Performance Highlights and Q&A for the Third Quarter of the Fiscal Year Ending March 2023

The Presentation of the Financial Results

At the financial results briefing, President Takahashi presented "FY23.3 Q3 Consolidated Financial Results," "Progress Towards a Rebound in Communications ARPU Revenues," and "Sustainability Management and Focus Areas."

1. Consolidated Performance in Q3

Consolidated operating revenue for the cumulative Q3 totaled 4,182.9 billion yen, an increase of 169.1 billion yen year-on-year. Consolidated operating income was 843.4 billion yen, down 31.2 billion yen year-on-year. Factors contributing to the change in consolidated operating income included negative 71 billion yen in multi-brand communications ARPU revenue and negative 20 billion yen in Group MVNO and roaming revenue, positive 61.3 billion yen due to 3G closure-related cost saving and cost efficiency efforts, positive 29.7 billion yen in DX and financial businesses, and negative 7.4 billion yen in energy business. The impact of fuel price hikes and communication failure was negative 23.8 billion yen, resulting in a cumulative decrease of 31.2 billion yen for Q3. Excluding the impact of fuel price hikes and other factors, results were generally within expectations.
Next, progress in focus areas. The initial forecast for operating income in the focus area for this fiscal year was plus 50 billion yen year-on-year. In the cumulative results for Q3, the DX business segment posted an increase of 8.4 billion yen, excluding the effects of fuel price hikes and communication failure. We expect profit to increase in Q4 due to the projects we have accumulated. The financial business has been performing well, with an increase in income of 21.3 billion yen in the cumulative results for Q3. On the other hand, the cumulative results of the energy business for Q3 fell short of the initial forecast, with a decrease of 7.4 billion yen, and we will strive to stabilize business performance.
The full year outlook for the current fiscal year is favorable, including a smaller decline in roaming revenue and steady growth in multi-brand communications ARPU revenue. In contrast, the energy business is expected to be lower than initially forecasted, and we anticipate negative 20 billion yen due to fuel price hikes and negative 15 billion yen due to communication failure, which were not anticipated at the beginning of the fiscal year. We will continue to strive for consecutive profit increases.
In the next fiscal year and beyond, we expect the negative impact of fuel price hikes and other factors to ease although they will continue, as well as multi-brand communications ARPU revenue to increase and the energy business performance to stabilize.

2. Progress Towards a Rebound in Communications ARPU Revenues

In Q3, multi-brand communications ARPU revenue was in line with expectations and multi-brand total ARPU revenue grew steadily. Both multi-brand communications ARPU and multi-brand value-added ARPU were positive quarter-on-quarter.
The impact of price reduction is gradually fading towards multi-brand communications ARPU revenue turns around. Data usage growth is in full swing with 5G penetration. Multi-brand IDs have been gaining momentum, growing to 31.02 million by the end of December 2022, and performing well compared to our initial forecast. While UQ mobile is seeing an increase in new subscriptions, the migration rate from au to UQ mobile is also decreasing. Multi-brand total ARPU grew steadily both year-on-year and quarter-on-quarter, with multi-brand value-added ARPU driving the growth and a corresponding impact from electricity as well as from settlement, product supports and contents. Multi-brand communications ARPU was 3,990 yen, an increase of 10 yen over the previous quarter, excluding the impacts of fuel price hikes, etc.
As for the au situation, more than 60% of the au 5G handset sales have chosen the unlimited-use plan. The shift from Pitatto plans to unlimited-use plans continued, with unlimited use plans increasing by 20% year-on-year and Pitatto plans decreasing by 17% year-on-year as of December 31, 2022. Along with 5G penetration in au, the number of subscriptions to unlimited-use plans has been increasing.
UQ mobile has made its medium and large-capacity plans more attractive, aiming for a further increase in data usage. Monthly data usage was up 10.9% year-on- year, which is low compared to au, but showing signs of growth in the future. To make it easier for customers to subscribe to medium and large-capacity plans, we are offering volume increase Option II and UQ Parent-child discounts.

