Performance Highlights and Q&A for the Fiscal Year Ended March 2021

The Presentation of the Financial Results

At the financial results meeting, President Takahashi described five points: "Consolidated performance in the fiscal year ending March 2021," "Growth strategies," "Personal Services Segment," "Improving corporate value & SDGs," and "Projections for consolidated performance in the fiscal year ending March 2022."

1. Consolidated performance in the fiscal year ending 2021

Consolidated sales were 5,312.6 billion yen, up 1.4% year-on-year. Operating profit was 1,037.4 billion yen, up 1.2% year-on-year. Despite the rapidly changing environment, revenue and profit increased, led by the growth fields.
Consolidated operating profit for the fiscal year ending March 2021 grew by 12.2 billion yen year-on-year. Sales in growth fields, which are the Life Design Domain and Business Services Domain, excluding the Energy Business, recorded 58.2 billion yen, despite au's total ARPA revenue decreasing by 40.9 billion yen. In the Energy Business, revenue dropped by 20.5 billion yen, but this is expected to be temporary as we will be putting power-source procurement policies to work.

2. Growth strategies

Our growth strategies will be based on our existing communication business. We will actively advance 5G usage through multi-brand strategies and save costs for stable growth. As the growth strategies that are built on this foundation, the Life Design Domain will look to expand the au economy zone through customer contact points and point-scoring schemes, and the Business Services Domain will look to expand its business areas based on communication and IoT.
In the Life Design Domain, we will increase customer contact points, based on communication services. We now have over 32 million members using smartphone payment "au PAY" at physical stores, and over 15 million members using the online "au Smart Pass" service. As for point-scoring schemes, we will enable customers to use and score points at more locations and make the schemes more appealing. Through enhancing customer contact points and these point schemes, we will look to maximize the au economy zone, centering around finance, energy and commerce. The Life Design Domain KPI has seen steady growth of core services, with 2.88 million au Denki,etc. subscriptions, 6.5 million au PAY card members, and 15.63 million au Smart Pass members. Of these, 11.37 million members are au Smart Pass Premium members, suggesting the services are steadily taking root.
In the Life Design Domain, we will look to boost sales and operating profit by double digits. The financial business, which is a driver of growth, has been contributing significantly to operating profit, showing 19 billion yen operating profit growth year-on-year for the fiscal year ending March 2021 across the KDDI Group. As a result, in the fiscal year ending March 2021, the Life Design Domain recorded a 20 billion-yen increase in operating profit year-on-year. We expect profit to grow further, to 52 billion yen for the fiscal year ending March 2022.

For this growth driver, with respect to the transaction volume of settlement and loan in the Financial Business, we have seen au PAY payments grow, with the au Carrier billing service doing especially well, thanks partly to the effects of more people staying at home due to Covid. au Jibun Bank payments have also greatly increased, thanks to the steady growth of au Jibun Bank mortgages and specified-purpose loans, and to the enhanced collaboration with au Kabucom Securities, boosting transaction volume of settlement and loan to over 9 trillion yen for the fiscal year ending March 2021, growing by 1.4 times year-on-year. As the amounts of payments and financial transactions increased, operating profit also significantly increased to 49.8 billion yen from the entire KDDI Group in the fiscal year ending March 2021, growing 1.6 times year-on-year.
We will aim for further growth in the financial business toward the next medium-term management plan. Currently, we are actively promoting au PAY to encourage not just au customers, but non-au customers to use it as well. The aim is to create new businesses by enhancing connections between the bank and credit cards through the use of au PAY. Furthermore, we are seeing the number of core service users growing, as we have utilized the synergy with communication services and offered au Jibun Bank's mortgage discount and improved the special offer from au PAY Gold Card. Going forward, we will promote online financial services associated with securities and financing, enhancing connections between the bank, credit cards and financial services.

