Performance Highlights and Q&A for the Third Quarter of the Fiscal Year Ending March 2020

The Presentation of the Financial Results

In the presentation of the financial results, Senior Managing Executive Officer Muramoto described two points;
"Highlights of Financial Results for 1Q-3Q", "Aiming to Step Up Engagement".

1. Highlight of Financial Results for 1-3Q

Consolidated operating revenue for the first nine-month period of fiscal year ending March 2020 (April-December 2019) was 3,902.6 billion yen and achieved 75.0% of the full-year forecast, and consolidated operating income was 843.9 billion yen and achieved 82.7%. Although earnings declined in the first half of the fiscal year, they increased in 1-3Q due to an increase in earnings in 3Q alone.

Regarding consolidated operating income, the growth fields, Life Design Domain and Business Services Segment, continue driving the results. In addition, handset sales cost, which increased in 1-3Q, has significantly decreased since October due to some factors such as the amendment of the Telecommunications Business Act. Backed by the high achievement of the full-year forecast, we will strengthen the preparation for sustainable growth in the future.

Both Life Design Domain and Business Services Segment have maintained double-digit income growth. Life Design Domain and Business Services Segment achieved 81% and 90% of the full-year forecast, respectively, and we will strive to create the foundation for sustainable growth by investing in the enforcement of engagement in 4Q.

The au churn rate has greatly recovered, and the number of Mobile IDs has increased. Further, Life Design Domain has driven the growth of total ARPA and total ARPA revenues.

2. Aiming to Step Up Engagement

1) Affiliation with Lawson, Inc. and Point Service "Ponta"
Through unifying KDDI's au WALLET points and Ponta points from this May, the member base will expand and exceed 100 million, one of the largest in the country. In addition, we will aim to increase au PAY membership and strengthen our service foundation with the point system that is easy to use and save, utilizing 4.1 billion visitors to Lawson, about 14,600 brick-and-mortar stores nationwide, over 1.7 million of points and payments affiliated stores, and over 200 billion points issued a year.
Through the tie-up, we will also provide new, customer-tailored consumer experiences as an AUGMENTED convenience store using our 5G and AI, as well as advanced technologies such as big data, and at the same time we will resolve social issues through convenience stores.

2) Enhanced Entertainment with an Eye toward the 5G Era
KDDI strives to expand attractive contents with an eye toward the 5G era. Regarding au Smart Pass Premium, we have dramatically expanded the unlimited digital contents of videos, music and literary since last November. As for Video Pass, we cooperate with TV Asahi and expand their unique contents in addition to the existing ones, and will begin a service as new Video Pass from this spring. We will continue our endeavors so that we can satisfy all customers including non-au customers by expanding both quality and quantity of content.

3) KDDI Group IoT Connections
The cumulative number of IoT connections KDDI has provided to corporate customers since 2001 exceeded 10 million in November 2019. While going forward to increase utilization and applications further in the existing fields, we will expand our IoT services outside Japan through KDDI IoT Worldwide Architecture, and at the same time we will further provide value and pursue digital transformation together with our partners.

4) 5G
KDDI provides customers with new experience value and steadily upgrades the infrastructure for the launch of 5G commercial services in March. Also, we have steadily conducted demonstration tests based on the use case assumptions with our various partners toward achieving 5G. We will create new experience value for the 5G era looking toward sustainable growth and developing future together with the society.

5) Our Initiatives for Network Resilience
Assuming large-scale earthquake disasters like Nankai Trough earthquake, KDDI is increasing the number of the core transmission lines throughout Japan to three. Most recently, Okinawa Cellular is constructing a 760-kilometer submarine cable from Okinawa to Kyushu and slated for completion in March, and with this line, the three nationwide lines will be realized. As a telecommunications carrier who has a role in important social infrastructure, we will strive to fortify networks against natural disasters in order to provide reliable telecommunication service 24 hours a day, 365 days a year.

6) DPS
To implement "Further strengthening shareholders returns" formulated in the medium-term management plan, we revised the FY2020.3 dividend forecast and increased it by 5 yen to 115 yen. KDDI will continue striving to attain sustainable growth and strengthening shareholders returns.

• Is the impact of the amendment of the Telecommunications Business Act from October on KDDI positive or negative?

  

  Although we had the rush of demand until September prior to the consumption tax hike and due to the amendment of the Business Act, replacements among MNOs shrank from October as assumed. New contracts particularly dropped, and replacement handset sales were a bit sluggish.
  After that, however, replacement handset sales exceeded the 3Q plan, and we expect that this situation will continue for the time being.

• How is a net increase after October considering relative power relationship among the three carriers?

