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

The Presentation of the Financial Results

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

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

For the third quarter of the fiscal year ending March 2018, consolidated operating revenue increased 6.8% year on year, to ¥3,760.1 billion.
Consolidated operating income was up 4.9% year on year, to ¥813.8 billion, mainly due to the revenue increase of mobile communications revenues and value-added APRA revenues, etc., no matter the strategic cost newly generated from this year to promote measures for growth next fiscal year and beyond.
Profit for the period attributable to owners of the parent rose 4.1% year on year, to ¥490.6 billion.
We have achieved 85.7% of our consolidated operating income target for the full fiscal year, meaning that we are well on progress.
Furthermore, the board of directors of KDDI Corporation at its meeting held on January 31, 2018, resolved the repurchase its own shares up to 50 billion yen.

2. Toward Achieving the Medium-Term Target

In our domestic telecommunications business, the "au Pitatto Plan," which automatically applies fixed rates in 5 stages based on the volume of data communication used by the customer, and the "au Flat Plan," well-suited for large-volume data use, have both steadily expanded their customer base since their introduction in July 2017. On January 21, the cumulative number of subscriptions reached 5 million. The selection ratio of the "au Flat Plan" among new price plans is on the increase and is also a contributory factor in the increase of au ARPA. Furthermore, KDDI launched the "Pitatto Student Discount," which targets customers 25 years old or younger and their families in December 2017 (subscription accepted from December 15, 2017 to May 31, 2018), which makes every efforts to satisfy various customer needs.
As a result, the au churn rate in 3Q (0.78%) stayed the same year-on-year. The au churn rate of December 2017 was below that of December 2016, demonstrating an improvement. While the improvement in churn rate shrunk the reduction in au subscriptions, the MVNO subscriptions continued to steadily increase, both of which contributed to a +2.2% year-on-year increase in mobile IDs, recording 26.24 million subscriptions as of the end of December 2017.
As for au ARPA, based on au subscribers, the steady increase in data use from au smartphones made up for the temporary decrease in income caused by the new price plans and campaigns and conrtributed to a +0.5% growth (5,910 yen) year-on-year in au ARPA. The mobile communications revenues, which is the sum of au ARPA revenues and MVNO revenues, increased by +0.5% year-on-year and recorded 1,351.2 billion yen.

Next, we will detail on our performance in the life design business.
Our efforts in expanding use of au Smart Pass (including au Smart Pass Premium), au WALLET (notably credit card), and commerce business Wowma! paid off, and the "au Economic Zone Gross Merchandise Value" recorded 500 billion yen, a near 1.5 times increase year-on-year, and the "Value-Added ARPA" recorded 590 yen, a +15.7% increase.
KDDI welcomed AEON Holdings into our Group in January 22, 2018, aiming at further expansion in the life design business domain. By this merger, we became available to combine AEON Holdings' strengths, that are capacity for development of teaching materials, highly-motivated students, and teachers with high-quality, and KDDI's strengths including utilization of IT devices and online learning, integration of CRM [1] and analytics infrastructure.
By those promotions of IT, we pursue greater growth in the education business, which we see as an expanding market.

• [1]

  CRM: Customer Relationship Management

Lastly, we will now discuss our efforts for medium-to-long term growth.
First, we will elaborate on KDDI's activities in the area of IoT, where everything connects to the Internet.
KDDI draws on its group companies' know-how to build competitiveness in one-stop solutions with optimal combinations in all layers, including sensor and devices, communications networks, data use and cloud services. This has been our differentiation approach. In the area of LPWA, the cornerstone of telecommunications networks, KDDI launched the LTE-M-based "KDDI IoT communication service LPWA" in January this year. This offers business possibilities in places where power supply was previously not available or where radio waves could not reach, as well as use of devices that were difficult to introduce due to issues in profitability. The LPWA offers added value beyond the communications layer.
KDDI will continue to firmly grasp customers' insights and offer IoT solutions that can cater to all sorts of issues in different industries.
As our "Measures for the 5G Era," KDDI promotes demonstration experiments in automatic car operation with partners. Last December, KDDI succeeded in Level-4 remote control of unmanned automatic driving on general public roads, which is the first in Japan. Envisioning automatic driving in the future of buses and taxis, KDDI will build up know-how in monitoring driving conditions and real-time judgment and control in case of danger.
In line with the realization of automatic driving, KDDI also began demonstration experiments in the generation and delivery of "dynamic map," which combines accurate information on road structures with dynamic information about weather conditions, accidents, and traffic conditions.
KDDI will steadily promote all efforts toward achieving our medium-term targets.

