KDDI HOMECorporate InformationInvestor RelationsIR DocumentsPresentationsFY 2019.3Performance Highlights and Q&A for the Fiscal Year Ended March 2019

Performance Highlights and Q&A for the Fiscal Year Ended March 2019

Date Wednesday, May 15, 2019 5:30 pm-7:00 pm
Location KDDI Hall (Otemachi, Chiyoda-ku Tokyo)
Respondents Makoto Takahashi, President; Yoshiaki Uchida, Executive Vice President; Takashi Shoji, Senior Managing Executive Officer; Shinichi Muramoto, Senior Managing Executive Officer; Keiichi Mori, Managing Executive Officer; Kei Morita, Managing Executive Officer; Nanae Saishoji, Corporate Officer, General Manager, Corporate Management Division; Keita Horii, General Manager, Investor Relations Department (MC)

Performance Highlights

The Presentation of the Financial Results

In the financial results briefing, President Takahashi spoke on the four topics: the business performance in FY2019.3, M&A towards new growth, our performance forecast for FY2020.3, and the new medium-term management plan that runs through FY2022.3.

1. Business Highlights of FY2019.3

The consolidated operating revenue for FY2019.3 (Apr 2018 to Mar 2019) was 5,080.4 billion yen and the consolidated operating income was 1,013.7 billion yen, recording 18-year consecutive increase in operating income and also achieving the operating income over 1 trillion yen for the first time ever. The churn rate improved by 0.1 point year-on-year to 0.76%. The au ARPA revenues increased year-on-year for the first time since the introduction of the au Pitatto/Flat unbundling plan in July 2017.
au Economic Zone Gross Merchandise Value significantly exceeded the previous medium-term plan target of 2 trillion yen―recording 2,517 billion yen. The value-added ARPA continued on to a three-year consecutive two-digit growth, recording 700 yen as the full year performance. Despite the rapidly changing business circumstances, we will continue growing sustainably.

2. M&A towards New Growth

KDDI's basic M&A policy prioritizes growth building on the group companies' maximum utilization of our assets. As a result, currently the growth of the group companies is driving the consolidated performance. The M&A over the past three years has been consistently focused on the three points: (1) Domestic telecommunications, (2) life design, and (3) new business fields. (1) Domestic telecommunications saw a synergy of 410 billion yen thanks to cross marketing with J:COM through au Smart Value and cost efficiency. (2) The typical example of life design is ENERES - building on the knowledge of power demand and supply management, ENERES supported au Denki's services and contributed to au Denki's total subscriptions exceeding two million customers as of the end of March 2019. (3) As a new business fields, KDDI developed a leading-edge IoT service through using SORACOM's technology. We are expecting its contribution to improving network efficiency for the coming of 5G era.

3. FY2020.3 Forecast

As the first year in our pursuit to attain our goals in the new medium-term management plan, we aim for consolidated operating revenue of 5,200 billion yen (2.4% year-on-year increase) and a consolidated operating income of 1,020 billion yen (0.6% year-on-year increase) for FY2020.3. In this fiscal year, we aim to steadily increase operating revenue and operating income while responding to the changes in the business environment, such as price drops and competitors' new entries into the mobile telecommnications business with a firm and steady hand.
We also announced a new price plan on May 13th. KDDI took the lead in introducing an unbundling plan. We already have 14 million customers, which accounts for two-thirds of au smartphone users, subscribing to this plan. The new price plan can give a 40% discount in price compared to the prices before introducing the au Pitatto/Flat Plan, furthering our competitive edge. In addition, we have introduced the au data MAX plan, which has no limit on data volume for the first time in Japan, as part of our future-looking strategy for the coming of 5G era.
With regard to payment, KDDI launched au PAY on April 9th, and within 35 days of release, the number of subscribers surpassed two million. We will continue to infuse efforts into services with "Convenience and Good Deals" and expand our payment business.
The dividend of FY2019.3 was 105 yen throughout the term―a 5 yen increase from the forecast at the beginning of the term―as an expression of sincere appreciation for our shareholders' continued support for three years. We aim for a further increase in dividend that comes with sustainable income growth, specifically to 110 yen (payout ratio of 41.7%) for FY2020.3. KDDI also resolved a payback of 150 billion yen (maximum) and aims to attain both a sustainable profit growth and increased shareholder return.

