Performance Highlights and Q&A for the Financial Results for the Fiscal Year Ended March 2022

The Presentation of the Financial Results

At the financial results meeting, President Takahashi presented "Consolidated performance in the fiscal year ended March 2022" and "New Mid-Term Management Strategy" toward the fiscal year ending March 2025.

1. Consolidated performance in the fiscal year ended March 2022

Throughout the last mid-term management period, from the fiscal year ended March 2020 to this fiscal year ended March 2022, we have achieved the continuous growth of operating income and advanced returns to shareholders. Consolidated sales in the fiscal year ended March 2022 were 5.4467 trillion yen, with CAGR grew 2.3% on the fiscal year ended March 2019, and consolidated operating income of 1.0606 trillion yen, with CAGR grew 1.5% despite the effects of lowering prices. The Life Design Domain recorded consolidated sales of 1.4220 trillion yen, with CAGR significantly grew by 14.6%. Consolidated sales in the Business Services segment were 1.0426 trillion yen, exceeding the target of 1 trillion, with CAGR grew by 5.6%. We successfully achieved a dividend payout ratio of over 40%, and EPS of 300.03 yen, showed 5% growth in CAGR.

With respect to Multi-Brand strategy, the number of group IDs grew steadily to 31.84 million, exceeded 31.80 million as projected at the beginning of the fiscal year. Multi-Brand communications ARPU recorded 4,200 yen just as projected at the beginning of the fiscal year, and Multi-Brand value-added ARPU was 1,740 yen, steadily grew by 200 yen year-on-year. Total sales of 5G unit sales also grew steadily to over 8 million.

In the Life Design Domain, key services showed a significant growth, with operating income recorded 254 billion yen in the fiscal year ended March 2022 and CAGR grew by 20.0% from the fiscal year ended March 2019. The number of au PAY members were 37 million, of which au PAY Card members were 7.6 million, up 1.1 million year-on-year. Main services also grew steadily, with the number of au Denki, etc. subscriptions being 3.38 million and the Transaction Volume of Settlement/Loan being 11.7 trillion yen.

In the Business Services segment, the NEXT Core business drove the growth, recording operating income of 186 billion yen in the fiscal year ended March 2022, with CAGR growing by 15.1% from the fiscal year ended March 2019. In the fiscal year ended March 2022, the NEXT Core business accounted for 31.9% of the Business Services segment sales. The total number of IoT Connections also grew to 24.50 million, up 6.5 million connections year-on-year, highlighting robust growth as a growth-leading sector.

Lastly, KDDI terminated 3G services at the end of the fiscal year ended March 2022. We thank you for using our many 3G services for almost 20 years. Being able to terminate the services without a serious problem in this tough environment was a positive step toward the future. It was also an environmentally positive result, as 3G services involved high power usage.

2. New Mid-Term Management Strategy (FY23.3–FY25.3)

Amidst the rapidly changing business environment, KDDI has raised new "KDDI VISION 2030: The creation of a society in which anyone can make their dreams a reality, by enhancing the power to connect" to bring about an ideal world. By 2030, we aim to become a platformer supporting society, providing added value in every business and every corner of daily living. Until now, we have been expanding non-telecommunication growth domains by the integration of telecommunications and life design, mainly through smartphones. In the new mid-term strategy, we will drive business reform toward 2030, with Promoting business Transformation Centered on 5G.

In the new mid-term management strategy (FY23.3–FY25.3), we first devised "New material issues (materiality)" comprehensively highlighting the levels of importance of social issues and KDDI Group management from a long-term perspective. With this in mind, we will strengthen our business strategies and the management foundation that underpins them, with sustainability management as the basis. As for the basis of sustainability management, the KDDI Group will aim for the sustainable growth of society and advance corporate value together with our partners through driving our business strategies and strengthening our management foundation. We will look to create a positive cycle where the growth of society benefits our business strategies, which will then give back to society.

