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

In the domestic telecommunications business, in August 2016 we launch a new membership program "au STAR" under our new business management direction, "Transform into a Business Providing Customer Experience Value." The program is designed to encourage long-term use by au customers.

In the UQ mobile sector, we aim to expand the number of electrical appliance mass retailers handling UQ mobile to around 1,000 stores and reinforce customer touchpoints in the MVNO market centered on online sales. In addition, from July we are expanding our communications fee plans and smartphone lineup to promote smartphone sales.

In the IoT field, we will promote connected cars and smart meters, aimed at developing new markets for the mid-to-long term strategy.

In the area of life design strategy, we will coordinate au WALLET Market commerce services and au STAR Gift to boost sales. Additionally, in the au Denki service launched in April 2016, we will promote payment of electricity services by au WALLET credit card. In au Insurances and Mortgages, we have developed services with partner companies, launching sales as au brand services from April. In addition to selling these services through customer touchpoints both offline and online, an au strength, we will develop effective promotions on three au ID-based platforms for maximizing the au Economic Zone: point rewardp, Big Data/Data Management Platform (DMP,) and settlement platform.

In the global business sector, since the conclusion of a joint venture agreement with state-owned MPT, Myanmar's primary telecommunications operator, in July 2014, we have seen steady growth in the number of subscribers. In March 2016, we consolidated MobiCom, the largest mobile phone operator in Mongolia, and launched 4G LTE in May 2016. We will continue to develop the telecommunications business in Myanmar and Mongolia.

• In the first quarter of the fiscal year ending March 2017, the au ARPA increased +3.8% year on year to 5,810 Yen, showing a high level of progress toward the full-year forecast of 5,730 Yen. While I believe that it will continue to increase each quarter going forward, to what extent will it increase in the second and following quarters?

  

  As mentioned during the reporting of the financial results for the fiscal year ended March 2016, the full-year forecast for this period is conservative, but in addition to the increase in the number of mobile devices per person, the downward trend in the "Kakeho and Dejira (Unlimited Free Domestic Calls and Data Plan)" voice ARPU has improved and the data charge usage amount increased to more than double, which lead to significant growth in first quarter performance. We do not see any factors which would greatly change this trend going forward, so I believe that it will continue to increase. However, since it is still the first quarter, we are not thinking of revising the full-year forecast.

• Regarding the churn rate, I think the outflow to current MVNOs and the fee campaigns have had some effect, but with the upcoming launch of the au STAR service and the store expansion of UQ mobile, how much can the churn rate be reduced year on year from the second quarter onwards?

  

  The churn rate has slightly worsened year on year in the first quarter results for this period, but looking at the results by month shows that it is declining. We think that the rate can continue to be improved from the second quarter onwards. That being said, the outflow to the MVNOs is a constant amount, so we wish to maintain the identity of the entire KDDI Group including UQ mobile.

• Regarding the life design strategy, what was the operational response to the financial services and energy businesses launched in April 2016 and the Jupiter Shop Channel ("JSC") during the three months ended June 30, 2016?

  

  Generally speaking, the financial services business is progressing smoothly according to plan. The life insurance business is switching to a refund-based insurance service, and preparations are under way for a December launch. Currently, JSC has a large number of elderly customers. The use of consumer electronics retailing to increase the usage by young people and lead them to the net has proven effective, so we believe that synergies can continue to be achieved by using net and mobile devices.
  Regarding the energy business, the market as a whole is not expanding since the deregulation of electricity. However, the au denki service provided by KDDI is able to present a suitable offer in the stores, and the business trend is increasing according to plan. We believe that the business will continue to trend steadily upward.
  An added side effect of the energy business is an increase in the au WALLET Credit Card setting rate for the payment of electricity charges. This promotes the use of au WALLET as the customer's primary card, and we are satisfied with the results.

• Was there any impact on the first quarter performance due to the guidelines on device sales from the Ministry of Internal Affairs and Communications?

  

  Under the IFRS accounting standards, the device subsidies are deducted from the device sales revenue. Because the device subsidies decreased year on year due to the enactment of the guidelines, the revenue from device sales and the gross margin on devices increased. We thought that the impact of the reduction in device subsidies would be 56 billion yen for the full fiscal year forecast, and the impact in the first quarter turned out as planned.

