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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Thank you very much. Now we would like to start KDDI Corporation Financials Results Briefing for the First Quarter of the Fiscal Year Ending March 2019.
Thank you very much for taking time out of your busy schedule to attend this conference call. I am Horii, General Manager of IR Department, and I will serve as the moderator today. This briefing will be interpreted simultaneously into English and will be distributed on demand on our IR website later. We thank you for your understanding.
Let me introduce the attendees today. Makoto Takahashi, President; Yuzo Ishikawa, Executive Vice President and General Manager of Consumer Business Sector; Takashi Shoji, Senior Management Executive Officer, Director and General Manager of Solutions and Global Business Sectors; Keiichi Mori, Managing Executive Officer, Director and General Manager of Business IoT Promotion Sector; Kei Morita, Managing Executive Officer, Director and General Manager of Life Design Business Sector; Yoshiaki Uchida, Executive Vice President and General Manager of Technology Sector; Shinichi Muramoto, Senior Managing Executive Officer, Director and General Manager of Corporate Sector; Nanae Saishoji, Administrative Officer and General Manager of Corporate Management Division.
We have 3 financial results related materials and 2 TSE disclosure materials posted on our IR website. Please read the disclaimer regarding the performance and projected subscribers numbers included in the material and referred to in the Q&A session today.
Today, President Takahashi will first explain the financial results followed by Q&A. President Takahashi, please.
Thank you. Thank you very much for participating in this presentation. I would like to present the financial results for the first quarter of the fiscal year ending March 2019 using the other materials.
First of all, KDDI would like to extend its sincere condolences to the people affected by the heavy rain in July 2018 in Japan and to their families. The KDDI Group is fully committed to supporting the efforts to recover the areas affected by the disaster.
So today's presentation has 2 points: integration of telecommunications and life design and highlights of financial results for the first quarter.
Starting with the integration of telecommunications and life design. Please watch the video. [Presentation]
For the integration of the telecommunication and life design, the video that was watched, and we'd like to have it well penetrated in the commerce business as well.
In this area, our base business, telecommunication business, forms its core in the service area such as commerce, financing, energy, entertainment and education, utilizing various technologies such as IoT and 5G, which will be fully developed going forward. We aim at offering new experience value beyond individual services and price plans.
Next, about Netflix Pack. Among younger generations, video viewing using smartphones is increasing, but paid video services are yet to be fully developed. But currently, content price and the telecommunication data price are hard also for the end users. By aligning with Netflix, we have announced the very convenient set of discount plan to eliminate those hurdles.
This alliance is not just to provide products and the price plans but to aim at offer better experience value. It's based on the sense of value shared between the 2 companies. The integration of telecommunication and life design contributes to the corporate customer business through IoT.
KDDI IoT solution service provides integrated support to the productivity improvement and cost reduction initiatives. The factory package to be launched this month provides one-stop support for sensor installation and the detection of precursors to malfunctions based on data collection analysis and alert notice. The monthly packet service allows to reduce initial cost, and this is based on so-called subscription model that we'd like to provide.
Next, I'd like to talk about KDDI IoT worldwide architecture. In addition to automobiles, we have expanded its scope to various IoT devices. And that way, we'd like to expand our service. We are working together with global partners such as Toyota and Hitachi.
KDDI's direct connections with local carriers, combined with alliance with SORACOM, connect telecom carriers for more than 100 countries and regions. We'll set an environment where globally operating the corporations can have seamless operation from device control to data analysis without being dependent on the lines.
Next, about SORACOM. SORACOM, a leading company in the IoT domain, is set to offer button devices for AWS IoT one-click service using KDDI's LTE-M network, and we expect various use cases to be created going forward. On the right-hand side, it's about global deployment. Here, in addition to collaboration with IoT Worldwide Architecture, collaboration with KDDI's overseas subsidiaries on sales will start first in North America and then in Southeast Asia, expanding in stages to other regions. KDDI Group as a whole is to promote this business.
