Performance Highlights and Q&A for the Third Quarter of the Fiscal Year Ending March 2021

The Presentation of the Financial Results

At the financial results meeting, Executive Vice President Muramoto described four points: "Highlights of the 1-3Q Financial Results," "Personal Segment," "Engagements in Growth Fields," and "Non-Financial Engagements."

1. Highlights of the 1-3Q Financial Results

Consolidated sales for the third quarter were 3,923.8 billion yen, up 0.5% year-on-year. Operating profit was 871 billion yen, up 3.2% year-on-year, showing growth in both sales and operating profit.
This growth was due in large part to the Life Design Domain (excluding the Energy Business) and the Business Services Segments, both growth fields, which together grew by 40 billion yen. The Energy Business's total sales for the third quarter grew by 11 billion yen, but this was partly affected by the higher wholesale electricity market price that began last December. The impact continued into January, but consolidated performance was able to cover the impact, achieving the beginning-of-term target.
Meanwhile, negative factors include decreased income from mobile communication fees and an increase in strategic costs for promoting 5G and smartphone payment transactions. However, the growth fields have pulled up the performance.
Regarding the growth fields, sales in the Life Design Domain were 940 billion yen in total for 3Q, up 72.9%, and 722 billion yen in the Business Services Domain, up 76.0%, both showing steady growth with respect to the beginning-of-term targets and the medium-term management plan targets.

2. Personal Services Segment

au total ARPA revenue was 1,721.5 billion yen in total for 3Q, up 75.5%, and for UQ mobile and MVNO, which merged in October, revenue was 70.2 billion yen, up 78.0%. They are growing steadily with respect to the beginning-of-term targets.
On January 13, we announced new pricing plans under the slogan of "Bring 5G to all customers". We eliminated complicated terms for discounts and aimed to offer simple, affordable plans fit for both families and individual users in order to accommodate diverse needs.
"au" is a worry-free unlimited plan which provides the value of a full range of services, from unlimited data to support and family discounts. au's new online-only brand "povo" offers 20GB a month for 2,480 yen, which customers can customize to meet their needs by choosing additional services.
"UQ mobile" offers affordable plans for individual users with low to medium data usage and offers in-store support, in addition to permitting data carryover. We will continue these efforts, seeing things from users' perspectives and delivering exciting 5G for everyone.
"povo" is based on the idea of simple, basic fees. Customers can add the features they need like toppings on ice cream. For example, customers can add an up-to-5-minute unlimited calls option for 500 yen a month, and 24-hour unlimited data usage for an additional 200 yen. The brand will incorporate more "topping" services and offer a new customer experience in which customers can omit what they do not need as well as add and subtract services as they wish.
Going forward, we will emphasize each brand's character and pricing plan while actively promoting 5G to gain momentum. au will offer worry-free unlimited usage and set plans that will drive 5G adoption. povo will aim to acquire new subscribers by differentiating its toppings and achieve high NPS through the new customer experience, while UQ mobile will aim to acquire new subscribers and higher data usage by offering attractive data-carryover plans. More subscribers in UQ mobile and povo will mean decreased mixed-communication ARPU, but we will aim for sustainable growth by acquiring more subscribers and more data usage as well as by enhancing each brand's life design service offers.

Regarding 5G, in December we rolled out 5G to all prefectures. By March 2021, we will have around 10,000 stations, and by this spring, we plan to have rolled out 5G to the areas around all Yamanote Line and Osaka Loop Line Stations. By March 2022, we plan to have launched 50,000 stations, which will cover 90% of the nation's population.
In December, we launched services using the existing 3.5GHz frequency. Service using the 700MHz frequency will start this spring. By using the existing frequencies, we will develop seamless 5G networks and expand 5G service areas.
Our 5G mobile device sales reached 1.2 million devices last December. Sales of the new iPhone that launched last October are also doing well. We will promote sales to meet the beginning-of-term targets. As for services, au 5G Experience automatically improves video to high quality by evaluating the user's unlimited plan usage status and whether the user is in a 5G area. We also offer unlimited data plans packaged with other deals through partnerships with various businesses, including Netflix and Amazon.
We will announce new pricing for the set plans in March.