In the Business Services Domain, sales were 991.6 billion yen for the fiscal year ending March 2021, while the projection for the fiscal year ending March 2022 is 1.02 trillion yen, and operating profit was 166.7 billion yen for the fiscal year ending March 2021.The projection for the fiscal year ending March 2022 is 184 billion yen. We are hoping that the operating profit will grow by double digits.
For the growth strategy for the Business Services Domain, we have positioned fixed lines, mobiles and 5G as the "core businesses." Based on communication and over 21 million IoT lines (current as of the end of the fiscal year ending in March 2021) , which are our strengths, we will advance our business domains at home and abroad to become the "NEXT core" which are "Corporate DX," "Business DX" and "Business infrastructure services." All of these NEXT core businesses are value-added solutions that enhance existing communication services, offering comprehensive support to customers' businesses. We are aiming for the NEXT core businesses to account for over 30% of entire sales in the fiscal year ending March 2022, while enhancing synergies with the core businesses by expanding IDs and enhancing customer engagement, boosting the growth of the entire Business Services Domain.
"Corporate DX" will be based on teleworking and a zero-trust approach. With the measures to prevent the spread of the Covid, more small and mid-size companies are adopting teleworking. KDDI Matomete Office products have grown over the last year, including cloud apps, with PCs and tablets growing by 1.3 times and smartphones by 1.7 times. Going forward, we will advance "Managed Zero Trust," a one-stop service to offer customers cloud and security operations and management to support "Smart Work," a new way of working, helping customers to organize their environment and to shift to smart work.
The "Business DX" will be based on IoT and cloud. The number of IoT lines has grown steadily, to a cumulative total of over 18 million lines, achieving the medium-plan target in advance. On a group-wide basis, we have over 21 million lines, including SORACOM lines. As for the KDDI Group's capabilities, we will introduce companies such as SORACOM as our group companies and establish DXGoGo, a new company to support companies' business transformation with AI and IoT, so that the entire KDDI Group can support customers identifying and working on new business opportunities, with the accelerating growth of IoT.
The "Business Platform Services" will be based on data centers and call centers, looking to grow together with customers at home and abroad. We are opening data centers mainly in Europe, a zone with high connectivity, operating at over 40 sites in 10 cities around the world. KDDI Evolva, which runs BPO and contact centers, recorded sales of over 100 billion yen in the fiscal year ending March 2021, and operating profit grew significantly by 29% year-on-year.

3. Personal Services Segment

Regarding 5G-accessible area construction, we will bring 5G to new areas based on where consumers are most likely to go on a daily basis. 5G will be available on all Osaka Loop Line stations from the end of March, and all Yamanote Line stations from around the end of May. We plan to gradually cover the other key railway lines. Toward offering 5G services across Japan, we plan to launch about 50,000 stations by March 2022, covering 90% of the population. Also, in addition to offering 5G services in the new 3.7GHz, 4.0GHz, and 28GHz frequencies for 5G, we have been launching 5G in existing frequencies, to create 5G networks ahead of the stand-alone 5G era.
For the number of smartphone subscribers, we reached a cumulative total of 4G LTE and 5G subscriptions of 28.87 million devices at the end of March. Cumulative sales of 5G smartphones were over 2.4 million units by the end of March, far exceeding the initial target.
For the multi-brand strategies, au will offer stress-free unlimited data services, looking to increase new subscribers with simple and affordable UQ mobile at the core, as well as povo that can be customized freely by customers by adding and taking away options. The multi-brand communication ARPU will likely decline, but we will aim for increased data usage as we offer more 5G services in the medium-term. Supported by the growth of the Life Design Domain, or the au economy zone, we will look to enhance customer engagement and total growth in ARPU.
povo started not just as a simple online-only service, but as a unique concept by being a customizable service with options. The application is simple and fast to use, and it can be easily customized according to customer needs. Customers can add and delete options such as "5 Mins Voice" and "Unlimited Data 24h" as needed. We also plan to open "povo Lab" as a place of collaboration for customers and partner companies, and to introduce more options as they become ready.

