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 emcee, Hongo from Investor Relations 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 Investor Relations 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 three items, related business results, one presentation, timing, detailed materials on our Investor Relations website. Please read the disclaimer in each document about what is listed in the material of performance, including what will be shared during the question-and-answer session and subscriber targets. First, President Takahashi will brief you on the summary of the business results, followed by the questions and answers session. Mr. Takahashi, please.
Thank you. Before question-and-answer session, here is the summary of the first half business results for the term ending in March 2023. In the Mid-term Management Strategy concerning satellite growth strategy, steady progress was made on KPIs in focus 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're promoting operations looking at the midterm. Thank you.
At this moment, we would like to take questions from the participants. We would like to take as many questions as possible from as many people as possible, so we would like to limit until you get the answer for your first question before moving on to your second question. We're planning to end this question-and-answer session at 6:00 P.M. Masuno of Nomura Securities, please go ahead.
Thank you. This is Masuno speaking from Nomura Securities. Question number one regarding mobile communication KPIs. In September, it was flat, and it seems that it's stalled. It's not growing. What would be the reasons if this is going to recover? ARPU with the refund cost of JPY 60. If it's JPY 3,980, that's a month-on-month decline of 6.8 percentage point in the third and the fourth quarter. How much decline do you expect to see on. It would be a JPY 15 difference. What's your view on that?
Let me 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. Let me turn to my colleague for additional comments.
Just as President Takahashi just said, for the second quarter, in August, or rather, in July, there was communication failure, so performance sagged. Thereafter, there was recovery. In October, it's almost back to normal. As far as the number of IDs is concerned, 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. The third to the fourth quarter. The overall communication ARPU in the first quarter, and if we compare that to the second quarter, there's a clear decline. Quarter-on-quarter ARPU, this time we have been able to increase it by JPY 10. In October, the report that I received is that it's moving quite favorably.
My second question. Toward 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. 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?
We're actually having discussions with respect to MTP, Mid-term Management Plan. Those are the topics that we intend to take up as part of those discussions. In terms of the composition, the three-brand composition is moving according to a plan. au accounts for a little less than 80% of the total in terms of the brand mix among the three brands. On top of that, povo and UQ, with the two combined, the number's up to 7.5 million. Therefore, I think the balance is quite good. On top of that, I think, two meetings ago what was pointed out. 4G au Pitatto Plan users, they are decreasing in number. 5G Max Plan users to grow. If that is to happen, then we will be able to recover our ARPU. That is our expectation. au Pitatto Plan users, their share or their ratio is gradually declining.
On the other hand, 5G MAX plan users are on the increasing trend. So far, I think the trend that we're seeing is quite good. Those who are not yet users of 5G MAX plan, I think there's quite a bit of potential to capture those users. We would like to maximize ID times ARPU toward next year. Having said so, of course, it's not going to be all that simple. We need to micromanage this business so that we can drive ARPU or achieve a favorable ratio or composition.
Okay. Yoshio Ando of Daiwa Securities, please go ahead.
This is Ando speaking from Daiwa Securities. Obstacles, if you will, that you should be able to overcome in order to grow them exponentially. If you have anything in mind.
May I turn to my colleague who's responsible for DX, which is growing most, for an answer.
The number of IoT lines grew to 28 million. That's what we're surrounding the IoT lines. There would be seeds for DX business. That is what we're trying to address and capture. We're putting together a structure and a framework to capture the seeds of DX around IoT DX Promotion Department. Once that becomes successful, I think this will start to grow quite successfully. On the financial business, if you could please answer. We have au Financial Holdings as an entity. We have a number of elements or parameters that we're looking at.
At the base of our business is au PAY settlement business, plus the credit card business, and the economic zone business. PAY and credit card users and 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. 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. We're going to continue to expand on this idea, and I think there's ample potential to grow our business in that manner.