■Business strategies

In the new mid-term strategy, we named business strategies "Satellite Growth Strategy." Putting 5G, which is set to expand full-scale, at the center of the strategies, we will advance our telecommunication business and focus areas with telecommunication at the center. Defining the following five domains as focus areas—(1) DX (digital transformation), (2) Finance, (3) Energy, (4) LX (life transformation), and (5) Regional Co-Creation (CATV etc) —we will accelerate the growth of the new domains, generating synergies with telecommunication at the center. For the long-term outlook of the focus areas, in DX we will utilize group assets mainly through 5G, aiming for a positive cycle of our businesses transforming people's lives. In finance, we will launch B-to-B-to-X businesses by providing platform services, and in energy, VPP businesses and so forth based on data utilization. In LX, with the hope of transforming lifestyles as the step of Life Design, we will transform people's experiences and activities in daily life by promoting 5G penetration and advancing 5G technologies, while for Regional Co-Creation, we will work on solving the digital divide problem. In every domain, we will utilize 5G, which is our strength, and our know-how and partnering from years of experience.

For 5G that will drive growth, we will aim to "blend in" telecommunications to every scene to bring about an era that provides new value with diverse partners. To develop areas that will serve 5G, we will expand in areas where people are likely to go to on a daily basis to enable more customers to enjoy 5G comfortably. By improving area coverage across Japan, we will also contribute to targets by the government's Vision for a Digital Garden City Nation. In 5G, arenas to bring about new value will expand with full-scale of Stand-Alone (SA) development. Network slicing will bring steady communication for each use case and openness and virtualization will also advance network operations. We have been behind other nations in terms of 5G deployment, but now we will proactively introduce 5G as well as its usage scenes with an eye to the times beyond 5G.

For the 5G Penetration, we will set the medium-term target of 80%, aiming to increase communications ARPU revenues in the fiscal year ending March 2025 to exceed that of this fiscal year ended March 2022. To achieve early ARPU growth, we will strive to maximize ARPU. We will also expand services through partnering, which is our strength, and provide experiences unique to 5G. We will provide leading entertainment OTT services with worry-free unlimited data usage, super-definition videos and real-time services.

■Focus areas

(1) DX

The center of the growth for the focus areas is the corporate business of DX. In the NEXT Core business, we will aim for double-digit growth in sales CAGR, making the Business Services segment the second pillar of growth after telecommunication, raising its operating income CAGR by double digits and making it account to about 20% of our group's consolidated operating income. To do that, we will capitalize on our strengths and advance the optimized operational management know-how toward the time when telecommunication will reach every corner of society. We will provide new value with our partners through 5G and DX, as well as through stabilizing the operational and maintenance management structures developed over the years with our global partners. In the future, we will combine our extensive assets such as ID management, payment, and data analysis developed through our telecommunication operations and consumer businesses, with guaranteed bandwidth based on 5G network slicing, proposing solution cases that tailored to each industry, to accelerate the DX of our corporate customers. We will also launch successful domestic DX models worldwide, based on our sales structure that unites our domestic and global sales prowess.

(2) Finance

In the finance business, we will aim to increase key indexes, as well as achieve double-digit growth in sales and operating income CAGR, mostly through growth drivers including home mortgages and the number of credit card members, while interlinking wide-ranging features and services from the finance group, and encourage customers' use of these services and functions across different channels. In the future, we will launch B-to-B-to-X services by providing platforms for au Financial Group's Banking as a Service (BaaS) to non-financial business operators, to make BaaS accessible for customers, employees and store operators beyond, expanding our business domains. Just as in telecommunication, we will aim to provide new added value by offering financial services to every corner of society.

(3) Energy

In the energy business, we will aim for double-digit growth of sales CAGR in the medium term through steadying income and expanding the customer base. We will also launch new carbon-neutrality-related businesses. We will look to providing renewable energy, strengthening our prowess to adjust supply-demand to address the fluctuations in the supply-demand balance arising out of the growth of renewable energy, advancing our VPP business.

(4) LX

In LX, we will create the businesses of the future through 5G penetration and technological advancement that will reform people's experiences and activities in their daily lives. To do that, as advanced technologies for the Beyond 5G and 6G era, we will focus our efforts into LX technologies from the consumer's perspective, such as networks, security, space recognition, image analysis, and AI. For the Metaverse, which is one of the examples of value created by LX, we will create spaces in which everyone can express themselves toward the Web3.0 era in which users can directly own and share contents with each other. For drones, we will launch services that will revitalize regional areas and people's lives, including unmanned delivery and augmented video experiences. For satellite communication, we will bring city-level communication quality to mountains, camping sites and remote islands, through partnering with SpaceX, thereby contributing to creating new experiences.

