Performance Highlights and Q&A of FY2016.3

Financial results for the fiscal year ended March 2016

President Tanaka explained the three points; "review through to the fiscal year ended March 2016," "medium-term target through to the fiscal year ending March 2019," and "forecasts for the fiscal year ending March 2017."

1. Review through to the fiscal year ended March 2016

In the fiscal year ended March 31, 2016, consolidated operating revenue increased 4.6% year on year, to ¥4,466.1 billion. Consolidated operating income was up 25.2%, to ¥833.4 billion. Profit for the period attributable to owners of the parent also was up 24.9%, to ¥494.5 billion.
KDDI announced the medium-term target announced in April 2013 (double-digit growth in consolidated operating income for three consecutive years and a dividend payout ratio of over 30%) and aimed for further growth by promoting the 3M Strategy. The expansion of customer base for au Smart Value and au Smart Pass, the two services embodying the implementation of the 3M Strategy, has brought KDDI three consecutive years of double-digit growth in consolidated operating income.

On the other hand, KDDI has promoted improvement in shareholder returns in line with the goal to ensure over 30% dividend payout ratio for three years in a row. The dividend per share as of the fiscal year ended March 2016, the final year of the medium-term plan, is planned to be ¥70―a five-yen increase from the forecast made at the beginning of the term. The payout ratio is planned for over 35%. KDDI has also resolved to repurchase of own shares up to aggregate price of ¥100 billion.

2. Medium-term target through to the fiscal year ending March 2019

To be the customers' preferred carrier while handsets, fees, and networks continue to be homogeneous, KDDI pursues the "transformation to a business that offers customer experience value" to "sustainably grow the domestic telecommunications business," "maximize the au Economic Zone," and "aggressively develop global businesses."

Specifically, for the sustainable growth of the domestic telecommunications business, KDDI seeks to expand the au ARPA by increasing the penetration of smart devices and IoT [1] services. For the maximization of the au Economic Zone, KDDI aims to establish a growth in non-telecommunications domains through increasing circulation in online (content services for au customer base) and offline (shop use) settlement as well as in commerce and financial services that cross over both settlement spheres.
For the aggressive development of global business, KDDI will ensure growth by developing businesses in heavily populated regions where business is flourishing at a rapid pace, drawing on its experiences and know-how cultivated through international and domestic activities.

Building on the achievement of such objectives, KDDI aims for CAGR of 7% in consolidated operating income, as well as attaining a dividend payout ratio from over 30% to over 35%, in its continuing pursuit to simultaneously improve sustainable profit growth and shareholder returns.

• [1]

  IoT: Internet of Things

3. Forecasts for the fiscal year ending March 2017

To achieve our new medium-term plan, KDDI projects a consolidated operating revenue of ¥4,700 billion (yoy +5.2%) and an operating income of ¥885 billion (yoy +6.2%) for the fiscal year ending March 31, 2017, as the first year of the plan.
We also plan dividends per share of ¥80 (dividend payout ratio 36.9%) for the year as well.

• The medium term goal upholds a CAGR of 7%; this indicates, simply calculated, that the operating income for the fiscal year ending March 2019 will be more than ¥1 trillion. What does KDDI envision for the organic growth and M&A-based growth toward an operating income exceeding ¥1 trillion?

  

  KDDI aims for growths of around ¥100 billion by "sustainable growth of the domestic telecommunications business" and around ¥70 billion by "maximization of au Economic Zone" and "aggressive development of the global business" combined, a total of about ¥170 billion within the next three years. As our business prospect for the fiscal year ending March 2017 is already published, by subtracting this from our three-year target, you can see the operating income growth estimated for the fiscal year ending March 2018 through the fiscal year ending March 2019.

• The power to generate FCF is key to attain the medium-term goals for profit growth and shareholder returns. However, in this light, the prospected FCF for the fiscal year ending March 2017 is ¥350 billion, which is somewhat low considering the profit standard. What level of FCF on an organic basis, that is, without the M&A and investments in new businesses during the fiscal year ending March 2017, are we looking at? What level of FCF will be generated over the next three years?

