KDDI Corporation
Q4 2022 Earnings Call Transcript

Published: 16 May 2022

[Ikuko Hongou:]

Thank you very much for waiting. We will now begin the Financial Results Briefing of KDDI Corporation for the fiscal year ending March, 2022. Thank you very much for taking time out of your busy schedule to join us today. I am Hongou of Investor Relations Department and will be serving as the moderator today. This briefing will be broadcast live on the internet, with simultaneous Japanese to English interpretation. The presentation will be available on demand on our IR website at a later date. Thank you for your understanding in advance. Four financial results related materials, which are two presentation materials, quarterly report and detailed materials and five TSC disclosure materials, a total nine documents are posted on our IR website. Please refer to the disclaimer in the material regarding statements made in these documents, performance targets and projected subscriber numbers, et cetera, explained in the Q&A session today. President Takahashi will first explain the financial results and midterm management strategy, followed by Q&A from 6

[Makoto Takahashi:]

Thank you. Allow me to share with you the business results of the term ended in March 2022. Thank you so much for joining us out of your very busy schedules. Let me share with you the business results of the term ending in March 2022 and midterm business strategy. First, on the results ending in March 2022, consolidated performance highlights of the term ending March 2022. Throughout, the previous midterm, we achieved both sustainable income growth and enhancing shareholders' return. From the top, revenues of JPY 5,446.7 billion, up 2.3% CAGR from the March 2019 term. Operating income was JPY 1.66 Trillion. There was some impact from lowering prices, but CAGR was up 1.5%. In Life Design Domain, revenue was JPY 1.422 Trillion with a significant growth of plus 14.6% CAGR. Business Services segment revenue was JPY 1,042.6 billion, exceeding the target JPY 1 trillion. CAGR was up 5.6%. The payout ratio was higher than 40%. EPS was JPY 300.03. CAGR was plus 5% growth. Next, on the multi-brand strategy from the left. The number of Group ID was 31.84 million, exceeding 31.8 million forecast at the beginning of the term with a robust result. In the center, communications ARPU was JPY 4,200, exactly as we forecasted at the beginning of the term. The right shows value-added ARPU, JPY 1,740 up JPY 200 year-on-year, making up for a decline of the communications ARPU. As shown on the bottom, cumulative sales of 5G units are steadily increasing to over 8 million. Next, the results of Life Design Domain. Main services enjoyed significant growth. Operating income increased with a double-digit CAGR growth. The left, operating income was JPY 254 billion in March 2022 with plus 20.0% CAGR from March 2019. The right shows main indicators. The number of au PAY members was ¥37 million, of which au PAY Card members was ¥7.6 million, up ¥1.1 million year-on-year. In addition, au Denki electricity and the others was ¥3.38 million subscribers, transaction volume of settlement and loan was ¥11.7 trillion. Major services enjoyed steady growth. Next, on Business Services segment results. Driven by the NEXT core business, the operating income enjoyed a double-digit CAGR growth. The left shows operating income in March 2022. It was ¥186 billion, up 15.1% CAGR from March 2019. The right shows main indicators, the percentage of NEXT core business, the in the Business Services segment revenue was 31.9% in March 2022, surpassing the target 30%. In addition, the cumulative IoT connections was ¥24.5 million in March 2022, up ¥6.5 million year-on-year, showing a definitive growth as a top runner. Lastly, on termination of 3G. Thank you so much for using 3G service. We appreciate it. For about 10 years, various services have been utilized. In a difficult environment, we were able to end 3G without major troubles, which was a good result for the future. It was a system with high electricity consumption, hence, a good result for environment as well and so much for the March 2022 business results. Next, let me focus on the new midterm management strategy. Allow me to share with you the new midterm management strategy. There are so many pages, it might take some time. I hope you can bear with me. First, major environmental changes from the top of diversification of values and work style, creating new business through DX, an increasing importance of sustainability and progress in beyond 5G, 6G research as well as next-generation technologies. Environment surrounding business is changing significantly. Responding to the business environment, towards the future we want to be, we devised the KDDI Vision 2030. On the right, by 2030, we aim to be a platform supporting society to offer additive values in all industries and every life scene. So far, by the integration of telecommunications and life design, we've expanded growth domains in non-telecommunications centering on smartphones. In the new midterm strategy, looking at 2030, we are promoting business transformation centered on 5G. Next on the provisioning of the midterm management strategy. Looking at right-hand side, looking at the long term, we formulated new materiality that comprehensively covers social issues and management and materiality of the KDDI group, important issues. Based on this, in the midterm management strategy, we put sustainability at the foundation and promote business strategies and bolstering management platform that supports them. To help you understand KDDI Vision 2030, we newly crafted. We prepared a concept movie. It's a four-minute movie. Please enjoy. At KDDI, our mission is to connect, our mission is to keep connecting and protecting lives. For example, our resilient communications infrastructure has supported the communications that are lifeline in times of disaster. Through the use of ICT to reduce the burden on the environment, we'll be able to contribute to saving our future earth. Our mission is to keep connecting day-to-day lives. For example, by bringing together new technologies and new partners, we have resolved problems facing urban and rural areas, as well as problems facing developing countries. Our mission is to keep connecting hearts and minds. For example, initiatives aimed at the creation of a safe and affluent digital society are essential if we are to eliminate isolation in this age of diversity and to live healthy fulfilling lives. KDDI's power to make connections will help create the sustainable development of the world and to our future. People’s values vary. Society offers more choices. Beyond these huge changes, we want to create a new world where people accept one another and where each of us can make our dream a reality. For that such to have room, we must overcome some hurdles, such altered conventional thinking, pre-conceptions. If there are boundaries that keep us apart, let us eliminate them and connect. With communication increasingly integrated into our lives, our capabilities should dramatically increase. We have the technology. We have the mindset. We have the partners. Together, we can surely make it happen, while enhancing the part to connecting line with the times; let's enjoy the dream of creating things. Let's go forward together towards a more interesting future. The creation of a society, in which anyone can make their dream a realty, by enhancing the power to connect, KDDI VISION 2030. How did you like it, the creation of a society in which anyone can make the dreams a reality by enhancing the power to connect. We are promoting the mid-term management strategy towards KDDI VISION 2030. First, on sustainability management. By promoting business strategy and strengthening the management that supported KDDI Group, are working with partners to achieve sustainable growth and enhance corporate value. We are aiming to achieve a virtuous cycle where the growth of the society is utilized for the next business strategies and then return to the society once again. Under the new mid-term management strategy, our business strategy is positioned as Satellite Growth strategy, place 5G that will be full fledged in the center evolve the telecommunications business and expand the focus areas with telecommunications at the core. As five focus areas

