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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 for waiting. We will now start the Financial Results Briefing of KDDI Corporation for the Third Quarter of the Fiscal Year ending March 2019. Thank you very much for taking time out of your busy schedule to attend this meeting. I am Horii of Investor Relations department, and I will serve as the moderator.
This briefing will be interpreted simultaneously into English and will be distributed live on the Internet, IR website and on-demand later. I would like to ask you for your understanding.
Let me introduce the participants today. From the center to the right, Mr. Takahashi, President and Representative Director; Executive Vice President, Uchida; Executive Director of Technology Sector, Senior Managing Executive Officer and Executive Director, Solutions Business, Shoji; Managing Executive Officer and General Manager of IoT Business Development division, Mori. Next, from the center to your left, Executive Vice President, Executive Director, Consumer Business, Ishikawa; Managing Executive Officer and Executive Director of Life Design Business Sector, Morita; Senior Managing Executive Officer and Executive Director of Corporate sector, Muramoto; Administrative Officer, General Manager of Corporate Management Division, Saishoji.
Today, 3 financial results-related materials are posted on our IR website. Please refer to the disclaimer in the materials regarding the statements made on documents, performance targets and projected subscriber numbers, et cetera, explained in Q&A sessions today.
First, President Takahashi will explain the financial results followed by Q&A. President Takahashi, please.
Thank you so much for joining us today for the results presentation of KDDI in spite your busy schedule.
Now I'd like to begin the explanation on the results for the third quarter of the fiscal year ending March 2019, starting off with the highlights of financial results. On the left-hand side of this page, consolidated operating revenue was JPY 3,371.7 billion (sic) [ JPY 3,771.7 billion ]. On the right side, operating income was JPY 822.5 billion. We achieved continuous growth in both operating revenue and operating income.
With regards to factors of change for operating income from Q1 to Q3 year-on-year, from the left, due to the negative impact from the price discount, au ARPA revenues were down continuously from the first half by JPY 36.5 billion. However, driven by higher MVNO revenues and value-added ARPA revenues as well as higher income in Business and Global segments, operating income increased by JPY 8.7 billion year-on-year. Factors behind lower income in Others include impact from the expiration of au points in the last fiscal year and so on. For your information, for the 3 months of Q3 alone, operating income was lower, which was worse than our internal plan due to worsening of competitive environment and increase in handset sales costs. There is a possibility of further sales costs in the future, however, we are aiming at our current midterm planned target of JPY 1.2 trillion while implementing necessary measures.
Next is on domestic telecommunication business. On the left, au ARPA and -- as well as au ARPA revenues. First, on the left, au ARPA in Q3 was down 0.7% year-on-year.
On the right, au ARPA revenues from Q1 to Q3 were also down 2.7% year-on-year. However, the impact from campaigns we did when we introduced au Pitatto Plan and Flat Plan are now filtered through or peaked out. And due to increase in high-volume data plan associated with data usage increase and higher penetration of smartphones, au ARPA has reversed year-on-year in January and we expect au ARPA to reverse in Q4 as well.
Next, let me explain price plans, Student Discount. We started new student discount campaign in December. Rates are so attractive they are appealing to their students and their families for their usage of smartphones at ease.
Furthermore, we newly introduced 5-gigabyte data plan exclusively for Student Discount to give more options depending upon how they use the data and also expanded Netflix plan applicable to Student Discount. We will continue to make efforts to provide our customers with services of good value for money and suit their needs.
Let me next talk about au churn rate and mobile IDs. On the left, with regards to au churn rate, payment plans, such as au Pitatto Plan and Flat Plan, au STAR membership privilege, life design merchandising as well as bundling and so on, have contributed to the improvement by 0.6 point year-on-year to 0.72%.
On the right, with regards to mobile IDs, thanks to lower au churn rate and net adds of group MVNO, mobile IDs have been steadily increasing to 26.8 million.