  

  When adding one-third of the ¥500 billion (approx. ¥170 billion) of the planned M&A to be pursued over three years to the fiscal year ending March 2017 prospect of ¥350 billion, we see an FCF level that exceeds ¥500 billion. On an organic basis, we believe that we can produce FCF of that level in the next three years.

• Will capital expenditure be decreasing in the coming years?

  

  As described in page 31 of the financial results presentation, capital investment is forecast to increase in the fiscal year ending March 2017 by approximately ¥30 billion. This is primarily due to changes in the construction schedules for au and UQ base stations and overseas data centers.
  Capital investment is expected to slightly decrease in and after the fiscal year ending March 2018.

• Will the profit growth and decreases in capital expenditure bring increased FCF toward the fiscal year ending March 2019, considering the total ¥500 billion?

  

  Yes, that is correct.

• The profit target in the medium-term goal is ¥1 trillion--is this correct? Is this based on the implementation of the M&A worth near ¥500 billion?

  

  If the operating income grows at a 7% CAGR over three years, the profit will exceed ¥1 trillion. On another note, the fiscal year ending March 2017 forecast does not count in the profits produced by M&A.

• Does ¥350 billion as the FCF forecast for the fiscal year ending March 2017 include the ¥170 billion scale M&A? Can we assume, based on the three-year total EBITDA, that KDDI has extra funds that amount to more than ¥1 trillion even with the deduction of capital expenditure, M&A, and dividends?

  

  Exactly. We are committed to ensuring the minimum standard as per the shareholder returns policy.

• The plan shows little growth in au ARPA in the Personal Services segment. The Value Services segment also shows limited increase even with the inclusion of the Jupiter Shop Channel. Won't KDDI outperform its plan?

  

  The fiscal year ending March 2017 plan appears moderate. The value-added ARPA is prospected to grow to ¥500 during the fiscal year ending March 2017; however, details may have to wait until later in the term due to individual circumstances.

• If the FCF increases more than the plan, how will it be distributed between growth investment and shareholder returns?

  

  The shareholder returns target as of this presentation represents the minimum standard. If the growth investment is less than ¥500 billion, there may be a possible buy-back.

• KDDI has publicly stated that it promotes customer experience value. What new value can we, as users, expect to see added to the customer experience?

  

  Due to the task force influence, the number of customers visiting shops will continue to decrease due to the increasing length of terminal ownership and the decline in terminal unit sales. Additionally, along with the telecommunications services becoming homogeneous, customers begin to make their choices which carrier or shop to take by themselves. Therefore, KDDI must operate its business with customer touchpoints―namely, the au shops and online portal―as the backbone of our business policy. We will soon have an opportunity to announce our activities for improving on pain points one by one in order to encourage positive visits to the touchpoints. We ask for your patience.

• Concerning the 7% CAGR in operating income in the medium-term plan, does the operating income three years ahead (fiscal year ending March 2019) consider future M&A?

  

  The growth for the second and subsequent years in the medium-term goal should be considered to include the expected ¥500 billion of M&A. While we are aimed at an over-¥1 trillion operating income in three years, we are not ready to disclose a three-year road map for specifics as of this time due to the impact of market conditions.

• KDDI announced a balancing of growth investment and shareholder returns over three years in the previous medium-term goal. As per this promise, KDDI is going to buy back ¥100 trillion worth of its shares―is this based on the balance within the three years according to the medium-term goal? What indices on the balance sheet is the balance between growth investment and shareholder returns based on? If a growth investment of ¥500 billion is conducted, will there be additional shareholder returns?

  

  It is not a fixed plan to buy back shares at the end of the three years; we will make the repurchase according to the state of share prices. We are aware of the low D/E ratio. Please consider that KDDI is promising the minimum for the shareholder returns. We will be dealing with buy-backs more flexibly than in the previous medium-term goal.

• Is there a financial target?

  

  Not that KDDI can disclose as of this point.

• KDDI is aiming for a ¥2 trillion total worth of circulation in the au Economic Zone. What is its breakdown like? What are the current standards and the categories to be improved in the near future?