[Operator:]

We will now start the Q&A session. We plan to end at 7 P.M. Let me introduce the participants today. First row from the center to your left, President, Takahashi; Muramoto, Executive Vice President and Executive Director of Corporate Sector. From the center to your right, Mori, Senior Managing Executive Officer and Executive Director of Solutions Business Sector; Amamiya, Managing Executive Officer and Executive Director of Personal Business sector. Second row to your right, Yoshimura, Managing Executive Officer and Executive Director of Technology Sector. Lastly, second row to your left, Akita, Executive Officer and General Manager of Corporate Management Division. We would like to entertain your questions. To give a chance to ask questions to as many of you as possible, we'd like to limit the number of questions to two per person. If you have two questions, wait for the answer to your first question and then ask the second question, please. Please raise your hand if you have a question.

[Daisaku Masuno:]

Nomura Securities, Masuno-san . Nomura Securities, Masuno. There are many messages when I look at this mid-term management strategy. I have two questions. First, about the profit target or income target, I understand the EPS, but your focal area is ¥100 billion operating income and cost reduction, ¥100 billion. What surprised me was that in two years, you are going to actually make the rebound of ARPU? You made a declaration regarding consumers, we think that the profit will come back and accumulating the past years and operating income, ¥1.3 trillion or somewhere around that figure, so, such profit level is not what you envisage? And in two years, you made a declaration to achieve the ARPU rebound. What are others kind of preconditions assumptions to achieve all these things? That's my first question. Thank you.

[Keiichi Mori:]

Let me see. Internally, we have been doing this Ambidextress Management, not just growing new businesses, but 5G, that's our core. And then, it has to be on the growth trajectory as a business. Otherwise, we can't enjoy the sustainable growth. We had extensive discussions internally. And I don't know about other companies, but I know about 5G ARPU, how best we can enjoy the recovery. We would like to really give our full commitment to this. In this time, somehow, we would like to hit the bottom and ¥70 billion to ¥80 billion is the level of the impact of the price cut. But on the following years, we would like to make it comparable to the previous year. And all of us are really working hard to achieve this. Having said that, no possibilities, as we look at the United States, for instance, the Verizon, AT&T with concerning 5G, there are something like OTT players. With the collaboration, there is a good track record to make achievement. If you look at them as a role model, I think there is still possibility and potential. Amamiya will give you more about the details about this, about the growth areas, finance, energy and obviously, DX centering on these three, we expanding those businesses. As we saw in the previous mid-term strategy, we are now confident that we can enjoy the growth in those areas. Sustainable Growth Strategy is what we call, this new strategy. On March 2025, in this time, ¥1.3 trillion, that might be a kind of a stretched target, but at least EPS 1.5 times, that's still our target. To be honest with you, in the third year, the CGI increase is only 1.5%. So there's going to be perhaps one year delay to achieve this, but we would like to do it as soon as possible, and that's behind our passion in crafting the mid-term strategy. About ARPU, I would like to invite Amamiya to give you some supplementary information.