With regards to TV commercial popularity ranking, CM Soken Consulting announced 2018 TV commercial popularity ranking by brands and au TV commercial was awarded #1 for 4 years in a row. Well-known Santaro series and others gained support from many people throughout the year. We are aiming at being the company where many consumers feel familiar and close by.
From this page onwards, I am going to talk about new fields of growth, which are future growth drivers. First off, with regards to the progress of KPIs in life design segment. On the left, gross merchandising value of au Economic Zone in Q3 was JPY 658 billion or JPY 1.826 trillion on a cumulative basis from Q1 to Q3, which was 74% progress against full year target of JPY 2.46 trillion.
On the right, au Economic Zone sales were JPY 491 billion on a cumulative basis from Q1 to Q3, which is 23.7% growth year-on-year.
Both gross merchandise value and sales are steadily growing.
Next, value-added ARPA. Value-added ARPA in Q3 was JPY 720, which is up 22% year-on-year. In Q3 last fiscal year, growth was up 15.7% year-on-year. So growth is accelerating. Behind this growth is an increase in settlement commission as well as strong trend of Netflix plan, which we started in August. Furthermore, the number of members of au Smart Pass Premium reached 6.5 million members at the end of December and still growing towards the target of 7 million members at the end of this fiscal year, which contributed well to the improvement of value-added ARPA.
Next, integration of telecommunications and life design. In the third quarter, we are expanding life design business domain. Top left, in commerce, discounts on au mobile phone usage fees of up to 10% of amounts spent on Wowma! shopping started on January 16. Lower left, in energy, we consolidated ENERES as a subsidiary on December 27.
And top right, in finance, we started au iDeCo. And center right, we started Netflix plan student discount. And lower right, in education, we developed comprehensive partnerships with KidZania.
So if customers use multiple nontelecom life design services that have strong affinity with telecom services, we can increase touch points with our customers and strengthen our customer retention because of the stronger engagement and we understand this better now. So we will continue focusing on customer retention enhancement. We will continue promoting the expansion so that our customers become more familiar with them and build the future growth platform.
Next, expansion of au Economic Zone. We plan to start the QR code payment called au PAY in April 2019. We are a latecomer in this field, but because you can start right away from au WALLET app, used by 9 million monthly au WALLET users of the total 20 million-plus au WALLET users and because it has balance of over JPY 100 billion combining au WALLET points and prepaid card balance, we think we can use this as our strength. And we have the partnership with Rakuten, so we have smartphone settlement, which becomes available in 1 million locations soon after the launch, and therefore, we think we can compete sufficiently and effectively.
And to repeat myself, by accelerating the circulation of over JPY 100 billion balance through better convenience with QR payment, au Economic Zone can expand further, and so we will expand our service and available merchants in life design domain.
Next is our initiatives towards the 5G era. As part of our migration to 5G, we announced in November last year that 3G services will end on March 31, 2022. In order for 3G service users to migrate to smartphone compatible with 4G VoLTE without any concerns, we prepared dedicated price plans and support services to offer meticulous customer care.
While we accelerate the migration from 3G, to promote the shift to smartphone, we will also switch our network facilities from 3G to simple 5G. As 5G will be combined with 4G area, they will be operated in parallel. For the first few years after launch, we will enhance our existing 4G network and achieve more than 1 gigabit per second maximum download -- downlink speed. We will take thorough measures to prepare for the 5G era.
Next, our initiatives with Toyota Motor Corporation. We announced at the beginning of this month that we will use global communications platform jointly announced and developed with Toyota and provide connected environment with Toyota and Lexus vehicles launched in the U.S. from fall 2019. The scale will be a few million cars by 2024. We collaborated with AT&T for local 4G LTE this time.
In addition to the U.S., we plan to offer services in Japan and China in 2019 using this global communications platform. We are also preparing for the launch of IoT World Architecture in fiscal year 2019 utilizing this global communications platform.
In addition to direct connections with local carriers, we will collaborate with our group company, SORACOM, and connect over 120 countries and regions in succession. This will be our new growth area.
