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

The Presentation of the Financial Results

At the financial results meeting, Executive Vice President Muramoto presented "Consolidated performance in the first to third quarter and KPIs", and "Topics."

1. Consolidated performance in the first to third quarter and KPIs

Consolidated sales from the first to the third quarter were 4.0138 trillion yen with an annual forecast progress rate of 75.0%, and consolidated operating profit was 874.6 billion yen with a progress rate of 83.3%, growing steadily toward the annual forecast.

Thanks to the increase in revenue in mobile communication and in the growth fields, consolidated operating profit from the first to the third quarter grew significantly by 3.5 billion yen on the year. Even though Multi-Brand communications ARPU revenues recorded a 56.4 billion-yen decrease, mobile communication revenue grew by 7 billion yen thanks to group MVNO revenue and roaming revenue. In addition, the Life Design Domain and Business Services segment, which are growth fields, saw a profit increase of 16.8 billion yen. This was partly due to a temporary increase in profits associated with decreased provisions in the third quarter. From the beginning, we had forecast that the growth fields would show significant growth in the fourth quarter, so these fields made steady progress toward the annual forecast.

The number of group IDs turned the corner in the third quarter, recording a net increase to 31.56 million subscriptions, which is equivalent to a net increase of 48,000 units as the total of the three quarters. The steady progress of the Multi-Brand strategies helped to recover momentum. As 5G spread to more areas, au saw steady sales of 5G models. UQ mobile demonstrated the positive effects of the "discount with Denki (electricity)/Internet" being launched in the first half of the year and of being offered at all au shops across Japan. povo has been seeing greater usage mainly among highly active digital-native users since late September, which is when povo2.0 was launched with the slogan "From zero, in your own way." Thanks to the good timing of the expansion of 5G areas and to the timing for marketing the new iPhone, cumulative 5G unit sales had grown steadily to 6.2 million units as of the last day of December 2021, and the outlook is for them to grow to 8 million by the end of the fiscal year ending March 2022. Demand for larger data packages is also increasing, and 5G mobile data traffic per person has grown by more than 2.5 times compared to that of 4G LTE.

In the third quarter, the Multi-Brand communications ARPU recorded 4,200 yen, down 240 yen year-on-year. Multi-Brand communications ARPU fluctuated as a greater than expected number of subscribers stayed with au, for whom the 5G effect was a plus, while the number of UQ mobile and povo subscribers also increased while staying within the range of the annual forecast. We will operate ARPU to ensure it will achieve the annual target of 4,200 yen.

For the growth fields, the Life Design Domain recorded operating profit of 181 billion yen, with a progress rate of 72.4% toward the annual forecast, and the Business Services segment also recording operating profit of 141.7 billion yen with a progress rate of 77.0%. Both are expected to see significant increases in profits in the fourth quarter and are currently progressing steadily toward their annual forecasts.

For the Life Design Domain's KPI, the core service customer base has continued to see steady growth. The number of subscribers for au Denki etc., has reached 3.24 million, the number of au PAY Card members 7.3 million, and the number of au Smart Pass Premium members 12.12 million.

In the Energy Business, the performance showed rapid fluctuations due to the price fluctuations of the power market as a whole in the last term, and profits were high from the first to the third quarter thanks to the lower procurement costs, but profits worsened in the fourth quarter as costs soared. This year, aiming to control costs, we have increased procurement ratio of private and stable procurement from local energy companies, etc. instead of from the wholesale electricity market. With this initiative taking effect, we saw profits decrease year-on-year in the first to the third quarter but expect to see significant profits in the fourth quarter.

In the Business Services segment, the NEXT core that are the drivers of growth recorded a two-figure growth in sales, up 17% 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 core and aim to grow entire Business Services segment through leveraging synergies with core businesses, such as attracting more IDs and improving customer engagement.

2. Topics

Based on the slogan "Zutto, Motto, Tsunagu Zo, au (Connecting more and always with au), we are creating safe and reliable 5G networks in areas where people are likely to go on a daily basis. With the au "Rail Line 5G Conversion" announcement, we are looking to cover 26 lines by the end of fiscal 2021, including JR and private sector lines. Furthermore, for steady network operations, we will enhance DX at operation sites and incorporate automation to monitor locations in the east and west to ensure network connectivity even during disasters.

We will also continue to enhance our collaboration with OTT partners. As we are seeing increasing consumer interest in 5G video services, we have expanded services from OTT partners who lead the entertainment industry to address such customer needs. We will continue to meet customer expectations, capitalizing on the strength of our partnerships.

With regards to the metaverse, KDDI has been accumulating use cases over a period of about two years through partnerships with community-based municipalities and tourism associations. The Halloween Fes that we held in October 2021 in "Virtual Shibuya" recorded a total of over 500,000 visitors. We have also recently launched "Virtual Osaka", enhancing collaborations with physical cities. To enable anyone to enjoy the metaverse with a sense of safety, we have also launched "Virtual City Consortium" to devise guidelines and so forth. We will lead industry standardization based on our extensive track record.

