Performance Highlights and Q&A for the First Quarter of the Fiscal Year Ending March 2024 | FY 2024.3

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Performance Highlights and Q&A for the First Quarter of the Fiscal Year Ending March 2024

Date	July 28, 2023 (Fri), 3:30-4:00 PM (financial highlights) 5:15-6:00 PM (Q&A for analysts and investors)
Location	Online streaming from KDDI Hall
Respondents	[Presentation] Makoto Takahashi, President, Representative Director, CEO [Q&A] Toshitake Amamiya, Executive Vice President, Representative Director, Executive Director, Personal Business and Global Consumer Business Sector Kazuyuki Yoshimura, Senior Managing Executive Officer, Director, CTO, Executive Director, Technology Sector Yasuaki Kuwahara, Senior Managing Executive Officer, Director, Executive Director, Solution Business Sector and General Manager, KDDI Group Strategy Division Hiromichi Matsuda, Executive Officer, Director, Deputy Executive Director, Personal Business Sector, and Executive Director, Business Exploration & Development Division Nanae Saishoji, Managing Executive Officer, CFO Executive Director, Corporate Sector Kenji Aketa, Executive Officer, Executive Director, Corporate Management Division, Corporate Sector

Date

July 28, 2023 (Fri),

3:30-4:00 PM (financial highlights)
5:15-6:00 PM (Q&A for analysts and investors)

Location

Online streaming from KDDI Hall

Respondents

[Presentation]

Makoto Takahashi, President, Representative Director, CEO

[Q&A]

Toshitake Amamiya, Executive Vice President, Representative Director, Executive Director, Personal Business and Global Consumer Business Sector
Kazuyuki Yoshimura, Senior Managing Executive Officer, Director, CTO, Executive Director, Technology Sector
Yasuaki Kuwahara, Senior Managing Executive Officer, Director, Executive Director, Solution Business Sector and General Manager, KDDI Group Strategy Division
Hiromichi Matsuda, Executive Officer, Director, Deputy Executive Director, Personal Business Sector, and Executive Director, Business Exploration & Development Division
Nanae Saishoji, Managing Executive Officer, CFO Executive Director, Corporate Sector
Kenji Aketa, Executive Officer, Executive Director, Corporate Management Division, Corporate Sector

Highlights of the Financial Results

The Presentation of the Financial Results

In "Highlights of the Financial Results" President Takahashi explained the consolidated results in the first quarter of the fiscal year ending March 2024.

1. Consolidated Financial Results for Q1 FY24.3

For Q1 FY24.3, both consolidated operating revenues and operating income are in line with the full-year forecast. Operating revenue was 1,332.6 billion yen, representing progress of 23.0% toward the full-year forecast, and operating income was 266.7 billion yen, progress of 24.7% progress toward the full-year forecast. In terms of the factors behind the change in operating income, Group MVNO and roaming revenues were negative 10.5 billion yen, multi-brand communications ARPU revenues were negative 2.9 billion yen, DX was positive 1.7 billion yen, and Financial Business was negative 12.9 billion yen. The Financial Business had a negative impact of 18.2 billion yen due to the previous year's accounting treatment. Without this impact it would have been positive 5.2 billion yen. Although the decline in roaming revenues and the impact of the previous fiscal year's accounting treatment, both of which expected from the beginning of the fiscal year, resulted in decrease in profit of 30.6 billion yen, the focus areas progressed steadily.

