KDDI Corporation (KDDIF) Management on Q4 2019 Results - Earnings Call Transcript

About: KDDI Corporation (KDDIF)
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Earning Call Audio

KDDI Corporation (OTCPK:KDDIF) Q4 2019 Results Earnings Conference Call May 15, 2019 4:30 AM ET

Company Participants

Keita Horii - General Manager, IR Department

Makoto Takahashi - President

Shinichi Muramoto - Senior Managing Executive Officer, Executive Director, Corporate Sector

Nanae Saishoji - Administrative Officer, General Manager, Corporate Management Division

Yoshiaki Uchida - Executive Vice President, Executive Director, Technology Sector

Takashi Shoji - Senior Managing Executive Officer, Executive Director, Consumer Business

Keiichi Mori - Managing Executive Officer, Executive Director, Solution Business Sector

Kei Morita - Managing Executive Officer, Executive Director, Life Design Business Sector

Conference Call Participants

Daisaku Masuno - Nomura Securities

Kei Takahashi - UBS

Yoshio Ando - Daiwa Securities

Satoru Kikuchi - SMBC

Jun Tanabe - Morgan Stanley Securities

Keita Horii

Thank you very much for joining us today for Financial Results Presentation of Fiscal Year Ended at March 2019 of KDDI Corporation. My name is Horii from IR Department. I serve as MC today. This presentation is being translated into English and it is also being distributed live on Internet and later on demand as well.

Let me introduce today's attendance. From the center to your right, Makoto Takahashi, President, Shinichi Muramoto, Senior Managing Executive Officer, Executive Director, Corporate Sector, Nanae Saishoji, Administrative Officer, General Manager, The Corporate Management Division. Next from the center to your left, Yoshiaki Uchida, Executive Vice President, Executive Director, Technology Sector, Takashi Shoji, Senior Managing Executive Officer, Executive Director, Consumer Business, Keiichi Mori, Managing Executive Officer, Executive Director, Solution Business Sector, Kei Morita, Managing Executive Officer, Executive Director, Life Design Business Sector.

Today we have distributed a total of eight documents for closing results related documents and for TSC closure documents, the same materials are also available on the IR website. As to the contents in those materials and results and targets which might be mentioned in the Q&A session today, please refer to their disclaimer page.

First, President, Makoto Takahashi is going to present to you the results and the new mid-term management plan, followed by Q&A session. Mr. Takahashi, please.

Makoto Takahashi

Thank you. Thank you for joining us out of your busy schedules for KDDI meeting of financial results. Allow me to share with you business results FY 2019 March period. First, I'd like to review the previous mid-term from FY ‘17 March to FY ‘19 March period.

Highlights of the consolidated financial results, the left shows operating revenues of FY ‘19 March which was 5,080.4 trillion, right hand side is the operating income was ¥1,013.7 trillion. We continue to increase operating revenues and operating income. Operating income rose for 18 consecutive terms, achieving ¥1 trillion yen for the first time.

Next page, au churn rate on mobile IDs. The left shows au churn rate where the penetration of au totalled a flat plan and more returns to customers and promotion of bundling and Life Design services it was 0.76% down 0.1 point year-on-year, which was a significant improvement and right side is mobile IDs due to decrease of au churn rate and net increase of group M&A there was a steady growth at 26.95 million, up 1.8% year-on-year.

Next page, au ARPA, the left shows au ARPA of the fourth quarter FY ‘19 March period which was up 1.4% year-on-year. The right shows au ARPA revenues which was also up 0.5% year-on=year. With the completion of a campaign and a shift to a large volume data planned it enjoyed the year-on-year increase for the first time since the introduction of unbundled plan.

Next page, au Economic Zone Gross Merchandise Value and Value-Added ARPA, on the left au Economic Zone gross merchandising value enjoyed a steady expansion of payments and commerce with increases of account and used volume in energy and it was to ¥2,517 trillion much higher than the ¥2 trillion which was a goal in the previous midterm plan. On the right Value-Added ARPA it enjoyed a double-digit growth for three consecutive terms full year result with ¥700.

