KDDI HOMECorporate InformationInvestor RelationsIR DocumentsPresentationsFY 2017.3Performance highlights and Q&A for the First Half of the Fiscal Year Ending March 2017

Performance highlights and Q&A for the First Half of the Fiscal Year Ending March 2017

Date Tuesday, November 1, 2016 5:30 pm-6:30 pm
Location 20F Conference Room, Garden Air Tower
Respondents Takashi Tanaka, President; Hirofumi Morozumi, Executive Vice President; Makoto Takahashi, Executive Vice President; Yuzo Ishikawa, Executive Vice President; Hidehiko Tajima, Senior Vice President; Yoshiaki Uchida, Senior Vice President; Takashi Shoji, Associate Senior Vice President; Shinichi Muramoto, Associate Senior Vice President; Hiroki Honda, General Manager, Corporate Management Division; Keita Horii, General Manager, Investor Relations Department (MC)

Performance Highlights

A look of the Presentation of the Financial Results

In the presentation of the financial results, President Tanaka described two points; "financial results for the first half of the fiscal year ending March 2017" and "promotion of domestic and global business to achieve the new medium-term targets."

1. Financial Results for the First Half of the Fiscal Year Ending March 2017

In the first half of the fiscal year ending March 2017 (from April to September 2016,) consolidated operating revenue was ¥2,301.6 billion. (49.0% progress for the full fiscal year forecast)

Consolidated operating income was ¥532.6 billion, mainly due to the increase of au ARPA revenues and the decrease of the handset sales expense. (60.2% progress for the full fiscal year forecast)

Profit for the period attributable to owners of the parent was ¥326.1 billion (60.4% progress for the full fiscal year forecast), EBITDA was ¥815.5 billion (55.1% progress for the full fiscal year forecast), all results are also going well.

2. Promotion of Domestic and Global Business to Achieve the New Medium-Term Targets

KDDI launched the new tiered data plan "Super Dejira" in September 2016 as part of our domestic telecommunications business to cater to large volume data needs and the new price plan for 4G LTE mobile phones in November 2016. Through an enriched service line-up, we will continue to offer a wide selection of plans selected and preferred by customers.

UQ mobile, inaugurated a full-scale smartphone business in October 2015, they have been focusing their efforts into building up services and sales channels, which have led to a steady increase in the number of subscribers. The Autumn to Winter 2016 models feature an expanded lineup of devices. A new commercial aired from October 25, 2016 as one of their approaches to advance their business by intensifying their promotion to customers who are currently using low-cost competitor smartphones and/or wanting to use smartphones more casually.

In our life design business, KDDI will step of our respective initiatives in the three points: Services, Customer Touchpoints, and Enablers.

First, for Services, in addition to creating synergy with the shopping mall business acquired from DeNA and other product sales business such as au WALLET Market and Jupiter Shop Channel, KDDI aims to widen the user base and the au Economic Zone through a tie-in with au STAR, a membership program for au customers.

Next, for Customer Touchpoints, we will strengthen multi-touchpoints both online and offline. In addition to the au Smart Pass, whose members reached a total of 14.87 million as of the end of September 2016, KDDI seeks to expand the au Economic Zone through increasing new-style direct-operated and owned shops that realize direct communication with customers.

Lastly, for the Enablers, i.e. the settlement platform, KDDI will enhance the convenience of the au Carrier Billing service and au WALLET prepaid and credit cards. In au Carrier Billing, KDDI became the first Japanese telecommunication carrier in August 2016 to support App Store [1] and other services available on iPhone [1]. For au WALLET credit cards, KDDI began supporting Apple Pay [1] on October 25, 2016.

In KDDI's global business, the joint business with Myanma Posts and Telecommunications (MPT) is contributing to the steady increase in the number of mobile service subscribers. Since September 2016, we have also begun selling MPT brand smartphones targeting entry-level smartphone users. KDDI's global ICT business, TELEHOUSE, started the operation of its fourth data center in Docklands, London in August 2016. KDDI also became the first Japanese carrier to provide Amazon's AWS Direct Connect [2] location at Voltaire, Paris. The data center service takes advantage of the high connectivity of the respective areas and offers a higher level of competitiveness through the promotion of collaboration with appealing partners.

  • [1]
    "App Store" and "Apple Pay" are registered trademarks of Apple Inc. in the United States and other countries. The "iPhone" trademark is used under license from Aiphone K.K.
  • [2]
    Connection to the AWS cloud computing service provided by Amazon Web Services, Inc. of a low-latency and secure closed network that does not pass through the Internet.