  

  Replacements among MNOs cooled off; however, the trend of customers moving to MVNOs remains unchanged. Accordingly, we aim to secure IDs as a whole group including the Group's MVNOs.

• Life Design Domain continues to be robust. What is the reason for it?

  

  In the field of content, au Smart Pass Premium significantly contributes to profit. The number of membership has increased to 9.03 million.
  In the field of energy, the number of au Denki subscriptions has steadily increased. Although the profitability is low, the growth rate is high.
  Also, in the field of finance and commerce, sales grew steadily and the transaction volume of Settlement/Loan has increased to 4.57 trillion yen.

• Total ARPA remained flat and was 7,770 yen for both 2Q and 3Q. While au Denki ARPA may vary due to seasonal change, how about changes in each of the other ARPAs?

  

  Each item of the total ARPA has been satisfactory, and valued added ARPA has done particularly well.
  Note that au Denki ARPA in 2Q was 690 yen because of the power demand during summer, but in 3Q, it was 650 yen down 40 yen.

• You will make investments aiming for sustainable growth in 4Q. Which fields will you invest in? Also, how will you compete while the amendment to the Business Act precludes you from providing discounts on handsets?

  

  We assume that the amendment to the Business Act will keep impacting us in 4Q. However, we will continue our current efforts as the sales situation has been on a recovery trend. Also, we announced an au PAY campaign the other day. We have analyzed that au PAY will be effective in improving the engagement of telecommunication services and will compete by combining these measures.

• The Business Services Segment has been profitable. What measures will you implement for future growth? Are there any business risks in the future?

  

  Profitability has been robust. As for measures we will implement for growth, we will basically increase the number of customers and services, which will be our business base, and then we will continue our initiatives to deepen engagement with customers. Future risks include international relations and a new coronavirus that may affect the economic activities of our corporate customers.

• What specifically do you mean by the number of customer services? Do you mean PoC, for example?

  

  First of all, we will increase the number of network service contracts such as cumulative IoT connections. Additionally, we will increase the number of new services including cloud computing and data analysis service that supports customers' DX.
  Further, we will invest in increasing the personnel needed for agile software development and preparing for overseas deployment toward future growth.

• While global communication platforms will be expanding, can you expect contribution to earnings? Will contribution to earnings be small due to the small unit price even if the number of contracts increases?

  

  We can expect strong growth in the number of automobiles. We made a prior investment and began the service in this term, which will contribute to earnings in two to three years. We will improve earnings by "connecting" services including those other than automobiles, as well as providing BtoBtoC services through data collections and applications.

• What do you think about the possibility of deploying 5G to existing frequency bands? Also, tax incentives for 5G investment have been discussed. Will tax incentives accelerate capital investment in 5G?

  

  First of all, our basic policy is to proactively use new frequency bands for 5G. Then, regarding the existing frequency bands, we will use them in order to leverage one of the 5G features, low latency, because existing band frequencies are narrow. By effectively combining existing frequencies and new ones like this, we would like to deploy services so that we can satisfy customer needs.
  Regarding tax incentives for investment, we would like to consider accelerating capital investment as soon as the details have been decided.

• A 5-yen dividend increase was announced. What is the background of the decision? Also, while the medium-term management plan targets a dividend payout ratio of over 40%, the actual dividend payout ratio will be about 43% from the first year. What do you think about the level of dividend payout ratio going forward?

  

  As the background of the increased dividend, the financial results have been progressing favorably with a high probability of achieving the full-year forecasts, which led us to make some investments in 4Q toward sustainable growth. Based on the Company's basic policy of aiming for both sustainable growth and strengthening shareholders returns, we have decided to increase dividends, which has been our main focus regarding shareholder return.
  Basically, we are considering maintaining a dividend payout ratio of over 40% for the three-year term defined in the medium-term management plan and will ensure to carry out both sustainable growth and boosting shareholder return.

• Are you considering to raise the dividend payout ratio further?

  

  We would like to ensure to carry out the policy of over 40% for the next three years.

• The medium-term management plan proposes to generate a profit of 100 billion yen through new businesses and cost reductions. It is said that the portion of cost reductions will be 70 billion yen. Please explain the progress of this structural reform.

