Performance Highlights and Q&A for the First Half of the Fiscal Year Ending March 2019

The Presentation of the Financial Results

In the presentation of the financial results, President Takahashi described four points; "Highlights of Financial Results for the 1st Half", "Domestic Telecommunications Business", "New Fields of Growth" and "Sustainabilty".

1. Highlights of Financial Results for the 1st Half

Consolidated sales for the first half of the fiscal year ending March 2019 (April to September 2018) increased by 1.9% YoY to 2,462.3 billion yen.
For consolidated operating income, even though mobile communications revenue fell due to lowered tariff of new price plans, increase of value-added ARPA revenues together with the Business and Global Services segments, resulted in 561.2 billion yen, up 3.4% YoY.For the consolidated operating income in the annual plan, this represents steady progress at 55.5% of the target.

2. Domestic Telecommunications Business

In the Japanese telecommunications business, we have been revising the previous price plans designed for customer needs. Due to a favorable response from customers to the "au Pitatto Plan" and the "au Flat Plan" introduced in July of 2017 as plans for separating communications fee and handsets, the number of subscriptions exceeded 10 million as of September 2018. Going forward, we aim to achieve sustainable growth by providing new forms of experience value to customers through the "Integration of Telecommunications and Life Design" centering on the "telecommunications", our infrastructure business as a core, together with provision of the optimal plans according to customer usage conditions.

3. New Fields of Growth

The Life Design Business is progressing smoothly with the au Economic Zone gross merchandise value reaching ¥608 billion in the second quarter, the total for the first half of the year at ¥1.168 trillion, and the full-year target at ¥2.46 trillion. In addition, the au Economic Zone sales was ¥167 billion in the second quarter (up 28.5% YoY), and the value-added ARPA was ¥690 (up 21.1% YoY) to post double-digit year on year growth for both results. The Life Design Business provides various services including energy, commerce, entertainment, and settlement services with the goal of (1) improving retention by increasing the level of customer satisfaction, (2) strengthening touchpoints with the customers, and (3) expanding the base of stable revenues by promoting customers to use telecommunications and non-telecommunications services together.

Furthermore, as the market environment and services are changing sharply due to technological advances, we announced a new framework of "cooperation and competition" in which we simultaneously cooperate and compete with Rakuten. The primary initiative involves both companies "utilizing each other's assets" with KDDI providing the telecommunications network and roaming to Rakuten while KDDI uses the payment and distribution platforms owned by Rakuten. This initiative enables more efficient infrastructure development in each layer and allows KDDI to accelerate the expansion of the au Economic Zone and the growth of value-added ARPA.

The creation of new forms of experience value is an important theme for KDDI as the digital transformation accelerates within IoT, which is another growth area. We established "KDDI DIGITAL GATE" in September as a base for developing new forms of experience value through innovation, with customers starting new IoT businesses.
In the field of mobility, we are launching initiatives with many partner companies beginning with Toyota Motor Corporation, and we are working hard to create safe, reliable, and exciting services by adding value through KDDI assets and capabilities in self-driving and big data utilization initiatives.
For the official launch of 5G services in 2020, we are promoting the roll out of service areas covering the Olympic and Paralympic venues and surrounding areas to meet the needs of local governments and partners with the goal of solving regional challenges and contributing to regional revitalization, through new 5G services.

4. Sustainabilty

The construction of a safer and more resilient connected world is our top priority. During the Hokkaido Eastern Iburi earthquake, the "KDDI Ocean Link" was dispatched to the disaster area to maintain the telecommunications infrastructure through an ship-mounted base station while ferrying emergency supplies to assist the disaster response.

Furthermore, in October we established a partnership with KCJ Group, the operator of KidZania, to jointly promote "learning while having fun = edutainment" by combining KDDI's 5G and IoT technologies.

In addition, KDDI was selected consecutively this fiscal year for inclusion in several ESG-related composite stock indexes. KDDI was selected for multiple indexes including the MSCI World Women's Leadership Index by MSCI in the U.S., the global and Japan indexes by FTSE, and the "S&P 500 Carbon Efficient Index" global environmental stock index in September. Going forward, we will continue to improve the corporate value for medium to long-term.

• What advantages does the recent tie-up with Rakuten provide to KDDI? For example, will unifying the businesses by linking and integrating points and IDs to advance the business prove to be an advantage?

