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

The Presentation of the Financial Results

At the financial results briefing, President Takahashi presented "progressing towards a resilient telecommunications infrastructure," "the consolidated financial results for the first half of FY23.3," and "the progress on the Mid-term Management Strategy," which is aiming for resilient telecommunications infrastructure.

1. Progressing Toward Resilient Telecommunications Infrastructure

KDDI has a cross-organizational structure in place to promote coordination between the Operation, Engineering/Construction, Customer Services/PR, and Sales departments to prevent the recurrence of communication failure. In September, company-wide training on communication failure was conducted in addition to the regular disaster drills. The training examined what happens when KDDI, which supports the infrastructure that underpins people's lives, faces a disaster and causes communication failure and how it should act.
At the Ministry of Internal Affairs and Communications' Verification Conference, discussions took place on improving public information and communication systems in the event of an accident and on formulating industry-wide rules. Based on these discussions, a report has been submitted from the six perspectives listed on the slide:

• (1)

  Review of work procedures and standards

• (2)

  Design review of congestion detection and control

• (3)

  Establish procedures for early recovery from congestion

• (4)

  Improvement of PR content and methods

• (5)

  Secure alternative means

• (6)

  Conduct training and strengthen quality control system

Discussions will continue in the Ministry of Internal Affairs and Communications' WG on (4) Improvement of PR content and methods and (5) Secure alternative means such as emergency calls.
Quality will also be improved through an additional medium-term investment of 50 billion yen, primarily in virtualization technology to meet customer expectations. As an advance on long-term investments, early migration to a virtualized infrastructure will lead to tighter congestion control and automation of operations. In addition, the operations upgrades will be promoted to accelerate abnormality detection and restoration response.

2. Consolidated Financial Results for the 1H FY23.3

The progress toward consolidated operating income was 50.8%. Although profit decreased in 1H due in part to the communication failure response and the impact of fuel price hikes, KPIs in the NEXT Core business and the financial business are on track, and performance is strong in our focus areas. The aim is to continue to increase consolidated earnings and expand focus areas.
As for changes in consolidated operating income, 1H saw a decrease of 14.8 billion yen due to the communication failure response and fuel price hikes. Excluding these impacts, multi-brand communications ARPU revenues were down 53.9 billion yen, group MVNO revenues and roaming revenues were down 6.9 billion yen, and focus areas were up 10.6 billion yen, and there was also cost savings related to 3G closure, resulting in a small rise in total revenues.
Although there was an increase in IDs, multi-brand communication ARPU revenues were down 53.9 billion yen year-on-year (YoY), excluding the impact of refunds, due to the brand mix. Value-added ARPU revenues were up 60.8 billion YoY, with growth in au Denki, settlement, content, and product support.
The number of multi-brand IDs grew to 30.93 million YoY as of the end of September. New subscriptions fell due to communication failures in July but have been on a recovery trend since August, primarily for UQ mobile. KDDI will continue to aim to achieve the target set at the beginning of the fiscal year.