Questioner 1

  • QThe free cash flow recorded for the first half of this term is 440 billion yen, which already has accomplished this term's planned 350 billion yen target. For what purpose will the subsequent free cash flow be used?
    A

    There are three reasons to why the free cash flow recorded for the first half of this term exceeded the plan. First, the sales cost was unexpectedly low, which contributed to reduced cash-out, and at the same time the au ARPA revenues and the value-added ARPA revenues steadily increased, increasing cash-in, both of which caused EBITDA to exceed the plan. Next, the capital expenditure is planned to have higher weight in the second half of the term in addition to a little delay in its progress during the first half. Lastly, for the 500-billion-yen scale M&As planned for over three years starting from the fiscal year ending March 2017, the relative investment was only about 15 billion yen during the first half of this term.
    As capital expenditure, KDDI plans to open 700 MHz and 3.5 GHz au base stations during the second half. For the delayed base station construction, we expect it to proceed as planned thanks to the establishment of the process that maximizes customers' sensory speed. KDDI has a budget of 170 billion yen for this term's M&A, which we will use for appropriate projects. From what we described above, we foresee that the free cash flow for the second half will decline, while looking at the whole term it will exceed the planned goal, supported by the plan-surpassing EBITDA.
    We have not decided on any matter regarding shareholder returns as of the present date, but with keeping a good balance of growth and strong shareholder returns being our basic policy, we intend to review the shareholder returns based on the cash flow and business performance of the second half of this term.

  • QThe 2Q au ARPA revenues seem low compared to 1Q of the fiscal year ending March 2017. What measures to increase income do you have in mind for the second half and the next term?
    A

    The growth in the number of subscribers is stagnant due to the outflow to MVNO; however, we expect progress in increasing IDs on the UQ mobile side in the future.
    On the other hand, we will need to increase both value-added ARPA revenues and other non-telecommunications revenues to ensure a sustainable growth in ARPA. This is our "Life Design Strategy." As preceding index, we are planning a total of 1200 billion yen circulating in the au Economic Zone for the fiscal year ending March 2017. The first-half performance was good, and by expanding the au Economic Zone, we consider it feasible to draw a profitable scenario on the whole.

  • QIs KDDI not expecting income increase from the new tiered data plan "Super Dejira" over the medium-to-long term?
    A

    We are expecting users subscribing an 8GB or heavier plan to switch over to the new plan first, which will initially have a negative effect on income. However, in the next term and on, we expect some revenue increase from 5GB or less plan users upgrading to the new plan.

  • QThe circulation in the au Economic Zone appears to be making a good progress. What measures are planned for the second half and subsequent terms?
    A

    Gross merchandise value of the au Economic Zone totaled to 556 billion yen in the first half of this term, and the rate of progress is 46%. The au WALLET credit card service is the driver for maximizing the au Economic Zone. The number of valid credit cards increased to 1.7 million as of the end of 2Q of the fiscal year ending March 2017. As credit cards have a synergistic effect on telecommunications, we are expecting further steady expansion of circulation in the au Economic Zone. KDDI is also showing sound progress in new services, including energy, in addition to au Carrier Billing, which is steadily expanding the range of non-au services that it supports.

  • QFor Global Business, a significant increase in income seems necessary to achieve the goals planned for the term. What is the second-half forecast like?
    A

    While the exchange rate showing yen appreciation has had a 20% plus negative impact on the operating income in the first half performance; it is still steadily growing on a local currency basis. We consider it important to ensure growth on a local currency basis in each business area, such the data center business, and we will continue on this path for the second half.

Questioner 2

Questioner 3

  • QKDDI is opening a number of directly-owned shops with a style different from conventional au shops. What effects can be expected? Also, how is the au WALLET Market at au shops coming along?
    A

    As of today, we have opened 7 directly-owned shops. These shops are also targeted at non-au customers, and by offering a variety of trials, we have an increase in sales of goods compared to conventional au shops. We intend to use these results as reference for our future shop development. On another note, while initially the sales of goods at all of 2,500 shops nationwide combined were tough, progress has been steady as of the 2Q of the fiscal year ending March 2017 as per plan. Notably, the sales of water servers are favorable and recurring use is also steadily increasing. We believe that this can also contribute to au WALLET Market earnings.

  • QKDDI has released the new tiered data plan and a new price plan for 4G LTE mobile phones, both of which followed competitor moves in the market. Will there be any price measures taken before competitors in the future?
    A

    This will require review in accordance with changes in the market. As an MNO, KDDI does recognize the critical importance of suppressing the churn rate. A reduction in the number of IDs can expand the drop-in income simply even if recouping subscribers with MVNO and increasing the number of subscribers. This is why we inaugurated au STAR. Furthermore, users churning out to MVNOs are now mostly the low-end user base, which is a change from the previous concentration on high-end users, and considering the aim to reduce the churn rate, we recognize the need to introduce pricing measures for the low-end users.
    On the other hand, speaking broadly from a telecommunications business perspective, it is meaningless that an MNO is homogenized with MVNOs―KDDI keeps our difference from MVNOs while considering necessary measures.
    Based on this perspective, we are not intending to catch up with competitors in terms of pricing measures, but we are aimed at carrying out timely efforts.

Questioner 4

Questioner 5

Questioner 6

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