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

The Presentation of the Financial Results

At the financial results meeting, President Takahashi described four points: "Consolidated performance in the first half of the year," "Multi-brand strategies," "Growth fields," and "Non-financial initiatives."

1. Consolidated performance in the first half of the year

Consolidated sales for the first half were 2.6252 trillion yen with a progress rate of 49.1%, and consolidated operating profit was 573.1 billion yen, with a progress rate of 54.6%. The first half saw increased revenue and decreased profit, but we are making steady progress with respect to the annual forecast.
Consolidated operating profit for the first half dropped by 15.7 billion yen year on year. Multi-Brand communications ARPU revenues dropped by 30.4 billion yen, as the impact of lowered prices stayed within the predicted range. Also, thanks to the group MVNO revenues and roaming revenues, mobile communications revenues saw an increase of 11.7 billion yen. The growth fields of the Life Design Domain and the Business Services segment saw an increase of 11.8 billion yen, contributing to increased profits. Meanwhile, we have undertaken operations in consideration of the future, and 3G-related expenses and sales promotion costs have resulted in decreased profit.

2. Multi-brand strategies

We started offering 5G across all brands, including UQ mobile and povo. With the slogan "Zutto, Motto, Tsunagu Zo, au (Connecting more and always with au) ,"we are introducing 5G to more areas where people are likely to go to on a daily basis, as well as offering diverse experiences and value, including virtual cities.
We will launch the au 5G network in areas where people are likely to go to on a daily basis, including railways and commercial districts, aiming to cover the key zones of 21 railway lines in Kanto and 5 lines in Kansai by the end of March 2022, including those of JR and the private sector. As for communication quality we have been cutting the rate of un-connectivity in connected areas and set base station parameters to maximize the connected areas to improve connectivity.
The total number of 4G LTE and 5G subscriptions grew to 29.78 million by the end of September. The total number of 5G unit sales also reached 4.7 million by the end of September. We will aim to reach 8 million by the end of the fiscal year ending in March 2022.
For au, mobile data traffic per person for 5G is more than 2.5 times that of 4G LTE. We will advance the full lineup of services to enable customers to use 5G comfortably, such as unlimited data offers, full-fledged set plans, and discounted devices.
For UQ mobile, we will offer simple, affordable services with secure support. In the second quarter, we launched Home Set Discount, which saves even more money when combined with the set discount with an electricity plan, which also provides a discount for home Internet that is used by many households. These services allow users to enjoy secure support and full services equivalent to those available from au.
povo2.0 is a service that looks to innovate by setting the basic usage charge to 0 yen, enabling users to top up on services that fit their lifestyles. Able to respond to the new usages anticipated in the eSIM and SIM-free days ahead, povo2.0 will respond to the needs of highly active, digital-native customers.
As for the experience and metaverse unique to 5G, we will develop virtual spaces that are connected to physical cities, creating various events and economic zones. To make 5G even more appealing, we will apply the most advanced technologies and deliver diverse experiences and value with our partners.
We have also signed an operational partnership with SpaceX's Starlink, which provides high-speed, low-latency satellite broadband Internet for use as au's backhaul lines. We will provide steady communication services to our customers by using Starlink for mountainous areas and remote islands, where providing service has been difficult, as well as to address natural disasters.

