KDDI Corporation (OTCPK:KDDIY) Q1 2023 Earnings Conference Call July 29, 2022 4:30 AM ET
Company Participants
Ikuko Hongou – General Manager, Investor Relations
Shinichi Muramoto – Executive Vice President & Executive Director, Corporate Sector
Toshitake Amamiya – Managing Executive Officer & Executive Director, Personal Business
Keiichi Mori – Senior Managing Executive Officer & Executive Director, Solutions Business Sector
Kazuyuki Yoshimura – Senior Managing Executive Officer & Director of Technology Sector
Makoto Takahashi – President
Conference Call Participants
Yoshio Ando – Daiwa Securities
Daisaku Masuno – Nomura Securities
Kazuaki Kikuchi – SMBC Nikko Securities
Hideaki Tanaka – Mitsubishi UFJ Morgan Stanley Securities
Ikuko Hongou
Now, I would like to explain about the financial results for the First Quarter Fiscal Year Ending March 2023. Here, the financial results highlights the first quarter of the fiscal year ending March 2023. The first quarter saw an increase in focus areas, but the consolidated results were an increase in revenues and the decrease in income. From the top, the consolidated operating revenue was JPY1,351.7 billion, up 4.0% year-on-year. The operating income was JPY296.9 billion, down 0.8% year-on-year.
Next, the results of the focus areas. Business Services segment revenue was JPY258.6 billion, up 5.5% year-on-year, and it’s operating income was JPY45.8 billion year-on-year, a 2.6% growth. Financial Business revenue was JPY64.6 billion, and it’s operating income was JPY21.7 billion, due partly to a temporary accounting effect.
Next, let me focus on factors for changing consolidated operating income. From the left, a decrease in multi-brand communications ARPU revenue was JPY29.2 billion, while revenue of group MVNO and roaming revenue saw a slight decrease.
On the other hand, promotion of the focus areas, including Business Services segments and Financial and Energy Businesses contributed to an increase of JPY15.2 billion in income. Other factors included three determination and the decrease in depreciation costs, which resulted in a decrease of JPY2.3 billion in income in total.
Next shows the number of multi-brand IDs under communications ARPU. The left, the number of multi-brand IDs was JPY30.93 million, a decline quarter-on-quarter. But excluding about JPY0.25 million decline related to 3G termination. At the end of March 2022, the number was expanding favorably. Many customers continue to use UQ mobile and Provo, with two brands combined, the number of IDs increased to about seven million.
Moving to the right. It shows changes in the communications ARPU, thanks to favorable results of UQ Mobile and Provo ARPU was JPY3,970, down JPY310 year-on-year, but it was within the estimates.
Next is our focus area, Business Services segment. As shown on the left side, operating revenue of the NEXT core business centering on DX increased to JPY87 billion, up 16% year-on-year and is driving growth. Right side, operating income in Business Services segment is progressing well with both the NEXT core business and the core business, existing business, increasing their profits.
Factors for change were the increase in the NEXT core business, including the impact of ForEx impact on the overseas subsidiaries, as well as the negative impact from contract cancellations due to 3G termination.
Next focus area is the financial and energy business. On the left, Financial business posted a large increase in profit, partly due to a one-time effect from a change in accounting treatment of mortgage fees. On the right, Energy business posted a year-on-year decrease in profit in the first quarter.
Cost is being controlled by increasing energy procurement through private power contracts. Given the impact from rising fuel prices, we will continuously monitor the earnings impact closely.
Next is the main indicators of focus areas, which are growing, especially, in DX, Finance and Energy, and DX-related indicators on the upper left. Next core business revenue was ¥87 billion, up 16% year-on-year. In finance indicators, upper row transaction volume of settlement and loan was ¥3.3 trillion, up 33% year-on-year.
au Jibun Bank loan product balance was ¥1.8 trillion, up ¥200 billion year-on-year. In bottom row, the number of au PAY Card members was 7.9 million, up by 1.2 million year-on-year. In energy-related indicators on the bottom right, the number of au Denki and other subscribers reached 3.53 million, up by 57,000 year-on-year.
Lastly, summary of Q1 results. In Q1, operating revenue increased and profit decreased despite higher profits in focus areas. The impact of communication charge reduction was mitigated mainly by promoting focused areas. Excluding the 3G termination impact, IDs increased steadily, thanks to the strong performance of UQ mobile and povo.
Main indicators and focus areas grew, especially, those related to DX, Finance and Energy. In light of the communication failure this time, we will strengthen our system to regain customer trust and improve communication quality in preparation for the 5G era and promote the initiatives towards sustainable growth.