3. Sustainability Management and Focus Areas

We will develop the "power to connect" to create new value for society in our sustainability management. To promote innovation centered on telecommunications, we are driving the Digital Twin and Starlink initiatives. To achieve carbon neutrality, we are aiming to operationalize renewable energy generation. To realize a safe, secure and prosperous society, in addition to supporting backup lines for IoT, we plan to offer a Dual SIM service for smartphones from the end of March. This will enable the use of SoftBank's line in emergency situations when communication is unavailable due to a service outage and natural disasters. In addition, investments for resilient NW are on track.
Next are our focus areas. First, the results of the Business Services segment show a steady growth in the operating revenue of the NEXT Core business. In terms of operating income, the NEXT Core businesses led the way, with Corporate DX, Business DX and Business Infrastructure Services all increasing. The existing core telecommunications business also reported an increase in profit, with the impact of cancellations due to 3G termination being mitigated in Q3. We expect the accumulated projects to deliver earnings growth in Q4.
The number of IoT connections at business DX has grown steadily. As of December 2022, KDDI exceeded 30 million connections. In November, SORACOM also exceeded 5 million connections, and the combined total exceeded 35 million connections. We believe that IoT, in combination with 5G and AI, will expand the possibilities for various data collection and its analysis, and will be the foundation for co-creating new value. We will contribute to the business transformation and sustainable growth of our customers by combining the security and operational expertise that we have developed in the telecommunications industry with value-added solutions.
Next, we will present Digital Twin. Digital Twin converts physical activities into data, simulates this in cyber space, and feeds back the results to the physical space. Through this cycle, we aim to transform the physical world for the better. Our efforts with our partners are also making progress. GEOTRA and Tokyo Tatemono are working together to utilize human flow data in the Yaesu area for post-pandemic urban development. With East Japan Railway Company, we have begun verifying a data-linked robotic delivery service in urban areas. AI analyzes video data from inside the building, selects the best route, and gives instructions to the robot.
Then there is Starlink. In December 2022, we started using Starlink as a backhaul line for the au communications network on Hatsushima Island in Atami City. This enables us to provide highly convenient "anywhere, quickly, and over wide areas" services to corporate and municipal customers, in addition to general au customers, with high-speed communications that are groundbreaking for satellite communications. We have already received more than 500 requests for information. At the site of a landslide in Chichibu City, a communications environment has been secured using Starlink and a drone service is in place to deliver supplies to areas that are inaccessible by vehicle.
In the area of business infrastructure services, there is a growing need to outsource common operations, including call centers, in addition to the digitalization of customers' businesses. We aim for business integration of the BPO business between Relia, Inc. and KDDI Evolva in the spirit of equality in response to these changes in the environment. By combining the strengths of the Mitsui & Co. Group and the KDDI Group, we aim to help solve the real problems faced by our customers and to expand our digital BPO services both in Japan and overseas.
In the financial business, the customer base is expanding, with au Jibun Bank and au PAY. The number of deposit accounts at au Jibun Bank exceeded 5 million in December. The cumulative amount of home mortgage loans exceeded 2.5 trillion yen in November, the fastest among Internet-specialized banks. The number of au PAY members reached 39.9 million in December, including 8.3 million au PAY Card members, an increase of 1 million year-on-year, demonstrating continued expansion.
Lastly, we have the energy business. To achieve carbon neutrality, we newly established au Renewable Energy Planning and will promote environmental initiatives aimed at operationalizing renewable energy generation starting in FY24.3. We will consider direct supply to our own facilities such as base stations and data centers. In addition, as an environmentally advanced company, we have received CDP's "A-List for Climate Change" rating, the highest rating for responding to climate change. We will continue striving for consistent results.
For the current fiscal year, despite the impact of fuel price hikes and the energy business, etc., we aim to increase profits for the full year. In addition, we will continue to promote future initiatives such as Digital Twin.

• Regarding increasing communications ARPU revenues in the next fiscal year and beyond, please tell us the current and future outlook for ID and ARPU, respectively.

  

  As far as ID is concerned, the momentum that had weakened slightly in Q2 picked up again in Q3. In particular, the UQ mobile is robust, and we expect it to continue to do well. povo, which targets Generation Z, is also doing well. au needs to reduce its migration to other companies, but the migration from au to UQ mobile has also been decreasing and we believe it will continue to improve going forward. In terms of ARPU, the company is promoting 5G-based services and traffic growth has been steady. As far as au is concerned, there is room for improvement in the ratio of MAX plans. This is something we want to work hard on. We are hopeful of a rebound in communications ARPU revenues in the first half of the next fiscal year.

• Please tell us about the future outlook of CAPEX to Sales, considering the impact of soaring component costs, projects for the next fiscal year, etc.