(5) Region Co-Creation

We will deal with problems in regional communities and create together with the communities. We will work on eliminating a total of 15 million digital-divide cases in the medium term.

We increase the sales of the focus areas to account for over 50% of consolidated sales by growing the businesses in these focus areas.

■Initiatives to strengthen our management foundation

First, we will transform into a company that puts human resources first. We will advance three-in-one transformation initiatives, with a new personnel system, internal DX, and work-style reforms. We will spread the KDDI version of the job-based human resource system to enable diverse people to utilize their talents to the full and to advance diversity and inclusion. To drive business strategies based on DX, we will develop all employees to be professionals and improve their DX skills through "KDDI DX University," shifting personnel to focus areas.

For carbon neutrality, in February 2022 the KDDI Group obtained SBT certification in an international initiative "SBTi." To accelerate carbon-neutrality initiatives, we will achieve carbon neutrality in fiscal 2026 for data centers and in fiscal 2030 for KDDI alone, bringing the initial target forward by 20 years, and by fiscal 2050 for the entire group. To save energy, we will work on the efficient development of 5G areas, implementing AI control in stations, sharing facilities, and bringing immersion cooling into data centers.

All KDDI Group board members and employees will respect for the "KDDI Group Human Rights Policy," ensuring due diligence for human rights, including in supply chains and global businesses, thoroughly respecting human rights in our business activities. As we welcome more group companies and our businesses diversify with the advancement of the Satellite Growth Strategy, we will strengthen our group's risk management and information security systems.

For cost efficiency, in technology-related areas, accelerating 5G roll-out to more areas, we will appropriately control our investment criteria, including through promoting the sharing of infrastructures and by using advanced technologies. We will also work on transforming our sales structure and making our sales channels more efficient to save about 100 billion yen of costs in the medium term.

For cash allocations, we will continue to enhance investment in growth areas and returns to shareholders for sustainable growth. For operating CF excluding financial business, we will aim for about 5 trillion yen in the medium term. The generated operating CF will be first allocated to capital investment for 5G, focus areas, and strategic businesses on a scale of 2 trillion yen in total. We will also provide returns to shareholder of about 1.5 trillion yen in the medium term, through dividends and share buybacks.

■Summary of the mid-term management strategy

For sustainability, we will aim for continuous growth of society and the enhancement corporate value together with our partners, through promoting the Satellite Growth Strategy, and by strengthening the management foundation that supports them.

For business growth, we will aim for continuous growth through increasing ARPU revenue from driving 5G, achieving profit growth of over 100 billion yen in focus areas, and by saving cost by about 100 billion yen.

In financial policies, we will prioritize capital investment into 5G and focus areas, and investment into strategic businesses, aiming for over 40% of dividend payout rate, dynamic share buyback, and continuing to achieve 1.5-fold growth of EPS from the fiscal year ended March 2019.

We will strive to transform our businesses amidst unsteady world affairs and rapidly changing business environment.

3. Projections for consolidated performance for the fiscal year ending March 2023

For the projections for the consolidated performance for the fiscal year ending March 2023, which is the first year of the Mid-Term Management Strategy, we are aiming for sales of 5.56 trillion yen, up 2.1% year-on-year, and operating income of 1.1 trillion yen, up 3.7% year-on-year. The Business Services segment and the financial business which are the focus areas will drive the growth, with the Business Services segment aiming for operating income of 206 billion yen, up 10.7% year-on-year, and the finance business 3.8 billion yen, up 95.9% year-on-year. The figures for the finance business include the temporary effects of an accounting process, but even without it, we will aim for double-digit growth for CAGR.

For shareholder returns, we have decided to buy back shares by up to 200 billion yen. For the dividend per share, we will focus on DPS growth that involves continuous growth, aiming for dividend of 135 yen for the fiscal year ending March 2023, which will be a higher dividend for the 21st consecutive year.

• About the target of operating income. You said you would achieve 100 billion yen more operating income in focus areas, cost savings of 100 billion yen, and surprisingly recover ARPU in two years, so you would expect the consumer business to record a profit, which would provide operating income of about 1.3 trillion yen. Is that the kind of profit range you are looking at? KDDI is the only company that has announced that it will recover ARPU in two years. Tell us what backs this enthusiasm, the premises for it.