Thank you very much for your attention.
Question-and-Answer Session
Ikuko Hongou
We would like to start a questions-and-answers session for the financial results of the first quarter of the fiscal year ending March 2023 of KDDI. Thank you for joining us via Internet as of your busy schedules. I’m your MC today. My name is Hongou of IR Department.
Let me introduce today’s participants; Executive Vice President, Executive Director of Corporate Sector, Muramoto; Executive Vice President, Director of Solution Business Sector, Mori; Executive Vice President, Director of Personal Business Sector, Amamiya; Senior Managing Executive Officer, Director of Technology Sector, Yoshimura; Executive Officer, General Manager of Corporate Management Division, Corporate Sector.
Today business results related materials of three items: presentation time detailed materials, the two items for TSC-related disclosure, five items are made available on the IR website, regarding what’s covered in the materials and the performance, we will share in the Q&A and subscriber targets please check the disclaimer of each material.
Now we will try to entertain your questions.
Operator
The first question Daiwa Securities, Ando-san. Please mute yourself, raise a question, please.
Yoshio Ando
Daiwa, Ando is my name. Thank you. I have two questions. First, net addition, 3G termination, if you could make adjustments 200,000 that’s the net addition, I think, churn rate is 0.92%. Can you hear me?
A – Unidentified Company Participant
Yes, we can hear you.
Yoshio Ando
That’s 0.92 million – so comparing these numbers you were able to get a good performance in net as a result, suppose there are various factors behind your competitors changed the pricing in addition to that, UQ had a strong performance. The devices – prices of those devices, I think there are various factors, but which factor contributed to the net addition, if you could sort of share with us, the orders of the influence, please let us know. And then, what would be the outlook for those factors going forward?
A – Unidentified Company Participant
Ando-san, thank you. First quarter IDs related questions. As you said, minus 50,000 is net decrease, but 3G churn was about 250,000, so Q-on-Q, ¥0.2 million net addition. What are the factors of these good results? I think that was your question. Amamiya is in charge of personal business, Amamiya please?
Toshitake Amamiya
Well, you’ve already pointed them out. First, UQ was pretty strong. there was a discount price like support discount. So on UQ we are competitive in the market and MNP and for [indiscernible] once they made a good contribution. On the other hand, other companies they created 0 term plan and concerning those, since that timing, the tide was changed to MNP. The number has been pretty good.
Concerning others, MNP has been doing well. And — it’s not just Rakuten, Docomo, SoftBank. Against these carriers, our numbers have been relatively well. Good. Now going forward, with this communication failure, we did have a business stumbling block in July, but we will be trying to hard to recover trust, and we would like to recover the business. That’s what we want to do. Thank you.
Yoshio Ando
Thank you very much. My second question. Energy business – in relation to energy business. There was a waterfall graph in the focus areas, ¥15.2 billion and business finance, when subtracting that minus ¥3.8 billion versus previous year. So whether, this is 100% energy or not, I don’t really know, but it looks likely. Am I correct in my guess? In addition to that, second quarter and onwards, concerning energy regarding fuel adjustment close to increase. Regarding this impact or burden is it going to increase, or how much will it increase? What kind of image do you have? And your company’s forecast, you haven’t changed the forecast by your company. So, are there any factors for change or consistency? Would you like to elaborate on that, please? Thank you.
Shinichi Muramoto
Slide 5, energy business. First quarter, as you said, year-on-year, the income decreased. Regarding the detailed numbers, I would like to refrain from touching upon them. But as Ando-san mentioned, those are the numbers. Your numbers are not far away from what actually happened. As it says, compared with the previous term the – we increased the private power procurement, compared with the previous year in terms of the unit, there have been changes. And in the first quarter, the income decreased. The fuel prices are now soaring. And the fuel adjustment cost, it might actually hit that ceiling. So regarding what’s likely to happen going forward, I think that’s what you asked. Amamiya is in charge of personal business. Pass the microphone to Amamiya.
Toshitake Amamiya
First, on the first quarter, as you heard from Muramoto, as you see we are trying to ensure business – the energy from private producer. We reflected what happened. We wanted to lower the volatility. So, we had more bilateral contracts, private part business. First quarter, we are controlling them appropriately. It’s in the negative territory compared with the previous year. But the effect is limited, we believe.
