Performance Highlights and Q&A for the First Quarter of the Fiscal Year Ending March 2021

The Presentation of the Financial Results

In the presentation of the financial results, Vice President Muramoto described three points;
"Entering the Era of New Normal", "Financial Results for the 1st Quarter", "Business Strategies".

1. Entering the Era of New Normal

First of all, we would like to express our heartfelt sympathies to those people and their families affected by the torrential rain in July. The KDDI Group will continue to do all it can for the reconstruction of the affected areas.

With the spread of COVID-19, a new normal living style is promoted across the world, and major changes are also expected in the business environment surrounding KDDI. In order to simultaneously achieve the prevention of the spread of COVID-19 and sustainable economic activities, it is indispensable to build a resilient social infrastructure. Towards the era of new normal, KDDI will further promote digital transformation (DX) by utilizing 5G, IoT, and AI.

To enhance the resilience of companies, the high levels of autonomy and growth of employees and organizations are indispensable. While advocating “human resources first” in management, KDDI has been internally communicating that employees should be highly self-driven and continue to grow. Currently, we have formulated the “declaration of new work styles” to realize a work style where every employee can achieve results without being tied to particular times and places. To support this, we will promote personnel system reforms and in-house DX. In the era of new normal, we will accelerate reforms to be a “human resources first company” and build a management base that can adapt to drastically changing environments.

Under the state of emergency declaration, about 90% of employees utilized teleworking. Currently, we are analyzing the effectiveness of and issues with teleworking. Going forward, we will make a new hybrid work style take root by using teleworking to further enhance the efficiency of operations. Specifically, based on the “declaration of new work styles,” we have categorized employees’ work styles and roles in the organizations into four model cases. As a company, we will support each employee in finding and realizing their optimum work style solution that best fits their environment.
We have introduced a new “KDDI version job style” human resources system that supports employees' self-driven career development by providing them with various growth opportunities in the KDDI Group's diverse business fields, while clarifying job boundaries and fully utilizing the advantages of “job-type” personnel management, with an evaluation and reward system based on performance, ambition, and capabilities. We will promote in-house DX to upgrade the office and IT environments to create a hybrid work style combining teleworking and in-office work, and we will further accelerate the implementation of the new-work style in our organizations and environmental development.

In May, we announced our basic policy for COVID-19, based on which we have taken various measures. In the startup support by KDDI ∞ Labo, MUGENLABO Support Program 2020 has been launched, in which 46 partner companies offer their assets. We also provided support for business operators through crowd funding by collaborating with CAMPFIRE which is the investee of KDDI Open Innovation Fund. At AEON, we have supported young children and students who cannot attend classes due to schools shutting down to prevent the spread of infection. While exploring means to live with COVID-19 in entertainment and sports, we provided “Sound VR”, an interactive audio and video technology that offers a new platform for artists to connect with their fans. We also provided training support using AI and IoT for “Team au” that has been affected by the one-year postponement of the Tokyo Olympics. Through our businesses, we will continue to contribute to the stability of society and people’s lives.

2. Financial Results for the 1st Quarter

The highlights of the consolidated results for the first quarter of the fiscal year ending March 2021 (from April to June 2020) are as follows: consolidated operating revenue was 1,242.7 billion yen, which is 23.7% of the full-year target, and the consolidated operating income was 290.7 billion yen, which is 28.2% of the full-year target. We are carefully analyzing the impact of COVID-19 on operating results from the second quarter onwards, and we are maintaining the full-year forecasts unchanged.

Operating income in the Life Design Domain and the Business Services Segment, which are growth fields, achieved an increase of 20.6 billion yen in total and is making steady progress. On the other hand, due to COVID-19, the sales volume of mobile handsets decreased significantly, which led to a reduction in sales costs, resulting in operating income increasing by 24.1 billion yen. Further, a decrease in the gross margin for mobile handset sales and others contributed to a 9.8 billion yen decline in income. Handset sales decreased by 450,000 units year-on-year. The initial migration from 4G to 5G is not on track as planned. From the second quarter onward, we will promote our businesses to achieve the initial plan.

To summarize the impact on performance of COVID-19, in the first quarter we enjoyed a temporary increase in income due to a decrease in costs of mobile handset sales in the Personal Services Segment and an increase in teleworking demand in the Business Services Segment. From the second quarter onward, we will promote our businesses and invest in growth areas to achieve the initial plan, while thoroughly examining the pandemic’s impact on our performance.

3. Business Strategies

[1] Personal Services Segment
In order to maximize “Group ID × engagement × total ARPU,” again this year, we have placed engagement at the core, prioritize relations of trust with our customers, and we are promoting business strategies across the entire group.

