Earnings Transcript for 9433.T - Q1 Fiscal Year 2024

Unknown Executive: Thank you for waiting. We will now begin the financial results briefing and Q&A of KDDI Corporation for the first quarter of fiscal year ending March 2024. Thank you very much for taking time out of your busy schedule to join us today. I am Miyagawa of Investor Relations department and will serve 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. :

Let me introduce the participants today. Amamiya, Executive Vice President and Executive Director of Personal Business Sector; Yoshimura, Senior Managing Executive Officer, CTO and Executive Director of Technology Sector; Kuwahara, Senior Managing Executive Officer and Executive Director of Solutions Business sector; Matsuda, Director and Executive Director of Business Exploration and Development Division; Saishoji, Managing Executive Officer, CFO and Executive Director of Corporate Sector; Aketa, Executive Officer and Executive Director of Corporate Management Division. :

Today, 3 financial results-related materials and 2 TSE disclosures, a total of 5 materials 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. :

Managing Executive Officer, Saishoji, will first explain the financial results summary, followed by Q&A. Ms. Saishoji. :

??????: Thank you very much for taking time out of your busy schedule to attend KDDI's financial results briefing today.

Before the Q&A session, let me share with you the summary of the financial results for the first quarter of fiscal year ending March 2024 and our initiatives. In the first quarter of fiscal year ending March 24, both operating revenues and operating income progressed as expected against the full year forecast. Left side, operating revenues were JPY 1,332.6 billion, 23% progress against the full year forecast. And operating income on the right side was JPY 266.7 billion with a progress rate of 24.7%. :

Next, I will explain the factors behind the decrease in operating income of JPY 30.6 billion. From the left, Group MVNO and Roaming revenues were down by JPY 10.5 billion. Multi-brand communications ARPU revenues were down JPY 2.9 billion. DX revenues were up JPY 1.7 billion, and the Financial Business was down JPY 12.9 billion. Excluding the negative JPY 18.2 billion accounting change impact of the previous fiscal year, the financial business posted an increase of JPY 5.2 billion. The decrease in Roaming revenues and the accounting change impact year-on-year, which were expected from the beginning of the fiscal year led to profit decline, but the focus areas remained solid. :

This is the summary of the financial results for Q1 of fiscal year ending March 2024 and our initiatives. I just explained the consolidated results. We will strengthen tsunagu, connecting through infrastructure improvement and partner collaboration in satellite growth strategy and strengthening of management. Communications ARPU revenues progressed steadily toward first half rebound. :

In the business segment, NEXT Core drove the growth. Leveraging its strength, we will further promote connectivity, data center, digital BPO, and connected. :

Financial Business achieved growth synergizing with au. We consolidated CATV business into J: COM to contribute to industry development and regional co-creation. In addition, we will promote initiatives toward a decarbonized society and utilization of generative AI. We will promote our initiatives for a medium- to long-term sustainable growth. Thank you very much again for today.

Unknown Executive: Thank you very much, Managing Executive Officer, Saishoji. Now I would like to entertain questions from all of you. [Operator Instructions] We'll receive questions until the scheduled ending time.

First question, Mr. Ando from Daiwa Securities. :

Yoshio Ando: So I have two questions. The first question is about ARPU revenues. In the first quarter if you look at the single month, then -- were there any months where you had year-on-year growth already? And there was some impact from Oyama, but in the second quarter, are you expecting as much effect from the previous fiscal year as you saw in the first quarter or you're not going to see that much effect but you are going to see a rebound in the second quarter, which one is what you're expecting?

Unknown Executive: Thank you for your question. As for ARPU revenues, I'd like to ask Amamiya to answer question.

Toshitake Amamiya: As for the first quarter ARPU status, on a monthly basis, whether we have had year-on-year growth, on that point, in June, we were very close. But on a monthly basis, we haven't been able to reach the complete positive territory yet. In July, we may be able to reach very close point. But the question is whether -- how much we can add up more. And we are going to see the impact in the second quarter as we saw in the first quarter of the support and discount. And so we would like to improve the communication ARPU.