• Would you explain the context behind the launch of the"Pittari Plan" (1,980 yen/month for a maximum of one year) for UQ mobile? Did the company start this plan to improve the MNP measures and the churn rate? Also, will this plan have a negative effect on the au ARPU in the future?

  

  Maintaining the identity of the KDDI Group by combining au and UQ is a large part of our thinking. UQ mobile will respond to the need for low monthly fees in the MVNO market. The switch from au to UQ mobile is included in the calculation of the company's churn rate, but the maintenance of identity is meaningful. Regarding the ARPU, the main UQ mobile plans are 1,980 yen and 2,980 yen. A certain level of ARPU can be achieved within those limitations, so we can increase the UQ mobile ARPU in an orderly fashion and boost sales for the KDDI Group.

• Was there any impact on the first quarter performance due to the JSC consolidation? Excluding the impact of the JSC, did earnings increase within the Value Services segment?

  

  I think it may be difficult to see, but the impact of the JSC consolidation is that the JSC earnings increased and are trending smoothly due to the amortization of JSC's intangible assets and the synergistic effects. We have achieved an organic increase in earnings of more than 10% within the Value Services segment. My apologies, but the specific financial figures have not been disclosed.

• Are there any plans to offer value-added services, such as the"au Smart Pass" provided by au, UQ mobile users?

  

  In addition to "Multi-network" services through au Smart Value, and "Multi-device" services, which contribute to an in increase in ARPA, there are scenarios to expand the au Economic Zone through "Multi-use" services. From an identity standpoint, we are also thinking about UQ. However, we believe that now is not the right stage to provide value-added services to UQ mobile users. There is a possibility that they may be provided in the future, but currently they are services for au users.

• What is the impact of the United Kingdom's departure from the European Union? Will it affect the future data center business strategy?

  

  At the present time, there is no substantial impact. If the United Kingdom's departure did have an effect, we think it would be in regards to the personal information protection act. The customers of the data center business provided under our TELEHOUSE brand are engaged in multinational corporate activities. With some customers pulling up business stakes from the UK, there is a possibility that they may diversify their businesses that are currently concentrated only in the UK to other countries, so we do not see this as a risk. Currently, the impact of currency exchange will have a far greater effect due to the weakening of the pound.

• What level do you expect the number of mobile devices per person will converge to in the future? Also, we would like the Company to increase the level of disclosure beyond the current two decimal points.

  

  We believe that the number of mobile devices per person will not decrease or flatten out but continue to climb. Routers are also making a significant contribution in addition to tablets, so the number of devices is strongly increasing. With regards to increasing the number of digits that are disclosed, we will take your opinion under advisement.

• What is the long-term business model for the Connected Car? In addition, what is the market scale?

  

  The ARPU in the IoT and M2M markets up until now has been low compared to smartphones and other smart devices, but they were markets where subscribers could be acquired. Going forward, we are considering the creation of a business model which would include not only communication charges but also operational areas such as platform and line monitoring features. The scale of the Connected Car market alone is enormous for future expansion of the current service, initially being provided by Toyota, from the domestic market to the global market, and the smart meter market is also massive as described on page 12 of the financial statement materials. Furthermore, please excuse us for not discussing the smart meter ARPU.

• What is causing the increase in the number of au subscribers and households who contract au Smart Value to soften, and what is the future outlook?

  

  The penetration rate of the au Smart Value service among smartphone subscribers has reached about 60%, so we believe that it will not continue to grow at the same pace as it did in the past. However, the number of au subscribers per household exceeds two devices, and we think that this can be steadily increased going forward.

• Please tell us your thoughts about the au WALLET Credit Card as a settlement platform. Even though the current number of validly issued cards has reached just over one million, I get the impression that they're not being actively used all that much.
  Is there a possibility of accelerating the uptake, including the incorporation of the settlement fees of au users who do not pay their monthly charges with an au WALLET Credit Card into the au Economic Zone?