3. Engagements in Growth Fields

First, we would like to touch on the Business Services Segment. The total number of IoT lines, which serves as the segment's KPI, rose to more than 16 million in December, against the 15 million mark set at the beginning of the term. The KPI is increasing faster than predicted at the beginning of the term.
Regarding the growing total number of IoT lines in connected cars, we have rolled out a global communication platform through a partnership with Toyota. The platform is now available in China, North America, Europe, and Australia. We are also promoting partnerships with Mazda and Subaru, and the platform is being implemented in their new models.
Our smart meters now cover not just electricity but gas and water as well. Our partnership with Toyo Keiki has made progress over the past two years. We are also working on measures against infectious disease with Ecomott, jointly developing various services.
With respect to expanding our Business Services Segment's business areas, we signed a basic agreement with JR East in December to launch a joint business that merges public transport with communication. We will jointly work on the Shinagawa Development Project with Shinagawa as the core city, and evaluate plans for developing satellite cities and mobility services to boost the business. We will also join hands with partners at home and abroad to create new businesses and advance KDDI Accelerate 5.0. KDDI DIGITAL GATE, a 5G and IoT business development site, our corporate sales division to support clients' digital transformation, and the new KDDI Research Atelier will work together as the "Toranomon Triangle" and function as an arena for open innovation.
Next, the Life Design Domain. Financial payments and transactions, which are the domain's KPI, grew significantly by 1.4-fold year-on-year to 6.5 trillion yen. au PAY Card (credit card) is also growing steadily, with 6.1 million cards issued.
Our "Cashless Payment via Smartphone", which is an important customer contact point, had been introduced to over 3.55 million stores as of last December, nearly doubling year-on year as the number of stores surges. We are also promoting a partnership between au PAY and Ponta, and au PAY was introduced to Digital Ponta Card last December. These services are more customer-friendly because they enable customers to pay without opening the au PAY app. This month, au PAY will also be introduced to the Lawson App. Through these efforts, we will continue to offer customer-friendly services.
To direct these smartphone-payment-enhanced customer contact points towards our financial services, we will launch on March 1 "Mortgage "au" mobile preferential discount", the first service in Japan to discount mortgage rates when the borrower signs up with an au phone. We have also ramped up the special offers for au PAY Gold Card, whereby users can obtain more Ponta points by using au communication services and other au-related services. Also last September, au Kabucom Securities launched a "point-based investment" service under which users can buy investment funds with Ponta points. We will continue our efforts to encourage higher usage by obtaining more au PAY users and offering various appealing financial services.

4. Non-Financial Engagements

KDDI is working to transform into a Human Resources First Company; last July, we introduced a new human resource system to implement a work-style that helps workers achieve results without being confined by time or location. We are simultaneously driving the Declaration of KDDI New Work Styles,KDDI Version Job Style Personnel System, and Internal DX.
Last December, we reduced the number of head office seats by 40% (to the number of head office employees) to optimize office space. We also aim to create a "hybrid" workplace where half of employees telework, providing all employees with a PC based on the zero-trust concept.
With respect to revitalizing regional areas, we aim to develop sustainable business models through our regional-revitalization project "Te to Te" based on partnerships with regional areas to train personnel, drive digital transformation, and utilize funds. In 3Q, we worked with regional municipalities, educational institutions, organizations, and businesses from across Japan, especially on 5G-based regional revitalization/art/culture projects.

• Tell us about the direction you are thinking of taking after we see the effects of lowering communication charges. You said that the mixed-communication ARPU will drop, but will gaining more subscribers cover the decreased revenue? If costs need to be cut, in which area can costs be cut significantly?

  

  Naturally, I expect to see certain effects in terms of decreased revenue because we are lowering our communication charges. We are currently evaluating plans for the next term and seeing what the effects will be. However, I would like to point out that KDDI is focusing on sustainable growth and will continue to do so. We hope to achieve sustainable growth by getting more IDs with our three competitive brands and ensuring the growth of our Life Design Domain and Business Services Segment, which are our growth fields. In the medium-term management plan, we have already stated that we will meticulously cut costs and improve efficiency, saving around 100 billion yen. I believe this will contribute to our performance next term, but it would be good if we could take further steps. One example would be to cut costs by integrating offices, as I explained in the presentation. With our sales channels changing significantly, we would like to review operating costs as well.
  I feel that we have reorganized the lineup of au and UQ mobile, and we have simplified the offers. In particular, UQ mobile offers unique pricing plans. We introduced more data plans like 15GB and 25GB and lowered the charges. I think the data carryover option will be another strong point. We have also created povo, which is a new online brand. It is extremely simple, offering 20GB for 2,480 yen. We would like to come up with more ideas to make it into a product that delights customers. As for au, it offers 4G for around 1,000 yen less, and 5G for around 2,000 yen less. The unlimited data offer is extremely attractive, being only 4,480 yen if at least three family members sign up for Family Discount Plus and apply both "au Smart Value" and "au Pay Card Payment Discount." We will work hard to ramp up the appeal of these brands for each customer segment and aim for up-sells to higher price plans. The mixed-communication ARPU will go down if we do nothing about it, so we will aim for sustainable growth by acquiring more IDs and as many up-sells as possible.

