Performance Highlights and Q&A for the First Half of the Fiscal Year Ending March 2021

The Presentation of the Financial Results

At the financial results meeting, President Takahashi described four points: "5G for Everyone," "Multi-Brand Strategy," "KDDI Accelerate 5.0," and "Aiming to Expand Growth Fields and Achieve Medium-Term Targets."

1. 5G for Everyone

As announced previously, au will roll out a broad lineup ranging from high-end to middle-range models, with all models supporting 5G. A new 5G-compatible iPhone has also launched, showing steady sales.
au will accelerate area expansion for 5G, utilizing existing frequencies. About 10,000 5G stations are to be opened by March 2021, and about 50,000 by March 2022, aiming to cover 90% of the entire population. Furthermore, all 47 prefectures are scheduled to be covered by the end of December 2020. In terms of frequencies, we want to expand into the new 28GHz, 3.7GHz and 4.0GHz bands with extremely high frequencies, and achieve 5G capability with 700MHz, 1.7GHz and other existing bands as soon as possible, to expand our area.
As for pricing plans, we have expanded the unlimited data plan for users to fully enjoy 5G. With Data MAX 5G as a base, we have bundled services like the Netflix Pack, Television Pack and ALL STAR Pack. We will also launch the Students Discount, expanding eligibility to customers 29 years old or under as the bundled services are popular with this age group.
We will also promote the au 5G Experience, realized by the strength of unlimited data plans and a wide 5G area. The new 5G iPhone carries a feature that automatically identifies if it is in a 5G area. For example, customers on an unlimited data plan can enjoy new value as their handsets automatically switch to full HD in a 5G area.

2. Multi-Brand Strategy

The Multi-Brand Strategy involves the entire Group working to meet a wide range of customer needs. The au brand will offer 5G-based unlimited data services for additional comfort. UQ mobile will serve as a simple and affordable brand with a new 20GB plan, and BIGLOBE mobile, J:COM MOBILE and the DX new brand will offer unique services. We have diverse price plans to accommodate diverse customer needs.
UQ mobile will offer price plans with high quality services that are comparable to international price levels. The 20GB SUMAHO Plan V will be 3,980 yen, and bundled with a call option it will be 4,480 yen with up to 60 minutes of calls. This is equivalent to New York and Seoul that offer similar plans with high quality like Japan.
The new DX brand will offer a new UX for digital natives. Together with Singapore-based Circles Life, it will have simpler and faster procedures, it will be fully online using eSIMs, and customers can customize fees as they like. In November 2020 a new MVNO company KDDI Digital Life will be established. The brand name will be announced at a later date.
To summarize the multi-brand strategy, we will enhance our ID base and promote further up-selling. First, using au, UQ mobile and the Group MVNO, we will prevent au users from flowing to non-Group providers. Second, we will acquire new users by offering an attractive lineup from each brand. Third, we will enhance up-selling from UQ mobile and the Group MVNO to au, enhancing ARPU as a group. Since the UQ mobile integration in October, up-selling from UQ mobile to au has been successful, over 3.5 times during a two-week period in October year on year.

3. KDDI Accelerate 5.0

Aiming to realize Society 5.0, we set up KDDI Accelerate 5.0 for 2030 and released it in August. Society 5.0 is an initiative that aims for a sustainable society as proposed by the government, and it seeks to achieve an enriched society by merging physical society with virtual space. It aims to bring a circulated society by collecting data in physical space, analyzing it in cyber space with AI, and then feeding the results back to the physical space to improve it. We consider 5G to constitute the foundation for this idea, and KDDI Accelerate 5.0 embodies a message to accelerate Society 5.0 with the power of 5G. To accelerate Society 5.0 through 7 technologies and 3 layers centering on 5G, we are pursuing research with KDDI Research. We have launched and will engage in a joint research project with prominent overseas universities and researchers in the fields of AI and wireless communication.
In initiatives for KDDI Accelerate 5.0 we have launched the KDDI 5G Business Co-Creating Alliance with partnered companies to drive DX in the 5G era. We will also link 3 sites in the Toranomon area to bring new business development. These sites are the corporate sales division to support clients' DX, KDDI DIGITAL GATE which is our business development hub, and in December we will open the KDDI research atelier which will engage in applied research and development. These three locations will work together to pursue DX.
In the business and capital alliance with Toyota announced today, we will strengthen our partnership for a society where towns, homes, people and cars are all connected. Up until now we were partnering to offer connected car services at home and abroad, but now we are going to develop this further and launch new initiatives that go beyond the "mobility" and "telecommunications." Together, we will work on R&D for a telecommunication platform, operational and management systems for next-generation connected cars, services and platforms that pursue safety and security, and in solving social issues with big data.