Next let me explain about a M&A we have done so far towards new growth. First KDDIs basic policy for M&A is to allow group companies to use KDDIs assets, all assets fully for their growth, which is the first priority. As a result, we believe relations are built and then for the first time synergies are created. And based on this policy KDDI addressed M&A in telecommunications, our platform business and Life Design domain. As a result KDDIs consolidated performance is driven by group company’s growth.

Next major M&A, the revenue - numerous M&A in the past three years we've focused on consistently on three point, priority areas, maximizing customer base and domestic telecoms, increasing engagement in Life Design, acquiring capabilities for the 5G/IoT era in new business field.

Let me explain main M&A we have carried out in these. First a Domestic Telecoms, Jupiter Communications or J:COM. The left with au smart value, we are conducting cross marketing between au smartphones and J:COMs cable television service.

In addition J:COM Phone Plus service contributed to the revenue increase of both companies regarding cost by switching network within group companies, greater efficiency has been realized in network costs to these effects have been ¥410 billion in six years since J:COMs consolidation. Robust returns are being made on invested capital as well.

Next Life Design business. And here we have ENERES and the other we have – we have a little bit, the other know-how that accumulated in the past. And as to au Denki the other smartphone and au Denki, combined business has been contributing,

Number two, M&A [ph] increased. As of the end of March 2019 we exceeded 2 million and then we could lower the churn rate of au. And it also has the other affinity with other credit card services. So in order to improve engagement with the customers we are going to use this indispensable services and with the other power source development company and the other three companies strings that will be the other six.

As to other silicon, this is the new business. As so other silicon we have AWS the other cloud, other business and we have been other who establishing the other very advanced business and the other we have been beefing up already at 114,000 other operators using other IoT services in the KDDI group.

As to IoT, the World Architecture that we used buy auto Toyota and we have already established and trusted other platform and the silicon with its advanced technology, state of the art technology creating the latest IoT services, so both [indiscernible] very advanced state of the art elements. Most of them are there and we have been developing with silicon 5G era state of the art core network MEC solution and which will contribute greatly to the other better efficiency of network.

Now I would like to talk about the other forecast of the other year ending in March 2020. Please look at the left hand side - left hand side. The operating revenue for the year is ¥5.2 trillion, on the right hand side, the operating income of ¥1.02 trillion and with the other new - other price program and the entry of the Rakuten there are some other changes in the other business operation and this is the very first year of the other new mid-term plan and we aim at increasing both revenue and profit in a steady manner.

And as to the other new plan, please look at the new price, a new mobile price. The plan. We have already the 40 million people using this unbundled plans which was introduced in 2017 before the other companies did. And so this 40 million people represent two thirds of the other au smartphone users.

The low volume data that new au had planned or au adjust plan and other middle - medium and the volume data au flat plan 7 plus compared to the non-unbundled plan that up to 40% discount has been introduced.

With 5G era around the corner, we introduced unlimited plan very first in Japan and the customer - the return that will be the total of the ¥400 billion including 300 billion which has already been introduced and additional 100 billion, up to 100 billion over the coming – the three years.

And as to au pay which was launched on April the 9th the number of subscribers has reached 2 million and it's a very accelerated pace and it is going very smoothly. In addition to au pay which uses QR code and prepaid card, credit card and QUICPay that we offer various other payment measures.

And we aim at having more than 1 million locations where the service is available within this year and we are going to focus on convenient and the value service fixed on our payment business.

And as to the dividend, as a token of depreciation for the support of their shareholders we are going to add ¥5 to the original dividend plan making the full year dividend ¥105. And as to the year ending in March 2020 it will be ¥110 and we are going to aim at increasing dividend based on a sustainable profit growth.