Through the double-brand strategy between au and UQ mobile, au started offering the Data MAX 5G ALL STAR Pack on June 25 to cater to customers who want to use a large volume of data comfortably, while UQ mobile started offering the SUMAHO Plan R on June 1 for customers preferring a middle level of volume. au and UQ mobile together will provide services that are chosen by a wide range of customers.

The number of Group IDs is growing steadily, led by UQ mobile, and reached 27.2 million at the end of June. The net increase of the number of UQ mobile IDs increased by 1.5 times year-on-year in the first quarter and by 2.4 times year-on-year in the single month of June when the SUMAHO Plan R started its service, and it is gaining popularity among users.

For the au PAY service, which is positioned at the center of engagement improvement, as a result of the campaign conducted in February and March this year, the service became widely used even by non-au customers and the awareness of it, as well as the number of payments increased significantly, which had been rising after the campaign. We also started Ponta Point, a common point program, on May 21. We will continue to promote its usage to further improve engagement.

In the first quarter, au Total ARPA was 7,790 yen, up 4.6% year-on-year. In particular, the growth of au Denki ARPA was prominent. With the steady increase in the number of au Denki subscribers and the extended time at home due to COVID-19, au Denki’s APRA was 640 yen in the first quarter, up 31% year-on-year.

The number of au Smart Pass Premium members is growing steadily and currently exceeds 10 million contracts. The number of Life Design service users is also increasing steadily.

[2] Business Services Segment
Along with the growing demand for teleworking, the number of KDDI service applications increased cloud applications by five times, remote access by four times, and video conferencing by eight times. During the state of emergency declaration, the KDDI Matomete Office, which offers one-stop solutions to companies, also increased the number of new smartphone contracts by 1.6 times, tablets by 1.8 times, and mobile routers by 1.9 times in April compared to the same period of the previous fiscal year. Measures to prevent the spread of infection spurred the expansion of teleworking and other contactless forms of work and digitalization, in large as well as in small- and medium-sized companies. KDDI is also promoting DX that supports new ways of working, including teleworking, and it started offering a new highly secure security system based on the zero-trust concept. We will propose optimal solutions for our customers’ work styles and system configurations.

As a 5G service for corporate customers, SORACOM will launch an MVNO business adapted to au 5G network by the end of this fiscal year. In order to create use cases leveraging 5G, in July 2020 SORACOM started a demonstration experiment jointly with KDDI for ultra-low latency applications using AWS Wavelength. To utilize 5G for office solutions to resolve issues in office buildings and to support work style reforms, we will promote DX leveraging the characteristics of 5G through our partnership with Mitsui Fudosan Co., Ltd.

[3] au 5G
For the au 5G infrastructure layer, we plan to deploy approximately 10,000 base stations by the end of March 2021 and approximately 50,000 by the end of March 2022. We will accelerate the early deployment of 5G services nationwide and promote 5G consumer use and IoT market penetration in each industry.

• Other companies resumed sales in June and I expect that they will step up sales promotions from July through to September. Meanwhile, the new prices of UQ mobile services are increasing quite a bit, which I assume will continue in the coming months. How are you encouraging au customers to shift to larger capacity plans while winning UQ mobile customers in the second quarter?

  

  Sales plunged in April to May due to the impact of the COVID-19 pandemic and have been on a recovery trend since June, with the pace of the recovery being faster than our internal plan from July onwards. From this time, we have been adding momentum to sales for growth in the second quarter. As far as 5G services are concerned, we are far behind schedule after the launch in March due to COVID-19 and need to enhance our efforts in this area. We are worried about this and determined to spread 5G for Japan as a whole. As part of such efforts, we will aggressively market the Data MAX Plan, an unlimited data plan, mainly for 5G under the au brand. For UQ mobile, Plan R is being well received and we will put our efforts into it. Our selling strategy remains unchanged in accordance with our double-brand strategy we will establish October this year, of recommending au for rich contents-oriented customers and UQ mobile for cost-oriented customers.

• I understand that the upswing beyond the internal plan since July refers to the handset sales figures. In this regard, is the understanding correct that you will aim to achieve a net increase in sales from UQ mobile? What about the promotion of unlimited data plans for 4G offered also from au?

  

  We will, of course, aim to achieve a net increase in sales from au and the Group MVNO as a whole. Since unlimited data plans are available for 4G LTE also, we will promote their sales as well. The proportion from 5G also needs to be increased for Android handsets. That ratio started to rise in June to July and we will build on this momentum.

• 50,000 base stations are planned to be built for 5G in the fiscal year ending March 2022, which I think will expand the area coverage considerably. While the Ministry of Internal Affairs and Communications of Japan seems to be assuming the use of 5G for factories and in industry thanks to its low-latency service capability, 5G will also be available for consumers to use, according to KDDI’s presentation. Under the current situation, how fast it can be for consumer use is uncertain, so how do you plan to use it?