3. Growth fields

The growth fields are progressing steadily toward the annual forecast. Operating profit of the Life Design Domain was 120 billion yen, up 10 billion yen year on year, of which the financial business saw an increase of 4.9 billion yen, driving profits. The operating profit had a progress rate of 48.0%, but thanks to the effects of the energy business from the last term, it is progressing as expected because profits are expected to increase in the second half. The operating profit of the Business Services segment was 92.3 billion yen, seeing increased profit in both core businesses and next core businesses, with the progress rate steady at 50.1% against the annual forecast. This year being the final year of the medium-term management plan, we will look to achieve sales of 1.5 trillion yen in the Life Design Domain and 1 trillion yen in the Business Services segment, which are top line targets in these growth fields, as well as double-digit CAGR profit growth.
In the Life Design Domain's financial businesses, we are enhancing coordination among financial services. We have linked banks and credit cards through au PAY and are thinking about further linking them to financial businesses beyond that. We are also rolling out efforts based on KDDI's unique strengths, such as enhancing the links between financial services, including au Jibun Bank, allowing users to enjoy interest rates that are up to 200 times better. Thanks to such linkage, the number of au PAY members grew by 4.3 million year on year, and au PAY Card members to 7 million, up 1.2 million year on year. The main services have also grown significantly, and we are seeing steady growth of our customer base and our assets, including the number of au Jibun Bank's deposit accounts growing to 4.48 million, and the Loan product balance to 1.7 trillion yen.
In the Business Services segment, sales of the growth-driving next core businesses grew by double digits, 17% year on year. In the next core businesses, we will create synergy in both, Japan and overseas, centered on growth-leading IoT by making the most of KDDI's prowess in communication and the strength of our global base. In addition to use in globally launched connected cars, we are seeing a rapid increase of our lines being used in social infrastructure such as those for smart electricity and gas meters, and we are looking to 30 million lines by the fiscal year ending March 2023. Beyond IoT, we will look to further advance our services with 5G and to create new businesses together with customers. Based on the IoT lines and peripheral services we are providing at present, we will support customers in a wide range of industries in developing recurring businesses. In September 2021, we launched "KDDI ID Manager," a customer ID management service that supports customers' recurring businesses, and started communication tests in commercial environments to create business use cases for the forthcoming 5G SA era.

4. Non-financial initiatives

For our conservation efforts for the global environment, toward carbon neutrality, we will reduce our own emissions by 50% by fiscal 2030 compared to emissions in fiscal 2019. We will forecast electricity consumption up to fiscal 2030, devise an execution plan, and advance our efforts by iterating the PDCA cycle, making sure that actual emissions decrease. The termination of 3G we are working this year to achieve is an important factor in reducing carbon emissions as it is a step toward shifting to more power-efficient networks. In November 2021, we will establish the "KDDI Green Partners Fund" to work on solving social issues through partnerships by capitalizing on our strengths in bringing about innovation with startups.
We will further develop DX personnel to transform into a personnel-first corporation, enhancing our growth fields such as the Life Design Domain and the Business Services segment while contributing to solving social issues through our businesses. We will increase the number of DX personnel from across the entire group to 4,000 people by the fiscal year ending March 2024, accelerating our efforts and potentially launching initiatives ahead of schedule.

• It looks as if the number of group IDs is better in the second quarter than the first quarter, possibly showing signs of a net increase. What is your take on the number of group IDs in the second quarter? What is your analysis, and which way do you think this improvement trend will go?

  

  We have been giving special attention to our work on the group IDs. Compared to the first quarter, the number of group IDs dropped by about 20,000 during the second quarter. I wanted them to increase in the second quarter somehow, but the 0-yen Plan in spring by Rakuten Mobile and competition with ahamo caused a big drop in the number of group IDs. Thanks to UQ mobile, the numbers showed a net increase in August. In September, we launched povo2.0, and in October, we are about to secure a net increase of several tens of thousands of group IDs. We want the net increase to grow further in the third and fourth quarters in order to make the annual total a surplus. I am sure the momentum has caused you worry, but we are seeing the tide changing, so we want to further grow the numbers.

• What is the current trend and number of contracts for povo overall, including povo2.0? povo2.0 is a different plan from before. I would like to know about user reactions and how users felt about povo2.0 right after launch.

  

  In the last conference, I said povo reached 900,000 subscribers. The most recent record is over one million, which is doing well for a launch, growing by around 100,000 a month. From November, we need to step things up to another level. povo is significantly driving up the number of group IDs. In August, we restored momentum by utilizing UQ mobile. Adding povo to that raised the number of group IDs to another level. The latest trends suggest that povo's ARPU can be raised higher than the average unit price of UQ mobile. povo signup is done entirely online, so it involves little cost when increasing the number of contracts. Personally, I am quite enthusiastic about povo.
  Circles Life is dynamic. Instead of closing contracts and being done with them like before, the question is how we can approach users with toppings after they sign a contract. Its strength lies precisely in digital transformation. Introducing more toppings can be data oriented. I want to develop the brand not just for the short term but so that it becomes an earner in the days ahead.