Wrapping up for the year ended in March 2019, the other operating and profit exceeded ¥1 trillion and for 18 consecutive the terms increase in the profit and we are increasing the other revenue and the other profit and the other both ARPA is increasing in a very static manner and as a token of the gratitude 40 other shareholders though we are going to increase the dividend by ¥5 and we have already acquired ¥150 billion worth of additional shares and we are going to continue that effort.

And for other 2020, the very first year of the three year plan we are going to aim at increasing both revenue and profit by introducing other various competitive plans. Au pay is doing very well, to expand the other payment services and ¥110 is scheduled for the year ending in the March 2020 or the – pay out ratio of 41.7% and the ¥150 billion of the other purchase - the buyback.

And 73,000 - 73 million shares will be the number of other shares to be acquired and from the other May 16th to the December 23rd of the 2019 we bought back the shares at worth ¥150 billion and we will review the additional buyback looking at the level of share prices and we are going to continue the sustainable growth and their shareholders return.

And with that, I’d like to conclude my presentation for the other results. Thank you very much for listening.

Next I'd like to ask President Takahashi to share with you new mid-term plan, new mid-term management plan. Mr. Takahashi, please.

Next I'd like to ask President Takahashi to share with you new mid-term plan, new mid-term management plan. Mr. Takahashi, please.

Makoto Takahashi

About the new mid-term management plan. First of all, as you can see we are refreshing our brand slogans. As for KDDI company and corporate business brand slogan, Tomorrow Together, is just branded slogan. We believe in our partners to move forward to the future with partners and continue to grow and develop.

Regarding the au the business brand for consumers, Explore the Extraordinary is the slogan, always just enjoyable in the playful future and provides change with excitement to the world. These express what kind of being does KDDI want to be. They show our heart that we want to grow and develop sustainably towards future together with our customers and society. To help we understand our heart, we have prepared a concept movie, I hope you will enjoy it.

[Movie Clip]

Thank you. Based on this video we're refreshing brand slogans 45 to 50 year that a new young people actually created this and we are refreshing the brand slogans according to the new midterm plan. We would like to recreate KDDI, more about specifics to segments in the new midterm management plan.

Some changes we would like to make. First, to advance integration of telecommunications and Life Design, regard to four segment have been streamlined to two personnel for individual customers and business for corporate customers.

Global businesses are now positioned on the extension of the domestic business, deploying domestic business know-how in both personal and business segments are broad. That's why there have been changes in each segment regarding how we are positioning global, I would like to come back to this later.

Focus of our business strategies, seven items. The first concerns to creating innovation towards the 5G era, the integration of the telecoms and Life Design, further expansion of the global business and the utilization of big data expanded also business growth as the group sustainability. These are the four areas of our business strategies.

Next our location of 5G frequencies. 5G frequencies are allocated in April 2019 are the largest bands totaling 600 megahertz. We've been able to acquire frequency bands where global 5G use is expected, it's significant 3.7 and 4.7 gigahertz. There is a 100 megahertz. It's not the same for everyone.

Regarding the band that we are located those are the bands that globally the 5G will be utilized in securing our competitive edge into 5G era and in lowering network development and handsets procurement costs. This is a big advantage.

Next to 5G rollout plan, pre 5G services are planned from September 2019 will start handset sales by the end of March 2020. That's for base stations establishment to realize 93.2% area coverage in five years. We keep in our mind early implementation of the establishment plan and actively develop 5G which began sourcing infrastructure for the next generation.

Next creating innovation by 5G. 5G characteristics include a high data capacity, low latency multiple connections, publications of various area is expected, together with a partner companies by utilizing 5G we create innovation and build a new platform.

We are proud of our leadership so far in open innovation by cooperating with our partners in various fields we will deliver exciting innovation and experience values you never had before.

Driving regional revitalization through 5G. We positively see business opportunities in utilizing 5G for regional revitalization. We've been cooperating with various municipalities to work on projects utilizing IoT.

