Performance Highlights and Q&A for the First Half of the Fiscal Year Ending March 2020

The Presentation of the Financial Results

At the Financial result Presentation Meeting, the three topics discussed by President Takahashi were the first-half financial results highlights, ID x ARPA x engagement, and growth fields.

1. First-half financial results highlights

In the first half (April to September 2019) of the fiscal year ending March 2020, the consolidated operating revenue was ¥2,564.5 billion, which is a 49.3% progress rate with respect to the full-year target. Similarly, the consolidated operating income was ¥553.4 billion, which is a 54.3% progress rate with respect to the full-year target. Although there was an income decrease in 1Q of the current fiscal year, it rebounded and became an income increase in 2Q, so that steady progress is being made toward the full-year target.

The income increase in the life design domain and business segment, which are growth fields, contributed greatly to the consolidated operating income, and the size of the increase between 1Q and 2Q also expanded. On the other hand, there was a ¥7.8 billion income decrease in the first half as a result of effects such as the increased intensity in the competitive environment, the increase in handset sales costs due to the migration of 3G users to 4G, the change in the accounting period for the Myanmar business in the previous period, and the accelerated depreciation of 3G equipment.

In the life design domain, factors such as the increase in the number of au Denki subscribers and the increase in the proportion attributable to au Smart Pass Premium made a positive contribution. With an operating revenue of ¥584 billion, which was a year-on-year increase of 38.4%, and an operating income of ¥87 billion, which was a 27.9% year-on-year increase, there was double-digit growth in both sales and profits.

In the business segment, the existing businesses of mobile and fixed-line communications expanded, as did the growth fields such as IoT. The operating revenue saw a 4.3% year-on-year increase to ¥451 billion, and operating income saw a double-digit year-on-year increase of 29.5%, to ¥82.6 billion.

2. ID x ARPA x engagement

KDDI is aiming to maximize lifetime value through ID x ARPA x engagement.

Regarding IDs, there was solid growth in the number of group MVNO subscriptions, and the number of mobile IDs grew steadily to 27.09 million at the end of September. By satisfying the needs of price-conscious customers in the group MVNOs, which have diverse sales channels and customer layers, as well as by offering a wide range of au price plans for customers who wish to use high-capacity data communications without stress, KDDI will continue to expand the number of IDs for the entire group.

All of the constituent elements of the ARPA saw year-on-year growth, so that the total ARPA of 2Q was ¥7,770, which was a 4.3% year-on-year increase. Total ARPA revenues also grew steadily to ¥569.4 billion, which was a 3.6% year-on-year increase.

3. Growth fields

(1) Finance business
The number of au PAY subscribers has surpassed 6 million within the first six months since launch. When these subscribers are combined with our credit card and prepaid card members, our payment platform has more than 33 million users. Moving forward, KDDI will provide financial products that support customers in various stages of life by using the smartphone as the touch point for point balances and our payment platform, which is based on our core business of communications. By doing so, KDDI aims to establish the finance business as a pillar for creating new profit.

(2) au Smart Pass Premium
By focusing on up-selling from au Smart Pass, the number of subscribers increased to 8.51 million at the end of September. With the launch of 5G in March 2020, we are planning to deliver immersive digital content that uses XR technology, 4K video, and smart devices, and further expand the number of subscribers and increase the total ARPA growth.

(3) IoT
The IoT market in Japan is expected to experience 1.8 times growth over the next six years. The KDDI Group has many capabilities that can provide customers with one-stop access to IoT solutions, from data collection to usage, and we aim to grow IoT business that leverages the overall strength of the group to improve market growth.

(4) KDDI DIGITAL GATE
Since the establishment of KDDI DIGITAL GATE in September 2018 as a base for business development in the era of 5G and IoT, it has been used by over 250 companies. In an environment with expanding needs, new bases were established this September in Osaka and Okinawa. Moving forward, we will continue to accelerate collaboration aimed at achieving the digital transformation of customers in a variety of industries and business categories.

(5) 5G
KDDI is planning to launch 5G services in the spring of 2020 by combining special 5G with our brilliant 4G that has been refined over many years. Our plan is to have over 50,000 5G base stations, which is the most in Japan, by the end of March 2024. We are conducting trial tests involving infrastructure sharing with SoftBank, and we are aiming to effectively and rapidly establish base stations and construct resilient networks.

With 5G, we are aiming to improve the customer experience value. For individual customers, we will deliver entirely new experiences by providing Japan's first unlimited data plan and augmenting the customer experience. For corporate customers, we will begin providing 5G-compatible solutions that combine 5G with high-resolution video, AI, and other technologies, on a trial basis starting in November. As we move into the 5G era where communications will be integrated into all things, we will continue striving to provide new experience value.

