Performance Highlights and Q&A for the Financial Results for the First Quarter of the Fiscal Year Ending March 2022

The Presentation of the Financial Results

At the financial results meeting, Executive Vice President Muramoto described six points: "Consolidated performance in the first quarter," "Toward sustainable growth," "Multi-Brand strategies," "Life Design Domain," "Business Services segment," and "KDDI Sustainable Action."

1. Consolidated performance in the first quarter

The first quarter saw steady progress toward the annual forecast, recording consolidated sales of 1.3003 trillion yen with a progress rate of 24.3%, and consolidated operating profit of 299.2 billion yen, with a progress rate of 28.5%. We will continue to achieve the annual forecast through measures such as expanding growth fields.
Consolidated operating profit for the first quarter was 8.5 billion yen, up year on year. While the Multi-Brand communications ARPU revenues dropped by 11.7 billion yen, the Life Design Domain and Business Services segment, which are growth fields, recorded 7.5 billion yen more profit, contributing to the final increase in profit. Operating profit in the Business Services segment was down 1.5 billion yen year on year, but actually increased when you consider the temporary impact on profits in the last first quarter, thus growing steadily toward the annual forecast.
We are focusing on giving value back to customers and driving 5G, as key issues for our communication business. Regarding revenue from communication charges, when we look at the loss from the return to customers through means such as revised plans, the gain from increased data usage and other factors, we expect to lose around 60 to 70 billion yen in revenue. Meanwhile, we will drive structural reforms for sustainable growth, with medium-term goals and measures such as further expanding growth fields, saving costs, and terminating 3G.

2. Toward sustainable growth

The fiscal year ending March 2022 is going to be a very important year, in that it is the year to complete the current medium-term management plan and build a foundation for sustainable growth. Our growth strategies are to continue to save costs and develop growth fields, centered on Multi-Brandstrategies and existing communication businesses, including 5G. The foundation for sustainable growth is to enhance customer engagement, which is our top priority.
To improve customer engagement, we will enhance customer touchpoints and higher-value proposals. For individual customers, we will propose convenient and pleasant services according to their use of the au Economic Zone. For corporate customers, we will explore issues together with the customers at their job sites and propose DX to transform their business models so that they will continue to choose us and we can build with them strong relationships based on trust. This year, we reinforced our organizational structure to drive these efforts. The Personal Business Sector established the Marketing Division to drive the communication and life design business together, based on strategic marketing. The Solution Business Sector established the Business Design Division to strengthen business design capabilities to contribute to customers and the Business Exploration & Development Division for cross-organizational innovation. Under the new structure, we will respond to the voices of customers more closely than ever before and offer value-added proposals.

3. Multi-Brandstrategies

UQ mobile is looking to become a brand that stays closer to customers' lives. We have launched the Denki Set Discount that will offer continued discount for families and single households alike. We will propose to UQ mobile customers the au Economic Zone services that have been extremely popular among au customers. We will offer them at all au shops and au Style shops. We have also substantially expanded the smartphone portfolio. As customer needs have been diversifying, we will try to become a closer partner to customers by responding to their expectations and needs.
With the slogan "Zutto, Motto, Tsunagu Zo, au (Connecting more and always with au)" we are introducing the 5G network to areas based on where people are likely to go on a daily basis, so that it can be incorporated more into people's lives. In June, we launched 5G services on the platforms of all 30 Yamanote-Line stations and all 19 Osaka Loop Line Stations. Furthermore, we announced au "Rail Line 5G Conversion" to cover railway stations and their routes with 5G. By the end of fiscal 2021, we will look to cover the platforms, station concourses and routes in the key zones of 21 railway lines in Kanto and 5 lines in Kansai including JR and private sector into 5G.
With regards to initiatives to improve the value of the 5G experience, we extended a virtual space in Shibuya through the Shibuya 5G Entertainment Project and started offering a new Harajuku area. We also projected 3D contents with cutting-age art AR, including contents from Aomori Nebuta Festival, hosting events jointly with JR East for people in Tokyo to experience Tohoku. We will continue to drive collaborations with our partners so that people can enjoy the most advanced technologies and 5G areas.
Regarding smartphone subscriptions, the number of smartphone subscribers for 4GLTE and 5G combined had steadily grown to 29.27 million phones by the end of March. The total number of 5G units sold exceeded 3.4 million by the end of June. With over a million more phones subscribed in three months, it has been growing steadily.