Next, measures for the 5G era. From the left-hand side. Telexistence with the robot being the other self, and unmanned automatic driving and drones working in disaster areas are the examples of a new world to be brought by 5G. To realize such a world, we will conduct innovative and practical tests. In the 5G era, all the devices around us will be connected through telecommunication. We are pleased to please you anytime, anywhere in every scene of private and business lives of our customers, that's what KDDI is striving for.
Next, I will talk about highlights of financial results for the first quarter. So first, this is the highlight for the consolidated results for the first quarter. The left side is the consolidated operating revenue in the first quarter, JPY 1,221.7 billion. And the right side is operating income, JPY 288.9 billion. So we achieved both higher revenue and income. We are making steady progress towards the current midterm targets.
Next, let me explain the consolidated operating income factors for year-over-year change for the first quarter. Now starting from the left. Mobile communications revenue decreased by JPY 11.2 billion due to one-off revenue decline from new price plan, among other factors. But thanks to the increase in value-added ARPA revenue and profit increase in the Business and Global Services segments, operating income increased by JPY 7.4 billion year-on-year. We are progressing steadily towards the full year forecast.
Next, au Pitatto Plan and au Flat Plan. This shows au Pitatto Plan, which is an economical plan tailored to customers' data usage volume, and au Flat Plan that gives value for money in high-value data communication. As of May 31, 2018, the number of cumulative subscribers has exceeded 8 million, and we have already exceeded 9 million in July.
Right chart shows the comparison of the selectivity between July last year right after launch and July this year. It was 24% in July '17, but now it's up to 41%. As the ratio of high-value -- high-volume au Flat Plan is increasing, we expect it will contribute to higher au ARPA going forward.
Next, price plan satisfaction. It has been a year since new price plan started. Customer survey shows that the satisfaction of price plan has risen. We will continue offering Netflix Pack and experience value exceeding customers' expectation. That is not just about price plans.
Next is au churn rate and mobile IDs. Let me explain the operational data for the first quarter. Left side, au churn rate was 0.71%, which was an improvement of 0.2 percentage points year-on-year. Thanks to the dramatic improvement in au churn rate, number of mobile ID, shown on the right side, is growing steadily to 26.6 million.
Next is au ARPA and mobile communications revenues. Left side. Regarding au ARPA, the shift to smartphone and the increase in the number of large-volume data plan subscribers led to an increase in data ARPA -- ARPU. However, this is preceded by a one-off revenue decline from new price plans. And therefore, au ARPA decreased by 2.2% year-on-year. Right side. Mobile communications revenue is showing a similar trend.
Next, au Economic Zone index and value-added ARPA. Life design services business. From the left. au Economic Zone gross merchandising value was JPY 561 billion. au Economic Zone sales, in the center, was JPY 144 billion. And right side. Value-added ARPA was JPY 660. They all grew at a double-digit rate year-on-year and are trending steadily.
Next, au Economic Zone customer base. The operational data of life design services business is favorable, thanks to the increase in the number of au Smart Pass Premium members; the increase in settlement revenue, including au WALLET credit card; and the increase in commerce revenue.
The left chart shows that the number of au Smart Pass Premium members has reached 5 million. On the right side, this chart shows that the number of au WALLET card for prepaid card and credit card combined has increased to 23.6 million.
Lastly, summary. Under our business strategy, we are striving to provide experience value through the integration of telecommunications and life design and released au Flat Plan 25 Netflix Pack and are promoting new initiatives of IoT and 5G.
Customer satisfaction for price plans improved after the launch of our new price plan. The number of mobile IDs is growing steadily, and life design business is also progressing steadily. We are progressing steadily towards the current midterm targets.
That concludes my explanation on the financial results. Thank you very much for your attention.
Now we'd like to move on to Q&A. If you have more than one questions, please wait for the answer for the other first question to ask your second question.
Now the operator is going to explain about how to make a -- how to ask a question.