4. Expanding Growth Fields and Achieving Medium-Term Goals

In the first half of the fiscal year's consolidated sales, operating revenue was 2,537.2 billion yen, down 1.1% year on year. This was affected by a drop in device sales but we will strengthen sales toward the second half of the year, centering on 5G. Meanwhile, the second quarter saw expansion in the Life Design Domain and Business Services Segment, both growth fields.
Operating income was 588.8 billion yen, up 6.4% year on year driven by growth fields. We will aim to expand the growth fields to achieve the medium-term management plan targets.
Consolidated operating income in the first half of the fiscal year was up 35.4 billion yen year on year, largely due to the growth fields (the Life Design Domain and Business Services Segment) accounting for 30.9 billion yen. In the Personal Services Segment, mobile telecommunication revenue from au and the Group MVNO dropped below that of the previous year. In "Others," income was up 6 billion yen due to temporary effects such as the lower au device sales cost and lower gross profit from device sales. We will strengthen our activities toward the next term and aim to meet the original forecast by expanding growth fields to cancel out the effects of lowered telecommunication fees.
In the growth fields that underpin consolidated performance, the operating revenue of the Life Design Domain was 603 billion yen in the first half of the year, up 46.7%, and 476.2 billion yen in the Business Services Segment, up 50.1%. Both are progressing steadily toward meeting the medium-term management plan targets.
As for shareholder returns, we have resolved to repurchase up to 200 billion yen of our own shares.
We will aim to achieve the medium-term targets by pursuing 5G and growth fields.

• In the three months of the second quarter, the operating profit from the Life Design Domain was 60 billion yen, a significant leap from 48 billion yen from the second quarter of the previous fiscal year. What pushed up the profit? And please explain future prospects, citing concrete examples in services.

  

  The energy business was a significant contributor. More customers are using it, resulting in more revenue and income. Our added-value service au Smart Pass is also growing. Members of au Smart Pass Premium account for 67% of au Smart Pass members, up 12 points year on year, which is another contributing factor. Furthermore, transaction volume of settlement/loan reached over 4 trillion yen in the first half of the fiscal year. Repair and warranty services are also growing. In this way, almost all services are growing.
  With respect to future prospects, we would like to maintain in the second half of the year these good results from the first half. The targets set at the beginning of the fiscal year are most likely easy to achieve.

• UQ mobile has announced a 20GB plan but the stock market is concerned about further push from the government. President Takahashi, can you please comment on this issue?

  

  The Ministry of Internal Affairs and Communications has released an action plan, which states the prices should be level with those abroad. I thought for some time about how to meet the action plan. I considered that it would be difficult to cater to diverse customers with just one brand, and I opted for a multi-brand strategy instead of taking a main and sub brand strategy. The au brand will specialize in 5G with unlimited data usage, and will also be bundled with more services. Meanwhile, UQ mobile is simple and easy to understand. That is why I reached the conclusion that it is best to create a plan that matches international standards with UQ mobile. Customers look at UQ mobile positively because the plans are very easy to understand at 1,980 yen and 2,980 yen, and this was another reason why I decided to use UQ mobile here.
  With respect to developments after we announced the price plans, I watched the press conference by the Minister of Internal Affairs and Communications and felt that our prices announced ahead of others were seen positively. The minister also commented that providers had gone to great lengths to offer a whole range of prices, similar to Adjust Plans and MVNO with KDDI, and that this offers a chance for users to reevaluate their plan. I feel our plans have been accepted this time and are suitable with respect to global standards as well.
  I can understand that customers may be concerned about NTT Docomo's plans because NTT Docomo is in the middle of a TOB and it is uncertain what steps the company will take. However, in my own opinion, NTT Docomo's pricing strategy and KDDI's strategy are two different things, unlike how the situation was before. We offer a wide range of prices to diverse customers under a different strategy from NTT Docomo. So, even if NTT Docomo launches a 20GB plan from its main brand we will not instantly follow in their footsteps with au. Right now it is not just about prices, so we should pay attention to every aspect and be ready.

• I would like to talk about the impact of the 20GB plan. I believe there are two main points here: not all au customers need unlimited plans so some au customers will switch to it, and UQ mobile can meanwhile gain new customers because of improved competitiveness. On the whole, how do you see the migration from au to UQ mobile and UQ mobile acquiring new users?

  

  The new UQ mobile prices are simple and easy to understand. Obviously, we need to bear in mind that some au customers will switch to such plans. Meanwhile, as you have just said, while we try to acquire new customers, some UQ mobile SUMAHO Plan S and SUMAHO Plan R users may switch to SUMAHO Plan V. For au, 5G is the main product so we are considering services that will be attractive for 5G users such as au Wide Student Discount, thereby aiming for up-sells from UQ mobile and MVNO. We will look at the balance of matters as a whole and aim to raise ARPU as a Group.