4. Life Design Domain

With regard to Life Design Domain's KPI, various core services have continued to grow steadily. We have 2.96 million au Denki,etc. subscriptions, 6.7 million au PAY Card subscribers, and 15.57 million au Smart Pass subscribers, of whom 11.64 million are au Smart Pass Premium members, and the services are taking root steadily.
In the Finance Business, which is the key driver of growth for the Life Design Domain, the amount of payments and transactions increased to 2.5 trillion yen, or by 1.3 times year on year, growing steadily. au Jibun Bank mortgage also reached the 1.5 trillion-yen mark in June, growing significantly. Its growth is accelerating, growing by 1.5 times in the last 9 months, thanks partly to measures such as the au mobile preferential discount launched in March.
For expanding the au Economic Zone, the number of members for au PAY, a smartphone payment service that serves as a customer touchpoint, reached over 33 million. To offer additional value, we also introduced food delivery services and healthcare services, expanding the portfolio of the au Economic Zone. Thanks to the au PAY campaign launched in July, users can score Ponta points more efficiently, and as its collaboration with the "menu" app and financial services has been strengthened, and we will further promote the point scoring scheme. We also signed a capital partnership with menu in June to make food delivery services more accessible. For healthcare services, we enhanced the features of the "au Wellness" total healthcare app in June. Looking toward further measures such as expanding to online medication guidance services, we will offer comprehensive support to consumers, from their day to day health management to medical treatment, driving digital transformation in the health and medical care domains. Going forward, we will continue to strengthen customer touchpoints and service areas to expand the au Economic Zone and make it even more attractive, along with the point scoring scheme.

5. Business Services segment

In the Business Services segment, sales from growth-driving NEXT cores significantly grew by 18% year on year. Corporate DX, Business DX and Business infrastructure services are all steadily expanding their business fields. We will continue to promote the NEXT cores and aim to grow the entire Business Services segment through synergies with core businesses, such as attracting more IDs and improving customer engagement.
Our strengths in the Business Services segment are, in addition to our extensive IoT track record and experience, the ability to offer various value outside of cloud and data analysis as a one-stop shop, and the ability to collaborate with customers to create businesses on a global basis. With the 5G era ahead of us, we are able to respond to the world that urges further connectivity and support our customers as they progress their DX.
The KDDI IoT World Architecture, which supports customers' global DX/IoT, combines localization and global standards in an optimal manner to support not just connected cars, but further beyond this, customers' DX at their overseas locations, offering platforms to a wide range of industries. To offer platforms to a wider range of industries, we launched Global IoT Access in June. It merges international carrier relations, which is one of KDDI's strength, with SORACOM's IoT technologies including on SIM management, being offered at low prices in many locations worldwide. We aim to roll it out to over 200 countries and regions by the end of the fiscal year to offer one of the largest coverages around the world.
We are also accumulating a track record of supporting customers' DX and IoT environments. The same applies for the automobile industry. With connected cars becoming more advanced, we signed a partnership with SUBARU for communication-based safe and secure car manufacturing. For DX cases for customers' overseas locations, we have supported Sekisui Chemical's local Chinese subsidiary's plant become a smart factory and transforming its operations, adopting our DX and IoT to improve production and maintain facilities systematically.
For new collaborations toward a mobile society, we entered an operational partnership agreement in June with Swift. We are aiming to create new markets and businesses by actively applying technologies, such as those associated with drones and self-driving cars, with the goal of launching commercial services by the spring of 2022.