[Operator Instructions] First question from Nomura Securities, Mr. Masuno.
Yes, Masuno from Nomura Securities. I have several questions. I will go one by one. First question, the impact coming from the other new price plan to the ad revenue, JPY 1,000 per month. So for the quarter, it's at JPY 3,000 to the 7 million to 8 million subscribers, so that will be more than the JPY 20 billion impact on the ad revenue. So it was already known. And the profit for the period from April to June was not expected to grow so strongly because of the campaign, the new price plan. What about July and August because the other set of discounts that will be removed gradually? And so the other -- from July to September and from October to December, what is your expectation of the revenue and profit trend?
Let me answer that question. You're right. The mobile -- the operation and revenue for April through June reduced. It was decreased. The au Pitatto Plan and the Flat Plan we're very well accepted and welcomed by the customers, and the customer satisfaction is improving. And so we believe that we are servicing, that was a relatively inexpensive way. But of course, there is an impact coming from campaigns towards the second half of the year. The impact of such price plan or campaign that will be less. So the -- we expect that the ARPU to begin to rise again. So the price is now lower than before. But as you can see from the au Pitatto Plan and Flat Plan, the more you use those, the prices will contribute to the increase of the communication ARPA. So we'd like to add a focus on content as well, so that the ARPA will increase and so that the communication ARPA will increase and also the Netflix that would be part of the picture to increase our business. And so that, ultimately, that we would like to achieve the positive trend for this year.
Some supplementary comments or rather about the clarification for the other price plan. So the -- you said that this campaign is provided to 7 million to 8 million subscribers. The upgrade -- this is only for the upgrades and new subscriptions. It's not that all of the 7 million to 8 million people are subject to this campaign. So that's for one clarification. Thank you.
So going forward, the impact will be less. And as to ARPA on the full year basis, it's now seeing a very good start.
Next question is about consumers. The 5 gigabyte, making 25 gigabytes for Netflix accessible. And the other companies are already have such level of gigabytes. And mobile also, the Y!mobile also made an announcement today. And there are many people who want the high volume, and I think that with Netflix that this is at least the first step. But what about the 50 giga? Maybe you can have much higher volume service offering.
Well, the Netflix plan -- this is the very first bundling case of the communication and the content. So we'll start with the 25 giga. But as you pointed out, probably a much higher volume is expected among the consumers. And of course, I know that there are various other plans out there in the market. So going toward 5G, we would like to certainly give consideration to higher volume options.
What about the announcement of Y!mobile today?
Y!mobile's price, well, it was -- it could certainly give a shock to the market. But our plan -- the au Pitatto Plan is based on a completely different concept that we have 20 giga, 30 giga plans as the Pitatto Plan. So we do not think that we need to follow the suit of Y!mobile right away. But as Mr. Takashi said, we would like to give consideration to different needs of different consumers, users.
As to Y!mobile, it is SML. And on your case, I think it is UQ for the decision making.
UQ's price plan is being considered I think by UQ itself. So I don't think I'm in the position of making any comment on that.
Understood. My last question is about corporate business. So you touched upon IoT and initiatives, but when it comes to the sides of the business and the gross pace of business, need to be there so that we can understand the whole picture of your business. On the midterm basis, what is expectation as to how to increase your business, expand your business and at what rate?
Here is Mori answering your question.
Within several years, JPY 100 billion -- we are striving for the level of JPY 100 billion in several years. So how would that compare to the current level? We are talking about expanding a business 2x or 3x.
Next question is from Daiwa Securities, Mr. Ando.
I have 2 questions. First is mobile ID and the churn rate. Your churn rate has declined significantly -- improved. So normally speaking, the number of mobile ID should go up accordingly. So what is the competitive landscape? So what is the numbers behind this quarter? And what kind of competition led to the results you had in the number of mobile IDs? Could you elaborate?