3. Progress on the Mid-term Management Strategy

First is sustainability management. KDDI seeks to create a virtuous cycle to impact society for the better through our business, and leverage this new social value in our forthcoming business strategy. Among the sustainability targets, the number of regional disparities solved was 2.75 million, compared to the medium-term target of 15 million. As for human capital, employees are taking DX courses in earnest, and the cumulative number of IoT connections has grown to 28 million, primarily in mobility.
As part of the efforts to strengthen our management, KDDI has issued its first sustainability bond, totaling 100 billion yen. The funds will be used chiefly for 5G capital investment, the core of our satellite growth strategy, and will also be used to promote carbon neutrality. We are also supporting cutting-edge technology and developing green innovations by investing in startups. We have revised our human rights policy to articulate more specific initiatives in response to heightened global awareness of human rights.
The impact of the communication failure on various industries and life infrastructures has caused a shift in mindset within the company. As the core of our satellite growth strategy, we aim to provide solutions for improving society in addition to building resilient telecommunications networks. For corporate customers, we will conduct analyses and in-depth investigations into the impact on customers further down to their end users, aiming to build a foundation as a robust social infrastructure that will create new value.
Regarding our focus areas, DX, finance, and energy, Digital Divergence Holdings, au Financial Holdings, and au Energy Holdings will align themselves to maximize corporate value by leveraging synergies with KDDI's strengths in the telecommunications business.
In the business segment, NEXT Core business drove revenue growth. As for operating income, the NEXT Core business also drove the increase, with Corporate DX and Business DX making particularly significant contributions. In Business DX, we are building the foundation for industry-specific DX through development, products, and BCP to help customers achieve DX. The KDDI Digital Divergence Group aims to expand development projects by connecting operating companies with capabilities essential for DX promotion, including cloud and agile. KDDI is also working to expand our DX products through partnering, and is strengthening value-added offerings using AI, video data, and au location data. In regard to BCP, we will strengthen our BCP response menu by offering SORACOM SIM combinations in IoT and, in the future, by providing backup line solutions.
Here is an example of Business Co-Creation: KDDI Video Management Service is a platform that enables integrated management of video data from surveillance cameras at multiple locations in high-security cloud settings and, combined with AI video analytics, achieves advanced operations. We will continue strengthening our value-added offerings in this era of blended communications.
KDDI's financial business recorded a significant increase in profit in 1H, partly due to a temporary impact from the accounting change in 1Q. Key KPIs' Transaction Volume of Settlement/Loan and Loan Product's Balance increased steadily, and the balance of card loans exceeded 200 billion yen in September.
Regarding synergies with KDDI in the financial business, we have financial services that center on points. Ponta's membership base exceeds 100 million, and this collaboration enables members to use and save points. We also promote cooperation with other financial services through the points. We will continue to offer attractive financial services centered on our au customers and Ponta member base.
In addition to making the service more attractive, we have launched an initiative to expand its use with au PAY merchants. The au PAY Growth Pack can distribute coupons to au PAY members targeted at those members' interests to support sales promotion activities, responding to merchants' wishes to "attract new customers." We will aim to expand our membership base further, thereby also growing our highly profitable credit card business.
As for Digital Twin, we are working on expanding our lifestyle and economic spheres by creating a virtual world filled with dreams. This Virtual Halloween festival, in collaboration with the government and startups, was held for the third time. By collecting data from the real world and reconstructing urban spaces in three dimensions, we aim to create a data platform that can be used in various industries by enabling precise simulations. We also aim to achieve an exciting shopping experience in the apparel industry that combines a diversified purchasing experiences and sustainability with high-definition real-time XR.
Regarding regional co-creation, we will promote regional DX in partnership with the City of Tsukuba. For example, our drone initiative combines drones with automated delivery robots to validate logistics services. Our nationwide au stores also emphasizes community ties, and many customers have participated in smartphone classes and Mobile Phone Reactivation events.
As for leveraging "Starlink" satellite telecommunications, we have agreed to provide it to enterprises and local governments throughout Japan, in addition to using it for au base stations' backhaul lines. Because Japan, with its many mountains and islands, is prone to natural disasters, we aim to bridge digital disparities and create a society where people can live peacefully.
As a summary of 1H results, within our Mid-term Management Strategy, the Satellite Growth Strategy is making steady progress through its KPIs in the focus areas of DX and financial business, and the Center's telecommunications business will continue to focus on 5G, aiming to bottom out multi-brand communications ARPU revenues in FY23.3. We will promote initiatives that take lessons from communication failures, and aim to create new value that will improve society in addition to building resilient network infrastructure. These activities will be promoted with a medium-term view.

• The number of multi-brand IDs almost levelled off in September, with growth appearing to struggle at the moment. What is the reason for the recovery?
  If ARPU is 3,980 yen, excluding the impact of the 60-yen refund, the result is a year-on-year decrease of 6.8%. How can it decline further in 3Q and 4Q? If the annual forecast of 4,000 yen does not reflect the impact of the refund, what change is projected to take place?