  

  Internally we have always focused on both axes. We have discussed that there will be no continuous business if we do not grow 5G, which is the center of the Satellite Growth Strategy, and instead only grow the new business domains. So we want to focus fully on how to restore ARPU in 5G. We want it to bottom-out this year and are currently working across the company to turn the effects of the approximately 70 to 80 billion yen from price lowering into a surplus by the next fiscal year. Verizon Communications Inc. and AT&T Inc. in the United States are also showing results in 5G through collaborations with OTT players and hyper scalers. If we set them as role models, I am sure there is enough potential.
  In the last mid-term strategy, we were going to expand centered on DX, finance and energy. We are now confident that these areas will grow steadily, so we have devised them to be the Satellite Growth Strategy this time to move forward. We might not make as much as 1.3 trillion yen by the fiscal year ending March 2025, but we want to aim to grow EPS by 1.5 times at least. Three years on, we are seeing CAGR having grown by about 1.5%, so it is lagging behind by about one year. We devised the new mid-term management strategy to shorten the period somehow.

  We know for a fact that in ARPU, traffic goes up when people migrate from 4G plans to 5G plans, and when they do, the Unlimited MAX plans account for a larger proportion. Looking at the configuration of the current customer plans, there are certain number of Pitatto Plan 4G subscribers and UQ mobile Plan S subscribers, leaving sufficient possibility to raise ARPU if we encourage migration to 5G. We would like to communicate to customers the benefits and user-friendliness of smartphones so that people will use them more. The know-how we obtained by talking to customers about povo and having them experience it will work for au and UQ mobile, too.

• About the policy of the medium-term cash allocations. Simply calculated, shareholder returns of 1.5 trillion yen will be just achieved by a 10-yen increase in the dividend every year and 200 billion yen of a buyback of shares every year. I would like to ask about how you view the balance between dividends and buybacks. Also, how do you view the 700 billion yen investment in businesses, given that you budgeted 500 billion yen in the mid-term management strategy before the last one and how do you evaluate this? Even if you do all of this, you will still be left with about 1 trillion yen, how do you intend to use it?

  

  For shareholder returns, what you have just said is not far off. Most will be accounted for by the dividend payout rate of over 40% and OP growth, and the rest will be accounted for by share buybacks. As for having 1 trillion yen left by subtracting the amount from cash allocations of 5 trillion yen, the 5 trillion yen is correctly around 4.7 trillion yen and includes a few hundred billions of yen for IFRS16-related leasing payments and so forth. We received negative reviews about the M&A and the way we dealt with it with the last budget. We are not going to set a budget for it. We want to use around 700 billion yen for capital allocations to invest in strategic businesses in growth fields, focusing on DX, finance, energy, and LX. We will not invest wastefully simply to satisfy budgeted targets. If we see good projects, we want to invest in them within the said range.

• Are you setting such plans because you are seeing signs of ARPU bouncing back in the medium term? In the fourth quarter of the fiscal year ended March 2022, ARPU declined and when compared with the fourth quarter of the fiscal year ended in March 2022, the ARPU in the new fiscal year does not seem to be declining. Tell us if there are any special factors affecting how ARPU is trending. I want to ask how ARPU will change from quarter to quarter in the new fiscal year.

  

  The decline in the fourth quarter of the fiscal year ended March 2022 might look significant, but this is because of access-charge payments and otherwise it is not at an unusual level. The most important thing is to stop the decline of ARPU. Rather than it declining in the first quarter of this fiscal year, we want it to start plateauing and to go up by the end of the fiscal year.

• For the low-price brands, the effects of lowering prices in the spring of last year will continue to deepen until around the launch of the iPhone in the autumn. Tell us this year's effects from the price lowering, breaking them down.

  

  I cannot share exact numbers, but the ARPU for each brand has not fluctuated that much. We see it reflecting the effects of migrations between brands. As the migrations between brands are beginning to settle down, the decline will also start to stop. We want ARPU by brand to bottom-out and recover through migrations from 4G to 5G.

• I want to ask about cost savings as shown on slide 35 of the new mid-term management strategy's presentation. You say you are going to save costs of 100 billion yen, but I see a slight increase in capital investment this year. You say that you will save investment by appropriately controlling investment criteria. SoftBank has gone full circle with 5G this year, saying that it will dramatically reduce capital investment next year. Are you talking about saving infrastructure costs based on a plan to reduce capital investment, like them? Tell us about your projections for capital investment.