  

  We have not published the breakdown of the ¥2 trillion plan. However, the fiscal year ended March 2016 financial result is ¥730 billion (au WALLET: ¥430 billion, au Carrier Billing: ¥290 billion, Other: ¥10 billion). We are aiming for ¥1.2 trillion (au WALLET: ¥690 billion, au Carrier Billing: ¥290 billion, Other: ¥220 billion) for the fiscal year ending March 2017. The total circulation amount in NTT DOCOMO's Smart Life domain is ¥3 trillion, which outclasses KDDI's near-¥1 trillion by almost ¥2 trillion. This difference derives from the number of credit card memberships: DOCOMO has 8 million while KDDI has only 1.5 million. As categories to improve on, we intend to focus on financial services and commerce in our Life Design strategy, including M&A.

• Is retention as internal reserves not considered as important as an appropriation for FCF?

  

  Exactly.

• What is the reason behind the small scale of operating income in the Business Services segment for the fourth quarter of the fiscal year ended March 2016? (Data Book on page 3)
  I would also like more explanation on KDDI's efforts for the fiscal year ending March 2017.

  

  The 4Q of the fiscal year ended March 2016 was affected by the increase in mobile device unit sales, including both new purchases and model switchovers. Since the negative impact of the fixed rate calling plan, which was the primary factor of decreased sales and profit in the previous term, is diminishing, we are expecting increased sales and profit for the fiscal year ending March 2017.

• What is in the backdrop of the increase in unit sales?

  

  In addition to promoting marketing, fourth quarters tend to have last-minute demand from corporate customers.

• In relation to "strengthening IoT initiatives" mentioned on page 13 of the financial results presentation, what is the future business scale envisioned for IoT? If there are specific products or services that are envisioned for this domain, I would like some examples.

  

  In the next three years, we are expecting to see early implementations of smart meters and connected cars, followed by household IoT. We do not assume that IoT itself will have a significant contribution to our profits, but we will pursue profitability in platforms as well rather than solely in telecommunications. This year KDDI is experiencing a change in business climate, where the increase in conventional smartphone-centered telecommunications charges is about to hit the ceiling. This domain will be supported by our IoT business as well as the profits expected from decreased incentives for mobile device subscriptions.

• The fiscal year ending March 2017 forecast for added value ARPA is ¥500. Which categories do KDDI plan to improve in order to achieve the increase?

  

  au Smart Pass is still strong and steady. Additionally, we hope to draw your attention to increases in payment charges based other Pass-related services and the packaged promotion of au WALLET prepaid card and credit card planned for the near future, as well as the expansion of the au WALLET Market product lineup.

• How is the number of au WALLET credit card memberships and the turnover as of the end of March 2016? I assume that it is possible to expand membership base using merchandising expenses. Is KDDI planning active efforts to increase the number of memberships?

  

  The total applicants for au WALLET prepaid card and credit card memberships for the fiscal year ending March 2016 was 20 million, out of which 17.9 million cards were active (16.5 million prepaid cards and 1.4 million credit cards).

• The strategy to grow au ARPA while expanding the au Economic Zone and value-added ARPA and promoting global business seems similar to that of the NTT Group. Are all telecommunications carriers directed toward similar strategies in the current market environment? If there is a difference between the NTT Group and KDDI strategies, please explain.

  

  Telecommunications carriers have lifecycles, and we take this as a discussion of dumb pipe and smart pipe. To focus on non-telecommunications spheres in our smart pipe by taking advantage of touchpoints is a drastic change in the flow, but a natural selection. While in the big picture, the strategies of the two operators may appear similar, but we believe there are differences in specific details.

• Looking at the business performance, specifically the scales of sales and profit, DOCOMO and KDDI appear similar in the short term to global investors. However, on the other hand, with regard to shareholder return, DOCOMO's dividend payout ratio is over 50% and the company is ready to buy back its shares on a large scale on request from NTT. Based on the above, KDDI's shareholder return appears subordinated. How do you intend to solicit investors?

  

  In the course of our operation, KDDI has always kept to achieve the guidance we have announced, which we believe have fostered a sense of security among investors. We hope that you will understand that this management style is what differentiates us from other carriers.