2. The Power to Connect

KDDI's mission is to "tsunagu" ("connecting") 24 hours a day, 365 days a year. As such, we are promoting initiatives to strengthen the telecommunications infrastructure that supports "tsunagu" ("connecting"), including the operational monitoring and automation of telecommunications networks. We are making an additional investment of 50 billion yen over the medium term, not only to put in place virtualization infrastructure for core facilities and AI-based operations as well as congestion detection, but also to strengthen our organizational structure and train human resources. Building on its robust communications infrastructure, KDDI will continue to connect lives, livelihoods, and hearts.
In addition, we will collaborate with our partners to strengthen "tsunagu" ("connecting") for a safe and secure society. For example, we have signed a disaster prevention agreement with the Kanto Regional Development Bureau, provided secondary line services in cooperation with other carriers, and provided vehicle-mounted, portable, and shipboard base stations using Starlink.
We will also promote endeavors to connect "here, there, everywhere, throughout Japan" by utilizing the "Starlink" satellite communications system. The system will be used for backhaul lines to au base stations. This will extend the communication range to 100 famous mountains and sightseeing areas. In addition, we will expand coverage to, for example, maritime use, hut Wi-Fi, and festival Wi-Fi.

3. Satellite Growth Strategy and Strengthening of Management

[1] 5G Communications

ARPU revenues remained stable, with total multi-brand ARPU revenues increasing YOY. Multi-brand communications ARPU revenue reached the level of YOY minus 2.9 billion yen. We continue to target a turnaround in the first half of the year, in light of both multi-brand IDs and the penetration rate of 5G subscriptions rising steadily. Specifically, IDs were YOY plus 190,000, and the penetration rate of 5G subscriptions continues to grow, with approximately 60 percent of our multi-brand subscribers now having access to 5G. In view of this development, we will further enhance the attractiveness of au by offering popular content with high data requirements in combination with communications as a reasonable set package. Average monthly data usage in au has grown steadily for YOY rise of 25%. Especially when switching handset models, approximately 80% of customers opt for an unlimited plan.. To meet the growing demand for data, we will continue to make our unlimited plans more attractive.

[2] DX

Regarding Business Services segment, it progressed as expected, with NEXT Core driving growth. Revenue totaled 281.3 billion yen, of which NEXT Core accounted for 106.0 billion yen, resulting in YOY growth of 21.8%.
Of these, Business DX is driving revenue and profit growth, particularly in IoT, with IoT connections growing steadily by 8.5 million YOY.
In Business Infrastructure Services, we expanded our connectivity data centers (DCs) and strengthened our contact center/BPO services.
The strength of the Telehouse brand in the DC business lies in its ability to provide not only space and equipment, but also an interconnected environment. For customers who want to connect directly to nearby end users without delay, we provide an optimal connectivity environment where hyperscalers are clustered in favorable locations where traffic is concentrated.
With these connectivity advantages, Telehouse has established a position as the fourth largest company in the world in terms of market share by number of connections, and the world's number-one company among telecom carriers. This connectivity DC is characterized by high profitability without requiring large investments, and Telehouse is targeting further business growth in this area. In addition to Europe, including London, the world's number-one connectivity hub, in May we opened our Asian location in Bangkok, and in North America in June we signed a business transfer agreement for Canada's top connectivity DC. The DC business is expanding globally through establishment of a three-pillar global structure.
Next is the contact center and BPO business. Relia, Inc. and KDDI Evolva will merge to form a new company, Altius Link, on September 1 through an equal management integration of the two companies. The company's strengths lie in its status as one of the largest contact centers in Japan and its global expansion, including into North America and Asia. In addition, the capabilities of the Mitsui & Co. Group and KDDI Group will be leveraged to provide a total solution. Going forward, the new company will integrate the strengths of the companies that came together to form it to become a leading digital BPO company.
And we are also expanding our Connected efforts. The number of IoT connections installed in connected cars is more than 20 million, and we are in the process of expanding our business in seven regions around the world. We have been working with Toyota Motor Corporation for more than 20 years, starting with our collaboration in automotive telematics services in 2002, which laid the foundation for this partnership. Both companies will continue to build a global "tsunagu" ("connecting") infrastructure to create a next-generation global communications platform.

