Performance Highlights and Q&A for the Fiscal Year Ended March 2020
|Date||May 14, 2020 (Thu), 5:00-6:00 PM|
|Location||KDDI Hall, (Otemachi)|
|Respondents||Makoto Takahashi, President; Takashi Shoji, Senior Managing Executive Officer; Shinichi Muramoto, Senior Managing Executive Officer; Keiichi Mori, Senior Managing Executive Officer; Kei Morita, Managing Executive Officer; Toshitake Amamiya, Managing Executive Officer; Kazuyuki Yoshimura, Executive Director, Technology Sector; Nanae Saishouji, Corporate Officer, General Manager, Corporate Management Division; Ikuko Hongou, General Manager, Investor Relations Department (MC)|
The Presentation of the Financial Results
In the presentation of the financial results, President Takahashi described four points;
"Response to COVID-19 Infections", "Highlights of Consolidated Financial Results for the Fiscal Year Ended March 2020", "Business Strategies", "Consolidated Financial Results Forecasts for the Fiscal Year Ending March 2021".
1. Response to COVID-19 Infections
We would like to express our deepest and condolences to all those who have lost their lives, as well as our deepest sympathies to all those who have been affected and are suffering with anxiety or pain due to COVID-19. At the same time, we would like to express our sincere gratitude to all those who are making strenuous efforts to prevent the spread of infection. KDDI will fulfill its responsibilities as a telecommunications carrier and will strive to prevent the spread of COVID-19 infections.
KDDI has developed "KDDI Sustainable Action" as our goal for 2030 in order to contribute to the sustainable growth of society. Based on this goal, we established our Basic Policy toward COVID-19 that provides the following five major activities implemented by KDDI as a company that supports society's lifelines:
1) Ensuring the safety of our customers and employees, 2) Maintaining telecommunications services, 3) Collaborating with governments, municipalities, and other public organizations, 4) Constructing a resilient social infrastructure by promoting Digital Transformation (DX), and 5) Alleviating people's lifestyle worries and difficulties.
We have already implemented various initiatives based on this Basic Policy, and will continue to contribute to the stability of society and people's lifestyles through our business.
2. Highlights of Consolidated Financial Results for the Fiscal Year Ended March 2020
Consolidated operating revenue for the fiscal year ended March 2020 (April 2019 to March 2020) was 5,237.2 billion yen, while consolidated operating income was 1,025.2 billion yen. We have achieved higher operating revenue and operating income than our initial forecasts.
Operating income in the growth fields, Life Design Domain and Business Services Segment, increased by 33 billion yen and 25.4 billion yen respectively, which continued to drive the results. On the other hand, due to a one-off decrease of 16.8 billion yen attributable to factors such as a change of the accounting period in Myanmar and the accelerated depreciation of 3G, as well as expenses related to au PAY campaigns and impairment losses in view of the impact of COVID-19 recognized as Others, consolidated operating income increased by 11.5 billion yen from the previous year.
We will make steady progress in business in order to continue sustainable growth in the future.
3. Business Strategies
 Personal Services Segment
Aiming to maximize "Group IDs x Engagement x Total ARPU," we are promoting strategies that place top priority on "engagement" again in this period. Engagement means relationships of trust with customers. If engagement is enhanced, the frequency of using KDDI services will increase, leading to a reduction in the churn rate and increase in Group IDs/total ARPU.
We are continuously working to improve NPS (Net Promoter Score) as an engagement index, and there is a positive correlation between customer contacts and NPS. We will continue to work on expanding customer contacts by integrating various telecommunications and life design services.
We conducted a campaign for au PAY, which serves as the center for expanding customer contacts from February to March 2020. Through the campaign, many customers other than au users experienced the au PAY service and its recognition was greatly increased, which more than doubled the number of payments using au PAY. Following the campaign, we continued our efforts to retain service customers, and as a result, the number of payments has continued to rise. In addition, through unifying au WALLET points with Ponta points from the end of May 2020, the membership base will exceed 100 million, one of the largest in the country.
To strengthen the ID base across the entire Group, we will stem the outflow of customers using the Group's brand power and strengthen acquisition of new customers from the MVNO market with a high replacement rate to Group companies. We will also provide high-quality 5G telecommunications and user experience and establish a circular structure within the Group by upselling to au in order to strengthen momentum.