4. Improving corporate value & SDGs

For financial engagements, we will advance our medium-term management plan to further improve profitability and efficiency.
For non-financial engagements, we will work on solving various social issues through our business, based on the "KDDI Sustainable Action" announced last May. Based on data, we verified and analyzed the relationship between our non-financial affairs and corporate value and found that various initiatives, including disaster-prevention policies, conservation for the global environment and efforts for women's career advancement, are proportional to corporate value. We will continue to advance these efforts to improve corporate value with both financial and non-financial engagements.
To conserve the global environment, the entire KDDI Group will advance decarbonizing initiatives. To reduce our own CO2 emissions, we will evaluate every possibility including technological development, and on the business side, we will work on creating new energy businesses. On April 26, we announced our support for the proposals made by the Task Force on Climate-related Financial Disclosures (TCFD). An analysis of the relationship between our ESG and corporate value with data has revealed that there is a positive relationship between the two, in which a 10% reduction of greenhouse gas intensity boosts PBR by 2.4% after 6 years. We will further advance initiatives and active information disclosure.
Toward our Human Resources First transformation, we have introduced a new human resource system to realize new work styles to help workers achieve results without being confined by time or location. We are simultaneously driving "In-house DX," the "KDDI Version Job Style Personnel System," and the "Declaration of KDDI New work Styles," and as part of In-house DX, we have provided all employees with secure PCs based on the zero-trust concept, and we are currently working on making visible work-style data to further improve productivity. Putting these initiatives to work ourselves has helped improve our prowess in making suggestions for Corporate DX in the Business Services Domain, an area that we will promote as a business to contribute to the public.

5. Projections for the consolidated performance in the fiscal year ending March 2022

For consolidated sales in the fiscal year ending March 2022, we are ascertaining the changes in circumstances as business opportunities, including the lowered communication charges, intensified competition, and significant changes in people's lives due to Covid, and we are aiming for sustainable growth. More specifically, we will look to further grow our growth fields, further save costs, and steadily create cash flow to improve returns to shareholders.
For the fiscal year ending in March 2022, we project consolidated sales of 5.35 trillion yen and operating profit of 1.05 trillion yen. We expect the growth fields to drive the increases in profit and revenue, with both the Life Design Domain and Business Services Domain to increase operating profit by double digits, with the Life Design Domain projected to record 250 billion yen, up 26.3% year-on-year, and the Business Services Domain's operating profit of 184 billion yen, up 10.4% year-on-year. For further cost-savings, we will improve marketing efficiency and reduce marketing costs, associated with the integration of UQ mobile. Toward improving and optimizing network efficiency, we will drive structural reforms, including by reviewing construction processes and internalizing them. We will also advance cost efficiency by driving work-style reforms on the corporate side, making every effort for sustainable growth.
Finally, for the dividend, we have been focusing on DPS growth associated with sustainable growth, looking to provide a higher dividend for the 20th consecutive term, at 125 yen for the fiscal year ending March 2022. We have also approved the acquisition of our own shares at an upper limit of 150 billion-yen.

• Tell us about competitiveness after the release of new prices. What is your projection for competitiveness for the coming 12 months, given the impacts of the March competition, the last-minute demand for Rakuten Mobile, and the start of ahamo? Tell us how much UQ mobile acquisition will accelerate and how effective povo has been.

  

  Customer movements remained limited in the first half of the 4Q with companies announcing online brands, but the second half of the 4Q saw active customer movements. With regard to Rakuten Mobile, actually we struggled a little because campaigns lasted until early April, but it then got back on track. UQ mobile has been doing well after the integration in October last year. The online brand povo is also doing well, being positively received by customers. Most customers are interested in the medium-volume data allowance. We will address customer needs with multiple brands and hope to help customers select UQ mobile and povo. The importance is how we can use multiple brands to boost customers' usage, including by offering au's unlimited MAX 5G and 4G to customers who want a large data allowance.

• You say our growth fields will significantly drive growth. How did the growth fields boost revenue last year? Tell us about the drivers of revenue for the coming 12 months.