Next, let me talk about our demonstration experiment towards the commercialization of 5G. 5G is expected to solve social challenges in new applications leveraging its advantages. As part of our effort to utilize 5G for labor shortage, disaster response and regional revitalization, we conducted a demonstration experiment on remote control of construction machines using 5G with Obayashi Corporation and NEC. We succeeded in simultaneous operation of 2 construction machines by 1 operator last December. Construction sites face labor shortage and lack of qualified personnel, and disaster recovery sites face challenges of risky tasks. And remote operation using 5G can be leveraged to resolve such challenges.
We will continue contributing to the resolution of social challenges using 5G through these initiatives with our partners.
Next is smart drone platform. We have a video again this time, so first, please look at the video on the overview of this platform. Thank you. [Presentation]
Thank you very much. The government and the private sector are pursuing integrated measures to enhance our international competitiveness in drone market, and we launched smart drone platform initiative in 2016 and have promoted this as our frontrunner.
Drones are expected to utilize IoT and 5G to solve social challenges, including security, disaster countermeasures, safety inspection, logistics and regional revitalization. We see increasing regional revitalization initiatives and are conducting various activities with local municipalities. We will use this platform as B2B total solution service and further expand it to offer wide-ranging services to B2C clients and promote our efforts to launch a full scale service in 2020.
And lastly, KDDI DIGITAL GATE. It has been thriving since it opened in September. We have contacted over 100 companies by the end of December through consultations and tours, which is generating various kinds of orders. Our approach of being involved in client's business challenges and to developing total IoT solution from business process to prototype development is winning our client's trust. It is serving as a place to create new 5G and IoT businesses, and we will continue utilizing it as an important contact point with our clients.
Summary. First, the third quarter performance. Revenue and income have both grown continuously. The revenue base in the nontelecommunications field is expanding steadily. And in the business strategy, we are promoting integration of telecommunications and life design and promoting initiatives towards the 5G era. And we are expanding 5G and IoT initiatives with partners.
This concludes my briefing on financial results. Thank you very much.
Now we'd like to receive questions from participants. We'd like to answer as many questions as we may have as possible. [Operator Instructions] Now please follow the explanation of the operator as to how you can ask questions.
[Operator Instructions] First question is from Daiwa Securities.
I have two questions. First, for this quarter, does the aggressive sales of handsets going on in the industry, and you had the impact from that, but in the future, what would be the anticipated impact on the cost -- or on your sales going forward and in the third quarter also? And until when do you think these aggressive sales activities in the industry will continue? Do you think it will linger after March as well? What is the view on those?
Thank you so much. From Consumer division, Ishikawa-san is going to answer your question.
First, in the market, competition is being intensified. And about the impact on our costs, I think there are 3 impacts. Commission and points are increasing. In addition, it's not really the direct impact from the tougher competition, but in the third quarter, there was an impact from the discontinuation of the service of 3G. The depreciation -- accelerated depreciation impact is included in the third quarter that worsened the profit more than we anticipated originally. And there's another impact for the specific handsets, sales were lower than we expected for some models. So there was some increase in inventory. For that, there was an impact from IFRS. So those were the impact on the cost side in the third quarter. And another point, to your second question about the outlook for the future, my answer is that honestly speaking, I don't know. Market environment now is no different from the market environment we witnessed in the third quarter. So we are trying to do the cost control well so that our cost increased that we saw in the third quarter will not recur, and we are working on various initiatives such as mix improvement and so forth to control the costs. Thank you.
Let me follow up with some numbers. In Q3 personnel, there was revenue lowered by JPY 11.5 billion. As Mr. Ishikawa just mentioned, handset sales cost increased by JPY 9.9 billion. Impact from the handset cost increase was JPY 9.9 billion. Although we have not disclosed the details, but there was a promotion immediate points impact on the inventory increase. Altogether, negative impact was JPY 9.9 billion. IFRS #15 had a positive impact of JPY 1.6 billion, so in total, revenue was lower by JPY 11.5 billion. I hope we answered your question or questions. Yes?