To accelerate this Group strategy, we will integrate the UQ mobile business into KDDI in October 2020 (scheduled). UQ mobile, which provides low-price and high-quality services, has two million subscribers. We will enhance sales organizations of au and UQ mobile nationwide and provide new value to customers, utilizing the features of both brands. Also, we aim to strengthen competitiveness by consolidating group management resources.
We started providing 5G services in March this year. To promote the switch to 5G, we are working on handsets, prices, and services. Regarding handsets, we have an extensive lineup of seven models, ranging from flagship to mid-range devices, which is the largest in the industry.
We will provide 5G service plans at around the same prices as 4G unlimited data plans and promote the switch to 5G by offering plans incorporating value-added services, such as video and music contents. We also aim to upsell by providing a new price structure and customer experiences, such as au Smart Pass Premium that provides an AUGMENT experience unique to 5G.
Regarding the progress on the medium-term targets in the Personal Services Segment, operating revenue in the Life Design Domain was 1,218 billion yen and achieved 49% of the target, and the transaction volume of Settlement/Loan was 6,537 billion yen and achieved 134% of the target. The medium-term target of 6,000 billion yen was achieved ahead of schedule due to the increase in the total settlement amount at Jibun Bank and the high-level progress made with regard to settlements using au PAY.
 Business Services Segment
Operating revenue for the fiscal year ending March 2020 was 923.5 billion yen, showing steady progress towards the medium-term target of 1 trillion yen. KDDI has been achieving growth both in the core business centering on existing telecommunications services and new domain consisting of IoT/5G businesses and domestic and overseas Group companies by promoting customer DX. KDDI aims to continue to grow in both its core business and in new domains by promoting customer DX.
KDDI creates new value with customers through DX. Specifically, KDDI carried out a joint project with Hitachi Transport System to migrate its distribution centers to 5G to enhance safety, quality, and productivity together. Also, with San-Ai Oil, KDDI aims to improve operational efficiency by using telecommunications and AI and has started offering KDDI gas platform services to contribute to maximizing CS and CX of gas subscribers. In this way, KDDI will contribute to creating resilient infrastructure that is resistant to environmental changes.
Regarding the progress on the medium-term targets in the Business Services Segment, operating revenue was 923.5 billion yen, achieving 33% of the target, and the cumulative number of IoT connections was 11.5 million, achieving 35% of the target. Cumulative IoT connections have been increasing ahead of schedule towards the target 18 million connections by the end of FY2022. We will expand our services on a global level through KDDI IoT Worldwide Architecture as our core platform.
4. Consolidated Financial Results Forecasts for the Fiscal Year Ending March 2021
Although the impact of COVID-19 that we can currently forecast has been included in our financial forecasts, while carefully assessing the future outlook, we will contribute to the stability of society and lifestyles based on the Basic Policy and aim to achieve our financial forecasts and medium-term management plan.
We forecast consolidated operating revenue of 5,250 billion yen and operating income of 1,030 billion yen for the fiscal year ending March 2021. Although we expect both operating revenue and operating income on par with the previous fiscal year's results, we will strive to further grow our business. The outlook may change depending on the situation of COVID-19, and we will promptly disclose any revisions to the forecasts as needed.
In reviewing the medium-term management plan, we expect operating revenue and operating income on par with the previous fiscal year's results, and there is no change in our plan for medium- to long-term growth. We will continue to aim for sustainable growth and strengthen shareholders returns in an ongoing manner.
In the last fiscal year, we announced KDDI's target SDGs linked to our business strategies and corporate activities in the medium-term management plan. In this fiscal year, looking further ahead to 2030, we have developed "KDDI Sustainable Action: Our power to make connections will help create a brighter future for all" as a goal rooted in our business activities. KDDI will further promote our initiatives as a company that contributes to the sustainable growth of society.
In terms of external recognition, KDDI has received awards for both innovation and sustainability, and was selected two years in a row as the winner of the "Innovative Major Corporations Ranking."
In terms of sustainability, KDDI has been included every year since 2017 in the FTSE and MSCI, which are representative socially responsible investment (SRI) indexes. We will continue to strive to be a company that can meet the expectations of society.