  

  We have defined the growth fields as finance, energy and commerce. In the financial business, we are just beginning to see signs of growth in au Jibun Bank. We feel that the other businesses, such as credit cards, securities and insurance, are also showing sure and early signs of growth. Energy and commerce have been growing recently as well. The key is how we can encourage au customers to use these services and how we can accelerate usage. With respect to customer touchpoints, we have been focusing efforts into au PAY. By using credit cards, customers receive Ponta points that they can use for payments. We want to drive this positive cycle further. We want to get to the entrance of customers' lives through channels like au Jibun Bank mortgages. We also think that the Energy Business is another field that will grow significantly.
  In the financial business, we expect the most from credit cards. I feel this area is set to grow, as au PAY Gold Card is being received positively. au Jibun Bank mortgages are also doing well. They are being used not only by au customers, but also by many customers from other mobile carriers. You get a lower interest rate if you are an au user, so it has helped attract more au subscribers. Paying by telecommunication carrier services is proving popular under Covid, driving growth. Unfortunately, the Energy Business recorded a decline of 20.5 billion yen in revenue this term due to the soaring market prices on the Japan Electric Power Exchange. Building on the lesson learnt, that it is a highly volatile market, we will pursue stability as we secure profit. I feel that this decline in revenue is temporary and that revenue will grow in the fiscal year ending March 2022.

• The multi-brand communication ARPU is projected to be 200 yen less year-on-year. Please give us some details. You are probably projecting sales declining by about 70 billion yen, please share the details.

  

  After much thought, I decided to disclose the number of group IDs and multi-brand communication ARPU. It was 4,400 yen for the fiscal year ending March 2021, and the projection for the fiscal year ending March 2022 is 4,200 yen. Simply put, returns to customers will rise from 60 billion yen to 70 billion yen. Although we have not disclosed the breakdown for each brand, you can imagine how much of the 200 yen margin will migrate from au to UQ mobile and povo.

• Let's look at the Business Services Segment, one of the growth fields on page 16 of the presentation material. This time you have disclosed the NEXT core businesses in the breakdown of the Business Services Segment. What kind of areas are set to grow? Please talk about their profitability as well, although the profit rates are likely to be lower than that of mobile.

  

  This time, we have distinguished core businesses from NEXT core businesses. We want to focus our efforts into them and develop both of them. The NEXT core businesses that will expand our business domains consist of three domains, as shown on page 16 of the presentation material. In Corporate DX, we will support the digitalization of work-styles. It was an ongoing business but has been highlighted by Covid since last year. More people are taking to flexible working, both inside and outside of the office. Doing the same ourselves, we will offer services to corporate clients, including offering guidance about how to go about it, thereby capturing teleworking needs. As for Business DX, corporate customers will digitalize their businesses for their customers. With our ongoing focus on IoT, we have been working in a number of areas that require digital transformation, including in cloud and data analysis around IoT, and we want to keep focusing on these areas. As for the Business infrastructure services, the more corporate customers advance their digitalization, the more data centers and call centers will grow in importance behind the scenes. We operate this business, and it has been growing steadily in recent years. As for the profit rates for the NEXT core businesses, some of the businesses will see topline growth, whereas some will start to see profit later. Meanwhile, core businesses are beginning to show better margins, mostly in fixed and mobile lines. We want to push-up profit from both of these.

• Will the three areas positioned as the NEXT core businesses grow similarly?

  

  Corporate DX and Business DX have good growth rate. Business infrastructure services are showing a steady profit rate and is an area that is going to grow at a slow but steady pace.

• I want to ask about cost savings. As revenue for communication charges will fall, saving costs will be important. KDDI has been looking to cut costs by 100 billion yen since the start of the medium-term management plan. How much will the effort materialize this term?
  Capital investment has also gone up, and depreciation costs are expected to increase by about 20 billion yen in the fiscal year ending March 2022. I understand the improvement of network efficiency is yet to start, but tell us how much cost savings are projected this term, including in relation to the sales system.

