KDDI Corporation (OTCPK:KDDIY) H1 2023 Earnings Conference Call November 2, 2022 4:15 AM ET
Company Participants
Ikuko Hongou – General Manager, Investor Relations Department
Makoto Takahashi – President
Toshitake Amamiya – EVP
Keiichi Mori – EVP
Kazuyuki Yoshimura – Senior Managing Executive Officer
Conference Call Participants
Daisaku Masuno – Nomura Securities
Yoshio Ando – Daiwa Securities
Satoru Kikuchi – SMBC Nikko Securities
Shinji Moriyuki – SBI Securities
Jun Tanabe – UBS Securities
Kaori Chiba – JPMorgan
Ikuko Hongou
Thank you for waiting. We now would like to start the meeting on KDDI financial results of the second quarter of fiscal year ending March 2023, questions and answers session. Thank you for joining us out of your busy schedules. I am your MC, Hongou from IR Department. This meeting is broadcast live on the Internet with Japanese and English simultaneous interpretation. Please be advised that the meeting will be later made available on our IR website for on-demand distribution.
Let me introduce today’s participants. From your left, in the center, President Takahashi; Executive Vice President, Executive Director, Corporate Sector, Muramoto; next, from your right in the center, Executive Vice President, Director, Executive Director, Solution Business Sector, Mori; Executive Vice President, Director, Executive Director, Personal Business and Global Consumer Business Sector, Amamiya; next, to your right in the back, Senior Managing Executive Officer, Director, Executive Director, Technology Sector, Yoshimura; lastly, to your left in the back, Executive Officer, General Manager, Corporate Management Division, Aketa.
Today, we have uploaded 3 items related business results, one presentation, detailed materials on our IR website. Please read the disclaimer in each document about what is listed in the material of performance, including what will be shared during the Q&A session and subscriber targets.
First, President Takahashi will brief you on the summary of the business results followed by the questions-and-answer session. Mr. Takahashi, please?
Makoto Takahashi
Thank you. Before Q&A session, here is the summary of the first half business results for the term ending in March 2023. In the midterm management strategy concerning satellite growth strategy, steady progress was made on KPIs in focused areas, DX and financial business. Regarding Communications business in the center, centering on 5G, our continued aim is to realize bottoming out of multi-brand communications ARPU in March 2023 period.
Now having learned lest network foundation, we aim to create new value for the betterment of society. We are promoting operations, looking at the midterm. Thank you.
Question-and-Answer Session
A – Ikuko Hongou
At this moment, we will like to take questions from the participants. We would like to take as many questions as possible from as many people as possible, [Operator Instructions] We are planning to end this Q&A session at 6:00 p.m.
Masuno-san of Nomura Securities.
Daisaku Masuno
This is Masuno speaking from Nomura Securities. Question #1, regarding mobile communication KPIs, September, it was flat, and it seems that it’s stalled, it’s not growing. So what would be the reasons if this is going to recover? And ARPU with the refund cost of JPY 60, if it’s JPY 3,980 that’s month-on-month decline of 6.8 percentage points. In the third and the fourth quarter, how much decline do you expect to see, on — it would be JPY 15 difference. And so what’s your view on that?
Makoto Takahashi
So allow me to answer that. With respect to multi-brand ID numbers, just as we disclosed in the first quarter, there was a slight decline. In the second quarter, it was flat in July because of impact from communication failure. There was negative growth, but recovery was seen in August, and it’s back to normal in September in — well. And let me turn to my colleague for additional comments.
Toshitake Amamiya
Just as President Takahashi just said, for the second quarter, in August, — or rather, in July, there was communication failure so performance staged. But thereafter, there was recovery and in October, it’s almost back to normal. So as far as the number of IDs is concerned towards meeting the target for the full year, I think we are moving quite successfully.
Makoto Takahashi
Regarding ARPU, on ARPU, what you just mentioned, in the second quarter, there was impact from the refund. Therefore, if we exclude that impact, JPY 3,980. That was the ARPU in the second quarter.
