Performance Highlights and Q&A for the First Quarter of the Fiscal Year Ending March 2023

The Presentation of the Financial Results

At "Highlights of the Financial results" held following "Press conference about communication Failure," President Takahashi explained the consolidated performance in the first quarter of the fiscal year ending March 2023.

Consolidated performance in the first quarter

In 1Q, although we saw focus areas growing revenues, our consolidated performance saw increased income and decreased profit. Consolidated sales were 1.3517 trillion yen, up 4.0% year on year, and operating profit 296.9 billion yen, down 0.8% year on year. As for the performance of focus areas, the Business Services segment recorded sales of 258.6 billion yen, up 5.5% year on year, and operating profit 45.8 billion yen, up 2.6% year on year. Sales from our Finance Business were 64.6 billion yen and its operating profit 21.7 billion yen, partly due to temporary accouting effects.

For consolidated operating profit in 1Q, Multi-Brand communications ARPU revenues decreased by 29.2 billion yen, while group MVNO revenue and roaming revenue dropped slightly. Meanwhile profit increased by 15.2 billion yen thanks to focus areas being promoted such as Business Services segment, Finance Business and Energy Business. With the cost of terminating 3G and depreciation cost decreasing, the profit dropped by 2.3 billion yen in total.

Multi-brand IDs decreased quarter to quarter to 30.93 million but are steadily growing taking out the decrease of approximately 250,000 associated with terminating 3G at the end of March 2022. UQ mobile and povo are still being used by many customers, growing to a total of approximately 7 million. As for Multi-Brand communications ARPU was 3,970 yen, down 310 yen year on year but within the range projected, due to the increase of UQ mobile and povo customers.

For the Business Services segment which is a focus area, sales for the NEXT core revolving around DX grew to 87.0 billion yen, up 16% year on year, driving growth. Operating profit has grown in both the NEXT core and existing communication businesses steadily. Part of the reason was the increased profit of the NEXT core partly due to the effect of the currency rate at overseas subsidiaries, as well as the decreased revenue from cancellations from terminating 3G.

The Finance Business, which is a focus area, saw a significant growth of income partly due to the temporary effects from the change in accounting process for handling mortgage fees. The Energy Business saw decreased income in 1Q year on year. We have raised the proportion of private and stable procurement, controlling cost. Even though there are immediate effects from the soaring fuel prices, we will keep our eye on their effects on the performance.

Key indicators of focus areas are growing mainly in DX, Finance, and Energy. For DX-related indicators, sales for the NEXT core were 87.0 billion yen, up 16% year on year, and for finance-related indicators, the Transaction Volume of Settlement/Loan was 3.3 trillion yen, up 33% year on year, au Jibun Bank mortgage balance was 1.8 trillion yen, up 0.2 trillion yen year on year, and au PAY card members reached 7.9 million, up 1.2 million year on year. For energy-related indicators, the number of subscribers to services including au Denki etc, was 3.53 million, up 570,000 year on year.

Keeping in mind the communication failure we allowed to happen, we will enhance the structure to improve our communication quality to recover customers' trust and for the forthcoming 5G era, advancing our efforts for sustainable growth.

• The net increase of multi-brand IDs will be practically 200,000 and churn rate 0.92% if 3G termination is not considered, suggesting satisfactory performance in competitive environment. I am sure there are many factors but tell us if there is anything that influenced the net increase, in any order, such as competitors changing prices, UQ mobile doing very well, or the pricing of devices. Tell us also how they will develop going forward.

  

  As you point out, multi-brand IDs in 1Q appear as if they have dropped, but as there were 250,000 3G cancellations, the IDs practically recorded a net increase of 200,000 quarter to quarter. First, UQ mobile did very well, and had discount plans like the UQ Support Discount, and UQ mobile is getting competitive in the market, contributing to the net increase through both of new contracts and MNPs. Since the dropping of 0-yen plan by other company, the tide has turned, driving MNPs steadily. Because of other factors, MNPs are also doing well, not only against Rakuten but also NTT Docomo and SoftBank, recording fairly good numbers. As for the times ahead, we had a hiccup in July with the communicationfailure, but we hope to get back on track by recovering trust as we move forward.

• I would like to ask about your Energy Business. The waterfall chart on slide three of the presentation shows increased income of 15.2 billion yen from focus areas. If you subtract business service segment and finance business, you get 3.6 billion yen down year on year. This may not be all, but would it be right to assume that this part accounts for energy business? On top of that, from 2Q, will the energy fuel adjustment cost break through the limit? Tell us how much you think it will increase, and why you did not change your projection.

  

  As shown in the Energy Business section on slide five of the presentation, the business has seen the income drop year on year. I am not going to disclose the actual numbers, but let's say the numbers you mentioned are not far off. We have increased energy procurement via private power contracts than last term, and with the unit price of procurement being higher than last term, we saw the income drop in 1Q.

  From the lessons learned until last term, we continued to secure private energy to keep volatility down as much as possible. Thanks to that, we were able to control affairs properly in 1Q, damping down the impact to a certain extent even though the profit decreased year on year. As for fuel adjustment cost, we project it will start to grow from 2Q, and we want to manage utilizing our group company ENERES. We hope to control the cost over the entire consolidated performance, watching trends ahead. au Energy Holdings started operating on July 1. We will consider various measures and control the entire operation.