  

  In the medium-term management plan, we set an objective of raising EPS by 150% (i.e. average growth rate of 7%) in six years. We are also aiming for EPS growth at the same level in the first three years, and based on this assumption, we are looking to generate a profit of 100 billion yen.
  Regarding the progress, we can include around 90% of the 100 million yen in the plan. As we explained previously, we will realize a profit of about 70 billion yen by the whole Group increasing cost effectiveness involving structural reforms, and for the remaining amount, we will realize it by generating profit from new businesses. We expect that the effects will gradually be actualized from the next term and target to achieve it by the end of FY2022.
  Specifically, the whole Group has been moving forward with initiatives such as the Technology Sector boosting the efficiency of networks including virtualization and the Sales Sector using DX in the operation of shops for significant improvements.

• The lowered charges of the unlimited plans make the au charges similar to those of competitors' plans. How is the upselling situation going from the 20 GB plan or others? You explained that replacements among MNOs cooled down but outflow to MVNOs continues. Won't you consider taking any countermeasures against low-end products with the au brand?

  

  au has introduced two types of pioneering unlimited plans, and this time, we lowered the monthly charge of one of them, au Data MAX Plan Pro, by 1,500 yen. This targets upselling from the 20 GB plan or other plans, and we strategically lowered it as we are entering the selling season for student discounts. This helps upselling to steadily progress mainly to users who favor high capacity.
  Regarding low-end users, we continue offering au Adjust Plan that can be used at 1,980 yen lowest, and for those who prefer lower charges, the whole KDDI Group recommends them to choose the Group's MVNOs.

• Regarding the au PAY campaign, how do you see the size of the prior investment and its returns in the next term?

  

  We will return the points of 1 billion yen to customers every week and carry it out for seven weeks, which will incur a cost of about 7 billion yen as a result of simple calculation.
  The most important touchpoints with customers are au shops and volume retailers; however, the frequency of serving each customer at stores is only once in two to three years, which is not that much. Meanwhile, the frequency of customers using financial and payment services is extremely high, and particularly au PAY is used every day and is an important touchpoint. We decided to carry out the campaign because it would lead us to improve NPS and engagement. Furthermore, the tie-up with Ponta has been decided, and we are now aiming to increase users all at once.
  As for returns, we will attempt to collect them comprehensively by expanding our business as a payment business and increasing the uses of other services while reducing the churn rate and bolstering engagement.

• Deducting 1-3Q Life Design Domain operating income from the full-year operating income forecast (i.e. 167 billion yen), 4Q's income will be 31 billion yen, which is 20% down year-on-year. By investing in other campaigns besides the 7 billion yen campaign, will the income fall to the forecasted level or exceed the forecast?

  

  Operating income up to 3Q achieved 81% of the full-year forecast, and we think that it will slightly exceed the forecast. Basically, we are aiming to increase revenue and income.

• Can we assume that investments made for sustainable growth in Life Design Domain will basically be for financial services?

  

  As explained earlier, the au PAY campaign is a measure to raise telecommunication engagement, and therefore, investments will be made not only for Life Design Domain but also for the entire Personal Services Segment.

• You achieved the year-end target of 10 million cumulative IoT connections in November. How many connections will be accumulated by the end of this year?
  Regarding the customers of those 10 million connections, are they mainly BtoC retail customers? If they are BtoB customers, are they in specific industries?

  

  The number of cumulative IoT connections is expected to be close to 11 to 12 million by the end of the fiscal year. The momentum of a net increase will carry over to the next term. Also, BtoBtoC customers are increasing as end users of IoT connections, and the largest increase is seen in power smart meter. The second largest is home security customers. Connected cars are also increasing, and we are trying to expand IoT connections to other fields than automotive.

• The number of Mobile IDs was slightly down quarter-on-quarter for the first time in this 3Q. It was explained that competition among MNOs cooled off, but on the other hand, competitions with MVNOs continue. It seems that a decrease in the number of au accounts could not be covered by UQ. What is your analysis of the current situation and the countermeasures?

  

  After the amendment of the Business Act in October, it was especially difficult to obtain new acquisitions. The number of Mobile IDs slightly decreased; however, it was planned in the full-year forecast due to the foreseeable impact from the amendment of the Business Act, and the results exceed the plan. Furthermore, we believe that the whole Group including UQ succeeded to secure the planned figures and have no recognition that we failed in achieving some of them.
  We will surely recovery in the upcoming spring shopping season.

• Life Design Domain has progressed more strongly than the fiscal year's initial plan even from a sales perspective. What exceeded the initial plan?
  Also, regarding the 7 billion yen campaign to be conducted in 4Q, did you spend the same amount of cost in 1-3Q, as well?

  

  Overall sales of Life Design Domain exceeds the plan. This is mainly because we successfully obtained more au Smart Pass Premium and au Denki than planned. Regarding the campaign, small-scale campaigns in several hundreds of millions of yen were held like a 20% return campaign, but this is the first time to hold such a large-scale one.