My next question, second question, is on the impact from DOCOMO price discount. I'd like to make sure of your stance to respond to that, including the press coverage in newspapers. How are you planning to respond to DOCOMO's price reduction? What are your plans to fight back? What is your anticipated impact on your outlook over your profit for the next fiscal year? Would you please give us your view on those points?
Okay, let me answer your second question. So let me sort out the facts. First, there were many things happened when we announced our Q2 results. We have separation price model, separating price for communication from handset, and for KDDI, in summer 2 years ago, we introduced Pitatto Plan and Flat Plan. We have already introduced a separation plan and it's been 1 year and 9 months and impact has been about JPY 380 billion. We have returned back to our customers worth JPY 380 billion. In addition, the other day, DOCOMO announced JPY 400 billion return to their customers. So the difference between the 2 is about JPY 20 billion between us and DOCOMO. In April -- around April, DOCOMO is going to make an announcement about their separation price model so we'd like to see the level of their separation price model, and we compete against them in the industry, so we'd like to see their level of the separation price plan first. And if our Pitatto Plan is lower, then we'd like to do something. We have already returned JPY 380 billion back to consumers -- or customers. That's our stance. As we explained when we announced our Q2 results, this year and next year, continuously, we'd like to achieve sustainable growth. That's our important target. So we are putting all our forces together in the whole organization of the company to achieve strong -- fundamentally strong, sustainable business to reinforce our sales capabilities. So it's too early for me to talk about the outlook for the next fiscal year, but that's our stance as of now.
Next question, UBS Securities, Mr. Takahashi.
Yes, this is Takahashi from UBS. I have 2 questions, so let me go one by one. First of all, this is related to the earlier question, so the handset price discount is now becoming more intense. And with that, the user's mobility, is it progressing? Is it increasing? Or looking at the churn rate, according to what you said in your presentation, your churn rate is lower than last year. Compared to the second quarter, it inched up, but this may be a regular seasonal factor. Is that your understanding? This price discount competition, is it impacting the churn rate? Could you elaborate?
Yes, first of all, to answer your question simply, MNP mobility increased slightly from last year. And on a Q-on-Q, quarter-on-quarter, basis, last year, because of the impact of Pitatto Plan, it did not go up, but usually third quarter goes up. We see an increase in the third quarter usually, and so this is not a concerning level. The total churn rate is lower than last year, so we are not worried about this.
My second question is life design, so gross merchandising value, including sales, is growing steadily. Au WALLET now exceeding JPY 20 million. What is the actual usage status? So as a background of the growing GMV, the active user base is expanding? Or are some specific users are using the service more frequently, is that a bigger factor? Do you have any analysis that you could share with us?
So Mr. Morita will explain.
Yes, this au Economic Zone GMV is growing steadily and the driver is, as you correctly mentioned, payment settlement and the usage status is being analyzed from various perspectives. But it is not just in some particular users. We think this is an expansion of the customer user base. And one more piece of information, the driver of this growing GMV is settlement, but there's another movement, which is energy sector. We're seeing a stronger growth in energy segment.
If you have the active user ratio, if you have such breakdown, I would very much like to know.
I'm sorry, I would like to refrain from mentioning numbers. Thank you very much.
Next questions are from Nomura Securities, Masuno-san.
My name is Masuno from Nomura Securities. I have 2 questions, first is on the price. At the end of the year, Mr. Takahashi, I read the interview article and you said you'd reduce the price worth JPY 10 billion. But I'd like to confirm, this JPY 380 billion in addition to the lower monthly discount or this is purely the tariff decline? Or including JPY 1,000 per month, you have a JPY 10,000 per month -- or per year discount -- sorry, JPY 12,000 per year, so it's JPY 120 billion. So does it include that? And au ARPA in Q4, you said you'd expect it to reverse. So if you look at JPY 12,000 per year monthly discount factor, then it should go up. But if nothing happens, then because of this price discount measure, what will happen to this reversing trend? Would you please give me the overall view?