[Toshitake Amamiya:]

About ARPU, this is what we know, 4G to 5G. When there's movement, what triggered customers move to 5G, the traffic increase is one and unlimited MAX Plan, the ratio of that unlimited plan goes up that much, we know for sure. Now currently, regarding customers' plan breakdown in 4G, Pitatto ratio and UQ is plan ratio. There are certain level of users, so by promoting migration to 5G, there's still room for increased ARPU, especially with those Pitatto’s plan people there those customers, if we don't really use them, it's true. But for such people, such customers, making good communication to them about the advantage and convenience of smartphones by conveying that to such people so that they can enjoy smartphones better. That's what we intend to do. With povo, communication with customers, something we have been doing. And that know-how, I think, will be useful. In Provo, we kept communicating to customers, and then customers use them. And then the know-how we have acquired from that experience, I think it can be utilized in AU and UQ as well. Those numbers are not easy targets, but it is not at all impossible

[Daisaku Masuno:]

Thank you. My second question also is about the mid-term management strategy capital allocation. ¥1.5 trillion, that's the shareholder return. If I do the calculation, at least might every year, 10-year increase and every year with a ¥200 billion, that's the buyback still, you may not be able to achieve this ¥1.5 trillion. So that might really be the minimum line based on my calculation. Now is my interpretation correct? The dividend and the balance between the dividend payment and the share buyback and ¥700 billion, the one before the last, there was a budget for the ¥500 billion. What was the validation? I think that was the question. But -- so based on that ¥700 billion, how do you look at the ¥700 billion. If you do all of them, ¥1 trillion, I mean, you have used ¥4 trillion, you still have the ¥5 trillion free cash flow. There's going to be still the ¥1 trillion. What are you going to do about this remainder ¥1 trillion, so a question on the capital allocation, please?

[Toshitake Amamiya:]

Thank you for your question. First of all, about shareholder returns, Masuno , you shared with us your view. Roughly speaking, it is all right. Basically, 40% -- more than 40% payout ratio that we have been doing. obviously, there's going to be -- you can look at the growth number. You can make a calculation. The rest is buyback. That's the kind of image we have. About M&A, I would defer to talk some, but the ¥5 trillion, you did the subtraction and you said there's a remainder ¥1 trillion. So ¥5 trillion level to be more precise, a little less than actually, ¥4.7 trillion or so. As for the rest, IFRS 16-related lease repayment. In three years, ¥700 hundred billions of yen. That's also included. So I hope you will interpret in this way.

[Makoto Takahashi:]

About ¥700 billion for growth investment. Last year, the ¥500 billion was shared more like a budget. That's why it was not received warmly. We have no intention to budget it. Capital allocation, ¥700 billion. We would like to use it for growth areas for M&A. And in terms of the domains, DX finance and energy that I shared with you, in addition to that, what we call LX life transformation into that new area, we would like to really put focus on. To achieve budget, the wasteful investment is not something we do. So if there are good cases within the ¥700 billion framework, we would like to make an investment. Thank you.

[Operator:]

Thank you. We will take the next question, SMBC Nikko Securities, Kikuchi-san, please.

[Kazuaki Kikuchi:]

Yes. This is SMBC Nikko Securities, Kikuchi speaking. So this is a -- follow-up to Masuno-san's question. ARPU in the short time, ARPU may turnaround. Is that the reason you have this plan. I think in the fourth quarter compared to the second and third quarter, fourth quarter ARPU seemed to have declined. So compared to the fourth quarter, the New Year's ARPU may not decline that much. If there are some specific unique movements with ARPU, I would like to know? And the ARPU in the New Year on a quarterly basis, what will the trend look like? If you could give me the breakdown. Thank you very much. That's my first question.

[Makoto Takahashi:]

Thank you. Amamiya-San.