In this first quarter, our Pitatto Plan's competitiveness was effective and was successful. In the entire market, the market is rather quiet, but we were able to acquire subscribers, and we also had good aftermarket, after-follow, not just the price plan, and that is why we saw the improvement in the churn rate. So your question is MVNO and MNO. In MVNO, the growth has not been remarkable, but I think MVNO is acquiring subscribers steadily. MNO's competition has declined or softened somewhat. Does this answer your question?
My second question is on the global segment. In the first quarter, the operating income segment operating income doubled. What happened in this segment, could you elaborate? And will this level of operating income continue going forward?
So Mr. Shoji?
Yes, this is Shoji speaking. First, you can see in the footnote of this material the Myanmar business account settlement timing is stabilizing. And therefore, we aligned their account closing to the Japanese account closing this time. And so they have 3 months more performance included this time, so that is why it's that much higher, Myanmar and Mongolia and data center, NSI. Excluding the Myanmar account closing impact, we were able to grow from all these factors, so that was our first quarter. That said, to answer your question, the first quarter had some extraordinary factors. But going forward, unless there are big problems, unforeseen problems, they will be able to generate stable revenue and operating income, I think.
Yes. I have additional question. So this Myanmar 3 months' worth of business, excluding this Myanmar's additional 3 months, what was the level? If you have the numbers or more details, please.
So the level is -- so your question is -- we saw a strong growth in the first quarter. We also had this positive factor of 3 months' worth of additional business in Myanmar. But can we multiply this by 4x? No, that will be too high.
Mr. Ando, are you satisfied?
Yes.
[Operator Instructions] Next question from UBS, Mr. Takahashi.
Takahashi from UBS Securities. About life design business, which is growing very steadily, including GMV. And in your presentation, you touched upon the payment and the contents. Could you please elaborate on that? For example, what about Wowma!? What is the current status of Wowma!, for example? Could you please elaborate?
Mr. Morita is going to answer your question.
As you pointed out, so the au Economic Zone GMV, the JPY 561 billion Y-o-Y, the 38.2% -- year-on-year, 38.2%. On a full year basis, it will be about JPY 2.46 trillion, that's the target. And the progressive rate is 22.8%. Progress rate is 22.8%, so it is growing very steadily. So you asked us to elaborate on individual businesses. A basic way of thinking is as follows. In the au Economic Zone, the EZ, electricity and -- which is good for the retention; the [ au Smart Pass and billing ], on the other hand. So it's not that the [indiscernible] strength in just one of them, but both of them. That's our basic stance. Have I answered your question?
Could you give me some breakdowns, for example, for each service? What about momentum for each service? And which service is the strongest or stronger than others and so on?
As to value-added ARPA, the Smart Pass has the biggest impact on the profit because of the increasing number of subscribers. Now it exceeds 5 million -- the subscriptions. So Smart Pass Premium or Smart Pass Premium percentage against all of the other Smart Pass is increased to 32% in the first quarter, driving the value-added ARPA. Other than that, in the life design area, for example, EZ, more specifically Wowma!, both the transaction volume and the revenue are growing very steadily. And for the energy service, the au Denki, the number of subscriptions is growing almost as planned, so that is our understanding. Thank you.
I have one more question. As for churn rate over the -- well, it's now improved, very low, lower than that of last year's. But what about in the context of life design or the users using that life design services, you think that there's a benefit coming from the decreasing churn rate to life design as well?
Here is Takahashi.
Yes, basically, yes. As Mr. Morita said, now GMV is growing for the power business and commerce business and also the credit business. They are working very nicely to contain churn rate. So through the integration of telecommunication and life design, by combining the products on both sides, we can improve churn rate. We can improve retention rate, and we think it's very important.
One more question. For life design and for others, you did some M&As in the past several years. And the retention on au side, where you talked about how the retention is getting better, but what about the synergy risk, the companies that you have bought? Are you seeing any synergy emerging from the acquisitions in the past?