Yoshio Ando: There's a follow-up question on that. So the ARPU support discount and also handset subsidy. I think there are two different approaches in this year. Is that the correct way to look at that? And in the first quarter, was -- you have seen that impact and that's why you have ended up with this result. Is that correct?

Toshitake Amamiya: With regard to the support discount, well, there was some discount for us extended period of time, but that time had expired, and the support discount had ended and there was an impact from that.

Yoshio Ando: So well -- so that means that handset support has not increased?

Toshitake Amamiya: That is correct. We don't have that view.

Yoshio Ando: Then, the second question is about roaming. If you look at the waterfall chart, there was a negative impact of JPY 10 billion plus impact. But for the full year, JPY 60 billion plus, and then there will be JPY 10 billion plus or close to JPY 20 billion improvement that you are expecting. But if you look at the status in the first quarter, compared to your assumption, do you think the pace has been slowing down as compared to your initial anticipation? And also the role -- on top of that, is there any possibility that there will be more requests for roaming? If you can explain about that, that would be appreciated.

Unknown Executive: As for roaming revenues, I would like to ask Matsuda to answer the question.

Hiromichi Matsuda: Thank you for the question. So with regard to the new agreement on roaming, with Rakuten Mobile, we have made announcement in May. But at the beginning of this fiscal year, as you said, we had expected JPY 60 billion decline in revenues. But with this new agreement, our new forecast for this fiscal year is that there will be an improvement of JPY 10 billion to JPY 20 billion. And after the first quarter is over, I think we are in line with our new expectations.

And for the second point, on a regular basis, we are having discussions with Rakuten. There is additional area for roaming, in other words, the business center district. But we are still under negotiation for the area for this district. So we would like to continue to have discussion with Rakuten Mobile. :

Unknown Executive: [Operator Instructions] Next question is from SMBC Nikko Securities. Kikuchi-san.

Satoru Kikuchi: This is Kikuchi speaking. I have two second questions. First, so your profit went down, but it is in line with your plan. So in your focus areas, you will increase the profit contribution this year, and next year, you will increase your profit from there. So the focus areas, if you could update us on the status of focus areas? That's my first question.

First, in DX, sales, the operating revenue of the business domain is growing, but the profit does not seem to be growing as much. So in which areas, which service do you plan to grow your profit going forward? It's growing, but finance, the housing loan and settlement, so there are various areas. Which area do you plan to grow the profit? And what is your forecast? So that's my first question. :

Unknown Executive: So focus areas, DX and finance. First, DX area will be responded by Kuwahara-san.

Yasuaki Kuwahara: Yes. Thank you for the question. So first, in DX domain, we have NEXT Core. We have 3 areas designated under NEXT Core and the sales revenue is growing steadily. In particular, IoT, Business DX is leading this momentum. In profit, JPY 1.7 billion. So overall, the growth seems to be small. In the first quarter, it was in line with the plan. Second quarter and onward, we are growing. We will grow year-on-year. I hope this answers your question.

Unknown Executive: Next, on finance -- financial business, Amamiya will respond.

Toshitake Amamiya: Yes. So financial business. In the current quarter, excluding the onetime factor, it was JPY 5.2 billion plus. The growth driver is the mortgage loan and the credit card business, those 2 continue to be strong. And those 2 will continue growing. In addition, in this current quarter, the fixed interest rate was mark-to-marketed and that was JPY 2 billion. So interest rate, there were some news today, interest rate is expected to rise going forward. So this -- we can expect profit contribution from that factor. I hope this answers your question.

Satoru Kikuchi: My follow-up question. Business DX is growing. Any particular service, which service, in particular, will contribute to your profit?

Toshitake Amamiya: Business DX is relatively IoT related and the development and operation. So both are expanding and profit is growing.

Satoru Kikuchi: I understand. My second question -- I would like to know the details later. So my second question is the churn rate is rising, and it's a bit concerning. And maybe it's because of SoftBank. Compared to a year or 2 ago, it is up by 40% to 50%. And from 3 years ago, it is double. And I think you are filling that -- offsetting that with new subscribers, but with -- to capture new customers, the acquisition cost, it incurs costs and so your reduction in the sales-related cost is not progressing well. So what is your forecast? Do you think you can control this or not? The government's guideline changed. So what is your forecast on that background? So if you could share with us your view on churn rate.