4. Announcement of the New Medium-Term Management Plan towards FY2022.3

In starting the new medium-term management plan, the KDDI brand and the au brand respectively refreshed their brand slogans to "Tomorrow, Together" and "Explore the extraordinary" These slogans represent our thoughts for sustainable growth and development toward the future along with our customers and society. We also changed segments to further promote the integration of telecommunications and life design. Our segments are now consolidated into two groups: the Personal Services segment for individual customers and the Business Services segment for corporate customers. Our global business is now positioned to extend domestic businesses.
As the focus of our business strategies, we will promote (1) creating innovation towards the 5G era, (2) the integration of telecommunications and life design, (3) further expansion of global business, (4) utilizing big data, (5) expanding the finance business, (6) growth as the group, and (7) sustainability.
5G frequencies has been allocated in this April, and plans to start pre-sales in September 2019 and the sales of devices by the end of March 2020. Through collaboration with partner companies in various fields, KDDI will generate innovations through 5G. Furthermore, in order to promote the utilization of 5G in regional revitalization, we established 3 billion yen fund for the regional revitalization. We will promote a digital transformation using 5G with our venture partners.
In the area of the integration of telecommunications and life design, we will endeavor to maximize our life time value and aim for a stable growth of total ARPA revenues. KDDI plans to increase the operating revenue in the life design domain - our growing business - to 1,500 billion yen by FY2022.3. Furthermore, drawing on the knowledge and experience from our life design domain in Japan, we aim to create an economic zone abroad equivalent to that in Japan. In the Business Services segment, KDDI will advance the development of recurring business with partners and step up our efforts in the new growth area centering around IoT business. By FY2022.3, KDDI plans to expand the total IoT connections to 18 million and Business Services segment operating revenue of 1 trillion yen.
With regard to utilizing big data, KDDI will offer better proposals of optimal services to customers through AI analysis. With regard to finance business, we will make the settlement and financial services in customers daily lives more accessible through smartphones that have become the center of our lives.
Our sustainability efforts aim to make KDDI a company that contributes to the sustainable growth of society, and as such, we have formulated KDDI's Target SDGs. We will identify the social issues that we aim to solve through our business and those that we aim to solve through our corporate activities, and set quantitative goals to drive our initiatives.
KDDI will also work on cost efficiency to generate profit on the scale of 100 billion yen over the three years.
We aim for sustainable growth and furthering a stronger shareholder return through the above strategies and efforts. By FY2025.3, which is six years from now, we aim for a 1.5 times growth in EPS compared to FY2019.3, raise the payout ratio to slightly over 40%, carry out an agile share buyback, and cancel all the acquired treasury shares.

Questioner 1

  • QCould you explain what are the major drivers of profit and how the new price measures will affect the high target of 1.5 times growth in EPS in the medium-term plan?

    The 1.5 times growth in EPS corresponds to a CAGR of approximately 7%. The EPS is naturally affected by activities such as share buybacks. For example, if we repurchase 150 billion yen in shares, the EPS is calculated to increase by about 2%. If you take this as an example, the corresponding profit growth would be approximately 5%, though the actual figure may vary depending on the business environment. In the previous medium-term plan, the CAGR target was 7% in operating income growth. This will be stable but we are willing to achieve solid continuous growth.
    Regarding the effects of the new price measures, an expected total impact of 400 billion yen was announced two days ago when the new prices were unveiled. However, we regard this as a cumulative total of approximately 400 billion yen in customer return, starting from the introduction of the au Pitatto Plan and au Flat Plan a year and a half ago. Approximately 300 billion yen of this has already been achieved as of the end of the previous fiscal year. That leaves another approximately 100 billion yen over the next three years. The impact of this will be slightly increased each year due to increase in subscriptions of new mobile price. Consequently, this will have only a minor effect on the current fiscal year. Since there are various ways to make up for this operating revenue decrease, our forecast is that we will somehow achieve growth in operating revenue and operating income this fiscal year. Our aims of achieving 100 billion yen in profit growth through measures such as cost reductions, etc., as well as achieving continuous growth in the medium-term, are reflected in the various policies in the new medium-term plan.