  

  The results for the first quarter are 1.6 million au WALLET Credit Cards and 17.3 million prepaid cards, and we are working on focusing our efforts in this area. We are increasing the usage amount by encouraging customers with multiple credit cards to use it as their primary card. In addition, we will accelerate the uptake by utilizing the transactions as big data and launching financial and other new services. The credit card business was originally part of our own bank, but it is currently carried out through our KDDI Financial Service subsidiary. Adding one more utility charge to the communications charge reduces the au churn rate and promotes its use as the primary card. It is also highly compatible with the au WALLET Prepaid Card, so we plan to concentrate on it more in the future.

• I believe that the section on installment sales in today's (8/2) press release from the Fair Trade Commission will have a direct impact, but what are your thoughts on future measures to deal with this?

  

  We have not analyzed the details yet, but with regards to installment sales, the specification of one type of retail price by the MNO to the distributors is a problem. We have never specified the retail price to the distributors and allow them to select from multiple installment prices, so we do not think this is a problem.

• The first quarter operating income was 275.1 billion yen, and the full-year forecast will reach a level of 885 billion yen even if the results are flat from the second quarter onwards. Usually, the figure would be revised upward in the third quarter results, but the results for this period are far better than expected. Will the figure be revised upward in the first half results?

  

  We realize that the forecast is conservative, but it is still only the first quarter. The au STAR rewards program for long-term users will increase costs in the second half of the year, so we would like to consider it further after seeing the future progress. Please do not expect any excessive changes.

• Even though the increase in au ARPA revenue is trending at a steady speed of about +15 billion yen year on year, it does not seem to be accelerating or decelerating. Will the revenue increase accelerate in the future under the right conditions? Is there a risk that the revenue growth might decelerate?

  

  We believe that ID x ARPU is fundamental to our business. ID is ensured through enhancing retention and recovery through UQ mobile while ARPA is trending above our expectations. Going forward, we believe that a time will come when we place more emphasis on the total ARPA (au ARPA + value-added ARPA) as the business changes with the market year by year. The operations are currently being managed effectively, and nothing has happened that would be a cause for concern.

• The company is going on the offensive for the UQ mobile service by starting to carry the iPhone 5s and setting low-priced fees. Why has the company taken such steps? Also, are there any problems with MVNO operators that are dissatisfied with KDDI's treatment of UQ?

  

  Fundamentally, the sales strategy is decided by UQ. However, the service previously lacked devices that supported CDMA. Then they were able to carry several types of devices as well the iPhone at the right time, so we heard that they went with a full launch to increase recognition which was a weak point.
  We set the same wholesale fee for UQ as for other MVNO operators, so UQ mobile will initially be in the red. If you think about increasing recognition as an initial strategy adopted by late comers to the MVNO market, then it is a strategy that is easy to understand.

• Among the factors contributing to the increased earnings in the first quarter, what is the breakdown of the factors (+26.6 billion yen) in the Personal Services segment that are not included in the au ARPA revenue? Also, will the increased earnings continue in the second and following quarters?

  

  The breakdown is +11.9 billion yen for the gross margin on devices sales, +3.3 billion yen for fixed communications revenue, and 10.5 billion yen for other earnings.

• The value-added ARPA increased year on year, but what areas can it expand into going forward to reach 500 yen for the full fiscal year?

  

  Comparing the fourth quarter of the previous period and the first quarter of this year, the value-added ARPA decreased by 10 yen, but the range of reduction is smaller than that between the fourth quarter two years ago and the first quarter of the previous period (-30 yen). The value-added ARPA is on target to reach the full-year forecast of 500 yen. One area for future growth is the au Smart Pass. The membership is steadily increasing, and the churn rate is at a low level of less than 1%. In addition, au WALLET and the au WALLET Market are also areas for future growth.

• What are the factors behind the low level of progress in capital expenditures? When will it begin to accelerate? Do you think that the same level of capital expenditures as the current period is required during the next period and the one after that?

  

  Certainly, the first quarter capital expenditures is at a low level of progress of about 80% compared to the planned amount. The capital expenditures is expected to accelerate during the second half of the current period to reach the forecast of 560 billion yen. The scale of future capital expenditures will trend at the same level as the current period, and we do not think that there will be any significant increases.