Unknown Executive: So churn rate forecast, Amamiya will respond.

Toshitake Amamiya: First on churn rate, First quarter was 0.96. On a year-on-year basis, this was up by 0.04. So that is a multi-brand. If we look at this on a brand-by-brand basis, au, churn rate is declining and UQ is pushing up the churn rate. Core ARPU au users are staying. So that is a favorable trend. So UQ is pushing up the rate because of two reasons. One is that the proportion of UQ is increasing so that is one factor. The other is that in the market, SIM, standalone, or the customers that are not cost conscious. The frequent buyers are increasing and that is impacting the churn rate somewhat.

We will analyze how we allocate our costs by customer so that we will not spend too much cost on the customers who do not have large lifetime value and capture them. We will try to efficiently capture customers. For au, like we've been doing so far, bundled plan with OTT will be enhanced to improve our retention. And going forward, we will also strengthen the bundling with financial services. So on au side, churn rate will continue declining, we think. :

Unknown Executive: So UQ and povo, so the -- now the mix is worsening. I think now the deterioration is milder. So the deterioration of mix, meaning there is ARPU and the churn rate. They're both becoming milder. For ARPU, in June, the new UQ price plan was announced, and we think this will have an impact. We've only seen the results for June and July, and we'll have to scrutinize further.

Looking at July results, the ARPU increase from the new price plan and ID. The penetration to the stores was not sufficient in June, so it weakened somewhat, but we've seen a recovery in July. So ID is recovering and ARPU is rising. So I think we're moving in the positive direction. In addition, after this new price plan was announced, au to UQ and UQ to au is now in a better balance. So another area we're seeing an improvement. We think this new price plan had a good impact. :

Unknown Executive: [Operator Instructions] Next question, Nomura Securities, Mr. Masuno.

Daisaku Masuno: Masuno from Nomura Securities. I have two questions. First one is about the profit increase and decrease. Honestly speaking, roaming revenues decline and finance business accounting was something that I had expected. But if you look at the waterfall chart, there was minus JPY 6 billion in others. And the initial -- originally, the power charge improvement contribution and the rationalization and the midterm plan had something that we had expected, but that was not the case. Maybe power charge was a onetime factor. Was that true?

And also rationalization is streamlining. In second, third and fourth quarters, we're we going to see some results. In other words, in the first quarter, in the annual plan, there was some SKU in the first quarter, and we're going to see improvements in the second quarter onward. And so that's -- that was about rationalization. :

But in terms of natural expenses, I think a new UQ Mobile plan expense JPY 2,980 fixed line and 20 gig is quite simple to understand that you don't have to spend too much money to acquire contracts. So it's not about rationalization. But organically, you can actually promote sales with the new UQ price plan. So inclusive of that, can you answer that question? :

Unknown Executive: Thank you very much for the questions. First of all, on the profit, JPY 6 billion negative figure in others, what are the main contributors? About JPY 4 billion is from electricity or power sector business. But actually, this has been already incorporated in our plan. So -- it is not out of our expectations. So it is in line with expectation. So the way you generate profit, if you look at that compared to our internal plan, actually it was slightly upside. That's how we are in terms of profitability.

And as for UQ mobile, I'd like to ask Amamiya to answer the question. :

Toshitake Amamiya: The new plan for UQ mobile, as I said, it is going in a very positive direction as we see it. As you said rightly, the Komi-Komi plan of UQ price scheme, the proportion is increasing much more than we had expected. More customers are using this plan. And mostly prior to the new plan, we had S, M, and L plans. And for M and L, the share was not that large for M and L. But the Komi plans, the share of these two plans are increasing. More recently, 70% of the customers are choosing these two plants. So I think we are in a very positive direction.

Daisaku Masuno: Then the electricity or power business, is it a onetime event? And JPY 90 billion or JPY 1 trillion for the 3-year period, that rationalization effect, what was that -- what was the effect in first quarter? Are we going to see those results in the second quarter onward? So was it the power sector, was it a onetime phenomenon?

Unknown Executive: As for the power business, so this was a onetime phenomenon.