  

  In principle, we are not going to reduce capital investment and will keep it at the current level. Out of the costs savings of 100 billion yen in the medium term, about half is related to terminating 3G, and nearly half is from reducing sales cost. There are many ways to save sales cost, including through structural reforms and saving shared cost across businesses.

• Is it different from the 80 billion yen in costs you are planning to save this year from terminating 3G?

  

  Out of the 100 billion yen saved by the fiscal year ending March 2025, compared to the fiscal year ended March 2022, we are looking to save 50 billion yen from terminating 3G. For sales expenses, we used about 30 billion yen for 3G-related operations last year, but when you look at the whole medium term, competitors could use the expenses from terminating 3G to conduct active sales promotions, so we are not expecting them to decline.

• Have you included the income from Rakuten roaming in the reduced income from the next year onward?

  

  Of course. This year we will see a decline of about 50 billion yen, but this will happen gradually, it will not vanish instantly.

• I would like to ask about the focus areas. Right now the profit rate of the finance business is not that much compared to the existing telecommunication businesses. It might start to grow significantly this year, possibly because of home mortgages and so forth, but how do you expect profitability to change and what kind of presence do you project to achieve in terms of market size? For LX, the Metaverse and related have become buzz words and are set to grow, but how will KDDI generate income from it and how will KDDI shape the LX businesses in the future?

  

  For finance, home mortgages and credit cards have been growing since last year, which will be the center of the finance business. It is to our great benefit that our group owns a bank. Significant numbers of customers are using au PAY's QR code payment. We will be able to boost profits by using that as the gateway so that customers will charge au PAY from banks and cards, which will enable us to expand finance services such as linking banking and securities, and build various services around cards and mortgages.

• For instance, PayPay is hugely growing but is spending a lot on sales promotion and is not generating a profit. Is au PAY making a profit? What about marketing costs, how do you view them compared to PayPay?

  

  au PAY alone is not recording a great profit, but it is probably not operating in ways that will result in much of a loss compared to PayPay. The biggest difference is that we will promote sales to significantly benefit KDDI customers, such as for au and UQ mobile. Sales operations do not incur huge promotional costs and are effective without having to spend much.

  For LX, currently we still just have an image to some extent, but we are calling it Life Transformation, meaning that we are going to the next chapter from Life Design. We do not really know yet whether society will really migrate from the centralized format to the distributed format by Web3.0, but we want to be prepared in case it does. We are not sure how much profit we can expect from NFT and Metaverse initiatives facilitating NFT usage, but we want to work on them during this medium term. Drones and SpaceX initiatives are also included in this arena, in that they too will transform lifestyles. We have not included how much profit they will generate in the mid-term management strategy, but I would appreciate it if you could see this as expressing our intention to work on these exciting fields.

• The total number of IoT Connections is projected to grow steadily and I believe it will be achieved given the number of cars that are being sold. Will we see profit accelerate unlike before?

  

  For the number of IoT Connections, there are issues with semiconductors and so forth, and so it could be impacted by the number of cars manufactured and sold. Meanwhile, we are seeing growth in the numbers of gas meters and so forth and of the infrastructure on which there is room to introduce IoT. As I mentioned in the previous presentation, we are beginning to see a profit and are already investing in the next steps and see the IoT Connections as achieving a certain profit rate. Going forward, IoT will be the foundation for DX.

• I would like to look at the analysis of the fluctuation in consolidated operating income for this year, as shown on slide 43 of the mid-term management strategy's presentation. What factors are included in the 30–40 billion yen labelled "Other" in the projections for the fiscal year ending March 2023? The Life Design Domain showed strong sales growth in the fourth quarter of the fiscal year ended March 2022. Were there any special factors for this and are there any factors that will be carried over to the new fiscal year?

  

  Compared with the previous year, marketing costs will decline. In the last fiscal year, we invested in various expenses to have many users use au PAY. We spent significantly in March to have customers buy models at fairly reasonable prices during the busy sales season, increasing IDs. This year we will reduce spending in this area for cost efficiency.
  In the Life Design Domain, au Denki showed the greatest sales in the fourth quarter of the fiscal year ended March 2022. Seasonally, this is a time when au Denki records large sales and this factor had quite an impact.