[Toshitake Amamiya:]

So one unique factor of the first quarter is the excess charge settlement. So the decline may seem a little bigger than usual. Other than that, it is a normal number. This fiscal year, ARPU trend -- our priority, our focus is to stop the decline. In the first quarter, it will not be a decline. We will start turning flat. And by the end of this fiscal year, we want to turn this upward. That is our aspiration. It seems like I wonder how -- what combination leads to this result? I don't think we are still in alignment here. So the brand is shifting to the lower price. In last spring, there was a price reduction, and that impact will deepen until iPhone this fall, I think. And there are positive factors, I understand that. But the balance among these factors, so the impact of the lower telecom charges, the lower price reduction and others. Could you give us the breakdown?

[Toshitake Amamiya:]

I cannot quantify and give you specific numbers, but multi-brand ARPU is shown to you. So ARPU by brand has not changed much. The price reduction impact is reflected more strongly here, the migration among brands. But now this migration among brand is settling down, calming down. So I think the decline will stop. Now as I mentioned earlier, by moving from 4G to 5G, this ARPU by brand can stop declining. So that is how we want to stop the decline of ARPU and turn this around, turn it upward.

[Kazuaki Kikuchi:]

Thank you. My second question. Page 35 of the slide, cost efficiency. So ¥100 billion cost reduction is aimed for. But CapEx is a slight increase this year. And I think there are different contents in this, infrastructure sharing, the optimal control of the investment, appropriate control and investment, so you will reduce through appropriate control. And your competitor, SoftBank, said they will drastically re-cut this CapEx because the 5G investment will run its course. So based on the plan of reducing the investment, your infrastructure cost is planned to be declining. So my second question is your CapEx plan?

[Makoto Takahashi:]

So CapEx, we do not have a plan of reducing CapEx. We plan to keep it flat. Now the cost efficiency of ¥100 billion, around half is the 3G migration, 3G suspension, end of 3G. So about half is the cost reduction there. And the sales cost reduction will be a little less than half, the other half. The sales cost, obviously, the structural reform and business structure, the common cost reduction, there are many ways to cut costs here. So it's not that we will reduce the CapEx. It will be 3G suspension and the reduction in the sales cost. So that is ¥100 billion.

[Kazuaki Kikuchi:]

So 3G suspension, this ¥80 billion, that is separate outside of this ¥100 billion?

[Makoto Takahashi:]

It's included.

[Kazuaki Kikuchi:]

I see.

[Makoto Takahashi:]

So you can achieve plus ¥20 billion. So of the ¥100 billion half is 3G suspension related. So part of the ¥80 billion is included here.

[Kazuaki Kikuchi:]

Understood. Thank you. Just a follow-up. So it's ¥100 billion comparing three years later, the third year and ¥50 billion is as Mr. Takashi just said.

[Makoto Takahashi:]

This is the ¥50 billion that will be reduced from 3G suspension and sales cost, sales expense, 3G related, we used JPY 30 billion last year. And when we look at the midterm period, other competitors will face the 3G suspension and they will use aggressive sales promotion cost. We may use aggressive sales promotion cost. So we are not reducing the amount. There are other structural reform measures that will build this number up.

[Kazuaki Kikuchi:]

Last question. So this roaming revenue from Rakuten, this will be a decline included a decline last year, right?

[Makoto Takahashi:]

Yes, it's included. This year, ¥50 billion negative. It will not be zero right away. It will be in a stepwise manner around tens of billions in a step-wise phased manner.

[Ikuko Hongou:]

Next question, please. If you have a question, please raise your hand. Mitsubishi UFJ Morgan Stanley Securities, Mr. Tanaka.

[Q – Hideaki Tanaka:]

Mitsubishi UFJ Morgan Stanley Securities. My name is Tanaka. First, I would like you to give me more explanation about focus areas. First, about finance. Currently, in terms of profitability compared with the existing communications is not so high, but I assume that starting from this term, it might increase. Perhaps it's related to loans. What are the structural changes in terms of profitability and mortgage loans market size, what is your presence? And about LX, again, it's difficult for me to have an image of this, especially metaverse. It's a bud word. And I think it's likely to enjoy some growth. But on the part of KDDI, how you're planning to actually make profit? What's your vision in this regard?

[Ikuko Hongou:]

On finance, Amamiya, would you like to address that?

[Toshitake Amamiya:]

About finance. Since last year, regarding mortgage loans, on credit card, business without doubt they are likely change growth going forward, they are likely to be the center. But in the case of finance, we have a bank and that is significant. AUP code settlement, let me see -- significant number of customers are using this. This being the gateway or entry -- and from the account -- bank accounts or cars, you can charge things. And then between the securities and the bank collaboration between the two entities and other services to other kinds of financial services, we would like to see the expansion. So by this expansion -- well, regarding cars and loans, the profitability just merely from those, that's what we enjoyed. But in the periphery, we could also see the other types of profits. And we believe that in finance, the profitability can be accelerated.

