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

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.

• Could 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.

• Regarding 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.

• With respect to the 7% CAGR for EPS, you mentioned aiming for profit growth of 5%. Taking the new segments into consideration, will your approach be to focus on growing one segment more than the other, or to grow both of them equally?

  

  In the new medium-term management plan, we have broadly defined two growth areas, one of which is the life design domain. This does not represent a shift away from telecommunications toward life design. Rather, it simply reflects our strong desire to move forward hand-in-hand with the life design business that is centered around telecommunications. This desire is also the reason why we only disclosed the total ARPA. We would like to achieve growth by increasing the mutual engagement between telecommunications and life design, thereby increasing the ARPA.
  In addition, we would like to achieve growth based on our IoT Worldwide Architecture by merging the global segment with the business segment. We consider this to be the second growth pillar.

• I have the impression that the 1.5 times growth in EPS and the 7% CAGR are a bit high when compared to the expected value in the stock market. Given the apparent mixture of profit growth and share buybacks, can we take these targets as a commitment?

  

  These probably are high targets, but from our perspective, we targeted the 7% CAGR in operating income that was set in the previous medium-term plan. We set the new EPS target based on our belief that we must, in one way or another, achieve higher figures because we are calling for continuous growth. We intend to work hard to steadily achieve the targets.

• With 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.

• Could 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.

• You mentioned that an M&A target amount has not been set in relation to the use of free cash flow, but that M&A would be considered in the case of a good opportunity. Will your surplus cash be put toward M&A, or will it be used for share buybacks? Could you provide more details about your distribution of free cash flow?

  

  It is very difficult to answer this question directly. Basically, there is a variety of uncertainty this fiscal year, so first we are aiming for growth in operating revenue and operating income. One difference compared to the previous fiscal year is that we will conduct about 150 billion yen in share buybacks up to December. After that, we will conduct additional buybacks in an active manner. In that respect, you can assume that we are looking toward more positive shareholder returns compared to the previous period.
  Also, we provided an additional 5 yen dividend per share at the end of FY2019.3, which enabled us to achieve a dividend payout ratio of more than 40%.
  However, the current fiscal year will be a period of particular uncertainty, so first, you can understand the direction in terms of the points that I just described. In creating the new prices that we announced this time, we took into consideration both the customers and the shareholders, and we will continue to place importance on both in the future.

• In comparison to the previous medium-term plan, can we assume that you are more likely to favor shareholder returns over M&A, even though it might actually be done on a case-by-case basis?

  

  EPS growth is set as a target in the medium-term plan, which opens up a variety of possibilities. Of course, operating revenue and operating income must grow in order for us to achieve solid shareholder returns. It is important to understand that, in the new medium-term plan, this balance is expressed in terms of EPS, and not profit growth.

• Regarding the financial business, I understand that you offer a wide range of services. Specifically, though, do you intend to grow by focusing on payment services, like the other carriers? Or, in order to grow with a more balanced approach that incorporates services such as banking, securities and insurance, do you think that a little more additional investment is necessary? Could you provide more details about your stance toward the financial business?

  

  The payment services are the starting point and, as outlined in the Smart Money Concept discussion, we intend to follow up by expanding into financial services. One reason is that the payment business by itself does not achieve a high return. Moving forward, as we consider how to deepen customer engagement by providing products that suit the life stages of the customers, it will be necessary to offer financial products such as insurance and loans.
  As for the actual products and services, we are now finally preparing the basic lineup. Also, the kabu.com Securities takeover bid has been announced, and once it is complete, I believe the lineup will be ready.
  The au WALLET app is currently gaining ground with customers, and it appears to be doing extremely well. The app is attracting customers because it enables them to use au PAY and check their points. Our approach was to start providing various financial services from there, and since the results appear to be decent, we would like to adopt a strategy of providing customers with not only payment services, but also an extensive lineup of financial services as life design products.

• Could you explain the reason for why the value-added ARPA stayed relatively flat, at 720 yen, from 3Q to 4Q in FY2019.3?

  

  In e-commerce, factors such as the cooling of the economy at the end of the fiscal year created some harsh circumstances for the amount of money in circulation in e-commerce, resulting in some slight effects that led to less than expected growth. Other than that, everything else went as planned.
  In addition, although the circulation amount increases when the points are applied in e-commerce, we applied some control because the profits have to be relatively fixed in 4Q. As a result, this is the value-added ARPA that was recorded at the end of 4Q. Rakuten will be entering the telecommunications sector, so we would like to strengthen our competitiveness in e-commerce.