[3] Financial Business

In the Financial Business, the customer base continues to grow. Transaction volume of settlement and loan was 3.9 trillion yen, the number of au PAY card members was 8.8 million, and the number of au Jibun Bank accounts was 5.3 million. In June, au Jibun Bank's cumulative mortgage loan disbursements exceeded 3 trillion yen, indicating plenty of support for au Jibun Bank. The effect of promoting the Financial Business is not only the growth of au Financial Group, but also the constructive collaboration with au, which is a key contributor to the telecom business. Synergies with au include an increase in value-added ARPU revenues and a reduction in churn rates. Finance-related value-added ARPU revenue was up 13.7% YOY. In addition, there has been a reduction in the churn rate resulting from the use of multiple financial services by au subscribers.
We will continue to promote the cross-use of financial services and strive for growth across the Group.

[4] Regional Co-creation -CATV-

Regarding regional co-creation and the CATV business, we announced today that our CATV-related business will be transferred to J:COM in January 2024. By consolidating CATV-related businesses under J:COM and leveraging the advantages of both companies to strengthen support for CATV operators, J:COM will maximize its business and contribute to further development of the industry and co-creation of local communities.

[5] Strengthening of Management

In terms of generative AI, we have introduced the "KDDI AI Chat" for 10,000 employees. In addition, we aim to build a company-wide, cross-functional organization to create and share best practices across the company that will lead to commercialization. To this end, we will also work to develop human resources in the field of AI development. "KDDI DX University" offers specialized AI training. Opportunities to practice AI by participating in company-wide organizations are also provided.
In terms of carbon neutrality, we are promoting renewable energy business and accelerating efforts towards a decarbonized society. We signed an agreement with Gunma Prefecture to promote GX, began operating Sustainable Base Stations, and joined the "RE100", which aims to achieve use of 100% renewable energy across the Group by 2050.

We will promote initiatives that have a medium- to long-term perspective to achieve sustainable growth.

Questioner 1

Regarding multi-brand communications ARPU revenues, if you look at a single month in Q1, were there any months that were already positive YOY? I understand that one of the factors is the disappearing negative impact of the "Support Discount," but I would appreciate it if you could explain whether it is expected to generate as much of a YOY increase in Q2 as in Q1, or still generate a positive YOY, but not to that extent.

Multi-brand communications ARPU revenues recovered to a fairly proficient level on a monthly basis in June but were not fully positive. July returned to a good trend, so it will depend on how much we can build from there. The negative impact of the "Support Discount" should continue to disappear in Q2 in the same way as it did in Q1, so we expect to see the turnaround in multi-brand communications ARPU revenues in Q2 as I mentioned.
Did the device purchase subsidy impact revenue?

No, there has been no impact.
The "Group MVNO revenues + Roaming revenues" in the waterfall chart on page 5 of the presentation materials shows an impact of -10 billion yen YOY. However, while the annual forecast is a revenue decline of -60 billion yen, based on the subsequent explanation, the decline is not likely to be that sharp because the revenue decline is expected to improve by 10 to 20 billion yen. Was the pace of decline in Q1 less than expected? In addition, is there any possibility of additional roaming applications?

I think your question is about the roaming agreement with Rakuten Mobile that we announced in May in terms of the new agreement. The plan at the beginning of the period assumed a fall in revenue of -60 billion yen, but the new agreement is expected to boost revenue by 10 to 20 billion yen. We hope you understand that after Q1, things have been progressing as expected. The Company is holding partial discussions with Rakuten Mobile about the terms of the offer.

Questioner 2

Although profits declined, this was in line with the plan. I believe that the company intends to increase profits in the current and next fiscal years by increasing the profit contribution made by your focus areas. In this regard, I would like you to elaborate on these focus areas. DX's profits do not seem to be growing much despite the revenue growth, so in which areas do you see profit growth in the future? Also, the financial business seems to be growing, but I would like to know exactly in which areas among mortgages, settlements, etc., this is happening and what the outlook is for the future.