[Q – Hideaki Tanaka:]

Excuse me, about PayPay, they are enjoying significant growth with sales promotion and not much profitability because of that promotion. But regarding au PAY are you making a lot of profit? What about the marketing cost? So versus PayPay -- compared with PayPay, what is your positioning? I mean, you have given back, so you are doing fine or -- some more information, please.

[Shinichi Muramoto:]

About au PAY, with au PAY alone, it's not that we are seeing great profitability. But compared with PayPay, our operation is not something that we suffer from huge losses. What's the biggest difference in au, UQ? To KDDI customers, these advantageous promotional activities. By doing so, it's not a huge amount of promotion costs. Effective promotion cost is what we spend. And without spending so much in cost, we are trying to seek higher efficiency. That's the kind of operation we are doing. About, LX, to be honest with you, on our part it's still kind of an image, but life designs next chapter, moving to the next step. That's why we call this life transformation. Its called web3, the network afterward 2.0, from centralized to decentralized one. Whether we can really move on to that, we don't know for certain, but we would like to be a pioneer. So as a structure web3 and there’s work on NFT and metaverse work, so that NFT can be utilized. Concerning those, we don't know the actual profitability at the moment, but we would like to be a pioneer. That's how we would like to do it in the midterm management strategy. Its life transformation, other than that, work on drones, SpaceX initiatives to transform lifestyles, those can be applied as well. What would be the level of profitability in this midterm strategy is not really covered in a significant way, but this is an exciting area, and this is the declaration we're going to do this. I think -- I hope you will interpret in this way. Thank you.

[Q – Hideaki Tanaka:]

So for the time being, you would like to take up many challenges. So even if you have to spend cost within making investment, even if you have to suffer a little bit of losses, you're doing this. Regarding LX, yes. That's fine. My second question, IoT, Mr. Mori? IoT cumulative connections -- in this year, I think in the detailed material says that your plan is a robust increase. But automotive sales units, given that I think this can be doable. But in terms of profitability increase, unlike in the past, is it going to be accelerated? Can we expect to see good changes, or it's not making -- you are not making much profit. Any additional information, please?

[Keiichi Mori:]

First of all, about the number. Admittedly, there are various issues, semiconductor issues, centering on automotive. In terms of the number of production units, sales in number of sales units, those are possible factors that may have an influence on what we do. Having said that, not just vehicles, not just as cars, gas, the number is on the significant increase with regard to infrastructure. The area is expanding with more IoTs added. So I hope you will understand it this way. About the profitability, as I shared with you in the last time, now, we are seeing profits being generated. Of course, do we are making investment for the future as well, but a certain level, not so bad profitability can be enjoyed now. Regarding DX, IoT will become a kind of a basis? That's what we see.

[Hideaki Tanaka:]

Thank you.

[Operator:]

So next is Credit Suisse Securities, Eguchi, please.

[Hiroyasu Eguchi:]

This is Eguchi of Credit Suisse Suite speaking. Yes, just one question. So about the slide that shows the analysis, ARPU decline and the new area of profit contribution, I understand. But 30 million to 40 million on the far right, others, what are included there in the operating income? And another question. In the fourth quarter, life design domain sales grew strongly. Was there any extraordinary factors in the fourth quarter? And is it sustainable in the New Year, this year? Thank you.

[Shinichi Muramoto:]

Thank you. I will answer the first part. This year, others, right? Number four this year, others, yes. So on a year-on-year basis, marketing costs will be lower than last year. But the details is, last year, AUP related costs was used in various -- for various customers to promote the usage of various customers. So that was one cost item. And in this busy sales season in order to sell the device at an affordable cost, affordable price, we used cost, especially in March, but we were able to increase ID as a result of that. So this year, we can save or suppress this part. So that is our view on cost.

[Makoto Takahashi:]

So the second question was on Life Design. Fourth quarter sales grew strongly -- fourth quarter last year.

[Hiroyasu Eguchi:]

Was there any extraordinary factor?

[Toshitake Amamiya:]

No special factor. But the biggest growth was in Denki electricity, because of seasonality, the fourth quarter electricity sales tend to grow. So that was a big contributor.

[Operator:]

Since it’s time, with this, we plan to conclude the KDDI meeting on the new the business results ending in March 2022. Thank you so much for your kind participation.