• These days, we increasingly hear about the desire to develop the growth fields further. Were there any changes in our efforts over the last two months or so? I believe the circumstances have changed for some areas. If you see any signs of change or change in direction, please explain by large segment, such as corporate, financial transactions, or electrical power.

  

  As mentioned in the presentation, the financial business and energy business are growing steadily in the Life Design Domain. We have created new pricing plans for au, povo, and UQ mobile, and we have been doing well with Life Design services being combined with communication. The number of au PAY Card members, and the amounts of payments and financial transactions are also growing. When we look at the details of the financial transactions and payments, payments are increasing, and mortgages are also doing well, with au Jibun Bank's cumulative mortgages exceeding one trillion yen. This is one example of how communication products and Life Design products are working together organically on a high level. Furthermore, in addition to au customers, UQ mobile customers are able to enjoy greater convenience if they use Life Design products, so there is still much room for growth. Salespeople are also driven to develop Life Design products further, so stay tuned for movements going forward.
  With respect to the Business Services segment, if we look at IoT, the pace slowed slightly in the first term, not just at home but worldwide, partly because of COVID-19. However, since halfway through the second quarter, we have been seeing more customers as planned. Connected cars have also expanded to Europe and Australia, and we are partnering with more car manufacturers. With respect to teleworking and work-style reform, initially they were benefiting from mobile devices alone, but after accommodating more workplaces including offices and outdoor locations, new needs began to arise for user-friendly fixed-line communication, an area in which we can expect future growth.

• I would like to confirm about the change in profit described on page 4 of the presentation. In the Life Design Domain and Business Services Segment, which are growth fields, the business segment in particular has seen a big increase from the plan. What is the exact business that is driving the increased profit? And in the changes in profit section, one can see that the "Other" factor has caused the profit to drop. I understand that sales promotion costs for the transaction business and 5G are rising, as well as depreciation costs, but what does this factor refer to?

  

  We have been working on the Business Services Segment as we originally planned to develop it. The volume of demand for teleworking exceeded our projection, and the mobile business also recorded more revenue than expected. As for our group companies, subsidiaries for small- to medium-sized enterprises and companies with call center operations are growing steadily.
  As for the other factors that caused the profit to drop, these include undertaking the campaign described a moment ago that we rolled out as strategic spending, and some increases in depreciation costs. We needed to recalculate the asset retirement obligation for terminating 3G, which was announced in October 2018, and we added it starting from the third quarter, which resulted in the rising of depreciation cost.

• I would like to ask about the effects of dropping prices for the three brands. While the impact of dropping the price for au's unlimited plan remains small, I believe the impact of downgrading on UQ mobile and povo will be significant. I also believe that it will be quite possible to secure a net increase in subscriptions with UQ mobile and povo. As a result, we will still see decreased revenue, but the decrease will be cancelled out to some extent, and there will also be up-sells from au. How many users will shift to UQ mobile and povo? I believe a net increase is possible, but are there any obstacles?

  

  I believe what you have just said is correct, but the services have not been launched yet. The new pricing plans for UQ mobile will start in February, and other services will be fully launched in March and April, so we would like to watch the market trends. However, as you just pointed out, there will be a certain volume of customers shifting from au to UQ mobile and povo, as the latter offers appealing prices and services. Meanwhile, since we integrated UQ mobile last October, 3.7 times more customers have migrated from UQ mobile to au compared to the previous third quarter, so the pace of migration has not dropped. Furthermore, most of the migrated customers have chosen the Data MAX Plan. As you noted, the medium-volume plan for UQ mobile and povo is the main battlefield in the market, so we will win our share there with UQ mobile and povo. If the customers feel that the data volume is insufficient, we would like them to migrate to au. We dropped the price for the unlimited data plan, so I believe it is easier to sign up. If you just look at the surface, mixed-communication ARPU seems like it is going to drop, but we will pursue sustainable growth by combining various measures across the board to improve user-friendliness.