In the new mobility business, we will connect people, objects and events in cities and regional areas together with our partners under the concept of "Transforming mobility into exciting experiences" to solve social issues. In December 2021, we announced that we will offer the short-trip service "mobi" together with WILLER, for trips within a 2 km radius. By facilitating freer travel, we will look to solve travel issues in regional areas, offering people more opportunities to go out and enjoy interactions in their communities, thus vitalizing their communities. As a spinoff venture from KDDI, we have also established a new company "KDDI SmartDrone Inc." and we will announce the details in February.

Connected services are also steadily expanding. KDDI's Global Telecommunication Platform excels in centrally managing different communication lines from different countries, offering high quality and stable communication. Our offers to key domestic car manufacturers are expanding, including to TOYOTA, SUBARU and SUZUKI, and in regions not just in Japan but also in Europe, China, Australia, and North America, for total of 5 regions globally.

We are also advancing our efforts at global data centers. Telehouse boasts the top performance in the world in London and the top performance in France in Paris, aggregating resilient and quality data centers with communication providers and mega-clouds to create a strong ecosystem with robust connectivity. We plan to extend such success cases from Europe to Southeast Asia and launch Telehouse Bangkok by the spring of 2023.

We have also passed a resolution to expand the treasury stock limit by 50 billion yen, from 150 billion yen to 200 billion yen.

• Tell me how users have migrated after 3G was terminated. How much migration have you seen? If migration concentrates in the fourth quarter it will be quite costly, what is your take on that? Customers could also cancel their subscriptions after the termination, tell us what is happening with respect to that.

  

  We have worked on the migration for several years now and it has been going steadily as planned. You will see this if you calculate the numbers, that we have about 1.1 million 3G phones left, which is as expected. We are currently working to make sure that customers will eventually migrate to 4G and 5G in the fourth quarter. It will be difficult to reduce the number to zero by the end of the fourth quarter, but we will do our best to help as many customers as possible to migrate.
  As was said in the past financial results announcements, we have recorded infrastructure costs, such as accelerated depreciation, unchanged as costs every quarter. Sales costs will rise significantly in the fourth quarter, but I believe they will be about 30 billion yen for the year as expected.

• Will the subscriptions of customers who did not migrate to 4G and 5G but stayed with 3G be automatically cancelled?

  

  Yes. We have contacted them in every way, by newspaper ads, news releases, calling them and sending them postcards, but regardless of this, there will be a certain number of customers who will have stayed with 3G.

• Depreciation costs decreased year on year and on the first and second quarter, which was a factor pushing up profits in the third quarter. Is this because depreciation costs associated with terminating 3G decreased comparing to the first half of the year, or because of something else? With regards to capital investment, it looks as if you invested significantly in infrastructures in the first half of the year, going a little over the amount in the annual plan. How will you control investment in the fourth quarter and in the next year onward, and how will that affect depreciation costs? Tell us including the impact of the accelerated depreciation for the 3G termination.

  

  I would like to talk about the decreasing depreciation costs. Every year, we investigate the current state of our fixed assets and closely examine whether we need to change the number of durable years. This fiscal year, we conducted an even more detailed analysis of the assets that we have been using for a certain number of years exceeding the currently set durable years. As a result, out of the facilities that have already exceeded the number of expected durable years, we have reevaluated the durable years for antennas, mainly transmission towers, and for some power facilities. We had planned to change the durable years from the first quarter, but as this investigation took time, we recorded decreased depreciation costs from the first to the third quarter in the third quarter.

• If the third quarter includes the decrease from the first and second quarter, does it mean that from the fourth quarter onward the number will be greater than in the third quarter?

  

  Exactly. As in the third quarter we recorded decreased depreciation from the first to the third quarter, it was two quarters too many. The fourth quarter will record depreciation for the fourth quarter only, so it is expected to be more than the third quarter.
  Capital investment is slightly exceeding the forecast. We are going to control it, but even so eventually it could be slightly above the forecast for this fiscal year. Depreciation will start to take effect, so from the next year onward we will keep an eye on Capex to Sales to control it. Please be rest assured of this.

• There is no point in comparing with other companies, but Docomo and SoftBank plan to cut their capital investment a little, starting from this year. What is KDDI doing that is making its capital investment exceed the plan? Tell me why this is so and also the ways in which such factors will develop in the next year onward.

  

  Our 4G investment is decreasing, but the investment into 5G base stations have grown. We will continue to invest in 5G from the next year onward but will keep the total down by sharing and repurposing 4G facilities and assets. The major driver of the increase is the greater investment in 5G base stations.

