KDDI HOME
Corporate Information
Investor Relations
IR Documents
Presentations
FY 2024.3
Performance Highlights and Q&A for the First Half of the Fiscal Year Ending March 2024

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

Date	November 2, 2023, 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	Makoto Takahashi, President, Representative Director, CEO 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 FY24-03 H1.

1. Consolidated Financial Results of FY24-03 H1

With increases in revenue and income, we are making good progress against our full-year forecasts. Consolidated operating revenue increased 1.4% YOY to 2,779.0 billion yen, with a progress rate of 47.9%. Consolidated operating income increased 0.2% YOY to 560.3 billion yen, an increase in income of 1 billion yen, with a progress rate of 51.9%. Group MVNO revenues and Rakuten Roaming revenue were -20.3 billion yen, Multi-Brand communications ARPU revenues were +0.8 billion yen, DX was +5.4 billion yen, Financial Business was -9.9 billion yen, and Energy Business was +9.5 billion yen. Despite decrease in Rakuten roaming revenue, profit increased by growth in communications ARPU revenues and focus areas.
Looking ahead to FY25-03 and beyond, key areas that will be the core of sustainable growth are steadily growing. In 5G Communications, Multi-Brand communications ARPU revenues rebound in the first half, DX steadily expanded increase in income, Financial Business saw double-digit growth in the first half, and the Energy Business increased in income in Q2.

2. Rebound in Communications ARPU revenues and growth

Communications ARPU revenues rebounded, value-added ARPU revenues also increased, and total ARPU revenues increased. Q2 communications ARPU revenues (YOY) were +3.7 billion yen. Multi-brand IDs totaled 30.94 million, with YOY +0.28 million and QOQ +0.40 million. The increasing trend is continuously and on track. Multi-Brand communications ARPU also grew to 3,960 yen, QOQ +30 yen.
We will promote the attractiveness of au for further telecommunications business growth. First of all, it's "au Money Activity Plan". KDDI has long been a pioneer in offering "Telecommunications + Value-added services offerings set plans tailored to customer needs. The "au Money Activity Plan" launched on September 1 is the industry's first "Telecommunications + Finance" set plan. One in three customers who have selected the unlimited usage MAX plan have subscribed to the plan, which is a strong start compared to the company plan.
The second initiatives of attractiveness of au are expanding and enhancing the contents distributed on smartphones. Recently, online distribution of sports and live contents has been increasing and needs for smartphone viewing are expanding. We will respond to these needs with Worry-free unlimited plan. Leveraging partnering, one of our strengths, we are enhancing free sports distribution. For virtual high school baseball, all games from regional qualifying rounds have been streamed, recording a highest number of viewers ever. From October, we also began distribution of high school soccer games and spring high school volleyball tournament. Through these initiatives, we seek to create an "Exciting Future" for everyone through sports.
UQ mobile has also seen an increase in data usage, with many customers choosing medium and large capacity plans. Against the background of double-digit growth in monthly data usage, UQ mobile launched three new plans in June. The new plans have been well received. Now, about 70% of customers have selected the Komikomi Plan and Tokutoku Plan, i.e., large and medium capacity plans.
5G network, which supports KDDI's mission of "Tsunagu"(connecting), is promoting area development along customer's life line. As of the end of October, it had expanded to 47 railroad routes and 384 commercial districts. Particularly on the Yamanote Line, where 5G is available at all stations, our communications speed is No. 1, according to the survey results. As our quality improvement initiatives, we have been effectively using data obtained from each devise. Using a variety of data, we automatically collect, analyze, and take countermeasures to quickly improve communications quality. We will continue to promote area development along customer's life line and refinement of communications quality.
We are also making efforts to connect the unconnected, leveraging the satellite communication "Starlink". We are creating an area that will keep us connected in special places such as mountains, festivals, and disasters by using Starlink for au base stations. In August 2023, we entered a new business alliance with SpaceX to develop satellite and smartphone direct communication service. We seek to begin sending and receiving messages in 2024, so that we can connect wherever you see the sky.