Daisaku Masuno: For the first quarter, what was the biggest contributor?

Unknown Executive: We are selling the electricity in the market. So the unit price of selling power was expensive last year, but it was cheaper this year. And as for the procurement cost, it was less, but the cost share was increased this year. So that's why the cost has increased. And in June, the power utilities, power charge regulation was modified, and we also modified our plan in line with that.

And as for the new adjustment, the power source procurement adjustment amount was added. So if there is any change in the procurement sector, we can pass this on to our customers when we charge customers, and that will be contributing more. And also the fuel adjustment fee cap, which was eliminated last year. So from July onward, there is no such negative factors. So we are going to turn into a positive territory. So there will be close to JPY 10 billion improvement for the full year. So that's all for the electricity business. :

And as for the rationalization for the 3-year period, JPY 100 billion effect is something that we had expected and announced. But up until March 2020, cumulatively, JPY 80 billion is expected until March 2024. And we are doing the restructuring in profit and revenue. And there was not much effect that we've seen in the first quarter, but there will be more in the second quarter onward. That's all. :

Daisaku Masuno: So in the second, third and fourth quarter, you are going to see a positive JPY 10 billion or more that you are going to see?

Unknown Executive: Well, among JPY 100 billion, up until last year, we had achieved JPY 50 billion. So cumulatively, we're talking about JPY 80 billion. So for the full year, JPY 30 billion improvement is expected. And there was not much that we've seen in the first quarter. So the larger portion will be realized from second quarter onward.

Daisaku Masuno: Thank you. I feel assured. My second question is about share buyback of your share -- treasury shares. So JPY 250 billion in tender offer was announced. So going forward, so 1 year behind, but in May, President has announced and explained about the share buyback of EPS target and -- EPS target and share buyback. So you're going to plan to achieve these -- both of these targets. Is that unchanged? And is your policy to accept the repurchase subscription if there is an offer?

Unknown Executive: Yes. As for the future policy for share buyback, JPY 250 billion worth of TOB, takeover bid, was announced. And it was not done in -- with a view of EPS target. We have been meticulously doing this. And JPY 300 billion is something that we had announced from all along. And of course, if you can increase this, then that would also affect EPS, but JPY 300 billion is the one that we have as a plan for this fiscal year.

As for achieving EPS, maybe this was explained in the previous meeting, but we haven't given this up, and we are still trying to aim to achieve this target. And in order to achieve this target of EPS, in every possible way, we are going to seek this achievement but we're not blindly and randomly doing the share repurchase. We are doing proper measures. And if there is any offer for repurchase, it depends on the amount. But if there is a huge amount offered, then we may seek other methodologies. So we'll be very flexible in addressing this issue. :

Daisaku Masuno: Maybe the way I put the question was not that appropriate. So you are going to seek EPS and looking at profitability and share -- number of shares. So it is not going to be changed from the first quarter onward?

Unknown Executive: That is correct.

Unknown Executive: [Operator Instructions] Next question, Mitsubishi UFJ Morgan Stanley Securities, Tanaka-san.

Hideaki Tanaka: This is Tanaka. I have two questions. First, multi-brand ID, number of multi-brand ID. The net increase is 28,000. It seems a bit weak. So what is the background to that? And UQ, you revised your plan and you said you're moving in the right direction, but the churn rate with UQ is rising. So including all that, this may be a bit weak growth in ID. Could you explain?

Unknown Executive: So number of multi-brand ID, Amamiya will explain.

Toshitake Amamiya: First, number of ID. As you mentioned, it's 28,000. The reasons are in July -- in June, when UQ introduced its new price plan, the store operation was not sufficient. And so we slowed down in June. And because of that, this number may be a bit weak. In July, we are back to normal. So going forward, we think we can meet your expectation.

Next, about churn rate. Churn rate is rising. Like I mentioned earlier, the SIM, standalone or the mobile subscribers or mobile users are increasing. So we are not pushing ourselves too much to capture them. So that is our intention. We want the customers that have reasonable lifetime value that meets the cost level who are willing to subscribe with us. So we will not allocate money on SIM per se. So the number of ID, we will continue net increase, but it may seem weak in some points, but we will see the balance with ARPU so that we can increase the revenue, the overall revenue as a whole. :

Hideaki Tanaka: One question. So you introduced a new plan and the -- maybe the administrative side, the back office had some confusion on the store front and was back to normal in July. So the number of applications or the UQ number of visitors was not -- did not fall, but it was the procedure that slowed down?