In the first quarter, it was JPY 3,970, I believe. So the third to the fourth quarter, Q-on-Q, there was an increase of JPY 10. Therefore, the overall communication ARPU in the first quarter. And if we compare that to the second quarter, there is a clear decline. And quarter-on-quarter ARPU, this time, we have been able to increase it by JPY 10. So in October, the report that I received is that it’s moving quite favorably. So the full year target of JPY 4,000 is something that we believe we can meet.
Daisaku Masuno
My second question — so towards meeting the targets under MTP, you’re going to target communication ARPU revenue to hit bottom this year, UQ, povo are growing, but can you grow AU 5G. If the numbers are going to go up, of course, they will be reflected in the revenue. But UQ povo, the growth in UQ povo, what’s its impact on ARPU? And AU 5G plan, do you think that you will be able to meet the plan into the next year?
Makoto Takahashi
We’re actually having discussions with respect to MTP, midterm management plan. And those are the topics that we intend to take up as part of those discussions. In terms of the composition, the 3-brand composition is moving according to our plan. AU accounts for a little less than 80% of the total in terms of the brand mix among the 3 brands. On top of that, povo and UQ. With the 2 combined, the number is up to 7.5 million, therefore, I think the balance is quite good.
And on top of that, I think 2 meetings ago, I was pointed out. So 4G Pittato plan users, they are decreasing in number, and 5G MAX plan users to grow. If that is to happen, then we will be able to recover our ARPU. That is our expectation. So Pittato plan users, their share or their ratio is gradually declining. On the other hand, our 5G Max plan users are on the increasing trend. So, so far, I think the trend that we’re seeing is quite good. And those who are not yet users of 5G MAX plan, I think there’s quite a bit of potential to capture those users. And so we would like to maximize ID times ARPU towards next year.
But having said this, of course, it’s not going to be all that simple. So we need to micromanage this business so that we can drive our ARPU or achieve a favorable ratio or composition.
Ikuko Hongou
Ando-san of Daiwa Securities.
Yoshio Ando
This is Ando speaking from Daiwa Securities. I would like to ask 2 questions as well. So DX and financial business are doing quite well according to your presentation. So these are the businesses here looking to grow in the medium term. Well, with the obstacles, if you will, that you should be able to overcome in order to grow them exponentially. If you have anything in mind?
Makoto Takahashi
Well, then may I turn to my colleague who’s responsible for DX, which is growing most for an answer?
Keiichi Mori
Well, the number of IoT lines grew to JPY 28 million. That’s what we said in our presentation and we will like to steadily grow this number, going forward, according to our plan and surrounding the IoT lines, there will be cease for DX business. And that is what we are trying to address and capture. And we’re putting together a structure and a framework to capture the cease of DX around IoT DX promotion department, digital divergence holding subsidiaries are being consolidated for that. So around IoT lines, we believe that we can provide solutions and once that becomes successful, I think this will start to grow quite successfully.
Yoshio Ando
So on the financial business, if you could please answer.
Toshitake Amamiya
Well, we have au Financial Holdings as an entity. And we have a number of elements or parameters that we’re looking at. So the base of our business is au pay settlement business, plus the credit card business. And then to reach further to the banking business and the economic zone business.
So PAY and credit card users, members, how can we grow that is going to be the primary question that we need to address if we are to see exponential growth. We have 30 million user base for our telecom business. So we need to promote and realize cross use with the 30 million users. And by so doing, we believe that we can scale up the size of our business. That’s been the idea, but we have not been able to leverage this idea fully. So we are going to continue to expand on this idea, and I think there’s ample potential to grow our business in that manner.
Yoshio Ando
My second question, on Page 9. There’s a chart, step chart. So JPY 14.8 billion, that’s highlighted in red. I don’t think that was included in the forecast. So if you could please clarify whether it was part of the forecast or not. And in the second half, there could be further fuel price hikes. And so those factors are explained in principle, or you’re aiming to increase your operating income. You’ve always said so. And I’m sure that plan remains unchanged, but is that correct?
On Page 27, there’s a summary. So you’re going to invest in cost and focus on MTP. So there are factors that will push down the income and those that push up income. So 2 groups of such factors are mixed and you looked at both to keep the forecast unchanged, I believe. And so if you could just sort out all of that and share your thinking on it?