• I would like to ask about the growth fields. When we look at the plan for the fourth quarter, the Life Design Domain and Business Services Segment seem like their sales will drop year-on-year. Do you have any specific reasons for why this will happen? The Business Services Segment's plan this term shows the profit virtually plateauing year-on-year, while the profit for the Life Design Domain is growing. Is the pace of growth accelerating towards the next term in each segment?

  

  In the third quarter, the Life Design Domain is doing better than planned, but the energy business will show negative effects in January, as well as in December, the month it dropped by 4 billion yen year-on-year. However, the wholesale power market has steadied over the last week, and I believe that the consolidated performance can cover the negative effects. Other segments like finance and commerce are doing well and will continue to do well next term, so there is no need to worry.
  As for the Business Services Segment, the plan for the fourth quarter forecasts a strong pace of growth. We would like to make active efforts toward further growth from the next term onward and invest in the segment. Starting next term, the surplus part will gradually lose momentum because of COVID-19. However, society is also transitioning to more digitization and new work styles. We would like to grow by speedily rolling out KDDI's digital solutions and communication solutions to the "new-normal" society.
  I would like to add that in the fourth quarter, the profit will fall slightly compared to other quarters because we are expecting spending toward spring sales and growth in the next fiscal year. In the Personal Services Segment, the fourth quarter will see a drop in profit because the energy business has had a slight unexpected impact. Meanwhile, I believe the Business Services Segment will do better than planned. We will work hard toward the next term and aim to record consolidated sales as we announced publicly.

• I would like to ask about the 100-billion-yen cost reduction, which is a target of the medium-term plan. The medium-term plan is already half over. How much of the 100 billion yen have you managed to save so far?

  

  We project that we can basically save (improve efficiency) 100 billion yen, so the effects will be visible mostly in the next term.

• It has been mentioned that the effects of saving 100-billion yen will become apparent next term. Does this mean that from this term to next term, we will see the profit go up because of cost reduction?

  

  I cannot cite concrete numbers, but it does not mean that the entire 100 billion yen will turn into profit compared to this term by the cost reduction (improved efficiency). We are seeing some effects already this term.

• Does that mean 60 to 70 billion yen next term?

  

  I will leave that to your imagination.

• Does the energy business's 4-billion yen drop year-on-year in December mean that the deficit will not last beyond February? As the energy business looks to land more subscriptions, it would seem as if the profit margin will be smaller. Please explain the structure of the energy business going forward.

  

  KDDI is operating as one of the new power companies. We are marketing the energy business mostly to au customers and have recorded considerable profits. KDDI itself has not been impacted by energy procurement costs. It impacts ENERES, which is a subsidiary of KDDI, because they are the procurer. However, ENERES is not procuring all its power from Japan Electric Power Exchange. They monitor risks and balance supply and demand. This time, the demand from Japan Electric Power Exchange was high, while the LNG (Liquified Natural Gas) supply was tight, affecting power companies' power generation, and that in turn tightened the supply. This pushed up the power price exponentially to an unprecedented level from around the end of December. However, as the supervising government division intervened to correct the imbalance, Japan Electric Power Exchange's price has started to stabilize. We have multiple ways of selling to our clients, such as directly or through agents. To answer your question about whether the same situation might recur in the future, I cannot deny the possibility. As we need to avoid highly volatile situations, we would like to minimize risks by enforcing measures from next month, such as by reorganizing our portfolio and increasing the volume of direct deals for procurement.

• The Life Design Domain makes a positive impression on me as it is growing steadily. Tell us which of its services contributed to the increased revenue—the rankings of increased revenue by business, and whether such rankings will remain the same from the next term onward. If our communication charges are unlikely to grow from the next term forward, which business area will be the driver for forecasting KDDI's growth and increased revenue?

  

  I do not cite concrete service revenues one by one, but in the Life Design Domain, cumulatively for the third quarter, the financial payment area was the major contributor to increased revenue. Our contents businesses, like au Smart Pass Premium, and the energy business also contributed at roughly the same level. We plan to develop each of the businesses next term.

• I believe au PAY is growing amongst its competitors in the financial payment business, but I believe that this growth involves a certain amount of sales promotion spending. I also believe that the financial payment business includes various things like mortgages. Please give us the cost breakdown.

  

  We are seeing immediate results in our credit card business. Members have grown by 17%. Carrier payments and au Jibun Bank's mortgages are also doing well. As for costs, we spread them over the Life Design Domain and Consumer Business to a certain extent, and we are not expecting to cover all costs with the Life Design Domain alone.