6. KDDI Sustainable Action

For our conservation efforts for the global environment, we have updated the KDDI GREEN PLAN. Toward zero CO2 emissions by 2050, we will reduce our own emissions by 50% by fiscal 2030 compared to emissions in fiscal 2019.
In au Denki services, we are collaborating with the subsidiary ENERES to launch a new eco Plan. Its practical renewable energy rate is 100% and 2% of electricity charges will be donated to conservation efforts for the global environment.
To enhance initiatives to reduce CO2 emissions, we will drive initiatives to reduce power usage at our stations and data centers that use large amounts of power. We have signed an agreement with Nokia to conduct an experiment to apply AI control for the first time in Japan to reduce the stations' power usage by up to 50%. Furthermore, together with Mitsubishi Heavy Industries and NEC Networks & System Integration, we have started an experiment to realize a small data center with containerized immersion coolers. We will enhance our collaborations with partners ahead of the 5G era.

• Tell us about the revenue from mobile communication services. The 11.7 billion-yen drop in the revenue of Multi-Brand communications ARPU falls within the forecast scope of a 60-70 billion yen loss a year. While ARPU has recorded only a certain level of loss, the number of group IDs is decreasing. I would like to know your view on this. Meanwhile, when we look at the revenue of mobile communication services as a whole, it is doing extremely well, an increase of 10 billion yen. Tell us why this has happened.

  

  As you have just pointed out, Multi-Brand communications ARPU saw a drop in revenue, but revenue from Mobile communication revenues has increased mainly from assets like roaming revenue. Regarding ARPU, its medium-volume range has been the main seller since last year, just as you have pointed out. The loss is largely due to subscribers migrating to brands like UQ mobile and povo. Meanwhile, more people are now using 5G and au's unlimited MAX 5G/4G LTE. Currently, it is mainly customers who have migrated to affordable plans, just as expected. As for the number of group IDs, the result in the first quarter was a bit poor to be honest. The fact was that the new Rakuten Mobile plans started in the last fourth quarter, with campaigns running until early April, and competitors released online brands that increased mobility.
  However when you look at the churn rate of 0.83% for the entire first quarter, it has been improving by the day since April, reaching 0.6% level by June, steadily improving. We want to further reduce the churn rate to meet the annual target.

• The plan was to save costs of 70 billion yen this fiscal year. Tell us how this has progressed. You say that the Life Design Domain has seen profits increase by 9 billion yen. Tell us which part of the annual plan has expanded and which has downsized, if any.

  

  The saved costs were mostly from marketing and from integrating with UQ mobile. Also, we have been working on improving network efficiency, which has been mostly proceeding as planned. Even though we managed to reduce costs this year, it will not be in profit because the cost reduction is going to be cancelled out by the cost of terminating 3G.
  Life Design Domain profit leaped to 9 billion yen. I think you are asking which part of its profit went up and down. You can take it that most of them went up. The added-value services of au Smart Pass and au Smart Pass Premium also did well. The payment business is doing well, and for finance, au Jibun Bank and Credit Card are also doing well. au Denki depends on the season, so from April to June sales go down quarter on quarter, because people do not use electricity much during this season, but it is doing well year on year, steadily growing.

• Please give us a bit more detail about the churn rate. I understand that in the first quarter of the last fiscal year the churn rate was abnormal, partly due to COVID, and comparing it with the first quarter two years ago, it has gone up slightly. When you look at its breakdown, it looks as if smartphone users are steadily growing while 3G users are leaving. You say that you are going to take measures to reduce the churn rate. What kind of measures do you have in mind?

  

  Overall, conditions were tough from the last fourth quarter to April, due partly to Rakuten Mobile's campaign. We are now at a point where competitor campaigns have ended and the numbers have started to calm down, and with the launch of the Denki Set Discount, UQ mobile's reception is great and it is growing steadily. Users can now sign up for UQ mobile at most au shops. We are going to take time and explain our multi-brand to customers at au shops and UQ spots across Japan. We hope to reinforce sales activities as various models will come out in the autumn.