  

  In the medium-term, we project that profit will improve by 100 billion yen. Breaking this down, we estimate new profit to be about 30 billion yen and cost savings about 70 billion yen. This term, I want to achieve that 70 billion yen by saving costs, and one way will be by making marketing more efficient. With UQ mobile being integrated, we are actively working on store DX. Capital investment has been going up, but we allocate about 11% of sales to capital investment, and we see it as staying within that scope. If you add using AI to improve and optimize network efficiency and to save costs by work-style reforms, the total will be 70 billion yen.
  I have mentioned the change from 60 billion to 70 billion yen for the fiscal year ending March 2022 due to the lowered communication charges, but we can recoup nearly 70 billion yen through the profit growth of the growth fields. The idea is to include cost-savings so that the sum will be 70 billion yen, but while costs for retrieving 3G will arise, including accelerated depreciation, we will see roaming revenue go up. That's how we want to achieve profit this term.

• I would like to ask about the accelerated depreciation. Is my understanding correct that it has already been incorporated in the plan, and we will see additional depreciation? You say capital investment will be 11% of sales. Will you be maintaining this level or will it decline? Will you suppress capital investment as communication charges fall?

  

  Basically, it is as you say. If sales decline, we must save capital investment. However, although we expect to see slightly lower sales in communication, I think that the multi-brand strategy will see some migrations from au to UQ mobile and povo. Meanwhile, we will develop the value-added ARPU as we roll out 5G, and developing this will mean continued capital investment. To share this understanding internally, I feel that the 11% indicator is important.
  We will save costs across the whole company this term. We plan to use the amount reduced by cost-savings for growth from the next term on. The biggest factor is the cost of terminating 3G. If you look at capital investment, accelerated depreciation has added a significant amount of depreciation. From the last fiscal year to this term, we will see more depreciation by asset retirement obligation. This will be all accounted for this term, projecting about 60 billion yen less for capital investment from the next term. On the sales side also, we will use about 30 billion yen of the 3G withdrawal cost this term. It is an upfront cost for later growth, or a resource for growth, generated by saving costs in other areas.

• The financial business and energy business are doing well, with many policies being progressed. Meanwhile, even though it has been positioned as one of the three pillars, efforts for commerce are lagging behind and seem to be struggling to grow under the current system. Will you keep going with the current commerce strategy, or do you have anything planned for it in the pipeline or M&As, and are you hoping to grow it with nonsequential strategies?

  

  Our commerce business is in the shopping mall format and to tell you the truth, we do not consider it to be a great contributor to profit. We put au PAY at the center and connect online activities and events to au PAY, connecting them further to Ponta points to operate an economic zone, and commerce is an extension of that. If customers use Ponta points for KDDI commerce, they get 1.5 times Ponta points, and that is one campaign we have been running and it has been doing very well. I believe commerce itself will bring about more engagements. We see it being profitable too, even though not of a large amount. As for M&As, we do not have any sizeable projects planned, but we are considering some investments to promote logistics. Once they are finalized, I will inform you.

• Let's check profit for the fiscal year ending March 2022. If the Life Design Domain records an increase in operating income of 52 billion yen and the Business Services Segment 17.3 billion yen, coming to a total of 69.3 billion yen, it would mean a decline of around 57 billion yen in operating income. Is my understanding correct, that the mobile communication revenue will decline from 60 billion to 70 billion yen, and with additional negative costs of about 60 billion yen, the total will be 60 billion yen with accelerated depreciation and provision of disposal? The 3G withdrawal cost of around 30 billion yen was spent in the fiscal year ending March 2021, so my understanding is that when you add and take away everything, the result is neutral, within consolidated operating income of about 13 billion yen.
  With regard to the increase in profit in the financial business, the profit from au Jibun Bank could not have changed that much, so the fact that it is showing this much profit for the fiscal year ending March 2021 must mean that payments by carrier services accounted for a significant portion of the profit. Please confirm how profit has increased or decreased.