• I would like to look at the future trends for your mobile communications revenues. This time, the number of the IDs was good, but is it sustainable? With regard to ARPU, I think UQ mobile is growing because of the impact of the "discount with Denki (electricity)/Internet" and such, and for au, Unlimited Data Max 5G is progressing at the high level of 60 to 70%, with au Support Discount being a driver. But in six months, when au Support Discount stops applying, do you think that users will stay and continue on the unlimited data plans?

  

  IDs grew significantly in the third quarter as discussed in the presentation. ARPU is also progressing as planned, I hope it can reach 4,200 yen which is this year's target. You are right that ARPU declined because of UQ mobile's growth. Many customers stayed with au, but UQ mobile and povo have been seeing great momentum with their IDs increasing, which is affecting ARPU. We want to maintain this momentum, raise the number of IDs, encourage users to choose high-end plans such as Unlimited Data MAX for ARPU and likewise for UQ mobile, encourage users to choose high-end plans like Plan M and L. Given the performance and contents of 5G models, traffic will grow significantly, so I think it is a question of how well we can explain these high-end plans to customers and have them select them.
  Sustainability depends on how ARPU and its revenue will perform. I would like to grow ARPU revenue by increasing the number of IDs and working on ARPU as explained earlier. The au Support Discount is being especially well received.

• If in 5G, Unlimited Data MAX accounts for 60 to 70% and will continue even after au Support Discount is over, is it the case that ARPU will likely not drop much if you just look at au?

  

  The purpose of au Support Discount is to let customers see how convenient Unlimited Data MAX is. That is why we have lowered the hurdle to using it. Data shows that a certain number of customers stay on the plan once they experience it, so I think it will have certain effects.

• I would like to ask about shareholder returns. You have just acquired treasury stock of 50 billion yen, what was the background to that approach? Can you also explain how sustainable that is?

  

  As you know, when we launched the current medium-term management plan, we announced that we would aim to grow our EPS by 1.5 times in six years, by the fiscal year ending March 2025. Since then, we have experienced unexpected market changes. It is inevitable that you would ask these questions about the target, but we made the announcements including shareholder returns, with the intent that we will be looking to achieve that target. Out of the current medium-term management plan, EPS growth is slightly below the initial plan, but we have included the message that we intend to recover it toward the next medium-term management plan. We would also appreciate it if you could understand that it also includes a message that as the management, we are not happy with the current share-price level.

• The churn rate seems to be remaining a little high. You are selling a considerable number of subscriptions due to UQ mobile doing well, but am I right in thinking that in UQ mobile, the best-selling plans are mainly the affordable plans? Also, for au, do you see any signs of profits increasing?

  

  The churn rate was high year on year and on quarter to quarter. Meanwhile, the market is rather dynamic and active, with new sales and MNP doing well with strong momentum. In the fourth quarter, the churn rate will be high as the quarter hits the sales period, which will not help, so probably the current level or slightly higher will be maintained, but we would like to keep this momentum to the end. The picture is varied for UQ mobile plans. Price-sensitive consumers choose plan S, which is the most affordable plan, but we are seeing more customers choosing Plan M and Plan L as well, as we have set strategic prices. UQ mobile's UQ Support Discount offers quite strategic pricing, so many people are choosing high-end plans.
  The fact is that more people stayed with au than expected. There are still many who have migrated from au to UQ mobile and povo, but with the iPhone launch as the foundation, 5G models are selling well to people changing models, and most people then choose 5G plans. Over 60% of people choosing 5G plans are using the Unlimited Data MAX 5G. We are also seeing many people subscribing to plans bundled with OTT services. I believe this situation will eventually get better.

• In the step line graph on page 2 of the presentation material, we see that the group MVNO revenues and roaming revenues continued to grow in the third quarter, with significant changes in "other" too. The roaming revenues include Rakuten roaming, which is changing the continuation of roaming with KDDI. Tell us the direction you have in mind and the gap between that and the trend in the third quarter, and also your take on future developments, along with the explanation of "others".

  

  The roaming revenues from Rakuten increased from the second quarter too, but it has not changed content-wise.

• I believe Rakuten is saying that they want to reduce the range of roaming a little to save costs. Does it mean that you are seeing no impact in the third quarter?

  

  We haven't seen that much change. We believe that at the very least this year will go as planned. As for "others", there are various fluctuations, but the biggest factor is the decrease in the provision for the handset purchase support program. We have and have had various handset purchase support programs, and for every program we have been recording a provision for a loss through the reversal method every quarter. You see this provision decreasing in the third quarter this year, because when the program ended, it significantly decreased the planned number of exercises, coupled with customers' outstanding debt decreasing and reselling prices of recovered models going up, which reduced the loss. The peak of the provision was in the third quarter last year, so the provision shows a big drop as the difference.