• How great was the impact from au Support Discount, on Multi-Brand communications ARPU, revenues and the total number of subscribers? It is about time people are reaching the end of their six-month discount. Are they staying with au? Is the cancellation part of natural cancellation? Tell us about the current state.

  

  au Support Discount has just ended in May and has not incurred any current effect. It will emerge significantly from July in the second half of the year. For Multi-Brand communications ARPU, 1Q recorded 3,970 yen, which was almost as projected. In 1Q we saw IDs increase in UQ mobile and povo, securing steady communication revenues. Multi-Brand communications ARPU may look a little lower but on the whole it is going well.

• How many tens of yen was the au Support Discount's impact on Multi-Brand communications ARPU? Would it be correct to understand that this impact is going to come down gradually in 2Q and 3Q, year on year?

  

  The impact of au Support Discount on ARPU was, year-on-year, several tens of yen. For 2Q and 3Q year-on-year it is as you have just said.

• When will you normalize marketing activities for personal services after the self-restraint due to the failure? Suppose for corporate sales you will move business talks forward with BCP measures, when will you resume sales as usual? You mentioned in the press conference concerning the failure that you will review mesh networks. Will it involve capital investment that is not ramping up facilities? Will software measures be enough? Tell us the impact of changing the mesh structure.

  

  For normalizing marketing activities for personal services, there was significant impact during the failure, and we received harsh opinions from customers who visited stores. The most important thing for us right now is to listen to these voices and ensure we have measures to prevent recurrence. The number of customers visiting stores dropped once and has steadied now and looks like it is dropping across the market. We just started accepting applications for My Number Card, and we hope to bolster the market again. Today we held a press conference about the failure and yesterday we submitted a report to the Ministry of Internal Affairs and Communications. We want to get back to our usual operations as soon as possible, starting next week.

  For normalization of marketing activities for corporate services, for about a week after the failure we visited our corporate customers to apologize, which is still ongoing, but gradually we are seeing more deals like new proposals including BCP. We are visiting more customers than usual, and we want to continue our efforts for more new discoveries. We are currently trying to normalize and are coming close to normalization, including apologies.

  For capital investment, revising the mesh configuration does not mean the need to ramp up facilities immediately and we are considering using software, etc. to address the issue. A validation meeting will be held with external specialists in which we will discuss measures to prevent recurrence and then, we will consider the capital investment f. We do not plan to ramp up facilities as a simple result of revising the mesh configuration.

• The Failure will not impact individual customers that much. There would be many ways to interpret how it would affect corporate customers. What do you think are its up and down sides? The upside would be KDDI being able to demonstrate its capabilities because the trouble could happen to any carrier and corporations would need to be prepared. The downside would be possible decrease of income because they could use other carriers alongside KDDI. If you are already witnessing any actual effects, tell us about that.

  

  The upside would be to bring multi-carrier redundancy from the BCP perspective and proposing services combining cellular networks with many other things such as other OTT speech services like LINE WORKS and Cisco's Webex Calling, or with the service to receive calls to fix phones and mobile phones on one number. The downside would be companies only using KDDI networks possibly taking some of their networks to other carriers to rely on multiple carriers. What we must do is to minimize the negative impact as much as possible and propose BCP redundancy, including other approaches such as OTT services.

• I would like to ask about the Finance Business. Tell us the amount of the impact of accounting change that was one of the factors contributing to the income significantly increasing. Tell us also which other parts have also seen an increase in revenue. When you look at au Financial Holdings, the gap between its ordinary profit and IFRS' operating income has grown since the 4Q last year. What made this happen?

  

  As you can see on the left of slide five of the presentation, the revenue from mortgage handling charges have been treated differently from the year before. Until last year the handling fees had been recorded as deferred income for 13 years, but as we have more liquidation of claims over the last years, the handling fees have been changed, being recorded in one go, so what you see is around 17 billion yen from the past seen temporarily. The gap between the Japan standard and IFRS happened because by the Japan standard, income from mortgage handling fees was recorded in one go but when converted to IFRS it was being deferred. Now that the fees are recorded in one go including those of the past, you are seeing all effects from the past.

• By KDDI's policy, finance is a focus area. Tell us which area you think you will be able to grow, aside from the accounting standards.

  

  Excluding the temporary accounting effects, Finance Business in 1Q showed a slight decrease year on year by IFRS, almost breaking even. If you look at the metrics of actual operations, mortgages of au Jibun Bank which is the pillar of growth have grown by 15% year on year, doing extremely well. Credit card members have also increased by 1.2 million members year on year, showing good momentum operation-wise. We did not witness profit in 1Q because of the cost of mortages interest and sales promotion cost to boost but we believe mortgages and credit cards will continue to be the drivers.

• This time, Multi-Brand value-added ARPU have grown more than projected. Tell us its breakdown and sustainability.

  

  Multi-Brand value-added ARPU are growing overall. The Transaction Volume of Settlement/Loan has grown mainly in au PAY and credit cards. As for contents we have more bundled contents including NETFLIX. Electricity and handset repair and compensation services are also growing, uniformly.

• What is ARPU for electricity? Is the understanding correct that mortgage handling fees of au Financial Holdings from the Finance Business are included in "Other revenues" and are not impacting Multi-Brand value-added ARPU?

  

  We have not disclosed ARPU for electricity. Mortgage handling fees are not part of Multi-Brand value-added ARPU.