  

  From next fiscal year, we aim to maintain the same level of CAPEX to Sales at 12%, including the response to the communication failure.

• What are the prospects for a rebound in communications ARPU and communications ARPU revenues? What actions, if any, are being taken?

  

  We believe that ARPU will reverse organically as customers use 5G and subscriptions to MAX plans increase. However, it is important to accelerate this process and achieve it quickly. To this end, we are planning to implement a number of measures. We will also work on improving the quality of 5G so that customers can enjoy 5G comfortably.

• What is au's 5G ratio? And what target are you aiming to achieve in the next fiscal year?

  

  Although not disclosed, au is lower than the 49% 5G penetration rate based on multi-brands. More than 60% of new 5G subscriptions are for MAX plans. If this pace continues, we believe we will see figures improve in the next fiscal year.

• What is your view on achieving the medium-term EPS growth target, in light of recent unexpected events?

  

  This is the first year of the three-year plan and we recognize that it will not be easy to achieve due to unexpected events, as you have indicated. Initially, the company's three-year targets have included 100 billion yen of profit growth in focus areas, 100 billion yen of cost efficiency, and a rebound of communications ARPU revenue by promoting 5G. Among the focus areas, the company thinks that profit growth in the energy business will be particularly challenging. Although the company as a whole is looking at how to recover from this, we have no plans to change our targets at this stage, which we hope to achieve through the efficient use of growth investments and a front-loading of the rebound in communications ARPU revenue.

• Although the churn rate remains high year-over-year and quarter-over-quarter, net growth is increasing, and momentum is picking up. This suggests that the contract cost may be high. I would like to know your expectations for future contract costs, including market competition.

  

  First, with regard to the churn rate, while it is certainly on the rise, we believe that the increase in the flow is a result of the penetration of lower switching costs, driven by the Ministry of Internal Affairs and Communications (MIC). However, the churn trend has not changed significantly and the increase in flow itself is a positive for us and we would like to use this as an opportunity to increase the number of IDs. The cost of sales is also subject to many regulations and cannot be used in an unlimited way. We would like to manage the project in such a way that we can expand the ID and at the same time keep it under control within the framework of the plan. Contract costs will also build up in the balance sheet. However, we are looking at a balance between capitalization and amortization at some point, and we will control these costs while keeping an eye on the overall earnings.

• Please explain the factors that led to the increase in sales and profit in each of the Business Services segment.

  

  In the NEXT Core businesses, Corporate DX, Business DX and Business Infrastructure Services all grew in both revenue and earnings. Within Corporate DX, Smart Work, Security and Management services, such as remote environment provision, which started with the COVID-19 pandemic, performed well. We hope that you will continue to look forward to Business DX, our new business area that includes IoT. On another front, the core mobile communications business is also growing although not as fast as the NEXT Core, due to the increase in IDs and services on smartphones. In addition, the need for fixed-line communications has not diminished and remains steady.

• Is it safe to assume that the robust performance of the Business Services segment is not temporary, and that growth will continue?

  

  It is now growing steadily.

• In my opinion, the financial business is also important for achieving the medium-term plan targets, but it is difficult to see the profit structure. I would like to know the overall picture of the banking and other business segments.

  

  The impact of interest rates was the main reason for the decline in profit in Q3. A revision of the future value of fixed mortgages has had a slight negative impact. However, we do not expect this to have a significant impact because fixed rate loans represent only around 5% of all loans signed. Going forward, the overall effect of higher interest rates will be positive. The financial businesses comprise mainly the banking and credit card businesses, both of which are still in the process of expanding their operations and still incur costs, and although profit growth still appears to be low, it is hoped that they will contribute to profit growth over the next few years.

• In the next fiscal year and beyond, will the financial business still be unprofitable?

  

  Profits will continue to grow in the next fiscal year and beyond, but the growth will be more pronounced in the next two to three years.

• Among the focus areas for earnings growth this fiscal year, I think DX is expected to have significant earnings growth in Q4. Am I correct in my understanding?

  

  You are right. We have projects in place for this purpose, and we will do our best to achieve the plan through the accumulation of a solid number of projects.

• Are there any particular large-scale projects that are expected in the Q4?

  

  Many of the projects were originally scheduled to be recorded at the end of the fiscal year. The structure is designed to build on these ongoing benefits starting next fiscal year.