  

  This tie-up is based on the concept of cooperation and competition and is divided into the areas of roaming and settlement/logistics.
  First, while we were concerned about providing roaming, for which we believed that Rakuten also asked DoCoMo and SoftBank, we reached an agreement as a result of serious negotiations. Even if we refused to provide roaming, we believed that one of the mobile network operators (MNO) would accept roaming because of the fundamental national policy position of introducing a fourth carrier as an axis of competition for the three existing MNOs including KDDI. In that case, we believed that there was an advantage to accepting roaming under a fixed set of conditions.
  In addition, because the roaming will not be provided in congested areas, significant additional investment is not needed, and we believed that it would be possible to receive roaming income, which would be an advantage for continuous, medium-term growth.
  Moreover, Rakuten will cooperate with us in developing affiliated stores and on the logistics side, which are behind schedule, for the "au Pay" service that we are trying to deploy, thus we hope to produce a mutually satisfying result.
  That is the extent of the tie-up as for today, but because we have established a good relationship with Rakuten, we would like to leave every possibility open for the future.

• A new mid-term plan is scheduled to be announced next year, but the environment in the telecommunications industry that the plan will be based on is significantly changing. Rakuten is expected to enter the market in October 2019 with an inexpensive price plan, and NTT DoCoMo announced that they will release a new price plan in the first quarter of 2019. Given this situation, how do you view the competitive environment in the telecommunications industry that the new mid-term plan will be based on?
  I would like you to also tell us what direction you are considering for the price plans.

  

  We believe that the ¥400 billion fee reduction explained by NTT DoCoMo at yesterday's announcement of financial results would be basically an explanation of the separation plan introduction.
  KDDI already introduced a separation plan a year and a half ago in accordance with the guidelines to prohibit excessive incentives for handsets. As a result, it is our understanding that over ¥300 billion was saved and returned on to customers. In this regard, we see KDDI as the lead runner, and NTT DoCoMo is the last carrier to introduce a separation plan.
  Currently we are formulating the next three-year mid-term plan from 2019, but continuous growth is the fundamental policy. We believe that cannot invest in 5G firstly, engage in regional revitalization, provide returns to shareholders, and returns to customers, without continuous growth. With regard to the price plan, because NTT DoCoMo did not make a detailed announcement we cannot respond to your question about the price level for the time being, but we will continue to grow by strengthening the company through promoting cost reductions while watching the changes in the competitive environment.

• Regarding the provision of roaming agreement, when looking at Rakuten's set up plan, it seems that it is quite difficult to build out their own areas. KDDI announced that they will provide coverage for the entire country with the exception of the 23 wards of Tokyo, Nagoya-shi, Osaka-shi, and other congested areas, but would KDDI cooperate with Rakuten if they requested that roaming be provided in such areas depending on the conditions?

  

  That depends on future negotiations, but our basic stance is that because Rakuten is entering the market as an MNO, we believe that they should at the very least build out the 23 wards of Tokyo, Nagoya, Osaka, etc. on their own. Roaming in such areas also concerns their reason for existence as an MNO, so for our part we would like to cooperate with them in regard to the details announced.

• The recent NTT DoCoMo announcement seems to be a more detailed one saying that they are lowering the total fees and device payments, but does the current KDDI separation plan meet the government's requirements?

  

  The government requirements started with guidelines to curb excessive incentives in 2016. In accordance with these guidelines, we introduced the au Pitatto Plan and Flat Plan as plans to fundamentally separate the device and communication fees and provide a roughly 30% fee reduction to customers. Based on the guidelines, while curbing device incentives, we have worked to increase profits as a private-sector company. In reality, it is difficult to just curb device incentives, and we have also secured profit combining cost reductions and MVNO revenues. Because this plan itself is being implemented according to the guidelines, we believe that it will not be denied by the government. We can't say anything about NTT DoCoMo's fee reduction at the current time, but the introduction of the separation plan implies that they will not be providing the same sizable incentives as so far. However, we believe that it is management's responsibility to steadily make continuous growth while focusing on the new price plan to be announced by DoCoMo next year.

• During the presentation, President Takahashi touched on facility sharing for the introduction of 5G, but I would like you for some supplement the discussion based on the cost reduction effects.