  

  Although the number of multi-brand IDs decreased slightly in 1Q, the decline levelled off in 2Q. After a slight reduction in July due to the influence of communication failure, it recovered in August and came back to about the same level in September.

  In 2Q, the situation was quite difficult due to the failure in July but then recovered, and as of October is rising back to the normal level. As such, there is steady progress towards achieving the full-year forecast for the number of IDs.

  The impact of the refund affected ARPU in 2Q, which was 3,980 yen when excluding the impact. Given that it had been 3,970 yen in 1Q, there was a QoQ increase of 10 yen. As the QoQ difference in multi-brand communications ARPU revenues is clearly on the decline, and the situation has also been going well in October, the full-year forecast, excluding the refund's impact, could reach 4,000 yen.

• What is the background to the communications ARPU revenues bottoming out? While UQ mobile and povo are growing, can au's 5G plans hold a leading position? What are your prospects for the next term, such as regarding the relationship between the influence of the growth of UQ mobile and povo on ARPU and au's 5G unlimited data plan?

  

  The composition ratios of the three brands have remained within the scope of expectations, and this will be discussed in earnest in the mid-term discussion. They have grown in a well-balanced manner, as UQ mobile and povo have totaled about 7.5 million subscriptions while au has been accounting for nearly 80%. Our presumption is that the ARPU turnover will take place if the 5G plans, mainly the 5G MAX Plan, will grow while 4G Pitatto Plan will decline. Given that the Pitatto Plan's ratio is now falling while that of the MAX Plan is on the rise, we believe things are going well at the moment. At the same time, there are still many customers who have not yet subscribed to the MAX Plan, suggesting high potential demand, which we should take advantage of to maximize ID x ARPU in the next term. It is also well understood that this objective is not easy to achieve. Therefore, the important thing is to constantly strive to improve ARPU and composition ratios while conducting effective micromanagement.

• According to the general overview, DX and financial business have been doing very well. What breakthroughs do you think need to happen in order to quickly achieve significant growth in the medium term?

  

  The number of IoT lines has grown to 28 million, and we are planning to continue steadily expanding this number. There are various DX seeds around IoT, and we are seeking to build a system to take advantage of this. The DX Promotion Division and KDDI Digital Divergence Holdings are working to construct value-added solutions around communications through coordination between group companies and by other means. Once this initiative takes off, real growth will start.

  Regarding financial business, we have au Financial HD and a range of different elements. au PAY and credit cards form the base, which leads to securities and banking. The key to scaling up is how to increase the number of gateway au PAY and credit card users. As our telecom business has a 30 million user base, we can secure a certain scale through cross-use with the user base. Nevertheless, we have not been able to fully leverage this scale. This means there is still ample potential to grow our business in this manner.

• In the step chart on page 9 of the presentation material, the figure of 14.8 billion yen, highlighted in red on the right-hand side, was not included in the company forecast. In the second half of the year, there could be further fuel price hikes. Even so, will your plan to increase your income year-on-year basis remain basically unchanged? There is a complex mix of factors, some of which are boosting our income while others are pushing it down. I believe you have taken this into account to keep your forecast unchanged. Could you summarize your views?

  

  Basically, we will continue to aim at increasing our income. In the second half, there could be subsidies from the government for this unexpected fuel price hikes. Although the incidents, namely, the communication failure and fuel price hikes, are certain to cause some level of impact, which is simply difficult to avoid, we will stick to the plan to increase our income as we move into the second half of the year.
  At the center of the satellite growth strategy is ID x ARPU in the telecom business, which we should see bottom out soon. As it has been showing QoQ growth and the impact of the price reduction has also been dissipating, we should keep up our efforts. There has been steady expansion in the growth areas, namely DX and financial business, in which we aim to achieve double-digit growth. Although income in our energy business declined in the first half of the year, there are factors contributing to an increase in income in the second half, since the business was quite tough last year. We think we can achieve a rise in income even if unexpected costs pop up.

• Do you mean that you will redouble your efforts in the growth areas to drive the numbers?