Thank you. My second question, on page nine. There's a chart, step chart. JPY 14.8 billion, that's highlighted in red. I don't think that was included in the forecast. If you could please clarify whether it was part of the forecast or not. In the second half, there could be further fuel price hikes, and those factors are explained. In principle, 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. You're going to invest in cost and focus on MTP. There are factors that would push down the income and those that push up income. Two groups of such factors are mixed, and you looked at both to keep the forecast unchanged, I believe. If you could just sort out all of that and share your thinking on it.
What you mentioned up front. In terms of our stance, of course, we will continue to aim at increasing our operating income. That remains unchanged. As is written here, there's impact from communication failure and fuel price hikes, and these were factors that we could not forecast. In the second half, there could be subsidies from the government for fuel price hikes, these are factors that cannot be avoided, there would be some level of impact that will continue. Having said so, we will continue to stick to our plan to increase our operating income as we operate into the second half. What you mentioned toward the end. We would like to maximize our revenue and minimize cost. At the core of satellite growth strategy, there's telecom business, ID times ARPU. The status is just as I explained earlier.
We would like to have ARPU bottom out this year. Q on Q, it's starting to grow, Q on Q, price decline is stopping. We would like to continue with that. Growth areas for both DX and financial business are growing quite successfully. We would like to achieve a double-digit growth in those areas. Energy-related business, in the first half, as you can see, if you calculate, there's a decline in income, operating income. Into the second half, because the business was not good last year, there are factors that will push up operating income. We believe that it's going to fare quite well. On the cost side, there were unexpected costs that occurred. Even considering that, we're looking to increase operating income.
In growth areas, more so than before, you will redouble your efforts to drive the numbers. Is that what you're saying?
On telecom business, JPY 4,000 ARPU, if we can achieve that would be according to plan. For growth areas, we'll continue to follow the plan. The target is a double-digit growth, quite high. We would like to make steady efforts to meet that plan.
Right. Thank you.
SMBC Nikko Securities, Satoru Kikuchi, please.
Kikuchi, thank you. I have two questions. First, about churn rate. Second quarter, regarding churn rate, 0.94%. As a second quarter, I think this is high, almost unprecedented. This time, there was this communication failure. I think there was an impact from that. With this communication failure, in the first quarter, you gave us the explanation. 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, not the churn rate. With competition, increase of churn rate continued. On the other hand, in July, you couldn't acquire people, August and September, you kept making efforts. You worked so hard. As for the net addition, I think you are working so hard in that front.
This is the subscriber cost increase and customer-facing area, intense competition, and intense competition also in sales. How do you look at the current competitive landscape now regarding other companies? 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?
Amamiya, would you like to address that question?
First about the churn rate, 0.94%. Compared with the first quarter, it's almost flat quarter-on-quarter . In July, there was impact from that communication failure. That's included slightly, but intensification of competition might be one reason. MIC, the Ministry, has been working on the reduction of the switching cost, I think that's having an effect. As for the competition, is it intensifying? Not necessarily. In certain limited or local areas, yes, that's true. Is it a full-blown fight? 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 that fight in a certain local area? That's what's happening. In addition to that, this time, the new iPhones have been introduced, and they have become pretty expensive.
The customers are rather slow to make a move compared with the past. The Pixel is communicated upfront by Android that are less costly, perhaps can be utilized more. By controlling cost, we would like to fight in this competition.
Thank you. My second question, if you look at page six of this material, front loading of investment. Could you give us more information? 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 with this front loading, have you actually changed the substance of this investment? Can you give me a little more substance about this?
About JPY 50 billion. Regarding the substance, cost, and CapEx, both are included here. More than 50% is on the virtualized network.
The 5G core network, that's all virtualized. It's placed on the virtualized, but VoLTE nodes, they have become pretty old, and that actually caused the communication failure. The virtualization, we need to do the front loading compared with the plan. It's more than JPY 30 billion, more than half. That 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 to sales, around 12%. We would like to control it around 12% according to a Mid-term Plan, and we would like to keep this plan unchanged. With the allocation in the investment, we would like to do this in the midterm. JPY 50 billion.
