Performance Highlights and Q&A for the Third Quarter of the Fiscal Year Ending March 2017
|Date||Thursday, February 2, 2017 5:00 pm-6:00 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)|
A Look of the Presentation of the Financial Results
In the presentation of the financial results, President Tanaka described three points; "Performance in 1-3Q," "Promoting Business Strategies," and "Revision of Full-year Results Forecasts."
1. Performance in 1-3Q
For the third quarter of the fiscal year ending March 2017 (from April to December 2016,) consolidated operating revenue was ¥3,522.2 billion (74.9% progress for the initial forecast.)
Consolidated operating income was ¥775.7 billion (87.7% progress for the initial forecast,) mainly due to the increase of mobile communications revenues  and the decrease of the handset sales expense and EBITDA was ¥1,203.4 billion (81.3% progress for the initial forecast.)
- au ARPA revenues + MVNO revenues
2. Promoting Business Strategies
In our domestic telecommunications business, we are promoting expansion in mobile IDs, which is the sum of au accounts and the MVNO subscriptions provided by our consolidated subsidiaries. We are aiming for a share of 30% in the new MVNO market with UQ mobile, which bolsters that growth.
At the end of January this year, KDDI consolidated BIGLOBE as one of our subsidiaries. BIGLOBE has a customer base of more than 2.4 million users in the FTTH and MVNO business. In the near future, we will collectively take advantage of BIGLOBE's customer base and KDDI's life design business and network technology to increase the number of multi-service users and create a wide variety of synergies.
In the life design business, we started au STAR (long-term user preferential service) in August 2016 and have expanded further. And we also launched au Smart Pass Premium and Wowma! (KDDI shopping mall service) in January this year.
As a result, the number of au Smart Pass Memberships, which constitutes the base for expanding the au Economic Zone, has steadily increased and now exceeds 15 million members.
The au WALLET settlement strongly drove the gross merchandise value of the au Economic Zone for the third quarter of the fiscal year ending March 2017 to 897 billion yen. The current attainment rate of our term forecast of 1,200 billion yen is at 74.8% and showing steady progress.
The churn rate of our customers who are using multiple KDDI services is low compared to customers who are only subscribed to an au smartphone, as shown in the figures. We will continue to reinforce retention by increasing and improving life design services.
Lastly, to create IoT businesses, we will develop a number of enablers to establish new business models to work with our partners.
For development support, KDDI acquired iret, Inc., a company that has been certified as an AWS Premier Consulting Partner for five consecutive years. We will be drawing on iret's know-how for our IoT development support. As for the platform, we have already released KDDI IoT Connect Air, an IoT-targeted network service jointly developed with SORACOM, INC.
As we are preparing both network and devices, we expect to step up our IoT business to full-scale operation.
3. Revision of Full-year Results Forecasts
With these favorable performance, KDDI raised the targets for the fiscal year ending March 2017; consolidated operating income rose ¥25 billion from the initial forecast to ¥910 billion and EBITDA was up ¥20 billion from the initial forecast to ¥1,500 billion.
In addition, KDDI resolved to revise its forecast for cash dividends per share to 45 yen, 5 yen up from the initial forecast with a record date of March 31, 2017.
- I would like to know the details of the revision of this quarter's business performance.
The subscribers' switchover to LTE was quicker and greater than expected, which reduced the operation rate of 3G systems. The operation rate impairment planned for next term (over 30 billion yen) was pushed forward to the fourth quarter of the fiscal year ending March 2017, which led to an operating income forecast lower than the consensus forecast.
- What are the prospects for capital expenditures for the next term and on?
Progress is slower this term, and therefore capital expenditures were downwardly revised. For the next term, we are planning to smooth out capital expenditures, without postponing as seen this term. The change in capital expenditures time has not affected business operation.
- Mobile communications revenues and au ARPA revenues are showing a steady rise in the third quarter. How are you picturing the current state of the new tiered data plan and the expectation for future increase in ARPA? What is the target for UQ mobile for the next term?
The decrease in income deriving from the switchover of tiered data plan 8GB or more users and heavy data-charge LTE flat-rate users to the new tiered data plan balances out in part with the increase in income from by tiered data plan 5GB plan users, which is making up for the initial decrease from these switchover.
UQ mobile's target for the coming term is to be finalized by UQ, but as UQ's President Nosaka has commented that UQ seeks to acquire about 30% of the new subscribers, we assume that they will continue on with their promotion. Initially it was predicted that the growth of the MVNO market would slow down, but now the MVNO market is expected to expand steadily.
- In the Value Services segment, the operating income for the third quarter of the fiscal year ending March 2017 grew significantly compared to the first and second quarters. I would like more insight into the circumstances.