  

  That is almost correct. To arrange the picture, the growth fields, which are the Life Design Domain and the Business Services Segment, will generate a little less than 70 billion yen, cost-savings will be 70 billion yen, and lowered communication charges will generate customer returns from 60 billion yen to 70 billion yen. For 3G-related areas, accelerated depreciation and related will generate about 60 billion yen. We incurred slightly higher 3G withdrawal costs of 30 billion yen this year than last year, because we are in the last year of the withdrawal. We project a little more roaming revenue this term. In the financial business, payments by carrier services have significantly contributed to profit. Meanwhile, au Jibun Bank is also beginning to show signs of becoming a growth field, mainly around loans.

• At the end of the fiscal year ending March 2021, net-interest bearing debt was around 840 billion yen, with the NETDEBT/EBITDA ratio being about 0.9 fold. In our industry, having about double leverage and making some growth investment or providing shareholder returns is I believe the way to use the balance sheet. With the current level of net-interest bearing debt, we have room to both invest and provide shareholder returns. What is your take on leverage?

  

  As you know, this is the last year of the medium-term management plan. Last year, we were unable to conduct large investments for M&As, partly due to Covid. This year, we will devise a new medium-term management plan. To ensure EPS growth, we need to develop existing businesses and to create new businesses, and to ascertain M&As properly in that cycle, as part of investment for growth. As for shareholder returns, we were quick to announce the buy-back of our own shares and the increased dividend. We want to ensure both growth and shareholder returns.

• The transaction volume of settlement and loan are projected to be 9.3 trillion yen for the fiscal year ending March 2022. I want to know the background to why it has not grown much compared to the previous amount. I feel that the projected cumulative number of IoT lines is insufficient, given that even though it has been growing, car sales are getting back on track.

  

  I regret, as you point out, that we were too conservative on the figures for transaction volume of settlement and loan. We want the numbers to reach over 10 trillion yen as soon as possible. We also plan to develop the global communication platform steadily this year. One thing is for sure is that China, North America and Europe, all of the big markets, have mostly been covered and there will be more emerging countries. We will steadily develop growth as a whole. Meanwhile there are decline factors too. The electric smart meter still has a large volume and is set to grow, but the margin for growth will begin to get smaller soon.

• With respect to the cumulative number of IoT lines, I can see how the pace for smart meters could slow down, but for global communication platforms, the more we sell devices, the more the cumulative total will grow, so the forecast seems conservative. Please tell us about the real targets for the financial transactions and payments this fiscal year.

  

  We consider them both to be conservative. Both are numbers that have grown faster than the figures disclosed in the medium-term management plan. I hope to indicate more aggressive numbers in the medium-term management plan.

• With regards to the situation in Myanmar, the financial digest states that there are no concerns, but could you give us more details about the current numbers on the B/S and P/L of the Myanmar business?

  

  I am sorry to have caused concerns about the Myanmar business. As you are aware, our business format in Myanmar is different from, say, how Telenor does business in Myanmar. While Telenor gained a license and invested in the business itself, KDDI has established KDDI Summit Global Myanmar (hereafter "KSGM") together with Sumitomo Corporation, whereby KSGM runs a joint operation with local communication carrier MPT. The business is mainly conducted by MPT, sharing revenue with us. The current situation in Myanmar is concerning. We have put the safety of our associates first under such situation as well and released a statement based on the "KDDI Group Human Rights Policy."
  When you look at the financial statements, capital investments are recorded on the B/S as lease receivables, and capital investment expenditures as negative sales cashflow figures. Lease receivables for MPT are around 110 billion yen, taking up most of the B/S, and we are receiving the receivables as appropriate. It has been agreed with MPT that it will pay the lease receivables in full, and the latest lease receivables have been recovered steadily. For KDDI, there is a risk of them becoming an irrecoverable loan, but I feel there is no need to make provisions for this for the time being. I cannot disclose the details of the P/L as it has been agreed with MPT that it will not be disclosed, but the projection for this term already incorporates the risk I have mentioned. It will have little impact on the Personal Segment Services as a whole.