• You have started to achieve rather significant profits in the life design domain and business segment. The fact that growth has started to occur in these two areas, which have been designated as growth fields in the medium-term management plan, is a very encouraging sign. Could you provide more specific details about the factors leading to this profit growth? For example, can you explain the contributions by each service? Also, is it safe to assume that the trend of increasing profit will continue in and after 3Q?

  

  A major driver of growth in the life design domain is the increasing number of au Denki subscribers. In addition, the number of au Smart Pass Premium subscribers increased to 8.51 million. Since this is a service with a high profit ratio, it contributed to the profit growth.
  Moving forward, we believe that au Denki, au Smart Pass Premium, and the payment and financial services will be drivers of growth for achieving the ¥1,500 billion revenue target that has been set for the fiscal year ending March 2022 in the medium-term management plan. You can expect au Denki and au Smart Pass Premium to continue the same level of growth. Payment and financial services are expected to start growing soon, but since we are now in the process of increasing the number of active users, it may take a little more time to achieve growth.
  In the business segment, the two broad categories are the existing businesses of mobile and fixed-line communications, and the growth fields typified by IoT. In the existing businesses, there is steady growth in the figures for both mobile and fixed-line communications, and profits are growing due to the improvement in the ARPU for communications. In addition, with the progress in digital transformation due to our approach toward digitization for corporate customers, the number of IoT connections is increasing. The target of 10 million total IoT connections, which was set for the end of this fiscal year, is expected to be reached in 3Q. With the further growth of IoT moving forward, we expect to expand the surrounding services.
  Furthermore, in the breakdown of the total ARPA, the growth of the au Denki portion is affected by seasonal factors. Since electricity is significantly affected by seasonal factors, we have decided to verbally disclose this information each time, starting now. There was an income decrease in 1Q, but the income increase returned in 2Q. Moving forward, we aim to achieve the full-year operating income target of ¥1,020 billion.

• If we think in terms of the former personal segment, there was a slight income decrease in 2Q, but factors such as increased competition before the introduction of new guidelines for handset sales had the effect of increasing handset sales along with the sales costs. Isn't it true that, in reality, there was a greater increase in income than the figures suggest? Following the introduction of the new guidelines in October, what is the forecast for income in the future?

  

  There was high market fluidity, particularly in September, due to last-minute demand in advance of the revisions to the Telecommunications Business Act in 2Q and before the sales tax increase. As a result, handset sales costs increased. There was also significant progress in the shift from 3G to 4G, so these costs also increased. However, these situations went mostly as we anticipated. Moving forward, the entire KDDI Group will continue striving to increase the number of IDs and improve the total ARPA.

• Regarding the convoluted factors such as temporary costs that were explained in the 1Q financial result, could you go back and describe the trend lines?

  

  As described on page 3 of the presentation, the temporary effects were ¥17.6 billion in the first half. The changes to the accounting period for Myanmar only affected 1Q. The accelerated depreciation due to the termination of 3G had the same effects on both 1Q and 2Q. Since this began in November of 2018, the year-on-year effects were visible through the first half of this fiscal year. Also, although this is not explained in the document, following the devaluation of some handsets in 1Q, the costs were returned in 2Q. As a result, 2Q improved in comparison to 1Q. Unfortunately, I am not able to cover each and every item in the financial breakdown.

• Although the market activity since October has been as anticipated, could you provide a more detailed description of the situation in October regarding the direction and competition for customers with respect to factors such as the KPI, increased subscriptions, and cancellations?

  

  It was suggested that all went as anticipated, but in October there was a particularly significant decrease in the fluidity between MNOs. On the other hand, there are still a certain number of customers who demand lower prices and are switching to MVNOs, but they will be captured by UQ and BIGLOBE in the KDDI Group. Regarding model changes, there were no significant changes in the situation.

• KDDI is shifting away from the previous business model of selling handset models at shops, toward one of selling services that are associated with daily life. However, it seems that the income from au Denki is small. Could you explain how you plan to improve the profitability?

  

  The low profit ratio that is structured for au Denki has not changed. However, by increasing the number of subscribers, we have increased revenue and steadily gained income as a result.

• Regarding the ¥100 billion cost reduction target set for the fiscal year ending March 2022, how do you expect to reduce costs for the next two years, amid the coming launch of 5G?

  

  We are now pursuing serious efforts to reduce costs in network equipment and sales, but we do not intend to achieve the entire ¥100 billion through cost reductions. In addition to cost reductions, we are also considering how to achieve a certain portion of the target by creating profit through new business. The forecast for approximately 70 to 80% of the ¥100 billion target has been decided.

• So, is it appropriate to assume that the three ways to achieve this are to decrease the network-related costs, decrease the promotional costs, and increase the income through new business?

  

  That is how we are approaching it. In the medium-term management plan, the operating revenue target for the life design domain is ¥1,500 billion, and the operating revenue target for the business segment is ¥1,000 billion. In addition, we would like to implement improvements so that 30 to 40% of the ¥100 billion is achieved through the generation of new business.