• Is it appropriate to think of the total number of IoT connections as linked to the 100 billion yen target in IoT operating revenue that was discussed previously, in light of the 8 million connections in FY2019.3, and the 18 million connections over three years?

  

  It is fine to think of them as linked, but it would be better to think of them as a major part. Simply increasing the number of connections does not increase the operating revenue, so we are also considering how to add value to the services surrounding the platform.

• In that respect, would it be inappropriate to calculate the ARPU of 460 yen by dividing 100 billion yen by 18 million connections?

  

  Correct. It would not be appropriate to think of it that way.

• Are the figures for SORACOM included here?

  

  Yes, you can assume that they are included.

• You described your aim to secure competitiveness with respect to your rivals in terms of the 5G network, but do you have any strategies for gaining the competitive advantage, providing 5G services that outclass the competition, and securing profits? Or, do you just intend to compete with the rivals side by side to secure network competitiveness? Could you clarify this point again?

  

  If you look at the new plan, I think the direction is clearly explained. Earlier, we discussed how we created an optimistic plan based on our desire to obtain frequencies for worldwide use. For example, if you look at the new plan, you can see our infrastructure development rate of 93.2%. In comparison, DOCOMO is at 97%, Softbank is at 64%, and Rakuten is lower, at 56.1%. In that respect, once we enter the 5G era, we should be focused on competing with DOCOMO. As for the number of base stations, we have plans for 30,000 stations (in the 3.7 GHz band). From our perspective, considering that the other companies have not come as far, we are much more active in terms of 5G network development. This is one of our competitive strengths.
  Also, with respect to mobile price, we always think of ourselves as price pioneers. We were the first to introduce an unbundling plan, the au Data Max Plan which was announced this time, and we actually introduced the first flat rate system in the 3G era. The au Data Max Plan will also be extended to 5G, so even in that respect, it is appropriate to assume that we will be a tough competitor in 5G.

• I would also like to ask about the share buybacks and EPS growth. First, is there a reason why the profit EPS target is set through FY2025.3, while the other operating revenue targets are set through FY2022.3? Also, for the current fiscal year, the plan does not call for reaching 7% even with the inclusion of share buybacks, so does that mean that you will catch up by achieving more than 7% in the subsequent fiscal years? Furthermore, in the previous medium-term plan, it seemed that you would conduct share buybacks each year if you could afford it. Does the new plan call for a more active approach toward share buybacks due to a greater focus on EPS?

  

  First, the reason for setting only the EPS target up to FY2025.3 is that we believe a figure of 1.5 times would have a major impact. Also, after referring to case examples from other companies, we thought that 1.5 times growth in EPS would serve as a good benchmark. When performing the calculations for the current fiscal year, we estimated a figure that would probably not reach 7%. Because there are many elements of uncertainty this fiscal year, we opted for a slightly conservative plan. Consequently, our policy regarding the amount that falls short this fiscal year is to recover it in the next and subsequent fiscal years. As for our approach to share buybacks, we will respond in an active manner based on the suggestions that we receive. It is appropriate to regard our approach as being more aggressive than in the previous three fiscal years.

• In relation to the cost efficiency efforts, when management looked at KDDI on the whole, did you find any areas that were inefficient in comparison to other companies in the same industry, for example? And, if so, will you introduce a variety of technologies to actively reduce costs, irrespective of the previous way of doing things?

  

  Yes, that is correct. We will incorporate RPA and AI technology to achieve efficient management. In other words, the direction of our network technology is moving toward network virtualization, which is an area that Rakuten is expected to enter this year. This is the first step in the digital transformation that we must undergo. This new era has undoubtedly arrived, so we would like to implement educational activities within the company and aim for a target of 100 billion yen. However, the point of the 100 billion yen is not just to achieve cost reductions, etc., but also to expand the growth area.

• In relation to the life design business, it seemed that your explanation dealt with expanding the business and services for KDDI and au users only. This is realistic in a certain respect, but it seems that overseas platformers and companies that wish to do something in this field in Japan, for example, are targeting all users and taking an aggressive approach. With this in mind, are you focused on the au Economic Zone, au, and KDDI users, or are there some businesses where this is not actually the case? To the extent that is possible, could you describe where your focus is and provide a more in-depth explanation?