Regarding DX, three areas have been specified for NEXT Core, and revenues are growing steadily. Among them, Business DX―and IoT in particular―is leading the way. Profits may appear to be small overall at +1.7 billion yen, but they are in line with the plans and are increasing compared to the same period last year.
In the financial business, net profit excluding non-recurring items rose by 5.2 billion yen in the Q1. The growth drivers, namely mortgage loans and credit cards, remain strong, and we expect these businesses to continue on this pattern. The company made a mark-to-market valuation of its fixed interest rate in Q1, resulting in a gain of +2.0 billion yen. With respect to interest rates, we expect them to rise in the future, and believe that higher rates will increase profits.
You mentioned that Business DX is growing. Specifically, which services are contributing to the profits?

The impact has been strong in IoT and related development and operations, both of which are on the rise.
I am concerned about the rise in multi-brand churn rates. The churn rate has increased by 40 to 50 percent compared to one to two years ago and has doubled compared to two to three years ago. It is supposed to make up with new subscriptions. I think it also costs more to acquire new subscribers under the low-cost brand. This would also mean that KDDI has not been able to make progress in reducing sales-related costs, which was KDDI's goal several years ago, and I am not sure if they can be controlled. In addition, I would also like to know what you expect to happen in the future on the back of the government changing its guidelines slightly.

Multi-brand churn rate was 0.96% in Q1, up 0.04 points YOY. This is the result for churn rates across multiple brands, but looking at each brand, au has decreased while UQ Mobile has increased. High-ARPU customers are staying with us, which we see as a good trend. There are two possible reasons for the rise in UQ Mobile's churn rate: firstly, the percentage of UQ Mobile customers is gradually increasing; and secondly, more customers signing SIM-only contracts are switching frequently in the market, which affects the churn rate. We look at how to allocate the cost of each customer, and are careful not to invest too much in our subscription efforts for customers who do not have a high lifetime value. We want to ensure an efficient subscription process for our customers. With regard to au, in order to retain customers, we will continue to promote the benefits of au and strengthen bundling plans with OTTs. In addition, we will continue to promote bundling with the financial business, and believe that the churn rate will continue to decline in the future.
Am I correct in understanding that the deterioration of the multi-brand mix, including povo, is moderating? At one point in time, I think the mix was more in favor of the budget brands.

When you say deterioration of the mix, I assume you mean that of the multi-brand telecom ARPU and the churn rate. Both of those are moderating. Specifically, for ARPU, UQ Mobile has adopted a new pricing plan that we believe will be quite effective. We will continue to analyze the situation carefully. However, the new pricing plan has resulted in an increase in ARPU, and although there was some weakness in IDs in June due to insufficient in-store penetration, there was a recovery in July, which is a positive development.

Questioner 3

I would like to ask about the fluctuation in profits. The decline in roaming revenues and the accounting impact of the financial business are as expected. However, in the "Others" section of the waterfall chart on page 5 of the presentation material, I had expected positive effects from the electricity rate review and outcomes of rationalization stemming from the medium-term management strategy. As for electricity, is its impact a temporary factor? Also, will rationalization be visible and improve from Q2 onwards? I believe UQ Mobile's new pricing plan from June is easy to understand and extremely competitive, and I see it as a cost-effective and efficient way to drive sales without spending a lot of money. I would like to know more about the cost aspect, including the cost effectiveness of the new plans.