  

  With respect to using the 4G LTE area for the new radio (NR), the speed may be lower than in the case of using a dedicated frequency for 5G. We consider that deploying the 5G network at an early stage to the whole area to be critical for the development of 5G. Hence, we think it is important to first offer 5G handsets widely to consumers by setting up prices, taking measures, and getting handsets and services ready. Based on this idea, we will work to be able to use the 4G LTE area for the NR. For 5G handsets, we plan to sell some two million and hundreds of thousands of units within this year, and with this target in sight, we will work to ensure that the area be built and mobile handsets be sold.

• With regard to the increase in operating income from the growth fields explained on page 12 of your presentation material, the Life Design Domain posted an increase in income of 12 billion yen. Despite the previous information that I had been told that some divisions would be affected by COVID-19, the increase was considerable. What is the breakdown of the increase in operating income?

  

  The energy business was the top driver of income in the Life Design Domain. This was caused by an increase in the electricity used at home due to “nesting.” We were able to purchase electricity at a lower price than planned, and so both these factors contributed to the increase in operating income.
  The second biggest driver of income was an increase in the number of au Smart Pass Premium members.
  Operating revenue was affected by a change in the accounting principles for revenue from ENERES starting the first quarter; the items that were previously recorded as revenue are now recognized as deductions from the cost. Accordingly, though operating income remains unchanged, operating revenue declined.

• In relation to the increase in operating income of 8.6 billion yen from the Business Services Segment, I think this segment was affected by teleworking demands, which was a highlight of the first quarter. Did teleworking contribute greatly to the income increase? I also would like to ask if you see teleworking as a sustainable business with a high potential for future development.

  

  The increase in operating income in the Business Services Segment reflects the increase in teleworking due to COVID-19. However, the growth even more reflects our original efforts in the growth fields through the use of IoT and taking various measures. Therefore, increased teleworking should be recognized as an additional factor. Teleworking contributed most to the growth in the mobile business field, with the number of handsets and mobile router IDs far exceeding the planned figures. They had a huge upswing in April following the declaration of the state of emergency and have been boosting the number of IDs as a whole since then, though their upswings are gradually becoming moderate. In addition, teleworking led to an increase in the use of data and cloud applications, which multiplied the growth of the operating income. Remote access, in which mobile devices and PCs brought outside the office are used to access systems within a company, is also increasing. Previously, corporate networks have mainly connected offices and been built within offices. In terms of the outlook for the future, however, it is considered that demand to use corporate networks from outside offices will increase and we will focus our efforts on this area in an attempt to achieve a sustainable growth in demand.

• You mentioned that factors other than teleworking made a greater contribution to the increase in operating income of the Business Services Segment. What specifically were these factors?

  

  The net increase in mobile handsets, the increase in revenue from goods accompanying the cloud service, and the steady growth in the number of IoT connections are each contributing to the increase. Among our Group companies in Japan, the introduction of information technologies is growing among SMEs, backed by increased teleworking demand, which also contributed positively to our call center business.

• What was the specific impact of COVID-19 on telecommunications services? Will you explain the breakdown, including the increase in voice, the decrease in data, and so on?

  

  In terms of the impact on ARPU, voice ARPU increased as you said and data ARPU decreased due to offloading to Wi-Fi. However, these positive and negative impacts cancelled each other out for zero impact. On the other hand, the number of handsets sold significantly decreased. The Business Services Segment was positively impacted by teleworking demand and negatively impacted by the reduction in economic activities overseas.

• What are the voice and data traffic trends in terms of monthly changes from April to June?

  

  After the declaration of the state of emergency, there was a correlation between the movement of people and the changes in the voice and data traffic trends. When people were nesting at home, voice traffic trended upward while data traffic trended downward. Since the end of the state of emergency in May, these trends reversed with voice traffic slowly declining and data traffic recovering. What was impressive was the fact that the use of fixed lines and Internet lines grew among both corporations and individuals.

• On page 13 of the presentation material, it is described that costs are expected to be used for growth fields in the second quarter onwards, with a list of some specific items including the promotion of cashless payments, the shift to online in the education business, and the promotion of DX. What will be the total costs to be used and what is the breakdown of the allocation of costs?

  

  In our Personal Services Segment, we must, under any circumstances, recover the delay in 5G that occurred at the outset. We will use promotions costs as needed to enhance our efforts in this area. The recovery of investment in 3G is also falling below the internal plan and we will take steps to roll this back. To this end, we have already been working to enhance promotions since July. With cashless payments and the My Number Card Reward points systems in progress, we have been seeing a good response in au PAY, but we will further use costs as needed. In order to fulfill our mission to contribute to society during the COVID-19 crisis, we will also work on the AEON program as well as on other initiatives in which we will support societies suffering due to the COVID-19 crisis.

• Is my understanding correct that you will use some costs other than the cost of discount per device for 5G?