Yes, for example, J:COM, Shop Channel. For example, for J:COM through Smart Value services, the fixed line services and the mobile services are combined to contain, generate. And as to the increasing what the -- it is actually contributing to the increase in subscribers on both ends. And as to the companies that we have bought and the synergy with them, I understand that it's actually our homework to show that to you. That would -- next year, fiscal year, we will certainly like to show that to you.
Does this answer your question, Mr. Takahashi?
Yes.
Next question is Mitsubishi UFJ Morgan Stanley Securities, Mr. Tanaka.
This is Tanaka speaking. I have 2 questions, so I would like to go one by one. First, Smart Pass Premium. From the normal Smart Pass, you pay JPY 100 more to shift, to transfer. What is the driver, biggest driver, or the attractiveness that drives the subscribers to move?
Morita would like to respond to that.
Smart Pass Premium, there are 2 distinct characteristics. One is the benefit that you can receive; au Every day, there's benefit that you can receive every day. And furthermore, it's the service that gives you security or sense of security. The security issues of smartphone is drawing attention. So in Smart Pass Premium, we have reinforced the security aspect, and I think this is gaining support.
I understand well. My second question is on the Page 7 of [ Tanshin ], global segment. You said restructuring the low profitable business. What kind of business have you withdrawn or restructured? And how much impact did this have on improvement of your profit margin?
Yes. Mr. Shoji?
Shoji speaking here. So I would like to refrain from giving you numbers, but one is in the U.S. MVNO business is being conducted, and this is in a difficult situation. So we have downsized this business. And another is the telephone wholesale business. But the general legacy voice business is shrinking globally. And therefore, regarding this wholesale business, we are reducing this business little by little. There was a sizable revenue but not much profit impact. So that is all.
So in that sense, this wholesale business, this was mentioned when you announced the full year results, but you will -- you are now having a new strategy in the MVNO.
Well, actually we've had this for about 1 year. This U.S. business has been reduced little by little, and we've been mentioning this for about a year now.
Next question, Merrill Lynch Japan, Mr. Kinoshita.
Yes, Kinoshita, Merrill Lynch. I have a question about cash flow. In [ Tanshin ], the table of the operating cash flow, the sales receivables are reducing due to the full year installment plan, I believe. And as to others, there are some negative numbers from the JPY 53.2 billion to JPY 24 billion. So the negative numbers have reduced and probably absorbing some -- the decrease in the operating cash flow. So what is the background? And in these developments of cash flow, when it comes to the additional or the aggravation of the sales, the receivables can be explained. How can it be explained?
Here's Muramoto.
And as to others, there's some -- the one-off factors in the previous year. In June, there were some -- the au points became invalid, and there's some reversal of the provisioning. So there was some impact on the cash flow, and also there's a decrease in the payables, which also absorbed impact. And the installment, the receivables are now more stable. And going forward, we do not see any one-off special factors, and so it would not fluctuate significantly.
What are you -- what is the cause for the reduction in the other payables?
Well, there's a progress in the payment, CapEx and so on. Compared to the previous year, the payment of CapEx and so on has progressed.
Okay. And one more question and details about life design services segment. The breakdown of the revenue is available in the closing results materials, and the value-added ARPA is growing very steadily. But others, on a year-on-year basis is on the decrease. Why is that?
Morita-san?
Value-added ARPA -- other than the value-added ARPA, what we call others, that's what you're asking about?
Yes.
I'm sorry. In the group company, there was a change from the gross accounting to net booking, from gross booking to net-based booking. That's the reason. So in reality, it is not a decrease. It looks like a decrease because now it is booked on a net basis.
Yes. On a full year basis, the full year plan reflects that? Because the plan says the increase of JPY 262 billion.
Yes. Yes, that included.
So the part of others will increase significantly, is that what you're saying?
Yes.
So any other questions, please?
[Operator Instructions]
So I do not see any questions. So we would like to close the financial results briefing for the first quarter of the year ending March 2019 of KDDI Corporation. Thank you very much again for your attendance.