in March 2018?

  

  The total number of au Smart Pass and au Smart Pass Premium memberships is 15.29 million and already exceeded our term target of 15.20 million. What characterizes KDDI's value-added service is the over-80% subscription rate of au Smart Pass and au Smart Pass Premium among the entire value-added service, on top of the low cancellation rate. Based on these factors, we believe that value-added ARPA is growing substantially. We also think that, if we manage to start charging for the au Smart Pass Premium―the higher-grade au Smart Pass program―in December as planned, this may result in good progress.

• Could you tell us about the aims and expected profit impact of the new rate plans and Upgrade Program EX?

  

  We recognize that the key to realizing sustainable growth in the domestic telecom business is to maximize au telecom income, in other words, "ID x ARPA." As for the current state, au ARPA and value-added ARPA are both showing a steady increase. While the number of IDs is increasing in the group as a whole, the number of au accounts is declining and the churn rate during 1Q was high.
  We presume that there is a significant volume of customers who are concerned about running costs and switch over to MVNOs. Based on the recognition that maintaining au IDs is the top-priority issue, we aim to put a stop to the decrease in the number of au accounts by means of au Pitatto Plan, rate applied according to the amount of data used which offers a low price standard comparable to MVNOs for months with a low volume of data use.
  On the other hand, to control the impact of decrease in income bound to occur with the new rate plans, these are not eligible for the Monthly Discount. Instead, KDDI provides customers with the Upgrade Program EX, which is an option that can give a maximum discount of 50% on the price of the device. In the initial sales, 84% of the customers who subscribed to a new rate plan on an installment basis when switching models chose the Upgrade Program EX, which speaks well for its acceptability.

• Does the decrease in income from the new plans forecast, i.e. 20 billion yen, include the increase in profit from non-application of Monthly Discount?

  

  Yes, it does.

• Is the mobile communications revenues for the fiscal year ending in March 2019 going to increase?

  

  That depends on how we operate in the near future. As long as we can keep the number of au accounts from dropping below our estimate, we can expect this to be a factor for increased income; on the other hand, we also expect a negative impact on au ARPA from the shift toward new rate plans. Customers are provided with two options: au Adjust Plan and au Flat Plan. Currently, we are promoting au Pitatto Plan, but we are also aware of the need for operation to boost au ARPA by raising the rate of au Flat Plan selection in the future. We are only two weeks from the launch of the new rate plans, but we do believe that au ARPA can be sustained through precision operations.
  We see good performance in this introductory period of the new rate plans and aim to continue increasing mobile telecom income during the fiscal year ending in March 2019.

• Wowma! has increased its number of shops by 1.8 times and merchandise value by 2.8 times compared to the previous year. Is this growth expected to continue? What are KDDI's measures for circulating WALLET points in Wowma!?

  

  We consider this a substantial expansion. KDDI particularly focuses on increasing the number of shops, using strategic cost. New shop opening campaign will be ongoing until March 31, 2018, and therefore we expect further growth during this fiscal year.

• What are the characteristics of KDDI's efforts in the field of IoT, or what differentiates KDDI from competitors in this field?

  

  Since 2001, KDDI has been working on M2M and accumulating know-how. Specifically, KDDI has provided networks and systems in the area of automobiles and security. Recently, we also started working on smart meters in the utilities field. In addition to these achievements, what distinguishes KDDI from competitors is that we have a framework for supporting IoT development on a global scale and the capacity to offer one-stop solutions including sensors, cloud service, and other IoT components for global businesses such as those found in the automobile industry.

• What is the current state of the global communications platform development that KDDI jointly announced with Toyota Motors in June 2016?

  

  We cannot publicize details yet, but we will say that preparations are well under way. Automobiles require time until they are marketed, needing design, development, and testing. Currently, KDDI is providing the telecommunications environment in advance and the automobile manufacturer is conducting development and testing.

• What are the factors driving the significant increases in profits in the individual Business Services segments?

  

  While the mobile business experienced a drop in the telecom income due to the introduction of the calling flat-rate plan, the data ARPU and the number of IDs showed steady growth. The fixed line business also had some decrease in legacy call income, but with the supplementation of the incomes from network, solution, and data center services, there was an overall increase in profit.