• How will the devices, services, network speed and stores change with UQ mobile from October? And will the new MVNO be exceptionally low-price?

  

  From October 1 onward, UQ mobile employees became KDDI employees. They are highly motivated as UQ mobile is now positioned as another main brand.
  With respect to services, we want to promote the two main brands, with au focusing on 5G and unlimited plans that users can use comfortably, while UQ mobile will appeal to customers as a simple and reasonably priced brand. There is a difference between these services as UQ mobile is 4G. I feel that we have also set up suitably different pricing structures for the two brands, with au being unlimited and UQ mobile otherwise. With respect to models, au features models like iPhone 12 and iPhone 12 Pro as you are aware, and UQ mobile offers reasonably priced models. However other value-added services are made available for both as much as possible for user friendliness. The same goes for the support structure. There is a difference between au and UQ mobile in terms of networks, pricing and devices, but we would like to make everything else available in both brands as much as we can so that customers can enjoy convenience.
  With respect to UQ mobile stores, we want to increase the number of UQ spots from the current figure of 190. There are 22 KDDI-owned stores across Japan, and they have started offering the UQ mobile as well. We need to think about how to move forward from there. Mass retailers have both au and UQ sales staff and we are training them so that they will be able to talk about both, to improve efficiency.
  We have not thought about pricing for the new DX brand yet, but as you can see with Circles Life, it is not just a reasonably priced MVNO. Circles Life is working in NPS management and has recorded ARPU to a considerable degree by offering services to digital natives. We are thinking about creating affordable plans, but they will not be simply low-priced services.

• How will the current au Adjust Plan and UQ mobile share the pie? You say that au's service will be based on 5G and unlimited plans. Will UQ mobile also accommodate 5G?

  

  For the time being UQ mobile will be 4G-based and the possibility of 5G has not yet been evaluated. We are currently considering how to differentiate the Adjust Plan and UQ mobile. The au brand will specialize in 5G and UQ will appeal to customers with its simplicity and affordability. However, I am aware that the Adjust Plan and UQ mobile are not differentiated, and we would like to work on this issue.

• From past cases, it seems as if the government regularly makes pricing requests and they might do so again in the future. In that sense it may be difficult to develop consumer businesses to a significant degree. Will these circumstances impact the direction of the current mid-term management plan?

  

  The topic of lowering prices came up a few years ago. When we introduced the Adjust Plan, we spent a few years covering the negative impact to income, amounting to about 400 billion yen. We are a private sector company and need to pursue profit for sustainable growth, so we have been recovering these losses by reducing our costs and by working to develop fields outside of telecommunications. However, Rakuten has now joined the race and the government is saying that price reductions should happen through competition, so lowering prices is almost unavoidable now.
  As a company we have promised sustainable growth and we have included EPS growth in our mid-term management plan. In the area of telecommunications, we would like to do something about MIX ARPU by creating multi-brand circulation. We would like to secure growth by placing telecommunications at the center and expanding peripheral industries and businesses to fill the gap. 5G is growing well in the Life Design Domain and Business Services Segment, so we would like to develop 5G a step further.

• I would like to touch on the subject of the capital tie-up with Toyota. I had a look at page 16 of the financial results presentation. Take the operation management systems for next-generation connected cars for example. I think that existing global communication platforms already carry such features. Does your announcement mean that you are going to work on something new? Explain how this is different from previous offerings.

  

  We mentioned four areas this time, but the details are still to be discussed. Take the future of connected services for instance. Right now connected services are communicating by LTE, but to go global we need to think not just about mobile devices but also about diverse types of connections. That is why we think we need to jointly develop operation management systems with Toyota. With respect to connected cars, the next generation of connected cars needs an upgrade and will implement the world of telecommunications. So, we are planning to work on the specifics of developing the management systems. With respect to going beyond the boundary of cars, Toyota wishes to get connected with customers through other channels too, not just cars. We would like to work together, as KDDI has been designing and offering various services for smart cities and homes, for safe and comfortable living. Although we are already working thoroughly on quality control for telecommunications, we will begin to see more ways of being connected through telecommunications. More types of data will emerge. It is important that users are connected end-to-end, whatever the data type. There are difficulties, too, which we will work on together.

• What are your thoughts on how to generate income?

  

  This initiative is more about research and development and does not lead to profit immediately. Even now we receive telecommunication fees from Toyota for the connected field. In addition to connected cars, we plan on working together on other services that will obviously lead to business. We will evaluate business models as well.

• What is the impact of COVID-19 on KDDI Matomete Office and other parts of the Business Services Segment? Please update us on SORACOM, too.