To further advance these measures, we established ¥3 billion regional revitalization fund in April 2019. Going forward together with venture companies we will promote digital transformation utilizing 5G.

Next on the integration of telecommunication and Life Design. For individual customers we offer exciting experiences with smartphones as a starting point and expand Life Design services.

For corporate customers contributing to their main line of business is the keyword. Together, with our customers we will build new business models and support customer’s digital transformation promotion. In both with telecommunications as a base, we intend to expand the business scale.

Next to maximizing lifetime value. Our business is based on ID time to ARPA, but you see in au smart value by combining multiple services such as fixed line and mobile service persistency or continuation ratio they increased has it was already been demonstrated. Going forward we will accelerate recurring services bundled with Life Design services not just with telecommunications. Through these we aim at maximizing lifetime value and ensuring stable growth of total ARPA revenues.

The operating revenues of Life Design domain in our growth area namely Life Design domain we aim to expand the operating revenues, alongside ARPA growth mainly in commerce, energy and finance. As operating revenue of Life Design domain target is FY ‘22 March is ¥1.5 trillion compared with ¥946 billion in the previous turn.

As to promoting deeper engagement, in order to raise the total ARPA to maximize lifetime value by bundling mobiles with fixed line communication and Life Designm it is also important to bundle multiple number of services to lower churn rate and raise persistency. And in particular, the bundling of au and au Denki has been proved to reduce churn risk significantly which will promote a deeper customer engagement as we aim at expanding our customer base.

As to global expansion, incorporating global consumer into personal segment and global ICT in business segment, we leverage our business know-how accumulated in Japan to create a global economic zone. In Myanmar [ph] we have already started game of businesses where we expand Life Design business from Japan to Asian region as well.

Next, I'd like to talk about creating a business with partner companies. Based on KDDIs platform and that of partner companies we could create businesses. KDDIs supports customers, digital transformation through recalling the business and we will strengthen initiatives in new gross areas, including IoT. By fiscal year ending in March 2022, we are going to expand the accumulative IoT connections to 18 and a million and operating revenue of 1 trillion in the business segment.

Next the global fields of ICT in the growth area. KDDI and Toyota are promoting global communications platform. It is applied in advanced as IoT word architecture on which service offering platform is built for all kinds of industries and we will support customers business with our global partners such as the Hitachi and Toshiba.

We have established a dedicated operation for technical reasons, as well as for a global alignment. We are directly working and coordinating our work with many overseas communication partners, meeting specific local needs. We are proud of this platform which we believe has a strong quality and cost performance globally.

Next as to the utilization of big data. On personal [Technical Difficult] space to visualize reality in society and we'd like to use data in these areas and we'd like to expand therefore our business by cooperating with partner companies, as to other financial business smart money concept announced in February in au WALLET was more than 20 million cars and its outstanding balance of over ¥100 billion, we will make payment and financial service closer to our customers using smartphones.

For full fledged strong financial business operation au Financial Holdings has been established and its operational companies have a brand reflected in their names. As to sustainability, with recent social changes and new challenges reflected in the AU SDG [ph] and the other post agreement being adopted and going into effect, we selected last March six material themes as our top priorities by promoting these initiatives company wide, we’d like to aim at to being a company to contribute to sustainable growth of society.

As to SDGs targeted by KDDI in other new MTMP [ph] that we set KDDIs target SDGs linked to our business strategy and corporate activities, telecommunication, global and other social issues to be solved through businesses and HR development, support for women's advancement and other social issues to be solved through corporate activities are listed here. We set quantitative targets for them to address these issues and we would like to grow with society in a sustainable manner.

As to CapEx, we announced a planned 5G investment of about ¥460 billion. This amount represents five year investment for newly allocated 28 gigahertz and 3.7 gigahertz to fiscal year ending in March 2024, with 5G placement over the existing funds, this amount is likely to go up, but by sharing facilities with other operators we will make efforts to lower the investment amount.