3. KDDI Group's Financial Business

The KDDI Group provides a full range of finance services to support customers' daily lives. The financial customer base for our main services is growing steadily, with the number of au PAY Card members surpassing 9 million in October. In addition, the number of au PAY members has expanded to 33.73 million, the number of au Jibun Bank accounts to 5.45 million, and the number of au Kabucom securities accounts to 1.61 million as of the end of September.
As for the Financial Business performance, finance-related value-added ARPU revenue was +13.4% YOY, contributing to an increase in value-added ARPU revenues. au Financial Holdings' H1 operating income expanded by +92.9% YOY, excluding the impact of accounting changes in FY23-03. Transaction volume of settlement / loan also expanded steadily to + 19.3% YOY.
The number of au PAY Gold Card members, which will be the driver of future growth, increased significantly to 970 thousand as of the end of September, YOY +54.0%. Furthermore, the number of members exceeded 1 million this October. Mortgage loan balance totaled 2.3 trillion yen, YOY +56.2%. Our customers are highly satisfied with our attractive interest rates. In addition, the preferential interest rates have been expanded within the KDDI Group: in September, preferential interest rate was extended to J:COM NET and J:COM TV, and from November 1, preferential interest rate was also extended to customers with ctc's Commufa HIKARI.
And for further growth of our Financial Business, we will leverage synergies with telecom to expand financial customer base. The "au Money Activity Plan" has accelerated financial service collaboration. Since the launch of the plan, over-the-counter subscription rate of financial services has increased respectively. By leveraging these synergies with telecom, KDDI seeks to further expand financial service customer base.
KDDI Group's strategy for Financial Business is a "Virtuous Cycle of Telecom and Finance". We seek to increase ARPU and reduce churn rates in telecom by promoting the attractiveness of au through "au Money Activity Plan" and other programs. Furthermore, we will leverage our telecom customer base to accelerate the growth of the au Financial Group's Financial Business.

4. DX/LX (Transformation)

First, here are the Business Services segment results. Operating income for H1 increased by +5.7% YOY, progressing as expected, with NEXT Core, particularly IoT, driving the growth, and existing telecom business also saw an increase in mobile communications revenues. H1 saw some impact of fuel price hikes YOY, but no impact is expected in H2. For the full year, the company aims for double-digit YOY growth, with business growth centered on the NEXT Core, including IoT and data centers, and the effects of M&A.
Next, here are IoT, which is one of KDDI's strengths. The number of IoT connections has exceeded 37 million for KDDI and 6 million for SORACOM in October, for a total of 43 million connections. Driving the growth are connected cars. Globally, we offer more than 22 million connections. We are pleased to announce that we will offer this service to new overseas manufacturers. In addition, we have decided to establish a new company for our overseas connected business growth. In the connected car business, where high market growth is expected, we seek to further expand globally on the strength of our high-quality telecom infrastructure, which is chosen by many customers.
KDDI's data centers business is also performing well with its strength in Connectivity DCs. DC business revenues continues to grow strongly at a CAGR of 20.4%. Telehouse, which rolls out KDDI's data centers business, ranks first in the world among telecoms carriers in terms of the number of connections. Leveraging this strength in connectivity, KDDI is further expanding its global expansion. In North America, the acquisition and migration of Canada's No. 1 Connectivity DC has been successfully completed, and in Europe, new facilities were opened in Frankfurt and Paris in October to meet growing demand.
One of KDDI's unique DX strengths is the utilization of group assets. In addition to the know-how cultivated in telecom operations, such as ID integration infrastructure and customer management, KDDI has a variety of group capabilities that support effectively using data. Let us recommend a case study of Company A in real estate industry. By integrating customer IDs that were different for each business and building customer's data utilization platform, we are contributing to marketing sophistication and identification of new customer needs. In competition with SIers and other companies, KDDI's strength in group collaboration was received recognition, contributing to the implementation of the customer's business DX.
We are also promoting our Carbon Neutrality through our business. As KDDI's initiatives, we are promoting switch to renewable energy and energy conservation in our data centers.
Efforts will be accelerated with the goal of achieving carbon neutrality at all data centers by FY2026. We are promoting customers' CN Support through DX. Through partner collaboration, "KDDI Green Digital Solution" provides one-stop support from emissions visualization to planning and implementation of reduction measures.
Next, here are LX(Life transformation's) initiatives, αU (Alpha U). Since the launch of αU in March, Metaverses for each use case have been appearing one after another, and needs for them are expanding. Sales to corporate clients have been particularly strong, stretching about 5 times scale in YOY. In the "to C" domain, the number of distributors has exceeded over 1,000.
Under these circumstances, we have expanded the services of αU and started full swing to accelerate the creator economy. "αU place" will offer a new shopping experience with a virtual store that combines the best of physical stores and online stores. "αU metaverse" will add a Karaoke function, and "αU live" will support creators by distributing artists' performances and music to the world. Furthermore, by utilizing generative AI, we will create a creator economy overflowing with more diverse contents.
Then we are using generative AI to strengthen our foundation for DX and LX growth. First, we are promoting a use of KDDI AI-Chat internally to enhance operation. In September, we announced collaboration with Azure Open AI Service and AWS for generative AI business development.
Based on the user experiences and use cases of 10,000 KDDI employees, we will support social implementation of generative AI. In parallel with business streamlining, we will also accelerate our human resources strategy. We will shift human resources to DX and LX areas and expand training in Web3 and AI program to support growth.
Lastly, I would like to talk about "MWC Barcelona 2024", which KDDI will be exhibiting at for the first-time in February next year. The theme of the exhibition is "Enhancing the Power to Connect". "The Power to Connect"(connecting), which is part of our vision, is the theme we are preparing for, including the business field. Specific exhibit contents will be announced in the future.