  

  If we achieve the multi-brand communications ARPU target of 4,000 yen, we can just go on as planned in the growth areas. However, we should make steady efforts to meet the double-digit growth target set for DX and financial business, which is actually a quite ambitious target in the first place.

• The churn rate in 2Q was quite high compared to the past, at 0.94%. Given that the communication failure may have resulted in loss of new subscriptions but not in cancellations, the rising churn rate must have been due to competition. I suppose the number of IDs indicates that you were doing quite well, since you did not acquire subscriptions in July. There are also other factors such as increasing contract costs and ever intensifying competition in sales. What do you think of the current competitive environment? While other companies may try to seize the initiative, what direction does KDDI want to take in the future?

  

  The churn rate, 0.94%, is almost flat compared to 1Q. Although there may be some influence from the communication failure in July, as well as the intensifying competition, we understand that the reduction of switching costs, promoted by the Ministry of Internal Affairs and Communications, has been having some effect. While competition has been tightening in some limited areas, there has been no full-scale intensification. Of course, we must not lose in this competitive environment, and will do what we can. Right now, we are exploring how to control the competition locally. The new iPhones have been priced quite high and customers have been slower than in previous years to switch to them. Although we are now promoting Pixel the most, Android, which is less costly, can be utilized more for controlling costs.

• Could you give me more information about the front-loading of investment, mentioned on page 6 of the presentation material? In response to the communication failure, what is going to happen to the scale and substance of the medium-term investment plan?

  

  Both capital investment and cost are included in the 50 billion yen, more than half of which is accounted for by virtualization technology. As the 5G core network is entirely placed on a virtualized network, and the VoLTE switching equipment, which caused the failure in this instance, has become quite old, front-loading of this virtualization is vital. The 50 billion yen includes more than 30 billion yen for front-loading of this capital investment. Naturally, expanding the 5G coverage is something we must do. In terms of priority, however, we have decided on front-loading of this investment with a view to making the equipment more resilient.
  In controlling capital investment, we would like to control Capex to Sales around 12% according to our medium-term plan. As we will control it through allocating investment funds while keeping the plan unchanged, the total amount will not rise with new capital investment. Although we originally planned to put VoLTE on the virtualized network after the three-year medium-term plan, we are now planning to move it up the schedule and complete it within these three years.

• When users migrate from 4G to 5G, how much will their data usage increase? What kind of content is driving the increase? Will they begin to watch more videos as their psychological limit will be lifted?

  

  The average traffic of a 5G user is about 2.5 times that of a 4G user. As there are many different types of customers, you cannot really generalize what will happen when individuals migrate to 5G. However, it can be said that it is not only heavy users who choose to migrate. Although some say that the data usage will not increase without killer apps, the path becomes broader with 5G. On top of that, the performance of 5G handsets has improved. This means that even if you watch the same video, the download speed is faster when you are using 5G, which may cause you to keep on watching one video after another before you know it. It is mainly video usage that is driving up traffic in not only heavy users but also general users. Therefore, we believe that the challenge is how we can efficiently build the network and translate it into increased communications ARPU.

• My understanding is that povo is a differentiating brand. Are there any new developments with it?

  

  povo also has many different types of users; some start using povo at 0 yen and do not use it very much after that, while others migrate from Rakuten Mobile, which has a lower ARPU. The ARPU and topping service usage of Gen-Z users are more likely to increase when influencers recommend povo to them according to different values. To improve ARPU, we are working in cooperation with Circles Life, which has technology to analyze these trends and increase post-contract value.

• With povo, there could be cancellations after six months of no payment. Doesn't this have a significant negative impact on the ARPU trend?

  

  We do not think we need to worry about that too much. It is true that there are users with a lower ARPU than initially expected as the result of former Rakuten Mobile users migrating to povo. However, we believe we can make up for that with our multi-brand scheme and raise our ARPU.

• I have a question about network capital investment. I suppose virtualization can bring down operating costs, but could you tell me about the possible effects of virtualization, and their scale?

  

  Although we cannot really share specific numbers with you, we believe the operating costs will fall once we automate the operations using AI and big data, in addition to the virtualized network. Besides the reduction of operating costs, including those associated with staff monitoring and carrying out the operations, adding more efficient equipment will become possible due to the virtualization. We are hoping to achieve positive effects from this in the medium term.