Makoto Takahashi
So what you mentioned upfront. Well, in terms of our stance, of course, we will continue to aim at increasing our operating income. That remains unchanged. But as is written here, there’s impact from communication failure and fuel price hikes, and these were factors that we could not forecast.
Well, in the second half, there could be subsidies from the government for fuel price hikes. But these are factors that cannot be avoided, so there would be some level of impact that will continue. But having said so, we will continue to stick to our plan to increase our operating income as we operate into the second half.
And what you mentioned toward the end, well we would like to maximize our revenue and minimize costs. So the core satellite growth strategy, there is telecom business, ID times ARPU, the status is just, as I explained earlier, so we would like to have ARPU bottom out this year, Q-on-Q, it’s starting to grow. And Q-on-Q, price decline is stopping. So we would like to continue with that.
And the growth areas for both DX and Financial business are growing quite successfully. So we would like to achieve a double-digit growth in those areas. And energy-related business in the first half, as you can see, if you calculate, there’s a decline in income — operating income. But into the second half because the business was not good last year, and so there are factors that will push up operating income. So we believe that it’s going to fare quite well. On the cost side, there were unexpected costs that occurred. But even considering that, we’re looking to increase operating income.
Yoshio Ando
So in growth areas, more so than before, you will redouble your efforts to drive the numbers. Is that what you’re saying?
Makoto Takahashi
Well, on telecom business, JPY 4,000, if we can achieve that, that will be according to plan. And for growth areas, we’ll continue to follow the plan. The target is a double-digit growth quite high. So we would like to make steady efforts to meet that plan.
Ikuko Hongou
SMBC Nikko Securities, Kikuchi-san, please.
Satoru Kikuchi
Kikuchi. I have 2 questions. First, about the churn rate. Second quarter regarding churn rate, 0.94%. So the second quarter, I think this is high, almost unprecedented. Now this time, there was this communication failure. I think there was an impact from that. But with this communication failure, in the first quarter, you gave us the explanation. And because of the communication failure, was that the reason that the churn rate increased? I don’t really think so. There might have been some problems in the acquisition, but not the churn rate.
So with the competition, increase of churn rate continued. On the other hand, July, you couldn’t acquire people, but August and September, you gave making efforts. So you worked so hard. And as for the net addition, I think you are working so hard in that front. So this is the subscriber cost increase and customer-facing area, intense competition and intense competition also in sales. So if you will — how do you look at the current competitive landscape? Now regarding other companies, well, you might say that it’s because of your peers are working so hard, but how would you like to see it evolve into the future?
Makoto Takahashi
Amamiya-san, would you like to address that question?
Toshitake Amamiya
First about the churn rate, 0.94%, compared with the first quarter, it’s almost flat Q-on-Q. Now in July, there was impact from that communication failure. And that’s included slightly, but the intensification of competition might be one reason. But MIC, the Ministry, has been working on the reduction of the switching costs. I think that’s having an effect.
As for the competition, is it intensifying? Not necessarily. In certain limited local areas, yes that’s true. But — is it a full-blown fit? That’s not the case. In this competitive environment, we cannot afford to lose. So of course, we have to work against them — but how? Can we sort of control the fight in a certain local area? That’s what’s happening. And in addition to that, this time, the new iPhones have been introduced, and they have become pretty expensive. And the customers are rather slow to make a move compared with the past.
The pixel is communicated upfront, but Android that are less costly perhaps can be utilized more. So by controlling cost, we would like to fight in this competition.
Satoru Kikuchi
My second question. If you look at Page 6 of this material, front loading of investment. Could you give us more information? So there was a communication failure and in responding to that, what about the CapEx? What’s going to happen? What about the scale? And what about the substance?
In the midterm, investment plan, have you increased it? Or will this front-loading have you actually changed the substance of this investment? Can you give me a little more substance about this?