• How will efforts to operationalize renewable energy generation affect costs in the medium to long term?

  

  The company plans to launch the business in April. Contributing to carbon neutrality is the primary goal. We plan to be carbon neutral on a non-consolidated basis by FY2030, and since we consume a lot of electricity internally, we will first accelerate the transition to renewable energy on our part. We believe it is possible to procure energy at a relatively low cost, although the cost will depend on market conditions for energy. Our goal is also to have cost advantages in the medium to long term.

• The operating income of the Business Services segment is reported to be stable, but the stand-alone profit growth rate in Q3 is about 4%, and the margins seem to be deteriorating. What are the drivers behind that? Just by accumulating projects, isn't it hard to increase profits in Q4?

  

  Excluding the effects of fuel price hikes and communication failure, growth was also strong quarter-on-quarter and in Q3, operating income increased 8.4% year-on-year. We would like to continue to do this in Q4. Although the hurdle in Q4 is certainly high, the company is managing the acquisition of monthly revenue as a KPI, and this is exceeding the plan as the number of projects is accumulating. By continuing this trajectory, we want to achieve the plan. We are growing especially in the new NEXT Core area.

• Is it correct to understand that the difference between the simple calculation of 4% and 8.4% is the impact of fuel price hikes and communication failure?

  

  You are correct in your understanding of this.

• You mentioned 20 billion yen of higher fuel costs. How would you see that broken down for the Business Services segment? Of that amount, what was the amount for Q3?

  

  Excluding the effects of fuel price hikes and communication failure, operating income in the Business Services segment for the cumulative total of Q3 of this fiscal year was 150.9 billion yen, up 5.9% year on year. The operating margin was 18.7%, almost the same as last year.

• I would like to know the breakdown of the year-on-year +370 yen in terms of value-added ARPU.

  

  Value-added ARPU is growing overall, except for a slight decline in commerce. ARPU from product support increased because of commission revenue from Apple and in-store setup support, etc. In finance, payment revenue increased and the number of Smart Pass Premium members also increased. These are expected to continue to grow at a steady rate, going forward.

• Of these, is payment growing at a significant rate as a momentum?

  

  It's not so much as which one. It's the overall growth.

• You mentioned that you are aiming to increase profits this fiscal year, but will it be difficult to achieve the company's plan given unexpected events such as the impacts of rising fuel prices and communication failure?

  

  The 20 billion yen impact of fuel price hikes is significant, making it difficult to recover. In Q2, it was expected that the energy business would recover in Q3 and Q4. However, the current downturn has created a difficult situation. That said, we are and will remain committed to maintaining the profit growth we have achieved to date.

• When will 5G network slicing be available for enterprises to use?

  

  SA services that take advantage of 5G network slicing are already being offered. The service area needs to be expanded. Preparations are underway for a major rollout of the service, which is scheduled to begin in the middle of the next fiscal year.

• We have heard that the implementation of network slicing will be coordinated with the MIC so as not to impact general users. Will there be any impact on enterprise usage in this area?

  

  At this time, there is no problem. To ensure that personal use is not affected, we will continue to improve the area.

• The energy business did not specify the amount of impact for factors not assumed at the beginning of the fiscal year, but how much?

  

  Although undisclosed, it was not as significant as the impacts of the fuel price hikes and communication failure.

• The decline in roaming revenue is more pronounced than in Q1 and Q2, but will it continue to decline?

  

  Our original assumption was for a decline of 50 billion yen, but the cumulative decline for Q3 was only 20 billion yen. This trend is expected to continue in Q4, with a further reduction in roaming service areas.

• Please tell us what you think about the situation where multi-brand IDs are increasing and the migration rate from au to UQ mobile is decreasing in light of the market liquidation situation.

  

  It is difficult to analyze whether UQ mobile has captured users who were originally planning to migrate to other companies, or whether users who were not planning to migrate to other companies have migrated to UQ mobile. From an overall perspective, the migration of au customers to other companies has not increased that much, and the migration to UQ mobile is also decreasing, and we believe that we have been able to reduce the churn rate while at the same time reducing the migration to UQ mobile.

• Is churn increasing at au or UQ mobile?

  

  Not disclosed, but it is not significantly different.

• What is the status of UQ mobile to au migration?

  

  It is growing at a significant rate. The difference between the migration from au to UQ mobile and from UQ mobile to au is gradually decreasing.