JPY 50 billion. Does that mean that net addition to the CapEx?
No, that's not necessarily the case. Clarification. When you say front loading in this Mid-term Plan, is it going to be after that, the start of this Mid-term Plan? That's right. This JPY 50 billion in the three-year term on the virtualized network, the VoLTE nodes function, we were planning to do this later, but within the next three years, we would like to do this. That's one of the major factors.
Understood. This term or the next year?
Yes. Not something that we can do this year or the next year. Within these three years, somehow we would like to manage to do that within the next three years. Thank you.
SBI Securities . Moriki of SBI Securities , please go ahead.
This is Moriki of SBI Securities . Thank you. I have two 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. If the same users migrate, what is the increase seen in 5G ARPU? Is it accelerating in terms of data usage? 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?
Among the customers who are moving from 4G to 5G or no. 4G average traffic and 5G average traffic, if we compare the two, there's a difference of 2.5x . That is the reality. That's because of the migration of heavy users, there should be that level of difference. Once they migrate to 5G, what happens is my question. There are a variety of different users. It's hard to generalize. It's not just the heavy users who are migrating toward 5G. There are others as well. In the dialogue conversation, without 5G, a 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, 5G's performance itself is also up. Be it iPhone or Android, 5G performance is improved. Even if you watch the same video, the download speed is increased if you're using 5G. Without knowing, you're watching video a lot more than you used to with 4G. I myself, once I start watching TikTok, I can't stop.
That does happen, doesn't it? I think that is happening, in general. Killer applications, centering around videos. With killer applications, the usage of video is pushing the use of 5G, 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. How can we efficiently build the telecom network and translate that into increased ARPU? There's no more psychological pressure in terms of the limit of usage. Yes, that's a factor as well, I think.
My second question. There are competitive supporters, I think povo has a differentiating point. Are there any new developments with respect to povo? After six months of no payment, there could be termination. What would be the impact of that?
Among the povo users, there are a variety. We do analyze who they are. Those who start using povo at zero JPY, 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. The so-called influencers. We're having some influencers recommend povo. There are young people and the so-called Gen Z youth. They have different values. We're asking influencers to recommend and introduce povo to their peers. Those users ARPU. The usage of topping services, that is starting to rise. We're seeing that trend. We are analyzing the trend. We're working with Circles.Life in Singapore. After the contract, we need to increase the value, that's the kind of technology that this company is experienced in operating.
With that, I do hope that we can see increased ARPU. At this moment, you don't have to consider having a significant negative impact on ARPU six months down the road. I don't think we need to worry about that too much. Rakuten has its own pricing scheme, some of the users are migrating to povo, more so than initially expected. It's true that there are users with lower ARPU than we expected, with a multi-brand scheme, we're trying to make up for that so that multi-brand ARPU average can be raised. Users from Rakuten, they're not using povo very much. There are lots of users who are paying zero JPY. Yes. There are a lot of such users. Some of the Rakuten users who come to povo have lower ARPU than initially expected. That's also true.
Right. Thank you.
Next, UBS Securities, Tanabe , please.
Thank you for giving me this opportunity. I have two questions. Previously, about network CapEx, virtualization was mentioned. 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. Any suggestions are welcome.
I can't really share with you specific numbers. As you rightly said, with this virtualized network and also using AI and big data, we try to automate the operation. Operation cost, apparently, we believe, will come down. In this mid-term target, yes, we would like to make it a target. Yoshimura, anything else?
As you rightly said, in terms of operation cost, 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. In total, in the mid-term, yes, we would like to come up with the good cost numbers. Thank you. Second question, roaming revenues. Page nine, 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?