Makoto Takahashi
About JPY 50 billion regarding the substance, cost and CapEx, both are included. Here, more than 50% is about — on the virtualized network. The 5G core network that’s all virtualized, is placed on the virtualized. But Voltair knows they have become pretty old, and that actually caused the communication failure. By the virtualization, we need to do the front-loading compared with the plan. And that’s — it’s more than JPY 30 billion, more than half and the CapEx that needs to be front-loaded, and that’s included in the JPY 50 billion.
Naturally, the 5G area expansion is something we must do. But in terms of priority, make the facilities equipment more resilient regarding this investment, we would like to do this in a front-loaded manner that has been decided.
As for CapEx, how are we going to control it? In principle, the CapEx versus CapEx to sales around 12%. We’d like to control it around 12% according to a midterm plan and we would like to keep this plan unchanged. And with the allocation in the investments, we would like to do this in the midterm. So JPY 50 billion, does that mean that the net addition to the CapEx, no, that’s not necessarily the case.
Satoru Kikuchi
Clarification. When you say front loading in this midterm plant. Is it going to be after that — the start of this midterm plan?
Makoto Takahashi
That’s right. This JPY 50 billion in the 3-year term. On the virtualized network, the voter knows function. We were planning to do this later, but within the next 3 years, we would like to do this. That’s one of the major factors.
Satoru Kikuchi
Understood. This term or the next year?
Makoto Takahashi
Not something that we can do this year or the next year. Within these 3 years, somehow, we would like to manage to do that within the next 3 years.
Ikuko Hongou
Moriyuki-san of SBI Securities.
Shinji Moriyuki
This is Moriyuki of SBI Securities. I have 2 questions as well. Question number one, regarding 5G user trend. 5G offers higher ARPU. That’s because migration from heavy users, so it’s only natural. But if the same users migrate, what is the increase seen in 5G ARPU? Is it accelerating in terms of data usage?
And what kind of content at this moment is leading the increase? With a psychological limit that’s being lifted, are users watching videos extensively? Or is there a new factor that comes into play?
Makoto Takahashi
So among the customers who are moving from 4G to 5G or — no, 4G average traffic and 5G average traffic, if we compare the 2, there’s a difference of 2.5x. That is the reality.
Shinji Moriyuki
Well, that’s because of the migration of heavy users, and therefore, there should be that level of difference. But once they migrate to 5G, what happens is my question.
Makoto Takahashi
Well, there are a variety of different users. So it’s hard to generalize. And it’s not just the heavy users who are migrating toward 5G. There are others as well. In the dialogue conversation, without 5G killer content or killer app, the speed doesn’t go up. That’s not necessarily the case.
With 5G, the road, if you will, becomes wider, broader. And 5G’s performance itself is also up. Be it iPhone or Android, 5G performance has improved. So even if you watch the same video, the download speed is increased if you’re using 5G. So without knowing you’re watching video a lot more than you used to with 4G.
I, myself, once I started watching TikTok, I can’t stop. That does happen, doesn’t it? So I think that is happening in general. So killer applications — so centering around video. So with killer applications, the usage of video is pushing the use of 5G, and therefore, the ARPU difference between 4G and 5G is 2.5x. That’s the trend in Japan, in Korea and other countries where they have advanced 5G, that seems to be the case.
And so how can we efficiently build the telecom network and translate that into increased ARPU? Well, there’s no more psychological pressure in terms of the limit of usage. Yes, that’s a factor as well, I think.
Shinji Moriyuki
So my second question, well, there are competitors support, but I think povo has a differentiating point. Are there any new developments with respect to povo? So after 6 months of no payment, there could be termination. And so what would be the impact of that?
Makoto Takahashi
Among the povo users, there are a variety. We do analyze who they are. So those who start using povo at JPY 0, there are those who do not use povo very much after that. Or there are those Rakuten users who migrate to povo, not very high in terms of ARPU. So the so-called influencers.
So actually, we’re having some influencers recommend povo. They are young people and the so-called Z Gen youth. They have different values. And so we’re asking influencers to recommend and introduce povo to their peers. So those users ARPU, and the usage of topping services, that is starting to rise. We’re seeing that trend.
And so we are analyzing the trend. We’re working with Circles Life in Singapore. And so after the contact, we need to increase the value and that’s the kind of technology that this company has experienced in operating. And so with that, I do hope that we can see increased ARPU.