• I would like to know about the reflection on the strategies up to today and KDDI's future vision upon having a new president.

  

  It has been seven years and two months since I took up the post as president in December 2010. While I have promoted the 3M strategy and the shift to smartphones, we heard about Rakuten's entry into the MNO business and constantly hear news of corporate acquisitions, which may give an impression that our competition in the telecommunications industry is to become even harsher. However, we foresee an age of transformation where the industry itself is changing due to technological advancements in 5G, IoT, big data, and AI. Amid the emergence of new communities and industries, the telecommunications industry is also coming to a great turning point. To ready ourselves for a transformation into a life design company, KDDI is promoting the current medium-term plan, preparing assets in telecommunications, finance, and commerce. The fiscal year ending March 31, 2019 is the final year of the current medium-term plan. The target is to attain 7% CAGR in operating income―that is to say, over 1 trillion yen in operating income. It is also the term in which we formulate our next medium-term plan, which we decided that should be laid out by the new president who will be spearheading KDDI in the coming age. The stock market appears to be on our side, thanks to our strong management, and we will see the achievement of our current medium-term targets. I believe your focus is now on our next medium-term plan. The change of presidency was based on our consideration that the priority for the fiscal year ending March 31, 2019 should be on the formulation of the strategies for the next medium-term plan.

• As methods of business transformation, we think of amicable alliances with partners and all-out rebranding. What does KDDI have in mind for its future business transformation?

  

  We consider the current medium-term plan to be three years of building the foundation for the coming age. The recent corporate acquisition may appear to be irrelevant to telecommunications, but it in fact envisions the fusion of future telecommunications and life design business. How this fusion is accomplished is to be mapped out by our new president.
  The telecommunications business resembles a fierce martial arts fistfight, but it will shift into something more like a track and field event where various players race toward the new age. In order to acquire that necessary capability, KDDI is promoting M&A to introduce the capabilities of the acquired businesses into KDDI and develop comprehensive strategies. We hope you will keep your expectations for KDDI's growth over the next three years.

• Upon Mr. Takahashi assuming the presidency of KDDI, I would like a comment on how you see the next three years in terms of profitability in IoT.

  

  While it is too early to give a comment, as a first impression, I recognize that Mr. Takahashi is succeeding to the presidency at a significant point in time. On the other hand, I have high hopes for the new challenges to be brought about from our progress in the areas of 5G, IoT, big data, and AI. While we are upholding and promoting our transformation into a life design company in our current medium-term plan, most of our employees had been seeing this as a transmutation from a telecommunications company to a life design company. Nevertheless, the employees have now begun realizing that what is happening in reality is that telecommunications are being integrated into various industries and services, creating dynamic changes in business models.
  Although the profitability of the telecommunications layer in IoT may be small, we can expect more from the business models on the layers above. We aim to mobilize the power of youth within KDDI and pioneer such new business models. In the future, we are planning to arrange an opportunity to present our strategies for expanding our life design business centering around KDDI's telecommunications business.

• I would like to know the outcome of the 3Q strategic cost.

  

  In the 3Q cumulative, KDDI made strategic outlays of approximately 27 billion yen. As for our progress vis-à-vis the term forecast of 50 billion yen that we announced at the beginning of the term, while there is a slight shortfall, we are still seeing the effects as predicted. Specifically, such effects include a decrease in the au churn rate thanks to improved retention. We ask for your patience until we can describe the effects in a more concrete fashion.

• How do you see the news on the reduced production of iPhone X? I would also like to know about KDDI's prospects for next term's MVNO market and au subscribers.

  

  Recent iPhone X sales are steadily increasing. Total sales, including iPhone 8 and 8 Plus, also shows steady growth year-on-year. We still expect a certain growth in the MVNO market for the near future. The number of au subscribers remains steady, with the decreasing trend settling down due to the introduction of the new rate plans―we expect further growth in mobile IDs, including group MVNO, during the next term.

• While the earnings growth rate is down in the telecommunications industry as a whole, I see KDDI can still generate a significant cash flow. KDDI has announced a 500-billion M&A in the current medium-term plan, and I would like to know the state of progress. I also want to know about how the cash flow is to be used in the future.

  

  We announced a 500-billion M&A in the current medium-term plan and have progressed to around 300 billion yen at this point. As we have announced in our current medium-term plan, we will continue to seek M&A with a focus on life design business and IoT business. While we can say that the next medium-term plan will reflect our ongoing attitude of maintaining a good balance between growth investment and shareholder return, we would like to refrain from going into details as we are in the formulation process.

• I would like to know about the impact and effects of the new rate plans on business performance.

  

  In this term, KDDI had an around 20 billion decrease in income due to the temporary impact of the campaign and others; however in a medium-to-long term span, we expect improved income to come from the unexpectedly and steadily high flat-plan subscription rate.

• I would like to know the factors contributing to the increasing handset sales income. Also, is there a change in handset sales cost?

  

  The introduction of the new rate plans has catered to the recovery of the momentum. The steady increase in handset unit sales for both new purchases and model switchovers and the rise in handset unit prices are also major factors to this change. The handset sales cost has decreased compared to last term.

• I would like to know about changes in traffic of the users who switched over to the au Pitatto Plan.

  

  Looking only at au Pitatto Plan subscribers, while we observed the expected reduction in traffic, the general traffic of smartphone users is still on an increase. We aim to expand smartphone use opportunities for au Pitatto Plan users as well in order to increase traffic.

• If you deducted the 27 billion-yen strategic cost from the operating income, the major factor in increased income is "Other" Can you elaborate on the details?

  

  8.4 billion yen from reduced handset sales cost, 7 billion yen owes to lower access charges, and 4.6 billion yen due to an income increase in the Global Services segment are contributory factors; the rest is undisclosed.

• I would like to know about the differences between NTT DoCoMo and KDDI regarding IoT strategies.

  

  The significant differences are our global telecommunications platform development with Toyota Motor and our acquisition of SORACOM. With SORACOM, we are currently analyzing over 8,000 PoC (Proof of Control) cases to refine our targets and offer packaged services as part of our efforts to differentiate ourselves from competitors.

• I would like to know about the general idea of stock buybacks from the perspective of balancing mobility and dividends.

  

  We acknowledged that the current stock price is too low, and therefore bought back our shares. We consider dividends as the basis of shareholder return, and we will perform agile stock buybacks in addition to this.

• How do you see Rakuten's entry into MNO? Was there any communication with Rakuten regarding the provision of a telecommunications network?

  

  Telecommunications, finance, and commerce will be at the core in the world ahead. How many customers, or IDs, you have and how much you know about your customers―such engagement will be the key. We see a data-driven management in the future, based on the big data created from such activities. From what we see, we presume that IDs and stronger engagement will be key indicators. While telecommunications with stronger engagement are coming to the fore, from Rakuten's perspective, we consider it natural to decide on entering the MNO business as their current MVNO business may not provide a strong enough engagement.
  On the other hand, as telecommunications networks cannot be developed overnight, KDDI also makes capital expenditures of 500 billion yen every year. Rakuten has announced a 600-billion yen investment in network development. We are of the opinion that they will need the assistance of an existing telecommunications carrier in order to develop a competitive telecommunications network. I will refrain from commenting on whether KDDI is to provide a telecommunications network to Rakuten.