Toward a safe national life and economic recovery, while looking at COVID-19 measures and beyond, KDDI will carry out mainly the following two activities as its missions as a telecommunications carrier in Japan: 1) Building a more resilient network to sustain day-to-day life and economic activities, and 2) Promoting DX to restore and grow the strength of Japan's domestic economy. We will work to realize Society 5.0 rapidly by continuing to make necessary CAPEX in Japanese society.
Regarding shareholder returns, we emphasize growth in Dividend Per Share (DPS) accompanied by sustainable growth. The DPS for the fiscal year ending March 2021 is scheduled to be 120 yen, aiming to increase dividends for 19 consecutive years.
The last is about maximizing corporate value based on the content explained so far. With regard to financial value, we will work to improve profitability and efficiency, while promoting our medium-term management plan. For non-financial value, we will work on ESG and SDGs and promote our transformation into a personnel-first company. Also, we will work on structural reform in both our financial and non-financial aspects in order to secure long-term, stable returns.
- The financial result forecasts have been issued for the current fiscal year, in which a dividend increase policy is clearly stated. In the forecasts, it is stated that the impact of COVID-19 has already been factored in; however, what are the profit drivers that cover the negative impact of COVID-19?
We have identified negative factors through internal discussions on our financial result forecasts. First, we discussed how to recover from the impacts on network traffic, sales partners, AEON English conversation schools and travel-related subsidiaries as "flow-type" businesses, as well as corporate customers, who are in a harsh environment. In order to achieve sustainable growth under such circumstances, we have announced our forecasts of 1.03 trillion yen. To achieve recovery in the future, we are reducing costs through structural reforms. Also, as positive factors, there are "nesting" demands (from people staying home) for content-commerce, OTT bundle plans, etc., and 60% of customers are choosing Data MAX for 5G services, demanding a sense of security from its large data bandwidth. Corporate customers also have strong remote-work related demands for the "new-normal" world.
We will carefully observe the situation and promptly announce any revisions to the disclosed financial result forecasts.
- Given the factors for the 30 billion yen decline in the Personal Services Segment in FY2020 and the impact of the temporary loss are recovered in this period, if the impact of COVID-19 falls within that range, an increase in income may be achieved. What do you think upon comparing with the previous year?
It depends on how the impact of the impairment and other losses in the fourth quarter of FY2020 will affect this quarter; however, we would like to somehow achieve higher income.
- How much synergy can be expected by making UQ mobile a subsidiary and integrating Ponta?
Since UQ mobile has been one of our group companies, we have cooperated in its sales activities; however, as it has now been substantially integrated with us, we can integrate the order and instruction system for sales activities and streamline its shops. Also, we can offer an easy-to-choose product lineup for customers as UQ offers low-to-mid capacity plans, while au offers high-capacity plans. Softbank, a competitor of ours, has been doing well with Y!mobile. Now we will be able to have a close match with Softbank, which will improve the momentum of our mobile business. There is also the effect of providing value-added services based on the double brands of au and UQ.
Through our soon-to-be-announced integration with Ponta, our au PAY service will penetrate into the member base of over 100 million to build Japan's largest common point system and payment platform. We will also aim to provide next-generation convenience store services by leveraging KDDI's technologies and Lawson's network of 14,600 stores, the expected synergies of which include reducing the au churn rate with enhanced engagement and conversions to au by taking advantage of Lawson's open touch points. Regarding the provision of next-generation convenience store services, discussions are currently being held with Mitsubishi Corporation, Lawson and Loyalty Marketing, and the measures will be announced by the end of this year.
We plan to open up the upper layers in sequence. The integration with UQ mobile will be announced in October, and specific effects will begin to appear later.
- I think that investment usually comes prior to profits in growth fields. What is the reason behind the current profits? Will the profits continue from this period to the next?
The Life Design Domain achieved a sales increase in FY2020 in all fields. The energy field that has been developed and the content field, which is centered on au Smart Pass Premium and is highly profitable, contributed to the profit growth. These fields are based on the stock-based business model, which has a structure to grow with an increase in the number of customers. There is room for au Smart Pass Premium to further penetrate and for energy services to penetrate among au users, allowing for sustainable growth in coming years.
The Business Services Segment achieved growth in FY2020 with an expansion in the scale of sales in the core business and new domain. In terms of profits in the core business consisting of mobile and fixed-line services, thanks to the steady growth in the number of Mobile IDs as well as an increase in ARPU and added value, monthly sales and profits have multiplied. In new domain, group companies both inside and outside Japan have increased profits. As for group companies in Japan, SME and call center businesses are growing. We have made prior investments in IoT, DX, and other similar initiatives; however, instead of starting from scratch, we aim to achieve growth by investing in new areas while making profits by leveraging our existing business foundations. We aim to continue growth in these areas over the medium-to long-term as well.