Of the -6.0 billion yen in "Others," the main part was -4.0 billion yen for the electric power business, but this was not unexpected because it was factored into the plan. Compared to the company's internal plan, the overall profit margin is slightly positive.
As far as the new UQ Mobile pricing plan is concerned, it is working very well. The Komikomi plan has been taken up by a higher percentage of customers than expected. Before the new pricing plan, there were S, M, and L plans, and M and L were not large in percentage terms, but about 70% of customers chose the Komikomi plan and the Tokutoku plan, which are respectively equivalent to these L and M plans.
The negative impact of electricity is temporary and the main impact in Q1 is the sale of electricity in the market. Compared with the previous fiscal year, the unit price of electricity sold was lower, while the procurement ratio was changed to reduce volatility, resulting in higher costs. As a result, the electric power business posted a negative result in Q1. Starting in Q2, the regulated rates of the electric utilities were revised on June 1. KDDI also implemented the same revisions. An "Adjustment Amount for Power Supply and Procurement, etc." has been added to allow changes in procurement to be passed on to customers. Due in part to the removal of the cap on fuel adjustment costs implemented last year, the market is expected to turn positive from July, with an annual improvement of nearly 10 billion yen.
As for the medium-term cost improvement of 100 billion yen, we are moving ahead with structural reforms in both technology and sales and expect to achieve a cumulative total of 80 billion yen by the current fiscal year. A cost improvement of 50 billion yen was achieved by last fiscal year, and the remaining cost improvement for this fiscal year was not significant in Q1 but will become so from Q2 onward.
Recently a share buyback of 250 billion yen was announced. President Takahashi said in the full-year results announcement that although the EPS target will be delayed by one year, he will not give up. Will there be any change in the company's commitment to achieving the EPS target in terms of profit and number of shares? I would also like to ask whether KDDI's policy is to accept further discussions on the sale of strategic cross-shareholdings.

The EPS target was not the reason for the 250-billion-yen TOB for treasury shares. The company announced a 300-billion-yen share buyback from the beginning. Increasing this amount would affect the EPS, but at this point the company is sticking to the 300-billion-yen plan. As we mentioned in the previous briefing, we will be pursuing the EPS target. While we will do everything we can to achieve the EPS target, we will not go on an unnecessary share buyback spree. If there is a proposal to sell our shares in the future, it will depend on the amount, but if it is a large one, we should be flexible and consider other methods.
This means that the company is committed to achieving its EPS target for the next fiscal year and beyond, both in terms of earnings and number of shares. Is that correct?

That is correct, yes.

Questioner 4

The number of multi-brand IDs looks weak with +28,000 QOQ. We are told that UQ Mobile's plan review is moving in the right direction, but the churn rate is increasing. Given the current situation in this area, is my impression correct that the number of multi-brand IDs is insufficient?

When UQ Mobile launched its new pricing plan in June, the number of IDs tended to slow down slightly due to a lack of operational expertise in the stores. This may have affected the increase in the number of IDs, but the trend returned in July, and we believe it will be in line with your expectations going forward. The increased churn rate is driven by an increased number of SIM-only and high-liquidity customers. Going forward, our focus will not be on acquiring such customers, but rather on increasing the number of customers who can expect lifetime value. We will avoid spending large amounts of money selling to customers who only buy SIMs, and aim to maintain a net increase in IDs. However, the resulting increase in IDs may still be somewhat unsatisfactory, but we would like to increase communications ARPU revenue while maintaining a balance with ARPU.
The slight slowdown in June after the introduction of the new pricing plan means that the number of customers visiting the stores remained the same, but the subscription process did not go well, and the target was missed.

Store traffic has not changed. The new plan required more careful explanation, and there were instances where customers did not decide on the spot but took the plan home to study. One major change was that we improved our ability to provide sufficient explanations and answers to the customers who came to the store, enabling us to close deals in store in July.
Why was there no profit growth in the business segment in Q1?

We explained that NEXT Core achieved double-digit YOY growth in both revenue and profit, with IoT in Business DX leading the way. Other areas of Corporate DX include Managed and Microsoft's M365, but while revenue from M365 and others grew, profits did not grow to the extent expected because margins were not as large as anticipated. In addition, the impact of fuel price hikes on data centers, which was small in Q1 of the previous fiscal year, was significant in Q1 of this fiscal year, but this was factored into the plan.
The NEXT Core business is growing well. What factors should be considered in order to improve margins in Q2 and beyond?

Starting in Q2, we anticipate a positive effect on data centers as the impact of fuel price hikes dissipates. In the Corporate DX business, after we get customers on M365 and other services, we can move into managed services and other high-margin offerings, which are the areas where we will make more profit. Deals have been accumulating at a rate of about 110% YOY in Q1, and we think profits will gradually rise.