• Am I correct in understanding that the recent churn rate has dropped to nearly 0.6% as a result of UQ mobile's enhanced sales structure taking effect?

  

  It's largely due to competitor campaigns ending, resulting in a lower churn rate, and UQ mobile's new services being extremely popular. au's unlimited MAX 5G Netflix Pack (P) and unlimited MAX 5G with Amazon Prime are also popular, attracting new subscribers, so there are synergies.

• You cited the temporary profit in the Business Services segment as one of the factors that contributed to profits. Tell us exactly what happened.

  

  We had some property deals for the data center business overseas. In finding a better location to expand the data center business, we recorded sales profit of a few billion yen.

• I want to check the Multi-Brand value-added ARPU and the factors that pushed up revenue. It must be largely the impact of electricity that pushed profits up year on year and down quarter on quarter. Tell us about the developments outside of the electricity field, breaking down the Multi-Brand value-added services, including qualitative developments and drivers of revenue.

  

  The largest year on year revenue growth is in the finance and payment category. au Smart Pass and bundled contents, such as those with Netflix, are also growing. When we sell iPhones, the users sign up for product warranty services, so warranty ARPU has also grown. These are the growth drivers. au Denki has also grown year on year. au Denki is mostly to blame for the quarter-on-quarter drop.

• I would like an additional explanation for the group IDs and churn rate, as I find them concerning. Though you say they have dropped, the group IDs haven't dropped that much. The rising churn rate seems to be due to a little drop in au, which was recovered by UQ mobile. You previously disclosed the ratio of MVNO and au in the group IDs, how did they progress and result in this churn rate? Y!mobile has gone a step further to lower the prices, and I am concerned that UQ mobile has followed in its footsteps probably too much. What do you propose to do to balance UQ mobile and au, and where do you think they are going and in what proportion in a few years' time?

  

  Facts first. Right now, as the battle is in the medium-volume zone, au subscribers have naturally decreased and migrated to UQ mobile. Meanwhile, UQ mobile is doing well, exceeding 3 million, and povo is also around 1 million. I cannot tell you how the proportion will change in future, but the bottom line is that we will have to further boost UQ mobile and povo and also au, so we will have to work harder. That said, group IDs have not dropped that much, but they did drop about 80,000 to 90,000. Some of them went to UQ mobile and povo, but as this fiscal year is the last fiscal year to terminate 3G, a certain number of users cancelled their subscriptions. Going forward, we will boost the number of UQ mobile and povo subscriptions that account for a substantial proportion of sales, as well as maintain au.

• I would like to ask about the graph on page 2 of the presentation document that talks about the factors that increased and decreased operating profit. The greatest contributor to profit was "Other," which is 12.6 billion yen. What does it actually consist of? Tell us what constitutes the substantial portions of this, and approximately how much loss or profit they recorded to generate this 12.6 billion yen.

  

  The positive factors, in descending order, include roaming revenue, followed by the reversal of provision for repairing marine cables, and the reversal of provision for points.

• If taking roaming for example, I want to know what's happening; should I look at the gap between the Mobile communications revenues and Multi-Brand communications ARPU revenues? As for the recovered provision for the marine cable repair, am I correct in understanding that I should look at "Other" of the segment showing a significant increase in profit?

  

  That's correct.

• I want to ask about the churn rate. Do you expect the number of group IDs to grow naturally when mobility drops steadily? Or will they only grow when you strongly enhance measures like UQ mobile's Denki Set Discount? Please share these details.

  

  As you know, this industry involves fierce competition in the market. You lose customers the moment you ease up on measures even slightly. Right now the battlefield is in the medium-volume zone, so we will further drive UQ mobile's Denki set discount. Currently, customers can subscribe for UQ mobile at most au shops, but because we implemented this measure quite quickly, some of the shops are not used to the new operations. au, UQ mobile and life design products will sell thanks to the hard day-to-day work of store staff. I think the numbers for UQ mobile will go up even further once the operations become smoother. We will also make sure to explain multi-brands in detail and drive steady and grounded sales effort so that we can also boost au's unlimited plans and Netflix plans.