- To achieve the objective of raising EPS by 150% in the medium-term management plan, it can be expected that EPS growth will be accelerated in the future. You have promoted EPS growth with operating income and buyback as its two drivers. What is your perspective on these two wheels in achieving the target?
We definitely want to achieve a 150% increase in EPS. Although it has been impacted by the COVID-19 pandemic, we are discussing structural reforms and profit expansion measures to steadily achieve sustainable growth. Above all, as we declared that we are aiming for both sustainable growth and stronger shareholders returns, we announced that we will firmly maintain a dividend payout ratio of 40% and increase dividends. Regarding a buyback, we would like to first focus on contributing to the sustainable growth of society while considering what we can do based on the current environment, and then consider a buyback if we still have enough capacity.
- Among the factors that increased free cash flow (FCF) in FY2020, what increased "Other" by slightly more than 170 billion yen? If approximately 100 billion yen out of the planned 710 billion yen for FY2021 is attributable to IFRS 16, what is the breakdown of the remaining amount of slightly more than 600 billion yen?
The breakdown of the increase in "Other" by 173.2 billion yen that contributed to the increase in FCF in FY2020 includes a finance-related impact, a smaller increase in installment sales receivables, a decrease in handset inventory, as well as reserves for upgrade programs.
The FCF guidance remains the same in FY2021 from the previous year. EBITDA, capital investment, and M&A also remain the same as the previous year. Although there is a decrease due to a temporary finance-related factor in FY2020, the decrease is canceled out by the decrease in installation sales receivables, and the total FCF is planned to be the same as the previous year.
Currently, it is necessary to pay close attention to flow-type business revenue sources of our subsidiaries and the extension of users' payment due dates due to the impact of COVID-19, etc. However, we think that it will not have a great impact on the Group's cash flow as a whole, and these matters have not been factored in, although there remains some slight uncertainty.
- Regarding the FCF flat plan in FY2021, is it correct to assume that the real FCF will expand, given that the temporary factors in FY2020 will disappear?
Taking into account the positive and negative impacts, we sense that it will remain flat.
- Is the understanding that UQ will become the second MNO brand, not an MVNO, correct?
KDDI will take over UQ mobile through a corporate split from UQ. KDDI will develop both the "au" and "UQ mobile" brands as MNOs. UQ will continue to have the Band 41 license and provide WiMAX 2+ services as an MNO. The business performance of WiMAX 2+ is steady.
- Following a decrease in the number of vehicles produced and sold by Toyota, lifestyle changes, and other factors, has the business environment for global communication platforms changed in terms of short-term impacts and medium-term perspectives?
We have been developing in-vehicle telecommunication systems for overseas markets since the last fiscal year. Originally, we planned to increase the number of targeted countries and automobiles; however, the plan was affected by closure and suspension of production plants and the slowdown of automobile sales. China is recovering now, and other countries will also recover successively. Our business in this year may fall behind the original forecast, but we can resume our business over the medium to long term. We would like to carefully identify and respond to changes in lifestyle and the use of automobiles.
- If there are any changes in the use of automobiles, what kind of changes are expected in KDDI's business?
First, we will see if there is any change in car sales. According to the latest survey, needs have been rising for travelling by car, rather than public transportation, mainly in Europe and the U.S., so we would like to carefully identify both positive and negative factors. The necessity to connect through telecommunications will always increase when the transportation style shifts to services like MaaS.
- While telework is progressing, positive aspects can be expected from telework-related solutions and data center business. What was the contribution of the Business Services Segment to FY2020, and what is the outlook for this fiscal year?
COVID-19 will have a tremendous impact on this period, including reduction in investments, etc. On the other hand, we think that teleworking and digitization will proceed. In that case, mobile and fixed lines, as well as Internet connections, will be needed more than ever, which will drive the use of cloud services to levels greater than before. We intend to grow our business by accurately ascertaining the needs of businesses.
- What do you expect the level of impact related to teleworking and other factors to be?
Since COVID-19 has a huge negative impact, we would like to somehow achieve positive results.
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