As to 4G investment, it is to pick out in a fiscal year ended in March 2019 in the new three year plan the annual investment amount is to be controlled in the order of at around ¥600 billion, while working speedily on 5G network deployment.

Now cost reduction, initiatives for cost efficiency we realized the need of fundamental review of cost structure to grow sustainably. To this end, we have started internal task force to reduce cost with out of the box thinking and use of other technology.

Reviewing, streamlining measures including automation and operating changes, we would generate profit of about ¥100 billion over a three year, with the other some new business seeds.

For sustainable gross and further strengthening shareholders return, based on sustainable profit growth we will grow EPS 5.2 times that of fiscal year ending in March – ended in March 2019 in six years time, namely fiscal year ending in March 2025. And as to dividend that we would target that more than 40% pay out ratio for a stable dividend increase. We will continue to target at EPS and EPS gross based on sustainable profit growth.

Lastly wrapping up, the target for fiscal year ending in March 2025 EPS 5.5 times gross and for the fiscal year ending in March 2022 operating revenue for Life Design domain ¥1.5 trillion and operating revenue for new business services segment ¥1 trillion and a three year total profit generation through cost reduction ¥100 billion. As to shareholders return more than 40% payout ratio and we will execute very flexible share buyback and cancel older treasury shares.

And with that, I would like to end my MTMP [ph] presentation. Thank you very much.

Keita Horii

Now we would like to entertain your questions. So that we can ask as many of you as possible to ask us questions. So I'd like you to limit the questions to two per person. If you have two questions please wait for an answer to your first question and then ask us your second question. Now if you have a question please raise your hand.

Question-and-Answer Session


A - Keita Horii

The first row in the center please? Nomura Securities, Masuno.

Daisaku Masuno

Two questions about your mid-term plan, first about the income or profit. EPS 50% increase. That's pretty ambitious. Operating income and a number of shares, how do you intend to strike a balance? About the new prices, I think there is some impact on the revenue decrease, that cost reduction 100 billion would be enough to absorb that effect?

Unidentified Company Representative

So first of all the income, the major drivers deemed backed on - of the prices or price increase. Allow me to press your questions. First of all, as you have said on EPS growth 1.5 times, but in CAGR, if you look at the CAGR, 7% percent per year, that's the extent of the growth we are looking at. This is EPS. So the share buyback will have an impact.

In ¥150 billion if you look at this term, I think this will translate about to about 2%. So given that there's a kind of sampled [ph] the income growth is around 5% as a perception as emerging. Of course, it's subject to change depending on the environment.

If you look at previous mid-term plan, the CAGR that was 7%, its more or less stable, but for sustainable growth we would like to make sure we'll do a good job. That's the first point I think.

Regarding the second point, new price. Day before yesterday we made an announcement overall I think we will set to something like ¥400 billion in total pit out of flat plan about 1.5 years ago it was introduced. So ¥400 billion that's the contribution to the customers as much as ¥400 billion.

Until the period that just ended, if you look at the returns of customers it was about 7300, a little more than ¥300 billion. And next three years additional ¥100 billion is what we are talking about. Each year the number is going to increase because of its relation to penetration. Regarding impact on this year, we believe it's small. So we would like to absorb that with some creative ideas so that in this fiscal year forecast is increased revenues and increased profit.

Masuno, you talked about the cost reduction to ¥100 billion is the growth of the income that we would like to do, in the mid-term it should be absorbed so that we can show you our sustainable growth. And that's a policy concerning the new mid-term plan. Thank you.

Daisaku Masuno

Second question the allocation of the management resources, at the outset you have mentioned with M&A [ph] you made investment and now for five 5G CapEx is being planned on shareholder returns, the acquisition of the fund and in this new mid-term plan the 5G shareholder returns those are increased but including the business investment what kind of balance do you intend to have in terms of the allocation of management resources?