Shinji Moriyuki
So at this moment, you don’t have to consider having a significant negative impact on ARPU 6 months down the road?
Makoto Takahashi
I don’t think we need to worry about that too much. Well, Rakuten has its own pricing scheme and some of the users are migrating to povo, so more so than initially expected. It’s true that there are users with lower ARPU than we expected. But with a multi-brand scheme, we’re trying to make up for that so that multi-brand ARPU average can be raised.
So users from Rakuten, they are not using povo very much. There are lots of users are paying JPY 0. Yes, there are a lot of such users. And yes, some of the Rakuten users who come to povo have lower ARPU than initially expected. That’s also true.
Ikuko Hongou
Next, UBS Securities Tanabe-san, please?
Jun Tanabe
I have 2 questions. Previously, about network CapEx, Virtualization was mentioned. And then later about the operation cost, I think it might actually go down. What about the effect or the scale? I don’t really know how fixed that is, but any suggestions are welcome.
Makoto Takahashi
I can’t really share with you specific numbers, but as you rightly said, with this virtualized network and also using AI and big data, we try to automate the operation. Then operation costs. Apparently, we believe, will come down. So in this midterm target, yes, we would like to make it a target. But Yoshimura-san, anything else?
Kazuyuki Yoshimura
As you have rightly said, in terms of operation costs regarding the members, monitoring members and other members, they are likely to come down. especially by virtualization, more efficient increase of facilities can be done. So in total, in the midterm, yes, we’d like to come up with the good cost numbers.
Jun Tanabe
Second question, roaming revenues. Page 9, I think, minus JPY 6.9 billion. At the beginning of the term, about JPY 50 billion decrease was mentioned. What actually happened? How should I interpret this number?
Makoto Takahashi
As you rightly said, at the beginning of the term, minus JPY 50 billion. That was expected at the beginning of the term. But actually, concerning roaming, 70% direct in a sense when direct coverage is higher than 70%, then that’s to be discontinued this roaming. So at the moment, since it has reached 70% already.
But with LTE, with those such level of basis stations, there are some remaining areas with poor quality. So they would like us to extend this a little more and we are responding to that. So compared with what we anticipated, the decrease of roaming revenues is less significant.
On full on year, we said JPY 50 billion decrease, but it’s a little less than that in terms of the factor. But with Rakuten, it really depends on how they build their network, and we will respond to that.
If they would like to rent more, if they would like to use our roaming service, that’s okay with us, and we would like to respond to their needs.
Jun Tanabe
A follow-up question. At the beginning of the term, first half and second half, second half decrease was more significant according to your estimates. And that estimate or outlook remains unchanged.
Makoto Takahashi
That’s right, gradually. Please reduce this area and reduce that area. When they say that, we will respond to that compared with the first half — the second half, that will be more significant without doubt.
Ikuko Hongou
Second round of questions, if anyone who’s already asked questions and would like to ask additional questions. Please go ahead.
Masuno-san of Nomura Securities.
Daisaku Masuno
Masuno, Nomura Securities. So we heard about the personal business, but corporate business, the — in terms of profit under the medium-term management plan, you may be on track, but that means that in the second half, you will have to grow operating income more so than in the first half. So — is that the plan to increase operating income in the second half procurement of handsets has become difficult in the industry in general, perhaps that is a factor? Or is that not the case? Are you looking to increase income in the second half?
Keiichi Mori
Against the plan, I think we’re more or less on track. That’s where we are. In the first half, growth in income may appear small with 3G closure in April, well, this was according to plan. IoT terminations cancellations and handset cancellations, there were some of those that happened. That was the starting point.
And in the second — or in the first half, those cancellations’ negative impact was initially expected, and we can recover from that in 1 or 2 months’ time. So the trend that we’re seeing is according to plan. And other DX projects and transactions, we do have KPIs that we set for ourselves and we are accumulating numbers vis-a-vis KPIs.
And so as you rightly pointed out, our plan is to increase income in the second half, and we are preparing to do so. We’re preparing to achieve that. So we have come close to the target, that’s where we stand right now.