  

  Previously, we were in an era of facility-based competition, but going forward we will enter a phase of competition based on building a solid platform and creating new businesses with many partners. In that sense, we see our network as something which is not built just by KDDI. In particular, when it comes to high frequencies, a lot of optical fiber is required, and we need to borrow NTT's bottleneck facilities. We believe that sharing with multiple parties enables us to efficiently build facilities.
  The current provision of roaming to Rakuten does not cover congested areas. Therefore, it requires almost no additional investment, and we can receive roaming revenues.

• Looking at just the three months for the second quarter, sales in the Global Services segment decreased in profits, so I would like you to provide a supplemental explanation.

  

  The adjustment of the accounting period for the Myanmar business was a special factor during the first quarter. The reason why profits appear to decrease in the second quarter is primarily due to the impact of the exchange rate. In particular, this is due to the impact of the exchange rate between the Myanmar Kyat and the U.S. Dollar, and if that is excluded, it actually represents a year-on-year increase in profits.

• Regarding the IoT World Architecture, I understand the outline, but I would like you to report on the interim progress in aiming for a sales volume of ¥100 billion over three to four years.

  

  As of today, domestic Japanese sales are the main focus. However, the plan aims for sales of ¥100 billion by expanding the IoT World Architecture to connect to overseas IoT devices several years. In fact, the overseas growth will mainly accelerate the efforts within the automobile industry. Going forward, the increase in the number of IoT connections leading up towards FY2021 is expected to surpass the domestic market speed of increase.

• I would like you to tell us about the tie-up with the startup company SORACOM and the results.

  

  We are working with SORACOM in both areas where they can grow independently and areas of our IoT World Architecture where they can actively participate. For example, we can implement roaming connections to the area possessed by SORACOM, which consists of 120 countries around the world, within the IoT World Architecture. Starting with such efforts, we believe that expansion of its own infrastructure construction and targeting their own business growth of SORACOM is an interesting pursuit. We will continue to grow the SORACOM business and integrate it with our network.

• NTT DoCoMo announced customer returns of ¥400 billion, but what is the reduction amount of the KDDI separation plan?

  

  The breakdown of the more than ¥300 billion returns amount mentioned includes the reduction from the separation plan and returns by au STAR, but we are counting the amount from the time of launch of the au Pitatto Plan and Flat Plan until the end of the current term.

• While some articles state that President Takahashi is positive toward price reductions, other articles state that the company won't follow in that direction, so the situation seems a bit difficult to understand. Will any price plan be introduced in response to the roughly ¥400 billion yen returns for customers announced by DoCoMo?

  

  It is clear that NTT DoCoMo is revising their price plan and Rakuten will enter the market as an MNO, and I cannot say that KDDI will never take any action in the future.
  In formulating the next mid-term plan KDDI, as a private-sector company, possess a strong desire to continuously grow by somehow securing an increase in sales and profits putting our heads together. We are forecasting an operating income for the fiscal year ending March 2019 of ¥1.02 trillion, but we believe that it is our mission to figure out how to return that on to society.
  We recognize that there are various ways for returns. In addition to continuing the amazing quality of Japanese telecommunications services up until now, investments in 5G will also play a major role in regional revitalization. Moreover, as we announce investments in anticipation of the next generation such as KidZania, returns to shareholders, and the need to lower fees for the customers, the impression is that the news media is only picking up on the phrase "returns for customers," and fundamentally we would like to approach the next mid-term plan from such a position.

• The au churn rate has dropped significantly, but I would like you to explain if there has been some change in the competitive environment such as a slight easing in the competition with MVNOs and sub-brands, for example, or if we are seeing the result of the life design strategy that KDDI is pursuing.

  

  While there are changes in the competitive environment, we can basically say that the impact of the new price plan, au STAR, and other long-term preferential treatment is significant. One more factor is the integration between telecommunications and life design. Using multiple services has the effect of increasing the level of satisfaction and strengthening customer engagement and it can be said that the effect is gradually spreading.

• What is behind the improvement in momentum in the Business Services segment?

  

  The operating income for the current fiscal year is forecasted to be ¥93 billion and steadily changing. Though there are no significant trend changes compared to previous years, the data center, solutions, and network businesses are all running smoothly, and in addition the subsidiaries such as CTC and KDDI Matomete Office Corporation are steadily contributing to profits and seem to be boosting the total results.