  • QRegarding the distribution of management resources, how do you intend to balance the distribution of cash in the new medium-term plan, for activities such as CAPEX including 5G, as well as for business investments through measures such as shareholder returns and M&A?

    We announced a 500 billion yen target for business investments in the previous medium-term plan, but we received many suggestions that we should not create a budget for M&A. As for future business investments, we are considering activities such as (1) expanding operations with a continued focus on au IDs, (2) expanding the life design business, and (3) expanding business and data center investments primarily in Southeast Asia. However, the details are not specifically outlined in this medium-term plan, and we would like to consider each investment on its merits. As for M&A, we conducted many transactions over the past three years, but the situation has calmed down. Therefore, we would like to continue making investments by positioning the three areas I just described as the main pillars.

Questioner 2

Questioner 3

  • QWith regard to the life design domain, could you once again explain life design and engagement from the perspective of factors such as the contributions to cost reductions, including profit and churn rate, as well as differentiation through activities such as the Rakuten measures?

    Regarding the life design domain, we explained that the operating revenues increased from 946 billion yen at FY2019.3 to 1.5 trillion yen at FY2022.3. The life design domain previously encompassed both the life design services segment and the personal services segment. To make the overall segment structure easier to understand, we thought it was necessary to combine and reorganize them. In the future, we believe this will make it easier to compare to NTT DOCOMO and others. Regarding the profit ratio, we would like to keep it at the current level as we increase the operating revenues. You can work backward from there to calculate the approximate profit ratio and profit amount.
    As for the problem of differentiating ourselves from the competition, KDDI intends to make slightly more progress in the life design domain compared to NTT DOCOMO and Softbank. For example, we have Jibun Bank in the financial area and au Smart Pass Premium in the upper-layer services, which make our stock business extremely stable.
    Rakuten has developed considerably in the fields of e-commerce and finance, so I think these are the areas where we need to catch up. However, I do not believe we are competing in the same circle, because we are moving toward life design while maintaining our solid foundation in telecommunications, and they are moving from life design, which is not such a large source of revenue, toward large investments in telecommunications. Basically, our stance is to compete steadily by relying on au telecommunications, which is our core strength.

  • QCould you explain the reasons for increasing the amount of CAPEX, as well as your perspective on differentiating yourself from the competition by strengthening the equipment?

    Our plan is to slightly increase the total amount of CAPEX for the next three fiscal years, over the 1.68 trillion yen total that was recorded for the past three fiscal years, from FY2017.3 to FY2019.3.. First, 3G will be phased out in March 2022, so there will be no further CAPEX in 3G. As for 4G, there were considerable investments in FY2019.3, but we believe that these investments will tend to decrease moving forward. Investments in 5G will shift into high gear in the coming fiscal years, but because the decrease in 4G investments will partially compensate for the increase in 5G investments, we anticipate only a slight increase overall.
    In addition, we have been internally conducting quite a few virtualization trials for the last few years, as part of our efforts to achieve cost efficiency through network virtualization. We have established the operations and other factors, which we believe can lead to significant cost reductions. Also, because we have devoted significant resources in terms of operations and maintenance costs, we are considering automation of these to combine 4G and 5G operations using the expertise that we have accumulated up to now. We also described our plans to share equipment with other telecommunications operators, which is being considered because it will become increasingly difficult for individual companies to develop their own facilities as the industry shifts to 5G.

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