As you rightly said, at the beginning of the term, minus JPY 50 billion, that was expected at the beginning of the term. Actually, concerning roaming, 70% the Rakuten's, when the Rakuten coverage is higher than 70%, that's to be discontinued, this roaming. At the moment, since it has reached 70% already, with LTE, with such a level of base stations, there are some remaining areas with poor quality. They would like us to extend this a little more, and we are responding to that. Compared with what we anticipated, the decrease of roaming revenues is less significant. On full year, we said JPY 50 billion decrease, it's little less than that in terms of the effect. With Rakuten, it really depends on how they build their network, and we'll 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.
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. That estimate or outlook, it remains unchanged?
That's right. Gradually, "Please reduce this area, then 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.
Any other questions, please? Second round of questions. If anyone who's already asked questions would like to ask additional questions, please go ahead. Masuno of Nomura Securities, please go ahead.
Masuno, Nomura Securities. We heard about the personal business, corporate business, in terms of profit, under the Mid-term Management Plan, you may be on track. That means that in the second half, you will have to grow operating income more so than in the first half. 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?
Against the plan, I think we're more or less on track. That's where we are. In the first half, a 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. In the first half, those cancellations, negative impact was initially expected, and we can recover from that in one or two months' time. The trend that we're seeing is according to plan. Other DX projects and transactions, we do have KPIs that we set for ourselves, and we are accumulating numbers vis-à-vis KPIs. 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. We have come closer to the target. That's where we stand right now. Thank you.
My second question, I'm sorry for asking a detailed question, impact of electricity. In the first half with the refund combined, negative impact of JPY 14.8 billion. Refund of JPY 5.9 billion, smaller than expected. If you subtract that, the remainder is JPY 8.9 billion. I think electricity cost impact was JPY 2 billion to JPY 3 billion in the first quarter. In the second quarter, JPY 6 billion or JPY 7 billion. With price revision in November, that can be eliminated. Last year, there was a loss. Year-on-year, you may be able to see an increase in income. In December. Is that the correct interpretation? I'm sorry, is that about electricity? That's about au Denki or electricity business?
I'm sorry. Are you asking about au Denki? On one of the slides, negative factor JPY 14.8 billion. Are you talking about page nine?
Yes.
This includes refund, correct? A refund of JPY 5.9 billion, somewhere around JPY 6 billion. Excluding that, I think the remainder will be around JPY 9 billion. 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. Refund for telecom business and distributors support and increased electricity cost. 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, because of fuel price hike, there was a reactionary fall this time. There's a cap that used to be placed on a fuel cost adjustment vis-à-vis customers.
There's a limit to how much we can pass on in terms of the cost, for the purchasing side, there was no cap. Because of that, our performance deteriorated, that continued until September. That is why we saw a negative number in the first half. In the second half, the cap on fuel cost adjustment was lifted. It's the same with all the other companies. Because the cap was lifted and eliminated, we will be able to pass on the full cost. There's no impact from that. You were talking about what's going to happen from November onward. Last year, in the second half, because of rapidly rising fuel price, our business performance deteriorated. Now that the cap on fuel cost adjustment is lifted, we don't have to worry about that. I think we will start to see increased income.
A net total on a full year basis, I think we will be able to increase our income. JPY 10 billion of negative impact in the first half. Next year, you won't see that. If there's zero impact from a fuel price, a fuel cost, or energy cost, we'll have to run a simulation. Electricity rate increases, that's been happening of late, so we'll 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, let us analyze. We need to take time to analyze that. Thank you.
JP Morgan, Junya. This will be the last question because it's time. Thank you.
Junya, JP Morgan. I had one question about this inflation, its impact on the ARPU. You mentioned that iPhones have become rather expensive. If this situation continues in terms of consumers' behaviors, there might be tendency to go to more cheaper ones. 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?
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 au to UQ mobile, there are customers migrating. 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, we need to make sure that will bottom out and we can recover it, and that seems coming on track. We need to control those numbers in both aspects so that we can see the growth in communication as well. That's the kind of operation we'd like to focus on. Thank you.
Thank you very much for asking so many questions. 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.