• How much exactly was the temporary profit from the Business Services segment's property sales last year, which you said was in the region of several billion yen?

  

  It was a few billion yen, not close to ten billion.

• Page six of the financial digest says that the Business Services segment profit dropped because of the decrease in device sales gross profit, among other factors. How much impact did device sales gross profit have? Am I correct in understanding that in the actual amount of sales, device sales gross profit had a significant impact, while other corporate businesses have done well?

  

  The major factor was the profit from the property sale. You are right that the Business Service segment profit was impacted by the decrease in device sales gross profit, as illustrated in the financial digest. The main models changed from last year to this year and the new models have lower prices. Mobile IDs have grown more than they did last year, so I think they will be returned as network income. As I explained, we are seeing the profits of the next core domains increase, so we want to support that growth.

• I see that in the Personal Services segment, the gap between the Mobile communications revenues and Multi-Brand communications ARPU revenues suggests that roaming has increased. Other services, like MVNO's J:COM MOBILE and BIGLOBE Mobile, may become less competitive in the future when their online-only brands exist. What is your take on that?

  

  Roughly speaking, neither J:COM MOBILE nor BIGLOBE Mobile constitute a substantial portion of sales as a whole, but they are steadily growing, not shrinking. J:COM MOBILE is definitely growing because it has a unique market established for cable TV subscribers. BIGLOBE Mobile is also fighting with its unique plans that are different from MNO and MNO's online brands and so can reach out to areas that we cannot reach. I would appreciate it if you could give them a positive outlook.

• I would like to ask about how operating profit increases and decreases are analyzed. The Energy Business is said to have grown year on year, but does this refer to sales or to profits too? I had heard that the different procurement approach was going to worsen the margin, so my understanding is that it would look worse temporarily and then would recover in the second half of the year so that the annual result would be a significant increase. Can you describe the trends in the Energy Business? You also said that the Business Services segment's sales profit was due to a temporary factor. Was it something that occurred in the first quarter of last year, or something that is going to constantly emerge as the business expands?

  

  Sales for au Denki are going up as more people are signing up. Regarding profit, last year we saw a surge in JEPX. JEPX will likely stabilize as the Ministry of Economy, Industry and Trade is taking various approaches to organizing it. Still, volatility must be kept low. We see more relative power sources, which push up costs slightly. The Energy Business did well in the first quarter of last year. As oil was cheap, procurement costs were low, pushing up profits higher than forecast, which is why we are seeing a decrease in profits this year. As for property sales profit in the Business Services segment, it was for the first quarter last year only. For data center business you get the property first and then bring in equipment, so last fiscal year we had obtained the property and were getting rent. This year we will turn it into a data center, recording the revenue in the coming terms, meaning we get no rent. So if we are to talk about large sums of property income it only happened last fiscal year in the first quarter.

• I imagine that the Life Design Domain could have been somewhat better, except for the loss in the Energy Business profit.

  

  That's correct.

• UQ mobile is going to be available from early July at au shops across Japan. Does this mean that the UQ mobile sales are growing linearly, and if so, will that not accelerate downgrading and improve the churn rate at the same time? Can you explain what you can about trends from July onward?

  

  You are right in saying that UQ mobile sales are growing linearly as more shops offer UQ mobile. Now we have over 2,000 shops offering UQ mobile. Will the number of shops grow endlessly? In most cases, the first thing customers ask shop staff about is the price, and they will not immediately switch to UQ mobile. Customers choose a service after evaluating numerous factors with the staff, in a sort of made-to-order manner. In that sense, the gate has been opened wider, giving more chances to switch to UQ mobile, but we are not thinking about switching all customers visiting shops to UQ mobile. It is more about looking to achieve a proper balance.

• Having UQ mobile as an option could boost downgrading.

  

  Revenue dropped about 60 to 70 billion yen this term from lowering the prices. The impact in the first quarter was 11.7 billion yen, which is approximately what we had projected.