  

  Regarding the life design domain, I believe the direction is fundamentally that of greater openness. We started au PAY for au users in April, and we are actually working to make this an open QR code payment service. Also, services such as Smart Pass will be expanded to other business organizations. There is also a move toward greater openness for au IDs, in the sense that we are considering whether to make them open.
  All of the telecommunications operators are undoubtedly starting to move in this general direction. DOCOMO is making their d points open, and Softbank made Yahoo Japan a subsidiary, so I believe this is the natural direction for them as well. However, realistically, au users are the closest, so it is true that they will be the target of our focus.

• Regarding EPS, it seems unclear whether you can say there is a commitment. I understand that setting EPS as a target creates a degree of flexibility. However, NTT, for example, has clearly stated their commitment, as well as their options in the case of no profit growth, which sends the message that they want stakeholders to have peace of mind. Looking at KDDI's balance sheet, there appears to be some possibility for EPS growth even when there is tentatively zero profit growth, but it is not definitively stated as a commitment. Is there any reason for this?

  

  Since these figures are presented in the medium-term plan, we aim to uphold them. However, as you know, there are various elements of uncertainty, even if you just look at the current fiscal year. This is why we cannot express a commitment with absolute certainty. The 6-year span is rather long, with many opportunities for presentations such as the one today, so we will provide clear explanations regarding the degree of certainty moving forward.

• In relation to the EPS, what is the minimum debt-to-EBITDA ratio that you want to keep, in the worst case scenario? Also, I understand that the 100 billion yen in cost reductions, etc. are intended to achieve 100 billion yen in cumulative profits after three years. Probably, it appears that the figures will increase toward the end of the three-year period. What are your visions and plans for each the first, second, and third year?

  

  Your assumptions are correct on the second point. However, we are now in the process of considering the breakdown, and we aim to work hard toward the goal of 100 billion yen.
  As for the debt-to-EBITDA ratio, I think it has consistently been at approximately 0.6 up to now. However, considering that we wish to maintain our current rating of AA-, it appears that we still have some room to move. We also want to remain flexible in considering factors such as the capital needs.

• If the share buybacks account for approximately 2% of the growth, and the remaining 5% is due to the growth in profit after taxes, how should we think about this in terms of differentiating between organic and inorganic growth?

  

  There is still some debate about how to differentiate between organic and inorganic growth in the medium-term plan, so we have simply defined the growth areas as the life design domain and new business domain. The operating revenues for each domain are 1.5 trillion yen and 1 trillion yen, respectively. We would like to generally maintain the current level of profitability for each domain, so I think you can figure it out if you calculate from there.

• It appears that the plan is to speed up 5G equipment investments and build the network, even though the actual operating revenue will begin after commercialization or, in other words, in the fiscal years to come. In what areas do you expect to generate operating revenue? Even if you take a global view, there are not many B-to-B business models that have been created, so why is there such a hurry? Could you explain this in reference to the forecast?

  

  In order to obtain the frequencies for 5G, it is necessary to submit the new plan, which includes a certain degree of commitment. This explains the timing of our activities. As for our approach toward expanding 5G, we will not make an abrupt and complete shift from 4G to 5G. That is, the initial stage of expansion will rely on a non-standalone network, which is a 4G and 5G hybrid network. In this approach, the 4G infrastructure will largely remain as the base while the services in 5G areas are rolled out gradually over three years. The core 5G network will come after that. Our competitors also have similar plans to rely on 4G and 5G over the next three years. Consequently, if other companies are delayed in their development of 5G during this time, I believe that our ability to differentiate ourselves through 5G will probably have an effect on the overall merchantability.
  In the corporate business, the ARPU is small if you consider only the IoT price, so our policy in the new medium-term plan is to establish a new recurring model and link it to revenue by creating a solid IoT platform.
  The implementation of 4G + 5G in the initial stage is aimed at meeting the needs for high capacity, which is also relevant to business, in response to the most immediate demand for content such as videos. After that, we will create business models that enable operations with low latency and large numbers of connections.

• Could you provide any specific examples of something that may emerge as the first business model in the B-to-B area?

  

  In video, there is a model that combines B-to-C and B-to-B, which can be deployed in places where people gather, such as at stadiums, for example. Similarly, we are considering the operating revenue of 5G at places such as factories, offices, and school campuses.

• The new plan calls for a rather high EBITDA and free cash flow. Could you describe the degree to which the adoption of IFRS 16 affects this?

  

  In the free cash flow of the current fiscal year, as you suggested, the application of IFRS 16 will have some impact in relation to the accounting process for leases. The EBITDA will increase by approximately 100 billion yen, which will also raise the free cash flow by 100 billion yen.