On the fuel adjustment cost, from the second quarter it’s increasing. We anticipated that, that Eneris among others, utilizing Eneris, we would like to do this business. We would like to closely monitor what’s going to happen. On a consolidated basis, we would like to control it. On our holdings from July 1, it started its operation, and we are trying to come up with creative ideas. Overall, we would like to have a firm control over the businesses. Thank you.
Q – Yoshio Ando
Thank you.
Operator
We will take the next question. Nomura Securities, Masuno san. Please unmute yourself and ask the question.
Daisaku Masuno
This is Masuno from Nomura Securities. So one by one, one is ARPU. So this time, support discount impact is my question. In revenue or in ARPU or the cumulative subscriber, how much was the impact? And after there are some who finished the six-months discount period. Are you — are they staying in AU — or are they in the natural churn, I think you have a good view on June and July. So if you could elaborate on this, please?
Shinichi Muramoto
Yes, AU support discount, six-months discount campaign. So customers joined with this campaign. So your question is what the impact is on our ARPU, currently and in the future. So Amamiya san, please.
Toshitake Amamiya
Yes, this support discount just ended in May. So it’s not that we are seeing a big impact at this present in July and August and in the second half, we will probably see a bigger impact. Regarding ARPU, in the first quarter, JPY3,970 billion. So — this is in line with our projections. For the first quarter, UQ and povo ID Zone was big, ID increase was big.
So in terms of telecommunication revenue, it is secured, ARPU may appear a bit low. But overall, we are trending forward strongly. Thank you. That’s all.
Daisaku Masuno
So if we look at the support discount alone for ARPU, how much or a few hundreds of millions of yen, or billions of yen. What was the result in April, June quarter?
Toshitake Amamiya
On a year-on-year basis, a few dozens of yen, so that is the impact of support discount on ARPU in the first quarter.
Daisaku Masuno
So this is the peak in second quarter and third quarter year-on-year will be down gradually. Is that the right assumption?
Toshitake Amamiya
Yes. Yes, you’re right.
Daisaku Masuno
Understood. The second question is in the communication failure briefing this was touched upon. So regarding the failure, the corporate customers, I think you are still holding back on sales for the corporate customers, but your proposals or the deals that are under negotiation — you will add BCP measures to continue your negotiation with corporate customers, I think. So as you normalize — how long will it take for you to normalize your sales activities? In the earlier briefing, you talked about network mesh. You said you will revisit, review the network mesh, which means you need CapEx other than building capacity or will this be covered with software — so the impact when you change from the mesh structure. Thank you very much
Ikuko Hongou
So thank you for the two questions related to communication failures. So first is from Mori-san in charge of corporate clients.
Keiichi Mori
Let me first talk about the corporate client sales activity normalization. So right after the failure occurred, that one week, we mainly visited corporate clients, apologizing what happened and this is continuing. But gradually, we are making new proposals, including BCPs. So this is increasing. We are visiting more customers than usual and finding new things. There are new discoveries. So we hope to continue this. So in terms of normalization of our sales activities. So including our apologies, we are working hard to visit and do sales activity that is close to a normal level.
Ikuko Hongou
So regarding our capital expenditure policy Yoshimura-san, please.
Kazuyuki Yoshimura
So first of all, revisiting the mesh structure, it does not mean we immediately need the capacity building. So software can address this. But for the entire capital expenditure, we will work with a validation committee or external experts served as a member. So we — this will be discussed in the committee to decide on the final CapEx. As mentioned, just because we review mesh does not mean that we need to add capacity or add facility. So I talked — asked about the normalization of the individual side users.
Keiichi Mori
So, yes, there was a big impact at the time of failure. And the users who visited AU shops gave us some very strong words. We take them seriously to first establish solid measures to prevent the recurrence. So, the visit declined at one point, but now it’s settled. It seems like we’re in a gradual decline.
And My Number Card application started at the end of this month. So, we want to give momentum to the market. We just had a briefing on communication failure today and also submitted a report to MIC. So, from next week, we will bring our activity back to normal. We think we can do this rather quickly. Thank you very much.
Daisaku Masuno
Thank you.
Operator
We would like to entertain the next question, SMBC Nikko Securities, Kikuchi San. Please start unmute icon. Ask a question please.
Kazuaki Kikuchi
Kikuchi speaking. Thank you. Two questions, please. Regarding the corporate, could you elaborate on that, please? Regarding individual, the impact by this failure was not that significant. Now on corporate, I think there are different views, positive factors, negative factors. Positive factors, various countermeasures because no matter which carrier you use, it will be the same, so you will — it’s possible that you will have more opportunities to utilize what you have.