Daisaku Masuno
My second question, I’m sorry for asking a detailed question about impact of electricity. In the first half with refund combined negative impact of JPY 14.8 billion will refund of JPY 5.9 billion smaller than expected. And if you subtract the remainder is JPY 8.9 billion.
And so I think the electricity cost impact was JPY 2 billion to JPY 3 billion in the first quarter. And so in the second quarter, JPY 6 billion or JPY 7 billion. And with price revision in November that can be eliminated.
Last year, there was a loss. So year-on-year, you may be able to see an increase in income in December. Is that the correct interpretation?
Makoto Takahashi
I’m sorry, is that about electricity? So that’s about au Denki or electricity business. I’m sorry.
Toshitake Amamiya
So are you asking about au Denki?
Daisaku Masuno
Well, on one of the slides, negative factor, JPY 14.8 billion. Are you talking about Page 9?
Toshitake Amamiya
Yes.
Daisaku Masuno
So this includes refund, correct?
Makoto Takahashi
Refund of JPY 5.9 billion, somewhere around JPY 6 billion. And excluding that, I think the remainder would be around JPY 9 billion. So that was the negative impact from electricity. The JPY 14.8 billion fuel price hike included in that is because of electricity price hike. And it’s separate from au Denki. au Denki’s impact is not included in this number. So refund for telecom business and distributor support and increased electricity cost.
Well, in terms of energy, what’s happening is, although we’re not disclosing this, if you can calculate more than JPY 10 billion of negative impact is caused because of energy-related costs. In the first half, au Denki performed very well. And because of fuel price hike, there was a reactionary fall this time.
And there’s a cap that used to be placed on a fuel cost adjustment, vis-a-vis customers. There’s a limit to how much we can pass on in terms of the cost. But for the purchasing side, there was no cap and because of that, our performance deteriorated, and that continued until September. And that is why we saw a negative number in the first half. But in the second half, the cap on fuel cost adjustment was lifted. It’s the same with all the other companies.
And because the cap was lifted and eliminated, we will be able to pass on the full cost, so no impact from that. And you were talking about what’s going to happen from November onwards. Well last year, in the second half, because of rapidly rising fuel price, our business performance deteriorated. But now that the cap on fuel costs adjustment is lifted, we don’t have to worry about that. And I think we will start to see increased income.
So net total on a full year basis, I think we will be able to increase our income. So JPY 10 billion of negative impact in the first half, next year you won’t see that. And so if there’s 0 impact from fuel price, fuel cost or energy cost, well, we’ll have to run a simulation. Well, electricity rate increases that’s been happening of late. So we will have to watch that and see what the impact will be on our business. Next year, in principle, I don’t think we will see as large a negative number as we saw in the first half of this fiscal year. But let us analyze. We need to take time to analyze that.
Ikuko Hongou
JPMorgan, Chiba-san. This will be the last question because it’s time.
Kaori Chiba
Chiba, JPMorgan. I had one question, about this inflation, its impact on the ARPU. You mentioned that iPhones have become rather expensive. But — if this situation continues in terms of consumers’ behaviors, there might be a tendency to go to more cheaper ones. And what about the impact on the brand mix? In terms of data capacity, I think you mentioned it’s likely to go up. Do you think that can be offset by that? Any thoughts on this, please.
Makoto Takahashi
As you mentioned, if prices are increasing in terms of communication, the customers psychologically would like to lower what they pay for communication. On our part, we have to closely monitor that.
About the brand composition compared with what we expected from auto UQ, there are customers migrating. And yes, it’s possible that what you said has an impact on that.
Regarding the brand mix ARPU, we are pursuing that carefully. And it’s being — well, we need to make sure that, that will bottom out and we can recover it. And then that seems it’s coming on track. So we need to control those numbers in both aspects, so that we can see the growth in communication as well. And that’s the kind of operation we would like to focus on. Thank you.
Ikuko Hongou
Thank you very much for asking so many questions. So with that, we would like to conclude the earnings briefing session for the second quarter of the fiscal year ending March 2023 for KDDI. Thank you very much for your participation.
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