Performance Highlights and Q&A for the Fiscal Year Ended March 2018

The Presentation of the Financial Results

In the presentation of the financial results, President Takahashi described three points; "Integration of telecommunications and life design", "Financial Results for FY18.3," and "Financial Forecasts for FY19.3".

1. The integration of telecommunications and life design

The "integration of telecommunications and life design" that KDDI aims for does not mean a business shift from a telecommunications carrier to a life design enterprise, but rather envisions a world where life design services are layered concentrically centering around telecommunications as the axis of business.
Specifically, upon delivering a wide range of life design services (commerce, finance, education, etc.) that KDDI is expanding and cater to all living situations and life stages, we aim to accomplish the following through customer contact points such as au shops and au Smart Pass (online) to become a company that "stand by you" through: (1) Building a system that aggregates points earned in various services to the customer ID so customers can use points easily, (2) Delivering experience values of high quality by integrating new technologies such as IoT and 5G, and (3) Providing optimal services that match each customer's state of use and preferences by improving analytical ability; all of which boils down to providing more comfortable, convenient services by mobilizing all know-how in the entire KDDI Group.
In order to be the first to establish "an infinitely expanding world driven by IoT and 5G," KDDI will promote "open innovation" in addition to establishing 5G networks and Group R&D. Through processes such as (1) discovery of business opportunities via open innovation, (2) support for business generation through minor investment, and (3) M&A by KDDI itself, KDDI seeks to deepen connections and grow together with partner companies and increase the corporate value of the entire KDDI Group.

2. Financial Results for FY18.3

The consolidated operating income of fiscal year ended in March 2018 recorded 962.8 billion yen (5.5% increase year-on-year), with the contribution of the increase in mobile communications revenues and value-added ARPA revenues, and, in addition to those, increased earnings in the Business Services segment and Global Services segment.
In the domestic telecommunications business, the cumulative number of subscriptions to au Pitatto Plan and au Flat Plan, the new price plans launched last July, exceeded 7 million on April 8th. The au Pitatto Plan features a price setting that offers noticeably good deals to even low-volume data users, who are more likely to churn out to low-cost smartphones, and this has contributed to improving au churn rate (4Q au churn rate was 0.96%, which is a 0.11 point reduction in churn rate year-on-year). On the other hand, the au Flat Plan, which is suitable for customers using large-volume data, enjoyed a favorable selection rate [1] (a 17% increase from 24% as of July last year to 41% as of April this year), contributing as a factor of au ARPA increase. The effects of new price plans are still continuing.

• [1]

  Rate of customers who selected au Flat Plan out of customers selecting the new price plan

The mobile communications revenues, which is the sum of au ARPA revenues and MVNO revenues, continues to keep steady with an increase over previous term's performance. Positive MVNO revenues made up for the temporary decrease in au ARPA revenues impacted by the new price plans.
In gratitude of our shareholders' continued support, KDDI also worked on improving shareholder returns, specifically, planning for a dividend of 90 yen per share (5 yen increase year-on-year), acquiring own shares with 150 billion yen (50 billion yen increase year-on-year), and cancelling portion of treasury shares exceeding 5% of the total issued shares.

3. Financial Forecasts for FY19.3

For the fiscal year ending March, 2019, which is also the final year of our three-year medium-term plan, KDDI plans for a consolidated operating income of 1,020 billion yen, 620 billion yen of profit for the period attributable to owners of the parent, and an EPS of 257.75 yen (basic term income per share), aimed at achieving the growth target of CAGR 7% in consolidated operating income.
In the domestic telecommunications business, while a decrease in au ARPA (5,850 yen, a 60 yen decrease from the previous term) is forecast due to the temporary drop in revenue caused by introduction of the new price plans, and the improved au churn rate is expected to bring longer customer subscription periods (increase in lifetime value), so in the long run it is expected to contribute to increasing au ARPA revenues (au ARPA x number of au subscribers). On a quarterly basis, we can also expect improvement in au ARPA toward the latter period.
In the life design business, we expect an acceleration in the growth of Value-added ARPA (590 yen of fiscal year ended in March 2018, which is 15.7% increase year-on-year; 700 yen forcast of fiscal year ending in March 2019, which is 18.6% increase year-on-year). In addition to gross merchandize value of the au Economic Zone, which we are aiming "over-two trillion yen as of fiscal year ending in March 2019" in the medium-term plan, the newly published "au Economic Zone sales (Revenue from external customers of Life Design Services segment + revenue from education, energy and others of Personal Services segment)," and the "au Smart Pass Premium members" and "the number of au WALLET cards issued" that support the growth of these key indicators are all showing steady growth.
The operating income in the Business Services segment is forecast to be 93 billion yen, which is a 10.1% increase over the previous term. KDDI will continue to create business opportunities through the promotion of digital transformation leveraging new technologies such as IoT and 5G, as well as co-creating new value with customers and partners.
In the Global Services segment, we forecast continued growth in operating income (34 billion yen, a 6.6% increase year-on-year) mainly based on the promotion of mobile business in growing regions in Asia and data center business.
Finally, KDDI is aiming for 17 consecutive years of increase in dividends, specifically 100 yen dividend per share (payout ratio of 38.8%, a 10 yen increase year-on-year) as shareholder return. We have also resolved to repurchase our own shares up to aggregate amount of 150 billion yen and cancel portion of treasury shares exceeding 5% of the total issued shares.
KDDI will pursue further enhancement in corporate value through both sustainable profit growth and stronger shareholder returns.

• The improvement in churn rate seems to be clear. Tell us about the background, including the effects of life design services.

  

  The reduced churn rate is primarily due to the introduction of the new price plans. The churn rate in the last quarter of the fiscal year ended in March 2018 was particularly good compared with the previous year. While we cannot give our target figures for this term yet, we will strive to maintain this improvement trend. KDDI has already started promoting the integration of life design services with the telecommunications, and a clear reduction in churn rate among customers who subscribed to both au WALLET credit card and au Denki (electricity) is observed. We believe that, instead of simply shifting from being a telecom business to a life design service provider, we can create a new revenue-increasing effect by combining these. As such, we will continue to promote the integration of life design services.

• KDDI has announced a 150 billion yen acquisition of own shares and a dividend increase, which is a strong showing in terms of shareholder returns. I would like to know more about the new president's vision regarding shareholder returns.

  

  The amount of buyback was a topic of careful internal discussion. We recognized that how we implement this year's return has crucial meaning in the light of the 150 billion yen amount of buyback we carried out during the last term. We decided on the 150 billion yen amount of acquisition of own shares to showcase our attitude towards our shareholders. If the stock market welcomes this shareholder return this time, we would like to continue to promote our dialog with our shareholders build on that return.

• Would you explain the overall picture of the new price plans' impact on business performance, including the churn rate improvement, au ARPA increase from customers shifting to large-capacity data plans, and improvement in handset sales income?

  

  As effects directly attributable to the new price plans, the churn rate is moving toward measurable improvement and the handset sales income is improving thanks to the reduced service charge for handset sales. As for au ARPA, a drop in income is currently taking precedence due to customers' subscription to the new price plans proceeding faster than forecast. On the other hand, the ratio of subscription to the Flat Plan is gradually rising as well as customers' general data usage. Since the data usage volume of Pitatto Plan customers is also on an increasing trend, we are expecting au ARPA to recover toward the second half of this term. In total, we consider the introduction of the new price plans to be successful.

• How is the actual performance and effects of the strategic cost for the fiscal year ended in March 2018? Also, what are the prospects for the next fiscal year?

  

  KDDI invested a strategic cost of approximately 40 billion yen for the fiscal year ended in March 2018. The breakdown of the 40-billion yen strategic cost is 25 billion yen for improving retention, 6 billion yen for channel structure reform, and 9 billion yen for expanding the life design business. As for the effectiveness on improving retention, au STAR membership has exceeded 17 million as of March 25, demonstrating a trend leading to reduced churn rate. As for channel structure reform, we are seeing some effects in sales through increasing staff in shops, au sales-related events and so on as well as supporting the expansion of the UQ sales network.
  As for expanding our life design business, while Wowma! is in the process of growing, the promotion to increase member shops is steadily working to increase sales, contributing to the au Economic Zone gross merchandize value and the au Economic Zone sales. From the above, we consider the strategic cost to be adequate. While this year's strategic cost has not been disclosed yet, we hope that you see it to be of a similar scale to the previous year.

• How do the M&A performance and effects look and what are the prospects for the fiscal year ending in March 2019?

  

  As announced in our current medium-term target, we are implementing a 500 billion yen M&A over the three years, and so far have completed slightly more than 300 billion yen worth of M&A transactions. We are seeing 200 billion yen worth of M&A this year. Please note that the free cash flow includes this 200-billion yen investment for business growth. We would like to provide a summary of those effects upon the announcement of new medium-term plan next year.

• The au Economic Zone sales have been disclosed, but I would also like to know about major factors relating to sales growth, their breakdown, and their contribution to profit.

  

  The breakdown of au Economic Zone sales is not disclosed. However, KDDI does disclose the breakdown of the au Economic Zone gross merchandise value, the components being au WALLET settlement, au Carrier Billing, and Other, which includes commerce, energy, and education. All components are steadily expanding. The strategic cost is also used to expand the au Economic Zone gross merchandise value. The take rate will be around 30% like other companies. We hope to increase the au Economic Zone sales as well as the au Economic Zone gross merchandise value.
  For our life design segment, we want to develop businesses that can be stock models for energy and education areas. Rather than simply pursuing higher margins in individual services, we wish to focus on integrating these services with telecommunications to produce secondary effects like we saw in au Smart Value. To that end, we will look to stock model businesses.

• How do you see the competition from the perspective of life design business, along with the possible impact of Rakuten's entry to MNO?

  

  We assume Rakuten will be launching its MNO service in the autumn of 2019, and we will be prepared to take them on. Telecom networks, as a platform, are where competition can generate better services, and thus we accept Rakuten's entry positively. However, the frequency available to Rakuten is only a 1.7 GHz band (20 MHz x 2), which we see as being not so different from downlink speed of MVNO. Also, according to Rakuten's financial statements, its capital investment is around 500 billion yen. To operate as MNO, they will need to organize and develop their service areas, and even though we recognize that we are entering a competitive environment, business operation may be tough for Rakuten. In addition, KDDI has been turning out good outcomes since last year by our new MVNO-conscious price plans. We believe that we can compete well if we hammer out a strategy along the lines of this policy.
  As the positive aspect of Rakuten's entry into the MNO business, KDDI will receive external stimuli from the e-commerce giant and renew the recognition that the integration of telecom and life design is inevitable in order to compete against Rakuten, which will help the internal promotion of this process. While we think this will spur the integration of telecom and life design, we will also remain vigilant for the coming competition.

• What are the factors behind the capital expenditure in the fiscal year ended in March 2018 higher than the forecast at the beginning of the term? What are the reasons behind the forecast for the current term being higher than last year's performance? How is the investment plan for 5G, which KDDI is aiming to launch in 2020?

  

  The steady progress of construction to improve LTE quality and increase coverage for mobile telecommunications has led to a higher figure compared to the forecast as of the beginning of the last term. The capital expenditure for mobile telecommunications for the fiscal year ending in March 2019 should be around the same level. We are expecting an increase in capital expenditure for fixed-line telecommunications.
  Investment for 5G is aimed at service launch in 2020, but for the fiscal year ending in March 2019, the investment is primarily for R&D. We expect full-scale approach to start from the fiscal year ending in March 2020. Since 5G is a technology that is an extension of 4G LTE, there are many aspects where we can simply share existing facilities by developing software to support 5G. Therefore, we believe that 5G launch should not need extensive investment, but we will look into this in detail further.

• How does KDDI plan to make IoT profitable in the Personal Services and Business Services segments?

  

  Our representative IoT service in the Personal Services segment is au HOME. We are constantly advancing our services, and our subscriber base is also steadily growing. au Denki features a system with IoT where customers can clearly see how much power they used, which differentiates the service from competitors and is contributing to increasing the number of subscribers. We expect IoT in the Personal Services segment to gradually grow and increase revenue through delivering customer experience value by life design.
  As for IoT in the Business Services segment, KDDI has over 15 years of connected car operations in addition to significant growth in home security and electricity smart meters. We expect the IoT market in the near future to have drastically more communicating devices, which will increase telecom sales as well as significantly expand the range of value-added services around telecom. KDDI promotes the provision of such value-added services. IoT devices will be equipped with sensors to acquire and so on position, temperature, and humidity data. KDDI offers more than 2,000 kinds of sensors, including those provided by our partners. Furthermore, provision of added value can have infinite possibilities by accumulating data collected from those sensors, analyzing data, and combining multiple data sets. We believe this can lead to profitability. We are also aiming to be an enterprise that can provide IoT-added value by connecting Personal IoT, Business IoT, and life design on top of telecom services. KDDI has already recorded IoT sales of several ten billion yen, and aim to increase this to 100 billion yen within the next few years.