• Page 9 of the presentation material says that the roaming revenue was -6.9 billion yen. I understand that a fall of 50 billion yen had been forecast at the beginning of the term. Could you tell me more about what has happened?

  

  At the beginning of the term, the roaming revenue was forecast at -50 billion yen. We have decided that roaming should be discontinued in areas where the area coverage of Rakuten Mobile exceeds 70%. In fact, it has exceeded 70% in virtually almost all areas by now. However, we are still requested to provide roaming services in some poor-quality areas for the time being, which we are doing right now. This is the reason that the full-year roaming revenue could be better than the predicted -50 billion yen. Anyway, it really depends on Rakuten Mobile's network construction. We will just respond to needs.

• You have estimated that your roaming revenues would decrease more significantly in the second half of the year. Does that remain the same?

  

  We are gradually discontinuing our roaming services. There is no doubt that the decrease will be larger in the second half.

• If your corporate businesses are on track to achieving their full-year targets, it is necessary to generate greater profits in the second half. Handset procurement has become difficult right across the industry. Is that a factor, or is it just that projects converge in the second half?

  

  We are more or less on track according to plan. Profit growth in the first half appeared to be slowing because certain numbers of IoT and handset cancellations followed the 3G closure, which had been included in our plan, and were reflected in the results of the first half. As we can recover in one to two months' time, things have been generally going as planned. In addition, we have been preparing to increase profits in the second half, as DX and other projects have been approaching their KPIs. We believe that we are coming closer and closer to the goal.

• According to page 9 of the presentation material, of the factors contributing to the profit drop of 14.8 billion yen, including the impact of the refund in the first half, the refund accounts for 5.9 billion yen and the remainder is around 9 billion yen. Am I right in understanding that the profit of au Denki will decline in 2Q, but year-on-year, you can recover thanks to the removal of the cap for fuel cost adjustment after the November price revision?

  

  The impact of fuel price hikes, one of the factors contributing to the profit drop of 14.8 billion yen, mainly affects electricity bills, and au Denki is not included. What it does cover includes refunds of communication fees, support for distributors and other involved parties, and increases in electricity prices.
  The results of energy business are not disclosed, but if you do the calculations, the profit declined by more than 10 billion yen in the first half. In the previous fiscal year, au Denki performed very well in the first half. By contrast, the fuel price hikes produced negative effects this year and a cap was placed on fuel cost adjustment for customers, but not for the purchasing side, and there was a reactionary fall in the first half. There is no cap on fuel cost adjustment in the second half, resulting in no negative effects associated with it, which other companies would have the same as we do. On top of that, our performance was poor in the second half of the previous year due to the fuel price hikes, which is another factor contributing to a profit increase. Taking all these into consideration, we presume that our full-year results will measure up to the plan.

• Does that mean that this 10-billion-yen profit-reducing factor will be gone from the energy business in the first half of the next year, replaced by a 10-billion-yen profit-lifting factor?

  

  This requires more simulations. As electricity rate hikes are now very likely, we will need to do new calculations. Our estimate is that the next fiscal year's result will not be as negative as this fiscal year's. However, more checks need to be done before we can be sure.

• Could you summarize how inflation could affect ARPU changes in the future? You have mentioned the high iPhone prices earlier. If this situation continues, what level of risk should be considered in relation to brand mix deterioration, such as people becoming more likely to choose lower-priced plans? At the same time, however, I have heard that data usage will naturally increase. Can it be offset? What do you think about this?

  

  Soaring prices in the future are certain to affect consumer psychology, making them want to spend less money on communication fees. Under such circumstances, it is vital that we keep an eye on the situation. Our brand composition shows that more customers are migrating from au to UQ mobile than expected. This may be affected by inflation. According to our multi-brand ARPU results, we are almost on track to bottom out and then rise. We will be doing our utmost to continue to manage these numbers and accordingly do the work needed for stimulating growth in communications.