In addition to the increase in value-added ARPA revenues, the Jupiter Shop Channel sold over 2 billion yen in a day during the Grand Foundation Festival held in the third quarter, which contributed to the steady growth of both the sales and income. The gross merchandise value of the au Economic Zone is steadily progressing as planned toward the FY2017.3 goal of 1,200 billion yen. We look to achieve our upwardly-revised operating income forecast of 95 billion yen.
- What are the reasons for not revising this term's income (attributable to the owner of the parent company) forecast?
While we cannot disclose the specifics, we can say that the reasons include the non-operating loss or the consumption of deferred tax assets due to dealing with the unprofitable business of some overseas subsidiaries, as well as the increase of attributable to non-controlling interests such as J:COM and UQ.
- What are the reasons for the downward revision of capital expenditures?
The inauguration of au's 700 MHz and 3.5 GHz-band base stations was originally planned for the second half of the fiscal year ending March 2017, creating a heavier concentration of planned projects in the second half. The delay in the construction of the base stations, which naturally results in later payments, and the revision in J:COM capital expenditures are also major factors.
- Are there any changes in the shareholder return policy in the medium-term plan up to the fiscal year ending March 2019?
No. Improvements in shareholder returns are still under review.
- KDDI explained that the acquisition of BIGLOBE supplies KDDI with touchpoints to a customer base that KDDI was previously unable to approach. I would like some elaboration on this matter.
Specifically, we are thinking of au's cross-selling to BIGLOBE Hikari and other FTTH customers, selling value-added ARPU improvements and terminal sets to MVNO users using DoCoMo lines, and offering online life design products through Japan's third largest portal site of BIGLOBE.
The FTTH business is growing at CAGR 3%. ISP business is also showing strong performance. We also expect MVNO to further grow in the future, with growth potential in BIGLOBE itself. BIGLOBE Hikari has been sold over the Internet, but it will also be sold at au shops, which will refer customers to au shops and BIGLOBE's portal site each other that create synergies.
- What are the factors for the additional 150 billion yen of free cash flows for the fiscal year ending March 2017 vis-à-vis the beginning-of-term forecast? Are there any changes to the use of free cash flows?
There are four factors as detailed below.
20 billion yen up for the increase of EBITDA, 30 billion yen up for the decreased capital expenditures, 43 billion yen up for the payment of BIGLOBE's debt recorded into the financial cash flow, and the remainder owes to the delay in payment related to the capital expenditures in the Myanmar business. As of the present date, there are no changes to the use of free cash flows.
- What is the reason for the +100 yen upward revision of au ARPA?
ARPA can be broken down into ARPU times the unit of mobile devices per person; the number of mobile devices is faltering vis-à-vis our internal plan partly due to the release of the new tiered data plan. ARPU, on the other hand, steadily grew driven by the 3.7% increase in smartphone penetration rate compared to the previous term.
- What are the details of the revision of the performance forecast of the Global Services segment?
The operating income of the Global Services segment for the first-to-third quarter decreased 5.1 billion yen year-on-year. This is primarily due to unfavorable currency movements affecting overseas subsidiaries and the disposal of high-risk low-return businesses; aside from this impact, the performance shows a substantially increased income. The forecast was revised based on the current circumstances.
- How was the acquisition cost for BIGLOBE, specifically 80 billion yen, valuated? I would also like to know about the policy for M&A valuation for future reference.
While we must refrain from disclosing specifics, we can tell you that the acquisition of BIGLOBE and the valuation thereof are advisable as a result of detailed examination of business plan and synergy, based on the objective opinions provided by financial advisors.
As for how we will approach future M&A, there will be no change to our current policy of pursuing M&A in the areas of "maximizing the au Economic Zone" and "ambitiously developing global businesses." The acquisition of BIGLOBE may seem to not be in line with our M&A policy, but in promoting our life design strategy, touchpoints will have an increasing significance―we believe that the touchpoints to the 2.4-million customer base can contribute to the sales of life design products and create synergies.
For the further growth of KDDI's income, it is essential to promote the life design strategy, building on value-added ARPA, in addition to expanding IDs, including MVNO.
- When promoting the sales of UQ mobile, is it correct to think that au's sales cost will be decreased to make up for the increase in UQ's sales cost in order to control the sales cost within the Personal Services segment? In that case, considering UQ's controlling ratio, the increase in UQ mobile's sales cost will work to the advantage of KDDI shareholders while working disadvantageously to UQ shareholders. How are you planning to adjust this?
The sales measures for UQ mobile and au are individually formulated by each company.
Most of UQ's income comes from the profitable WiMAX business. We are assuming that UQ is using advertising costs in advance for the preparation for UQ mobile, which will be their next pillar of business. We will seek to balance the interests of UQ's shareholders.
- What are the constraints in the provision of KDDI's services and products to BIGLOBE's customer base?
There are some constraints, but they are insignificant. We will offer KDDI's services and products, as well as pursue synergies, in both the FTTH business and MVNO business areas to all customers, including those who are using another carrier's network. Streamlining can also be expected from using KDDI's network.
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