Our thoughts about the NTT Law

The review of the NTT Law is currently being discussed by LDP under the project team on the "the Act on Nippon Telegraph and Telephone Corporation" of the special mission committee on financial resources for Defense-related expenses, and by MIC under the information and communications council.
As we have said at each of the hearings, we believe that the NTT Law should be reviewed in line with the times, for example, reviewing provisions such as obligation to disclose research results, authorization of company name change, director appointment etc. On the other hand, we oppose the abolition of NTT Law, which jeopardize the public interest, and we believe that careful discussions should be devoted to three important points. The first is to ensure fair competition between NTT Group and other operators. This is to prevent the integration and unification of NTT Group. The second is to protect the existing 60 million users and ensure the obligation to provide nationwide. The third is to ensure the government control communications that are high public interest, and to protect NTT's special assets by foreign investment regulations. We concern there will be the impact on national interests and people's lives if existing rules are not to be ensured,.
In addition, on October 19, 2023, 180 entities including telecommunications operators (MNO, cable tv, ISP, Power company related) and local governments, etc. submitted a jointly-signed request to oppose the abolition of NTT Law to LDP and MIC.
These 180 numbers include many local operators and municipalities in various regions of Japan, including numerous cable TV operators. Many of them are concerned that the integration and unification of NTT Group will undermine a fair competitive environment. Given this situation, and the public interests, we feel strongly that a more careful policy discussion is in order.

Questioner 1

Please give an overview of the increase and decrease factors in consolidated operating income in FY24-03 H1, particularly with regard to the Energy Business and "Other" components in the Q2.

Energy Business achieved a large increase in income in Q2. This was due to the impact of the stabilization of business performance following the rates revision implemented in June in response to the fuel price hikes, as well as the impact of increased electricity consumption due to the intense heat. "Others" was affected by a reduction in depreciation expenses due to thorough management of capital expenditures as part of the cost structure reforms outlined in the medium-term plan, which is expected to continue in the second half of the year. In addition, product support services and other services are functioning well, contributing to the increase in revenues and profits.
I would like to know the factors behind the increase in profit levels in Q2 compared to Q1.

The Energy Business had the largest increase in income, and profits from compensation services also increased in Q2. Furthermore, profits in Q2 rose significantly due to a reduction in sales promotion expenses. However, since sales promotion expenses increase or decrease depending on seasonality and campaigns, the company expects to make some investments in the second half depending on the situation.