  

  We will offer the discount prescribed by the relevant business law as a matter of course. It is rather au shops and volume retailers who are suffering. In April and May, they had to impose restrictions on customers’ visits to stores, which prevented them from running promotions to guide customers to 5G. We will use costs in such promotions as necessary in the future. From July onwards, some new affordable Android models will be introduced. Their prices will be around 30,000 yen in real terms when the Kaetoku program is applied. We will strengthen marketing strategies for such models.

• You are running a 5G campaign in which customers can use the service at the same price level as 4G if they apply for the service by the end of August. Considering the delay at the start, are you thinking of extending the campaign to stimulate demand? I think you are hesitant to ask for a higher price for 5G based on the current 5G network situation, but what do you think the pricing and campaign for 5G should be like in the future?

  

  Due to some uncertainties, including about the new iPhone scheduled to be released in the fall, we must conduct investigations. For this reason, I would like to refrain from answering this question as of today.

• May I assume that the status of the spread of 5G, the network coverage, handsets, and so on will be important factors when you decide on future actions for 5G?

  

  The construction of the network is underway as planned. In the meantime, we were behind schedule for 5G during April to June, and we will decide by comprehensively considering those factors.

• Although the financial result forecasts were not revised in the recent report, the forecast to increase operating income for the year by 5 billion yen year-on-year was far exceeded by the result for the first quarter only. Based on your previous discussion, I believe you will be using costs in the coming months, but may I assume that the Business Services Segment will show an upswing in future results and that you will use that margin from the Segment as the costs for the medium- to long-term growth of the Personal Services Segment?

  

  We made the forecasts for the year just two and a half month ago, and we are still ascertaining them, while leaving the forecasts as they are. It seems that you view the results for the first quarter as in good shape. But when we compare our results based only on the first quarter, we had poor results in the previous year and this year’s income is the same level as that for the year before last. We were only unable to use the costs that should be spent, and we will firmly follow the plan at the beginning of the year and use costs for each segment accordingly. As for the allocation of the margin from the plan in your question, we will consider this in the second quarter.

• Then, is my understanding correct that you may aggressively use costs not only for the Personal Services Segment, but also for the Business Services Segment?

  

  That is possible, as we will take measures in anticipation of medium- to long-term growth.

• How are you developing your double-brand strategy in comparison with SoftBank? SoftBank emphasizes the number of subscriptions. This is because they can sustain revenue from telecommunication fees even if they receive a lot of subscriptions, thanks to the effect of the reduction in the monthly discount. Meanwhile, as the effect of the reduction in the monthly discount is fading for KDDI, the industry is paying attention to its future strategy, of whether it will emphasize the number of subscriptions under the double brand strategy or maintain revenue from telecommunication fees. In your strategy, which will you be emphasizing?

  

  As we have explained before, customers will be divided into two groups. Accordingly, our basic stance would be that we recommend that those who want to use more data choose au and others who want a less expensive, stable quality service choose UQ mobile. We cannot comment on the policies of other companies, but if we are asked which of IDs and ARPU is important for us, we would say both, of course. With respect to IDs, we will work to increase their number even a little or to prevent IDs from outflowing to other companies amid the situation in which market liquidity is falling. Therefore, what is most important is that we strive to convince customers to remain with our Group by providing various pricing systems based on the double-brand strategy. Even if au customers shift to UQ mobile, they will come back to au as their use of data increases. Under our double-brand strategy, au customers can shift to UQ mobile in a simple procedure by only changing the model. While firmly securing the IDs within the Group, we will deal with maintaining ARPU in telecommunications. As for total ARPU, we will work to maintain it by allowing customers to conveniently use the Life Design services that we have developed so far and thereby providing experience value to them.

• Based on your answer, my understanding is that you prioritize the ID count. Is my understanding correct, that you just need to secure revenue for the entire business over the long term when the future growth in 5G and electricity is taken into account, and therefore you will emphasize the ID count over the next several years?

  

  It is not that we will emphasize the ID count, but rather that we must keep a balance to maintain the IDs. There is no doubt that we want to achieve a net increase in the number of IDs with au, but customers choose UQ mobile or come back to au depending on their needs. As such, we will provide customers with services that best suit their needs by combining our strategies, including those for 5G and Data MAX. We will encourage customers to use our electricity services in combination at the same time, rather than simply using telecommunications services, because they will benefit from a reduced cost of living by doing so.

• The commission received by agencies is declining. It seems that there are differences in the recent measures taken in response to the COVID-19 crisis by the carriers, but do you have a plan to revise the agency commission during the second quarter? I would like to ask whether KDDI provided less support to agencies for management and fixed costs than other companies, for example, or whether they provided more support.

  

  We also provide the support required by agencies to deal with the damage due to COVID-19. In addition, we have no plan to significantly change the commission and the measures for agencies in the second quarter.