Unknown Executive: So the number of visitors did not change. Compared to -- unlike the S, M, L days, we needed to explain a little more with the new plan. So we explained to our customers but customers did not make the decision on the spot and went home without a decision on that day. And so there was some shortcomings on our part, and we improved that. And in July, we were able to close the contracts in the store on that day.

Hideaki Tanaka: So my next question, Kikuchi-san asked, but was not answered. So Business DX, the profit did not grow much in the first quarter. What is the reason for that?

Unknown Executive: Thank you. Kuwahara will explain.

Yasuaki Kuwahara: So the reason it did not grow in the first quarter was NEXT Core, on a year-on-year basis, both sales and profit grew by double digits. And the driver is business IoT, Business DX -- IoT under Business DX. In other areas like corporate DX managed and M365, Microsoft M365, sales increases, but profit is not that large. So profit did not grow as much as we thought. Another is data center related. Fuel price increase in the first quarter, first half last year was not existent, but this year, it is evident. So that is another reason profit is not as large. And we already incorporated this factor in the plan. So as a result, it seems like the profit is not growing strongly.

Hideaki Tanaka: Okay. So the business that you're aiming for is growing. The NEXT Core is growing, but Microsoft 365 margin is low. But Microsoft 365, it's not that it's not promising from the second quarter. What is the biggest factor that will push up or improve the profit margin from second quarter onward?

Yasuaki Kuwahara: In data center, from second quarter onward, the fuel price increase, this will be gone on apple-to-apple. So that will be a positive factor. And in corporate DX, M365 is one. We go to our customers, and then the next stage is managed service. We can deploy more profitable services in the next stage, which will bring us profit. So the deals from last year, accumulation of deals from last year, in the first quarter, we are 110% year-on-year, the accumulation of deals. So the number of deals is increasing steadily. So we think the profit will increase steadily going forward.

Unknown Executive: We were close to our ending time. We're sorry, but we would like to take one last question from one person. [Operator Instructions] The last question, Mr. Tsuruo from Citigroup Global Markets Japan.

Mitsunobu Tsuruo: I would like to ask about roaming. From August, there will be connections that will be started gradually. So we're talking about JPY 10 billion to JPY 20 billion in benefits from roaming. From what timing in -- what magnitude are you going to see the effect? And what are you going to spend that money on? Are you going to spend on the improvement of competitiveness or profitability improvement philosophically? In my understanding, raising ARPU revenue is your priority. So probably you are going to spend more on profitability. That's my guess, but is that correct?

Unknown Executive: In the first half of your question, it was not audible. Are you asking about roaming revenues from Rakuten?

Mitsunobu Tsuruo: Sorry. Yes.

Unknown Executive: Then, Matsuda will respond.

Hiromichi Matsuda: Thank you very much for your question. For the full year, in the first quarter, as I said, we were just as expected. We're not going to see particular improvements from the second quarter between JPY 10 billion to JPY 20 billion. In the first quarter as well as in second quarter onward, we are expecting to make progress. And there will be several discussions that will take place as we go along with the other body. And how we're going to land on is what we are going to also discuss with the other party. Does that answer your question?

Mitsunobu Tsuruo: Well, there were two parts to my question. So that revenue, are you going to spend that money on the strategic approaches or initiatives or profitability because this is the money that you would get that you had not expected initially?

Unknown Executive: Well, I'll answer the question. Just -- this is for the full year prospect and we're just looking at the first quarter, and there could be some changes in the environment going forward. So at this moment, as for the upside expected, we are going to make some upward revision of forecast or spend the money on any specific items were not have yet to decide. If there is any change in the environment going forward, we would incorporate that in our business forecast. Does that answer your question?

Unknown Executive: So we have used up our time. We'd like to conclude the financial results briefing on the first quarter of March 2024 of KDDI Corporation. Thank you very much for your attendance.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]: