Performance Highlights and Q&A for the First Half of the Fiscal Year Ending March 2018

The Presentation of the Financial Results

In the presentation of the financial results, President Tanaka described two points; "Financial Results for the First Half of FY18.3," and "Toward Achieving the Medium-Term Target."

1. Financial Results for the First Half of FY18.3

For the first half of the fiscal year ending March 2018, consolidated operating revenue increased 5.0% year on year, to ¥2,416.1billion.
Consolidated operating income was up 1.9% year on year, to ¥542.5billion, mainly due to the revenue increase of mobile communications revenues and value-added APRA revenues and profit increase of the Business Services segment, no matter the strategic cost newly generated from this year to promote measures for growth next fiscal year and beyond.
Profit for the period attributable to owners of the parent rose 1.0% year on year, to ¥329.4billion.
We have achieved 57.1% of our consolidated operating income target for the full fiscal year, meaning that we are well on progress.

2. Toward Achieving the Medium-Term Target

In our domestic telecom business, the number of "mobile IDs," which is the sum of the number of "au accounts" and "MVNO subscriptions," reached 26.08 million as of the end of September 2017 (+1.5% year-on-year), which represents a 1.0% increase in "mobile communications revenues" year-on-year. "au ARPA" per au customer is still stably growing at \5,970 (+2.2% year-on-year) mainly with the expansion of high volume data needs.
The number of combined cumulative applications to "au Pitatto Plan" and "au Flat Plan", the new rate plans that KDDI started offering in July 2017, exceeded 2 million as of October 14, 2017, partly due to the expansion of availability that covers all devices, including Android devices and iPhones (available for iPhone starting September 22). Currently, the selectivity of "au Flat Plan (over-20 GB high volume data plan)" is rising, and we can expect its contribution to increased au ARPA in the near future.
Thanks to the performance of these new rate plans and the au STAR effects, the au churn rate for the 2Q of the current fiscal year was 0.79% (down 0.12% compared to 1Q), showing a gradual improvement trend.
As a result of the recognition we earned for these efforts, KDDI won "a two-year consecutive number one" in the 2017 Customer Satisfaction Survey regarding mobile phone services for individual and corporate customers. KDDI will continue to exert company-wide efforts to promote the provision of "customer experience" that is beyond the customers' expectations at every contact point.

Next, in the life design business, gross merchandise value in the "au Economic Zone" amounted to ¥443 billion, which is 1.5 times year-on-year, and "value-added ARPA" was ¥570, which is a 14.0% increase year-on-year. The increase in both fields was primarily due to the steady increase in transaction via au WALLET (particularly, credit cards) and commerce business (au WALLET Market and Wowma!) as well as the increase in au Smart Pass (including au Smart Pass Premium) memberships.
In August 2017, KDDI added "au Simple Payment" to the Shop Channel payment options. This is an example of the many programs KDDI is promoting to make more services available for further expansion of the "au Economic Zone."

Finally, KDDI will elaborate on our activities in the area of "IoT", where everything connects to the Internet.
At the end of August 2017, we consolidated SORACOM, which has quickly established a business model that provides an IoT communication platform on cloud service and has been offering excellent technologies and services. This undertaking has been received favorably for the easiness and the short time taken by customers to introduce IoT. The number of customers rapidly increased to over 8,000 in Japan and abroad within the two year of starting the service. By combining the know-how of KDDI, which provides reliable telecom services with attentive sales approaches, with SORACOM, which has the aforementioned strengths, KDDI aims to offer IoT solutions that can address various issues to wide range of industries.

• The au churn rate has been a concern for the stock market, but it dropped during 2Q, counteracting the downward trending number of au accounts. This change is possibly due to the introduction of the new price plans, and as such, I would like to know the structural effects they are bringing.

  

  In these new price plans, while communication tariffs are lowered, the communications charges have no negative impact of monthly discount as the handset prices are separated, which balances out to a neutral impact on revenues.
  As for handset prices, we started au Upgrade Program EX, which not only introduces a 48-month installment to reduce the monthly payment of the device price, but also offers a maximum discount of 50% in substance to customers over two years.
  This composition makes the plan very approachable for customers who plan to use the device for a long time and customers hoping for lower monthly running costs, and hence contributes to a reduced churn rate. The au Pitatto Plan is also appealing to customers using 1-3 GB, from which we cannot only expect a retention effect, but also acquisition of competitors' low-volume user base, which leads to increase of sales accordingly.
  While au STAR's retention effect analysis is necessary to examine the medium-term impact of the new price plans, we believe that for the time being it can quite effectively reduce the churn rate. The new price plans are also contributing to a broadening of the customer base as shown in the 1.5-fold increase in new subscriptions and the 1.7-fold increase in MNP. In the 3Q, we will be entering the iPhone selling season, and we expect an even further drop in churn rate and increased ARPA along with an increase in the au Flat Plan subscription rate.
  The 2Q results are a halfway mark in the medium-term management plan. While KDDI underperformed during the first half due to the outflow of customers to MVNOs, we are now managing to control this in our own playing field, and the roll-out of the new price plans is shrinking the diminution of au accounts. The Group MVNO subscriptions are steadily growing, and the overall telecom business appears to be trending upwards.
  In terms of KDDI's makeover into a life design enterprise, as upheld in the medium-term management plan, the expansion of the "au Economic Zone" is progressing steadily. These undertakings take time to show up in corporate performance, but we say that our momentum is steadily recovering across the board.

• au ARPA shows no progress from 1Q to 2Q. Is this due to the introduction of the new price plans? I would also like to know when the new price plans will start contributing to an increase in au ARPA in addition to the effect of non-application of monthly discount.

  

  While we can say that the momentum is recovering, we cannot say anything for certain until we observe user behavior a little more regarding the effect of the introduction of new price plans on any au ARPA increase.

• How is the progress of the 50-billion yen strategic cost for the fiscal year ending in March 2018? I would also like to know about specific measures that are affecting growth for the coming and subsequent terms.

  

  The breakdown of the 50-billion yen strategic cost for the fiscal year ending in March 2018 is approximately 25 billion yen for improving retention, approximately 15 billion yen for channel structure reform, and approximately 10 billion yen for expanding the life design business. The actual strategic cost in 2Q, amounting to approximately 11 billion yen, was comprised of approximately 7 billion yen for improving retention, 3 billion yen for channel structure reform, and 1 billion yen for expanding the life design business. The first half total is approximately 16 billion yen. Regarding retention improvement, the au STAR memberships have reached 13 million, showcasing the positive effect of events like San Taro no Hi (au user bonus day). The rest of the measures are planned for implementation in the second half.

• What business is driving the increase in the gross merchandise value in the "au Economic Zone" ?

  

  The actual quarterly figure of the gross merchandise value in the "au Economic Zone" deriving from each area is not disclosed, but it is progressing steadily toward the disclosed term forecast of 1.7 trillion yen. In particular, KDDI is infusing strategic cost into Wowma! and other commerce businesses, which are growing well.

• What are the year-on-year increase/decrease factors of 2Q operating incomes in the Value, Business, and Global Services segments, respectively?

  

  Value Services segment: The decreased income is due to the spending on strategic cost to expand the life design business, aside from that, the operating income actually shows a double-digit increase for the first half. It is progressing well in the light of the term forecast.
  Business Services segment: While the legacy fixed calling income continues to fall, the other fixed systems, as well as mobile and IoT businesses, are doing well. Cost operations are also progressing smoothly, contributing to an overall increase in income.
  Global Services segment: The Myanmar telecom business and data center business are also doing well, resulting in increased income.

• I would like to know about the progress of the 500 billion-yen M&As mentioned in the medium-term management plan. Also, what is the synergy from purchasing SORACOM?

  

  KDDI has carried out around-200 billion-yen of M&A by 2Q. The plan is being implemented with slightly more weight on the second half. The synergy from the purchase of SORACOM has been as much as expected. There is no change from the medium-term management plan regarding the future target of M&A, i.e. the Life Design and Global domain.

• How are you seeing the increase in connected car-based income?

  

  The in-vehicle telecom modules are currently limited to high-end cars, but we are expecting the application to expand to a larger number of models. KDDI is still building a global platform for connected cars with other telecom carriers around the world. We believe that adoption by automobile manufacturers worldwide will dramatically expand the range of automobiles using the module, leading to an increase in our income.

• The mobile communications revenues and revenues from external customers in Value Services segment have decreased in 2Q from 1Q. What is the reason behind this?

  

  The drop in mobile communications revenues is mostly due to the new price plans. However, while we have lowered the communications charges, we have also reduced lump-sum payment in sales, which should counteract negative impact on profits. The decline in revenues from external customers in Value Services segment is possibly a seasonal influence as we had a home appliances sale on the Jupiter Shop Channel in 1Q, which temporarily increased income.

• What is the reason for investing as much as 20 billion yen in the purchase of SORACOM?

  

  The scale of IoT is varied. While the stable, large-scale platform for global operations is provided by KDDI, using our established know-how, new businesses are emerging at an incredibly rapid pace in the world of IoT, repeating Proof of Control (PoC). SORACOM offers a platform that enables self-service PoC. More than 8,000 PoCs have been covered in slightly more than two years, incubating even large-scale IoT innovations among others. From these facts, we believe that synergy between KDDI and SORACOM will be significant.
  KDDI believes that reliable telecom service and speedy, small-start launching will be essential in the future world of IoT, and we hope that you will have expectations for our future IoT.

• Is the monthly data usage of smartphone users rising since the launch of the new price plans?

  

  Overall, the average data usage is increasing. The au Pitatto Plan is a plan where the charge fluctuates with the volume of data use, and considering customer psychology in this light, there is a trend of keeping down data use. However, the plans have just been rolled out, and we are still keeping an eye on the effects and outcomes.

• What percentage of the smartphone users, including Android users, is selecting the au Upgrade Program EX?

  

  More than 80% of the customers purchasing the device select the new price plan. While there are slight differences in the rate of au Upgrade Program EX selection of customers selecting the new price plan among models, as shown in the presentation material, the overall selection rate is high.