On the negative side, by using — user using other carriers, are you going to suffer decreased revenues, or are there other options? Do you see some specific pros and cons, negative factors and positive factors?
Ikuko Hongou
Thank you for your questions. Mori-san was in charge of corporate business.
Keiichi Mori
Well, positive and negative factors. Regarding positive factors, positive size from the viewpoint of BCP. For instance, multi-carriers having redundancy trying to have redundancy or even before that cellular network and non-cellular, for instance, OTT voice service, OTT voice service, for instance, line or Cisco WebEx calling by Cisco. Those are available services.
On fixed line and mobile, combining them both once again and with same number receiving calls, I think that’s going to increase as well. So with this, even more than before, combining many things, different things, we could make proposals. That’s the positive side.
Negative side, make sure that the negative side would not become significant. We would like to keep making efforts, but with the other side of the coin. Those customers who are just using our network with this multi-carrier, it is positive that we’re okay, but switching to some other carriers for some of the usage, I think that could also happen. But we would like to minimize the impact from those. And OTT and other options included, the having redundancy in the BCP and making proposals to that direction is what we should really focus on.
Kazuaki Kikuchi
Thank you. Second question. Financial business, some questions for clarification. Significant increase, one of the factors, this effective accounting process effect, other than the accounting effects, I think you still enjoy increasing income. What contributed to that increase in income? Financial Group — in addition to that, Financial Group recurring profit, ordinary income, IFRS operating income difference from them from the last four quarters, I think it has difference widened in the first quarter, what’s the difference? That’s my second question. Thank you
Shinichi Muramoto
This time — show the slide please. Different slide, for mortgage loan, the fee income, accounting-wise, it was treated differently from the previous year. The fee income last year, for 15 years, it was deferred before it’s listed as income. But in the past two years, the liquidation of the receivables, we have accumulated experience. And this is listed on block. So the past ones, about JPY 17 billion in worth for the past that listed as the temporary income.
IFRS and JGAAP difference, Makoto, would you like to address this
Makoto Takahashi
Right. Compared with JGAAP and IFRS, especially in the first quarter, there is a significant difference, as Muramoto explained it to you that significant. Based on the JGAAP is one-time. Home mortgage loans, when it’s done, then fee income was listed. But under the IFRS, it’s deferred. The deferred portion, including the past ones, just like JGAAP, when loan was disbursed is recognized as revenue. But this time, the past portions were done, and that’s significantly reflected.
Kazuaki Kikuchi
Right. So accounting effects that contributed to the increase in income. In your policy, I think this is a focus area, excluding granting effect, where can you expect to see the growth in the second quarter and onwards? What’s your outlook?
Makoto Takahashi
[indiscernible], just be just to give you some additional information, excluding temporary effects, first quarter financial business is concerned year-on-year, based on IFRS, slight decrease, but almost the same as before. In terms of the actual provision indicators, especially the Jibun Bank loan, the outstanding balance Y-o-Y increase of 15%. It’s a very brisk business. Now, concerning credit cards, 1.2 million increase by OI, that’s the membership increase of credit cards.
So in terms of operation, we believe that there’s momentum, there’s good growth. In the first quarter, slightly the income was not that robust. But interest rate cost for mortgage loans and also sales promotion costs, those have some impact, but overall, these are the drivers, two other drivers, and we believe that we can enjoy good growth. Thank you.
Operator
Time is almost up. So I would like to take the last question. Mitsubishi UFJ Morgan Stanley Securities, Tanaka-san, please mute yourself and ask your questions. Thank you.
Hideaki Tanaka
Hello. This is Tanaka speaking. I have one question. So multi-brand value-added ARPU. Growth is stronger than I thought. Could you give us the breakdown here and the sustainability going forward? Thank you.
Ikuko Hongou
Thank you. Value-added ARPU. For Personal, Amamiya-san, please.
Toshitake Amamiya
Yes, value-added ARPU is growing. It is growing in general, financial settlements, au PAY and credit cards are growing. And in content, Netflix, we have bundled content with Netflix, and that is growing. And in others, electricity is also growing. And also the compensation is also growing, repair and compensation.
Hideaki Tanaka
What is the ARPU for electricity?
Toshitake Amamiya
That is not disclosed. I’m sorry. I see — and just for partition in finance, AU Financial. So this is loan. And so other revenue is included, so it’s not included.
Ikuko Hongou
Thank you, very much. We will now close the financial results briefing for the first quarter fiscal year ending March 2023. Thank you very much for your attendance.
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