• Is povo2.0's ecosystem beginning to run smoothly, including Giga Katsu?

  

  Not yet, but in November we will focus our efforts on Giga Katsu. Unlike the way we approached customers before, our partners promote Giga Katsu, causing users to earn additional data. As it takes the form of an eSIM, various strategies can be employed, such as use as a second SIM. I have high hopes for it.

• What is the trend regarding the number of IDs for UQ mobile and au? What was the churn rate in the second quarter, what has the churn rate been recently? Also, it seems you have implemented various promotions, but which ones have succeeded?

  

  I think that the churn rate could be a bit lower. In the second quarter, it was 0.74%, which requires us to make a bit more effort. Meanwhile, customers are staying with au more than expected. I thought that more customers would switch to UQ mobile and povo, but customers are staying with au more than we imagined, thanks partly to sales promotions, including those for older iPhone models. Meanwhile, UQ mobile now has a full range of offers, such as a set plan with UQ Electricity and set plans with Internet, which can be signed up for at any au shop today. Some say we are following in the footsteps of SoftBank, but we learn from our mistakes to iterate a better cycle and it is working well so far. As you can see, the number of models sold has significantly grown year on year, and even though the churn rate has also gone up, this means the market is heating up and driving model sales.
  As for promotions, au's summer TV advertisements received particularly complimentary reviews, contributing to au's momentum. The mysterious utterance "UQUEEN" in the new UQ mobile TV ad has also attracted attention. I have great expectations for these promotions as they are doing well for the first time in quite a while. We quickly established sales channels for UQ mobile, which is now offered at all au shops and au Style. So, as you can see, we have focused our efforts into various sales promotion measures.

• The step-line graph on page 4 of the presentation document indicates that the impact of lowering the price fell within the expected range, but how did that impact progress up to the second quarter? Tell us how you think the impact will look in the second half of the year, given the current situation.

  

  At the beginning of this fiscal year, we expected the impact of lowering the price to be around 60 to 70 billion yen per year. It is 30.4 billion yen after the first half of the year, which is within the expected range, so the impact will probably stay within the initial annual forecast. Given the overall structure, the impact of lowering the price is 30.4 billion yen, but we hit back with roaming income, and used a bit of the surplus to terminate 3G early, ending 3G earlier than other companies and recording the depreciation early this year, and we have also made strategic investments for the coming term and still we are at this point. A decrease in profit during the second quarter had already been predicted internally and was included in our disclosure of 1.05 trillion yen (annual operating income forecast). So, we will control the impact within the manageable range.

• The negative figure in the "Other" part of the step-line graph on page 4 of the presentation document looks rather large, making it appear as if "Other" costs have increased by about 10 billion yen compared to the first quarter. Tell us what these costs include.

  

  In the second quarter, the largest portion of those costs was the sales costs due to the increased number of models sold. We are steadily terminating 3G, including model changes, which is why the cost went up compared to the first quarter.

• The churn rate has not dropped as much as we imagined, yet the number of group IDs is still falling a little. I suppose that is because you are getting more new contracts, so is that the cost associated with that? Or have any other measures been put into place?

  

  As you pointed out, thanks partly to the iPhone launch, the second quarter saw a larger number of models sold than last year, and so the commissions and sales costs associated with that also went up. The other thing is that as this year is the final year of 3G, various measures and sales of models have accelerated to encourage users to switch to new plans and models, which has also pushed up the costs associated with these measures. In addition, as the market heats up, the number of new contracts is growing, despite the number of churn also increasing. Sadly, we did not see a net increase in the second quarter, but we want to improve the figures since the latest trends look promising.

• I want to touch on the multi-brand communications ARPU. It was 4,280 yen in the first quarter, and 10 yen lower in the second quarter at 4,270 yen, seemingly not dropping any further. With so many brands out there, it is hard to predict the multi-brand communications ARPU and brand ratio. If au decreases and povo and UQ mobile increase, the mixed ARPU should decrease. Meanwhile, due to upselling and seasonal factors, there may be some impact on voice, but tell us of your current analysis of the multi-brand communications ARPU. Is there still room with respect to the annual forecast of 4,200 yen?