First, to your first question, about JPY 380 billion, what we have calculated is that it's been 1 year and 9 months since the start, that's number one. And number two, the breakdown, I cannot really disclose the specific breakdown in terms of the numbers. But the price reduction due to the introduction with the separation plan and the campaigns, those are lower revenue from campaigns I included. And Santaro series and so forth was implemented to increase the retention so that's included and the point reward is also included. So in total of those factors, we have returned JPY 380 billion. About ARPA, as you explained, quickly, as you know, for the communication, Pitatto Plan and Flat Plan were implemented already that lowered ARPA and it's a separation price plan. So monthly discount is lower now so that's a positive factor. And as you pointed out correctly, since the start of the campaigns, the impacts are now filtered through, so there's an impact from that. So in total, from January, ARPA has reversed. And ARPU, although we do not disclose the numbers, but in fact, starting from this month, ARPU has started to reverse as well. So we are moving towards a positive improvement trend without a doubt.
If that's the case, even though you do something about the pricing, so next fiscal year, communication -- telecommunication ARPA, au ARPA, will go up. Is that your outlook? Is that your view?
Well, for each telecommunication price plan will depend upon what DOCOMO is going to do. We have to wait and see. So we cannot assert at this point, but our stance, as I mentioned earlier, is that we'd like to achieve sustainable growth with a total profit of the company. We are making the utmost effort to make a plan so that we can achieve a sustainable growth of the profit.
Second question is on the new growth driver in the medium term. As you explained, finance and e-commerce, including global communication platform, IoT will be the future growth drivers. And what would be the contribution to the profit? I think contribution from the finance is going to be large to your profit of total. But, B, global communication platform, I think there's quite a large impact I expect in the long run. On the other hand, there's upfront cost in e-commerce business, so by each area, would you please share with us the magnitude that you see in terms of the contribution to your profit because this is the big pillar for your next midterm plan?
Exactly. We have to really talk about those factors when we explain the midterm plan. But life design, you asked about the active users' ratio earlier, but continuously, in the life design segment, what's driving is our Smart Pass Premium and the payment. Those are the drivers. And e-commerce, we have not got to the point where we can generate a large amount of profit. It's a bold business -- it's more business, so it's a lower margin business. And when we started smart value, I think we were in the same or similar situation. And when we try to do this type of stock business, profit contribution, in addition to it, engagement or retention, there's significant contribution to retention or engagement. So smart value is the combination between the communication and communication. But we are trying to combine telecommunication and life design. So we cannot measure the benefit only in the amount of profit. I think we have to generate more synergies in the medium-term plan. And about B, Mr. Mori is going to answer your question.
Let me answer your question. In the presentation, as Mr. Takahashi mentioned, using the global platform, we have -- we are going to start services from this year. And for sales and profit, we expect them to go up both in Japan and globally. For Japan, we have existing services that we have been doing from the past, so it's in addition to the existing services. But for global overseas, we are going to start services newly from this year, but ultimately, every year our communication 2-digit millions of scale is expected, so it's going to be quite large. There's upfront investment we are making, so profit contribution will start by phase starting from 2020. That's all.
Next question is from SMBC Nikko Securities, Mr. Kikuchi.
This is Kikuchi speaking. I have a question on life design. My first question is in your achievements, it's related to the focus point, Jibun Bank and Lifenet Insurance Bank. We don't have much information on how much impact has been seen. It may not be big, but the equity ratio in Lifenet, it's only been a few years and so I'm sure there are still challenges. So could you share with us some benefits, some affects you are seeing? And what is your outlook going forward? What do you want it to be like?
Mr. Morita will explain.
So Jibun Bank, it is our affiliate, and Lifenet Insurance is also our affiliate. So I would like to refrain from giving you the details on their business. But regarding this finance business, au -- for au customers, we call this white label. So au something, au insurance, for example, so we've been providing au so and so. And when it comes to insurance, we think this is a product where we can build long-term engagement with our customers. So through such services, it has great contribution on au retention. In Jibun Bank, bank gathers money and it is a smartphone bank so it is highly regarded -- its service is highly regarded in Japan and abroad. So this smartphone-oriented financing is something we want to continue to focus on. Thank you very much.