Questioner 2

About the business plan for this fiscal year, factors contributing to an increase in income, such as an increase in ARPU, stable Rakuten roaming revenue, increase in income in energy, and expansion in DX and Financial Business, one by one, are steadily accumulating, and the company is on track to achieve the plan. I think it is better to think about new measures that will become a significant backbone of the company over another 4 to 5 years in the medium-term plan, but it would be difficult to create such measures in the current 3-year period of the medium-term plan. What are your thoughts on the plan to create a major pillar over a long period of time and its specific areas?

The impact of price reductions that we have suffered for the past several years has disappeared, and the growth areas of DX, finance, energy, etc., have stabilized and will continue to expand steadily. I think everyone is aware that Japan's population will decline in the future starting around 2025. In this context, new functions of generative AI are being installed in terminals, and Google is also focusing its efforts on this area, which I believe will be an area that we would like to expand as personal business. After all, the overwhelming growth is in the business areas. Particularly in IoT, the number of connections has reached 43 million. Although the contribution to profit is still small, we believe that this is a very promising business opportunity. However, it is necessary to go beyond just connection revenues to include value-added areas of business in the coming era of telecommunications in everything, and we believe that data-driven and generative AI will play a significant role in this context. In our Medium-term plan, which is currently rolling out, we will focus on this area and also believe that there is potential in regard to space and other areas.
Regarding the medium-term financial plan, the current plan establishes a cycle of shareholder returns once every three years, but I have doubts as to whether this is appropriate. I recognize that dissipating policy shareholdings is a trend of the times, and it may be necessary to set a longer plan period for shareholder returns to allow for more flexible responding. I would like to hear your views on this point.

In the medium-term plan, we first need to achieve 1.5 times EPS, which we have promised, and since there were some issues such as lowering rates, we would like to seek this goal with about a year's grace period. About the cash allocation of operating cash flow of 5 trillion yen as indicated in the Medium-term plan, we need to consider how to use it for shareholder returns and investment for growth. We believe it is important to respond flexibly to variable factors such as policy shareholdings, while adhering to the cash allocation in the medium-term plan.

Questioner 3

Please tell us about the impact of the review of NTT Law on KDDI's business performance, particularly the possibility that NTT's organizational integration and universal service review will have a negative impact on KDDI. Also, with rates plan remaining high, could this be an opportunity for KDDI to expand its market share?

This is not a discussion that will have any impact in the short term. Since the liberalization of telecommunications, competition policies have been promoted, and there is a history of service improvements due to the division of NTT. However, the abolition of NTT Law could result in the re-formation of a giant corporation, which would hamper the competitive environment and possibly reduce the level of service. In addition, a single NTT may cause disadvantages to companies outside the NTT Group through higher connection rates and other measures.
I think the discussion about the stock holdings at the Highlights of the Financial Results meeting of Kyocera has had some impact on KDDI's stock price. If KDDI shares held by Toyota, Kyocera, and others with large holdings are sold, please tell us if it will be under the repurchase of own shares framework or if a new repurchase of own shares will be set up.

Since this is not a formal offer, it is difficult to comment, but we believe that we should have a conversation when the offer to sell is made.
In the case of TOYOTA's sale of KDDI stock, we had a lot of discussions after the offer was made. Basically, I do not think it is a good idea to inconvenience shareholders. I think it would be good to have a good conversation and consider ways that do not lead to shareholder disappointment.
Originally, the cash allocation was designed to have an operating cash flow of 5 trillion yen, of which 2 trillion yen is for capital expenditure, 1.3 trillion yen for growth investment, and still another 700 billion yen for strategic business investment.
The Medium-term plan calls for shareholder returns of 1.5 trillion yen. The breakdown of shareholder returns is as follows: 300 billion yen in dividends for three years, and 200 billion yen in share buybacks for three years. Our policy is to have a surplus in terms of cash, and we will consult with shareholders when they make a formal offer, but in a way that does not cause disappointment to them.

Questioner 4

The "Others" category in the Personal Services Segment operating revenue listed on page 2 of the Data Book for the 1st Half of FY2024.3 has expanded considerably in Q2 alone, but I would like to know what kind of subsidiary and what kind of revenues and incomes are growing. I would also like to know if it is sustainable.