  

  You are right, but as we need to recover momentum in the medium-term, the negative factor is that the multi-brand communications ARPU will decrease due to marketing UQ mobile and povo. Meanwhile, it is to our benefit that all our brands are now 5G, and with the launch of iPhone 13, 5G coverage is available in more areas. Learning from past mistakes, we are introducing 5G to areas that people go on a daily basis. We have over 2.5 times more 5G traffic than LTE, and the prices are gradually changing to match that, encouraging upselling from UQ mobile to au. This is exactly what we wanted to do during the 5G era. We are offering various brands, and their establishment will work to our advantage. So our plan is to mix those brands and maintain the annual multi-brand communications ARPU of 4,200 yen, which we will steadily reflect in our strategies. For 5G, it is extremely important to generate more traffic.

• In that case, are the Unlimited Data MAX plans increasing more than the Pitatto plans (Adjust plans) ?

  

  There are many types of customers. Some customers on Pitatto plans move up to another plan as their traffic increases. Having UQ mobile customers switch to au is also good for ARPU. We started our partnership with OTT player Netflix early on, so we have a close relationship. Customers on bundled contracts show exceptionally low churn rates. The key to the strategy is to offer various products to encourage customers on upgraded plans to stay on those plans, thereby preventing them from downgrading.

• I want to ask about the market environment next year. With the fierce competition, when someone wins, other companies are impacted, resulting in the market plateauing rather than expanding or shrinking. I think the result of the competition culminates as the market, but what is your take on next year?

  

  It is exactly as you say. The population is not going up, but the way companies handle customers has diversified, including the launch of eSIM. Each company will address it by its own means. Competition has resulted in better services and lower prices. As for prices, we have plans starting from zero yen, so if companies lose any more, investment in 5G will be affected. We are entering the phase in which the question is how quickly we can launch 5G services, improve services, and generate more traffic as a result. We want to lower infrastructure costs and expand communication steadily.

• Suppose the market has somewhat plateaued. Do you think the rate of users signing up for unlimited plans will grow if users use two or three times more traffic?

  

  Exactly. Primarily, I am thinking about supplementing the drop in communication with added value, but 5G is not worth investing in if we are unable to develop the core communication part solidly with 5G. If 5G is generating 2.5 times or greater traffic, the question is how we are going to skillfully convert that into plans. Value-added services grow as users become more active. The way people watch videos is also changing dramatically these days, so we want to explore opportunities.

• Next year, you will not need to record the 3G related cost of 90 billion yen, and roaming income, which is currently increasing, will drop. What is your take on the balance between the dropping cost and sales?

  

  The 90 billion yen cost for 3G consists of 60 billion yen for infrastructure and 30 billion yen for sales, just as predicted for this year. Roaming revenue will not suddenly drop. We have areas where roaming will continue even when Rakuten's coverage exceeds 70%, so we can continue to expect a certain amount of income this year. Next year, roaming revenue will decrease, but it can be offset within the scope of the 60 billion yen for infrastructure. So then the question is how much we can invest in recovering momentum and develop growth strategies.

• Please explain why the Life Design Domain's operating profit of 60 billion yen in the second quarter hasn't grown year on year.

  

  Compared to the second quarter last year, it hasn't grown because of electricity. Financial and product warranty services are growing steadily. In the first half of last year, energy procurement costs dropped and generated profit, and the second half saw an imbalance in supply and demand due to the extremely cold winter, which spiked the JEPX market and resulted in huge losses for us. This year, procurement costs started rising slightly in the first half, offsetting profit into the second quarter. In the second half, JEPX is being safeguarded, and more direct deals have been introduced for procurement, which will result in a volatility risk that is not too large, thus maintaining the increased-profit scenario for the entire year.

• If you take out electricity, how much profit did Life Design Domain make, and by what percentage did it grow?

  

  The profit was 4.9 billion yen from financial services, and for warranty services, we are not disclosing numbers, but they are growing at a slightly better rate than financial services. The first half of the year saw 9.1% more profit year on year.

• The transaction volume of Settlement/Loan growing 1.3 times with an operating profit of 25% seems as if the margin is worse. Did something happen?

  

  We have not paid particular attention to that; nothing major has happened. au Carrier billing Service and au Jibun Bank mortgages are both doing well.