• In the business segment in 2Q, there was an approximately ¥13 billion increase in income for the approximately ¥15 billion increase in revenue, which is an extremely high profit ratio. In the explanation of the income increase for the business segment described on page 5 of the presentation, President Takahashi mentioned controlling the operation costs. Could you provide specific details? In addition, the second-half plan for the business segment anticipates a 15% year-on-year decrease in income. Is this because there is some risk involved?

  

  The growth of existing businesses, which make up 60% of the business segment, is gradual, and income is achieved by controlling costs. For example, there are efforts to reduce fixed procurement costs. In the second half, we will maintain the current income level, but would like to direct more spending to IoT of the growth field, which is why the plan calls for some control.

• I would like to ask about the overall roadmap for 5G on page 15 of the presentation. Have there been any changes to the timeline for the launch of standalone (SA) networks, which is scheduled for the middle of the fiscal year ending March 2021? Also, considering that the investments for this will come in the first half of the fiscal year ending March 2021, how will it affect the equipment investments in the next fiscal year? Finally, could you provide a broad overview of the type of businesses that are being anticipated for SA?

  

  We are making steady progress toward the launch of 5G service according to plan, which is scheduled for March 2020. As for the SA launch period, the forecast is based on the schedule for the core equipment standardization, so as long as the standardization is not delayed, the schedule will proceed in line with the roadmap. Regarding the investment amount, the medium-term management plan calls for a flat amount of approximately ¥610 billion. Toward that end, we are considering the implementation of all sorts of cost reduction measures, and we are looking at infrastructure sharing with SoftBank and various other types of collaborative efforts to reduce costs, as we aim to keep equipment investments down to the target level. Also, we are now beginning the process of considering the details of SA services. Basically, we are looking forward to the development of network slicing and MEC technology, and we are proceeding with discussions on how these technologies can be used.

• I understand that after the devaluation of handsets in 1Q, sales of those handsets were resumed. What effect did this have on the income in 2Q? Also, if the income was recovered, which segment did it contribute to -- the business segment or the personal segment?

  

  The income was mostly recovered, and it contributed to the personal segment.

• In the life design domain, there was an approximately ¥80 billion year-on-year increase in revenue in 1Q and 2Q. In comparison, the income increased by ¥5 billion in 1Q, and approximately ¥14 billion in 2Q. Why was the income increase so much larger in 2Q?

  

  In terms of the revenue, the amounts from au Denki and au Smart Pass are large, but there was also a large increase in revenue from payment and financial services. As for the income, au Denki and au Smart Pass experienced further growth in this period.
  Furthermore, revenue from both Eneres and the KDDI side are included in the au Denki revenue, which makes it appear slightly larger.

• There was a comment that the au Denki ARPA part of the total ARPA would be disclosed, but what is the amount? Also, what is the amount for value-added ARPA?

  

  The au Denki ARPA was disclosed verbally. It was ¥490 in 1Q of this year, and ¥690 in 2Q. The value-added ARPA is not disclosed.

• Regarding the global communications platform (GCP), could you provide an update on the development schedule and the current status? Also, if you have any specific case examples of cooperation with Hitachi or Toshiba, could you describe them?

  

  Broadly speaking, the two categories are automotive and non-automotive. The automotive category began in the first half. The figures will improve in the second half, and they will grow internationally as well. In the non-automotive category, there are plans to launch services with Hitachi and Toshiba in the second half.

• Will the system be implemented in Toyota vehicles? Also, what is the financial scale?

  

  Yes, it will be implemented in Toyota vehicles. As for the amount, the unit price is low, but the volume overseas is much larger than in Japan, so the amount will grow. The specific amounts are not disclosed.

• Now that there are no longer any temporary factors contributing to the income decrease, the trend in the second half will improve. However, could you explain why the full-year forecast has not been revised upward?

  

  We have only just finished October, and the market had many moving parts through September. The effects of the revisions to the Telecommunications Business Act have calmed down, so we will make our assessments after carefully considering the situation moving forward. We will meet the ¥1,020 billion full-year forecast for the operating income. I would like to discuss this situation again in 3Q.

• Does "carefully" mean that you are also considering marketing costs?

  

  It means that we will incorporate activities that are required as we move forward, such as the migration of 3G users to 4G, 5G promotion, and payment promotion.

• When the current fluidity calms down, do you expect there to be any indirect effects on the life design services?

  

  Since we are increasing the engagement in life design by incorporating the use of recurring services, we are expecting to reduce the churn rate.

• I understand that you expect to reach the full-year target for income growth. If so, considering Rakuten's market entry next fiscal year, will you undertake additional spending this fiscal year or set aside any income?

  

  The circumstances are extremely fluid, so we would like to see the situation in 3Q before making the assessments.