Although specific details are not disclosed, it's mainly Financial Business of au Financial Holdings. In addition to value-added ARPU revenue, the company is also expanding other areas. J:COM also saw significant growth from Q1 to Q2. Other companies such as BIGLOBE, overseas subsidiary Mobicom, and Myanmar business also saw profit increases in Q2 compared to Q1.
Page 6 of the presentation material describes 5G communications and Multi-Brand Communications ARPU revenues rebound, but it includes 5.9 billion yen impact of refunds for last year's network failure, and I think the hurdle for the rebound will be higher in the Q3. I would like to comment on Multi-Brand Communications ARPU revenues in the Q3.

As you pointed out, the positive figure includes 5.9 billion yen impact of refunds due to communication failures. Although the result would be negative if the impact of telecommunications failure refunds were excluded, on a quarterly basis, it improved to -2.9 billion yen in Q1 and -2.2 billion yen in Q2, and we believe that the trend is within our plan.
As an initiative to increase ARPU, "au Money Activity Plan" was launched in September 2023 and has been progressing well. This plan is also expected to increase ARPU for au. UQ's new plan is also performing well and is expected to contribute to ARPU improvement. One negative aspect is the migration from au to UQ mobile, but both ARPU revenue and ARPU are on an upward trend and are expected to rise for sure.

Questioner 5

Regarding strategic investments, 700 billion yen was planned for the three years of the medium-term plan, and how much has actually been invested now that half of the plan has passed? I would also like to know, to the extent possible, your future investment plans and target areas.

The company has invested ¥200 billion in the current phase of its strategic business investment plan of ¥700 billion. Major investments include data centers in Canada and IIJ. Currently, the company is still in the preparation stage of large-scale projects and plans to announce them at an appropriate time.
If the company does not fully utilize its investment quota in accordance with its plan, does President Takahashi intend to allocate the money to shareholder returns?

The current cash allocation is part of the mid-term plan and there are no plans for major changes. However, the amount of share buybacks to shareholders, for example, has changed from 200 billion yen to 300 billion yen. The company intends to flexibly reconfigure this amount. We do not believe it is necessary to announce any specific changes at this stage.
Regarding the mobile competitive environment, what changes have occurred in the deterioration of churn rates and the situation of MNP with each company due to the introduction of new plans and investment in new brands by each company from July to September? What measures have been taken and what are the prospects?

I feel that the mobile competition situation is gradually calming down after the introduction of new plans and new brands. Recently, companies have been rolling out plans that seek to improve ARPU, and we believe that competition has reached a certain equilibrium.
iPhone sales season this autumn and "40,000 yen rule," a new incentive rule starting in next January, may generate new momentum, but we do not expect it to bring about a dramatic flow with respect to stand-alone handset sales. We will closely monitor the situation in this area toward the end of the fiscal year.

Questioner 6

While it is good to see that Multi-Brand Communications ARPU has rebounded and its impact is beginning to be seen, are you sure that it will be able to do so? What will happen to investments in 5G, etc. if profitability is not secured when there is pressure from the government again, and what are your specific views on capital expenditure?

In fact, we have already invested heavily in capital expenditure, and we wanted to further curb our investment when rates were lowered, but we have to install 91,000 station facilities this year in order to execute our opening plan. However, this is the peak, and the rest will be to ensure quality, so there will be no further increase. In fact, our 5G frequency, Sub6, is affected by interference from satellites, and we expect this to be resolved by the end of this fiscal year, allowing us to improve quality.
I believe that users currently contracted on Unlimited MAX plan expect to see an enhancement of existing services such as video, etc. I would like to ask about your vision for new or additional services for consumers.

We believe that the introduction of 5G has significantly changed the customer experience and data usage. A specific example is that high school baseball games, which used to be viewed on TV, have changed to streaming viewing on smartphones.
These changes are inducing an explosion of data traffic. Furthermore, we believe that users will be mainly responsible for content creation in the future, and that generative AI will be used to create richer and more creative contents. This will further increase data traffic. However, these are just my subjective views, and specific changes will depend on market conditions and other factors in the future.