• I want to touch on the operating profit in the Business Services segment. It was 47.9 billion yen this second quarter, compared to 46.6 billion yen in the second quarter last year. I thought it would be a bit better than that.

  

  We will push it up going into the second half of the year. Last year, there was a temporary factor in the first quarter, and there was also a different gross profit from devices. The impact of the gross profit from devices continued into the second quarter, keeping the profit in the second quarter below two figures. In the second half of the year, this impact will start to diminish, eliminating factors that could cause a decline. DX-related services are growing steadily by two figures. High emergency needs for mobile services due to COVID-19 last year are beginning to subside, but serious DX and networks for connecting telework and office work are growing, so we want to encourage this development. As mentioned in my presentation, we will steadily aim for a top line of 1.5 trillion yen, 1 trillion yen, and 2-figure profit growth as described in the medium-term management plan.

• Are connected cars included under Business DX? Is there any chance that lower car production means fewer IoT lines, impacting profit due to not being able to meet the targets?

  

  Connected cars are included under Business DX. Due to the shortage of semiconductors and the impact of COVID-19, car production dropped in September and October, and this is set to continue into November. That portion will negatively affect the plan, but IoT as a whole achieved the targets for the first half of the year. It is not easy to predict how the semiconductor situation will turn out, but I am not too worried as demand for cars itself has not disappeared from the market and will definitely come back.

• There may be only a limited impact on profit, but won't the delay matter? Some say that procuring semiconductors may be difficult through the end of this fiscal year.

  

  There will be some impact, but we will cover for that with other areas.

• Is there any chance that soaring energy costs could affect the profit of KDDI's business as a whole, including communication?

  

  Providing communication services incurs electricity costs at stations, but the volatility is not so high because we have direct deals with power companies. We are also working to reduce energy usage. Energy costs will not have a significant impact on our communication business.

• The significant growth in 5G traffic may be due to higher demand caused by lowering the prices. Tell us how much traffic has been growing.

  

  Traffic has continued to show an upward trend, doubling over 3 years as forecast. Traffic has continued to grow as COVID-19 has prompted greater use of mobile devices, and with 5G showing more than 2.5 times the traffic of 4G LTE, it is growing at a rate of doubling over 3 years as predicted.

• Isn't it the lowered prices that are pushing up the traffic more rapidly than expected?

  

  Generally, it is thought that lowering prices will boost traffic, but we have not yet observed such a relationship. We are keeping an eye on the 2.5-times traffic increase with 5G, but we have not seen UQ mobile's new plans and povo boosting traffic. We want to continue our analysis.

• You said that the electricity business saw decreased profit in the second quarter. Will the profit also decrease in the third quarter, and then significantly increase in the fourth quarter so that the second half of the year will see increased profit?

  

  It is the second quarter that witnessed a significant loss in energy business profit. I believe that profit in the third quarter will not drop as much as in the second quarter.

• The Business Services segment shows NEXT core businesses growing by 17% year on year in the first half of the year, suggesting that your intent is to double the number of DX specialists, but I feel that the projected number of DX specialists is not enough. Won't you lose momentum from the next fiscal year? Can you explain the situation? For example, is there a customer base, and is cross-selling working well? How have the NEXT core businesses been expanding?

  

  We are ramping up the number of DX specialists plan this fiscal year, both for core personnel and personnel overall. The goal to develop 4,000 DX specialists must be achieved ahead of schedule, which I think is possible. To develop Business DX, we need specialists who not only are skilled in communication technologies but in other areas as well—not just development personnel but core personnel who can oversee business development and project management. We have launched a program named KDDI DX University which we would like to drive forward steadily.

• NTT is taking the direction of internalizing and enhancing their development team. Customers are also showing a trend to ramp up their internal engineers. Given such circumstances, have you been successfully hiring core personnel and project management personnel? Are you aware that this is an issue?

  

  I am thinking of having core personnel internally. As for personnel for overall development, we have already been applying agile development in our own DX, and we have already applied this to corporate customers and been developing externally marketed services through agile development. I would like to introduce various measures and work further on this issue as the number of personnel and development prowess have not been enhanced enough.