So Jibun Bank, as your business, finance business may not be generating much benefit. I think the benefit can be much bigger going forward. So as a background, if you think there are some shortcomings now, what do you think you need to do more? And what do you think you need to change to enjoy bigger benefits? And do you plan to fill the shortfalls with M&As? What policies or strategies do you have?
So this is 1 pillar of the finance business and we are developing our medium-term plan and this will be an important component. So let me clarify this and share with you information later on. So if I could refrain from elaborating on this today, thank you very much.
Next questions are from JPMorgan Securities, Tabane-san.
Mr. Tanabe. I have two questions. The results in the third quarter for the life design segment, on the year-on-year basis, revenue increased but income growth year-on-year was not as large as revenue growth compared to the first half. The income growth pace has slowed down. Is there any particular reason? And in the future? As you grow your revenue, how are you anticipating the change of the marginal profit?
Let me answer your question about the operating profit in the third quarter. On the cumulative basis, JPY 86.6 billion, OP on a cumulative basis, which is plus 5.3% year-on-year. So true, as you pointed out, that increase of the profit is a bit slower and the reason is because, in fact -- in principle, revenue has been increasing steadily, but we have so-called strategic costs that we are spending and there's some impact on the strategic spending. And excluding strategic spending, for sure, it's a double-digit growth in terms of the profit growth.
And another point, on the top line going forward, what will happen in the future? Are we going to see the same pace of revenue growth in the future?
To that question, yes, exactly, as you mentioned, this revenue growth pattern or trend will continue. As Takahashi-san mentioned, in the future, finance is going to be a bigger pillar for our business. And e-commerce, we have larger scale of e-commerce business now so contribution to the profit from those businesses will be larger. In addition, energy and electricity, as I touched upon earlier, the gross merchandising value of KDDI Economic Zone is increasingly driven by that and we have planted seeds, and at last, we are seeing bearing fruits from those seeds that we planted in the past. So I would like to really nurture and grow those businesses to achieve the revenue growth continuously.
I'm sorry, I didn't ask questions well. In the first half, you increased your revenue as well as OP, and I guess the margin profit increase in the first half. Seems like in the third quarter, marginal profit increase was not as large as the marginal profit in the first half. OP did not grow as much as the top line growth in the third quarter. Is that because of the larger strategic costs? Am I right?
Yes, I think you can understand that way.
Understood. So when do you think this impact will fade away?
This strategic spending, for the future, we are still planning to see how we are going to spend the strategic costs. So at the moment, let me refrain from commenting about the future spending level. Thank you.
Second question, Page 13, au PAY. Simply put, what will be the anticipated impact from au PAY on your results? This is a new way of payment and this is going to be in addition to the traditional regular payment means? Or is it going to be a totally different business model? So do you expect quite a large profit contribution? And do you have to do the system development? I think you have to spend some costs, so probably are you anticipating loss at the beginning and then gradually start to generate profit later on?
About au PAY, in April this year, we are planning to launch au PAY. Well, let me explain the business model. You are right, the payment means will be added for this au PAY. This is a new payment means. So I think this is a type of business that can generate quite a sizeable amount of profit, but in the payment area, especially QR code payment area, rates are low and there's significant fierce competition. So profitability-wise, we cannot expect a large profitability in the early phase.
Then what's our view in the long run then?
As we wrote in the presentation material, we have a large stock -- customer stock of au WALLET. So we'd like to offer a payment means that are nontraditional payment means, such as credit cards. And WALLET points and the values, which will accumulate more and more can be spent or circulated in the e-commerce or in other life segment. So probably we can monetize more in those other areas. That's all.
Any other questions?
[Operator Instructions]
If there are no other questions, we will close this Q&A session. With that, we will close the Financial Results Briefing of KDDI Corporation for the Third Quarter of the Fiscal Year ending March 2019. Thank you very much, again, for your attendance.