• Is this a temporary change or set to continue?

  

  Hard to tell. As explained, it could fluctuate with these parameters. However, for the programs that are already over at this point, it is trending downward. Meanwhile, it will go up for the new handset purchase support program - Kaetoku Program. Next year, PL will show the year-on-year effect.

• When we look at the operating profit of the Life Design Domain, on page 5 of the data book, operating profit for the last three months has not grown and is at the same level as in the previous year. The value-added Multi-Brand ARPU is growing steadily, so you could say it is expenses, but tell us why profit has not grown and your take on this for the future.

  

  As you commented during your question, the handset repair and compensation services and financial transactions, credit cards, and au Denki are performing well and achieving good sales, so this is the effect of cost. Out of the costs, the impacting factor is energy. As you can see from the graph on page 9 of the presentation document, the light blue is the JEPX unit price last year, which soared in the fourth quarter pushing down operating income. This year, we significantly ramped up private and stable procurement to avoid this volatility. Until the third quarter last year, we had been able to procure JEPX affordably, which meant that costs were low, generating profits. This year, costs went up relatively as we increased private and stable procurement to avoid volatility, but in the fourth quarter, you will see profits significantly increasing. Other than energy, there were other things that showed a rise in profits for temporary reasons last year, which also created the difference year-on-year.

• If you take out the loss from the energy, how much profits did you achieve?

  

  We have not disclosed the details, but energy also achieved profits. We have 3.24 million for au Denki,etc subscriptions and would like to grow that toward this year's target of 3.4 million. It is an extremely important service as it will boost sales and affect the churn rate of other services. The rest involves controlling costs. We will look to generate profits by avoiding volatility, thereby lowering costs. We are seeing profits, but until the third quarter we saw a profit decrease year on year.

• Let's talk about connected services on page 16 of the presentation document. I believe it is growing with the IoT lines and connected cars, but its contribution to the PL of KDDI as a whole could be small. Tell us the scope of your current sales and how much of a contribution to profits you have been seeing.

  

  We started this in 2019 with upfront investment, but we are seeing profits recently. It is contributing not just to profits in Japan, but also to those of overseas corporations.

• Global telecommunication platforms could expand to industrial machines and so forth. When you look at connected cars and other areas, are sales mostly coming from connected cars?

  

  Yes because we have a large number of lines for cars. In comparison, the number for industry machines is lower, but we are seeing a rapid increase in gas meters and so forth. Connected cars are currently leading the trend.

• In relation to migration, you say you have set aside 30 billion yen for sales expenses this year. How much of that did you use up to the third quarter? Does it mean that the infrastructure expenses will not grow from the third quarter because you have been spending them as planned? Will the absolute costs go up with retirement costs of 3G ending in the fourth quarter?

  

  The 30 billion yen sales expenses are rather for the second half of the term, mainly the fourth quarter. There are no factors that will push up infrastructure expenses in the fourth quarter.

• Until last year, the Energy Business had certain factors that pushed profits up and down, and in the fourth quarter of last year, you recorded a loss of about 30 billion yen. So I understand how you will achieve profits this year, but does this mean that from the first quarter next year onward, you will have a new cost structure that will continue to achieve a profit increase?

  

  On the whole, yes. Avoiding volatility is extremely important and we considered various measures for it this year. We will continue to do so toward the next year. Next year will be at least level with this year. We will do everything we can to work on operations that will boost profits as sales will grow. Procuring electricity is extremely difficult, but we intend to work on various measures.

• Would you disclose how much energy was a negative factor up to the third quarter?

  

  We have not disclosed an exact number, but in total around a few billion yen.

• I want to talk about Multi-Brand communications ARPU revenues. If the average this year was 4,200 yen, will the fourth quarter show a decrease accordingly? What is your take for ARPU in the coming year and when do you think the decline in ARPU is likely to stop?

  

  We plan to achieve ARPU of 4,200 yen this year and expect it to drop in the fourth quarter. IDs are steadily increasing, but the market is still being drawn toward mid-volume services. We will grow areas that are doing well such as au's Unlimited Data MAX plans, but overall sales will slightly decrease, so the idea is to control this to eventually be 4,200 yen. As for when the decline will stop, we are currently in the planning stage. Backed by the IDs' momentum, usage will go up with all the brands together that are au, UQ mobile, and povo. I would like the overall situation to turn around quickly, but please be aware that we are currently planning how to achieve this.

• The net increase situation was good in December. I believe you are planning for the January-to-March term to continue that trend. Does the situation look strong in January? Tell us as much as possible about your immediate situation.

  

  In the third quarter, all results were good. In the financial result announcements in the second quarter, we explained everything would improve gradually, and the situation gradually improved over August and September and then started to improve significantly in October. The situation did not change in January. We would like to step up our efforts in the sales period to achieve the target.