  

  COVID-19 spurred the needs of our small and medium company clients for teleworking and digital transformation, so our subsidiary KDDI Matomete Office is doing very well. We believe it will continue to do well. I believe that the shift to IT and digitization is something that Japanese companies should continue to do, and this is also something that KDDI would like to support.
  IoT is doing well overall, and SORACOM is performing above and beyond our plans. KDDI headquarters' IoT and SORACOM's IoT are working well in sync. KDDI can run big projects, and SORACOM can work on smaller projects. As SORACOM can provide IoT at home and abroad, we can respond to customer needs freely according to their individual circumstances. SORACOM's profits and losses aren't disclosed but they are positive figures in general.

• Your performance in the first half of this fiscal year was good. If you are just seeking to meet the company plan, you can do so even if you generate less profit in the second half of the year. If you plan to put in any costs in the second half of the fiscal year, please tell us about this. Would it be safe to assume that income will rise?

  

  That is a hard question to answer, but currently performance is good. We would like to spend money to accelerate 5G. The payment business based on au PAY is also doing well and we will invest in it to attract more member stores. However, we would like to wait a little longer and see, as UQ mobile prices have just been announced. As our performance is good, we are likely to meet the disclosed target.

• In the last quarter last year, you made investments toward measures for au PAY. Do you plan for additional investments this fiscal year?

  

  There is nothing concrete right now. The numbers before were impacted by incentive pay, but this fiscal year the numbers will not be extreme in the fourth quarter.

• Now, about the capital tie-up with Toyota. Why does Toyota need to have KDDI stocks? You already enjoy a close relationship. There was a similar discussion about NTT and NEC, but is this in truth a case where KDDI is giving 50 billion yen in return for receiving cash from Toyota? My concern is that you may end up offering 5G and IoT at low prices. Tell us the background and significance to this capital tie-up, as well as the future relationship between KDDI and Toyota.

  

  To strengthen our relationship with Toyota further, we expanded joint business not just in cars but for towns, homes, and people, and we defined four themes. When our project teams evaluated how much the research and development will cost for these four themes, the estimate turned out to be about 50 billion yen. Toyota wants to improve their corporate value with these projects and focus on these research areas, and that idea materialized in the form of the capital tie-up. It can be likened to a 50-billion-yen equity financing. I feel it is important that the tie-up will work to improve our and Toyota's corporate value. With respect to your question, there is no need to worry as we have transferred the stocks. Now that they have invested in us, we would like to commit to improving our corporate values mutually.

• Does this mean that you expect 50-billion-yen expenditures in research and development within these four areas over the next few years?

  

  50 billion yen is just an estimate. Although we need to analyze the finer details of development going forward, the expenditures are expected to be about that size.

• This time we saw many topics from the entire financial results. My understanding is that your message is to develop profit and provide value to stockholders, and that the tie-up with Toyota and the new DX brand are measures that you have taken in anticipation of the changes expected to happen in the future.
  As for the new DX brand, how long do you think it will take for the domain to become active? Or will this depend on the competitive landscape and changes in regulations? It looks to me like a measure that features a new perspective, aimed at customers with IT literacy, rather than being based around shops and devices. Tell us the scenario you have in mind about the changes that you think will take place, the requirements for competitiveness, and when the market is likely to get active.

  

  I think the market will grow more active, but this is a hard question to answer. We have partnered with a company named Circles Life for the new DX brand, who offers services in Singapore. You can sign a contract just using an application with no device, and you can change your price plan every month, or every day. You can also bundle services with just a smartphone. So, although we are not sure whether we will actually do this, you could choose an unlimited plan this month, but go with a 1G plan the next month, within the application. Looking at these services I feel Japan is not taking the lead, and that a wide range of services are progressing on the global stage. This is a challenging framework that we need to adopt as soon as possible. We would like the new company to be English-based, so that the company will be able to adopt the latest global initiatives quickly and launch them in Japan. It is hard to comment when the market will grow more active, but we will launch the 20GB plan from UQ mobile to counter Rakuten, who is working on eSIMs. At the same time, it is important to take the initiative in adopting eSIM services that are in tune with global trends, to be able to offer a diverse selection to a wide range of customers.

• Approval has been given to repurpose existing frequencies. You have been saying that as you invest more in 5G, your investment in 4G will drop so the total will not change much. Has there been any change to that idea? Also, was repurposing part of the capital investment?

  

  It has been incorporated into our plan in general. We plan a capital investment of 610 billion yen this fiscal year and we believe that it is necessary to maintain investments at this level in the long term. Generally capital investment would be calculated as a certain percentage of revenue. Our current level of investment is almost the same as global standards and we need to maintain this level