Unidentified Company Representative

Regarding business investment in the last midterm plan ¥500 billion that's what we had to where we went to various countries and we talked about those, people didn't receive them warmly, as a growth investment don't budgetize M&A, many people said that regarding the growth areas centering on the au, the expansion of the operations and expansion of Life Design businesses and centering on Southeast Asia expansion of business and investment on data centers, we do have those in our minds. But this time as a kind of a framework we are not having data kind of a framework established, we would like to just look out to each case.

Regarding number of M&A, we've been doing this for the past three years more or less stabilized at the moment. So in these three areas those are the main areas that we look at each case, case by case in terms of investment. Thank you.

Keita Horii

Other questions. Yes please?

Kei Takahashi

My name is Takahashi from UBS. I have two questions. First question is about MTMP, CAGR 7% percent among which 5% is from the profit growth. And what about new segments, which segments will be the driver for that growth or the other segments that will contribute to the growth?

Unidentified Company Representative

So as to growth fields there were two things that we have been explaining about. One of them is Life Design business, telecommunication - it's another shift from telecommunication to Life Design, but our business is centering around telecommunication, but we'd like to go with Life Design as well. It is not the other best - the other accepted by the market, but because of the total ARPA alone is other disclosed.

So both telecommunication and Life Design we'd like to improve engagement, as well as ARPA. That's one thing. And also the other - we added global to the other business segment so that the other IoT architecture will be the basis for future growth.

So answering your question, I would say I cannot say very specifically, but the other personal and the Life Design we will be the gross driver and for business side, it we will be at global and IoT the expansion. Thank you.

Kei Takahashi

Second question, EPS growth in 1.5 times and the annual at 7% compared to expectation in the equity market, it is rather high expectation. I have been looking at your company for a long time and 7% attainment of this number how confident are you and of course, it will be based on the mixture of the profit growth and share buyback. Am I right to understand that you are committed to this number?

Unidentified Company Representative

Well EPS 7% might be a very high target, but from our point of view 7% CAGR all it was target in the previous fund. So at least since we are committed to the sustainable growth we need to either have certain percentage number as our target. Your question whether it is commitment or not. Well, it's difficult to say, but we would like to make efforts to achieve this target.

Keita Horii

Will there be any other questions? Right hand side, the front row, please?

Yoshio Ando

Ando from Daiwa Securities. Again, I have two questions. First page turn on page 11, you talked of Life Design and engagement, as a concept if you could teach me about Life Design profits income, churn rate, the cost reduction contributions to differentiation from Rakuten services? From those perspectives if you could once again elaborate on these matters please?

Unidentified Company Representative

First about Life Design domain, in terms of the revenues 946 billion to 1.53 trillion. Life Design domain compared to DOCOMO for instance, it was rather difficult to compare, so the warranty for repair, education, until last time Life Design segments, Life Design domains its a bit too confusing and Life Design business in the personal segment.

So there were two, so by combining them and show you the total picture, its rather confusing that one of the comments we received and that's why we are showing it in the way we show it to you.

Now, I think it's going to be a easier comparison with DOCOMO regarding the profitability, if possible with the current profitability we would like to increase revenues in terms of the income level if you could back calculate, I think you'd get to some image, differentiation from other players in the market.

DOCOMO and SoftBank compared with them, if you look at the Life Design, we believe that we are actually ahead of them. For instance, we have a banking financial segment for instance and upper layer services, smart past premium is one of the things we offer, very stable recurring, something called a stock type of business.

It's not just a video and music. It's a very good recurring business. This is new good area compared to be at the Rakuten they well advanced in the financial business and other services in a way there is a little bit of catching up for us to do, but we have telecommunication so it's a big base and then go into Life Design.

In their case, Life Design is not the great source of income, but now they're making a huge investment getting into telecommunications. We don't think we are really competing on the same field, the same access, we have au telecommunications at the heart of the business, we value that and then we are going to take up this fight.

Page 19, CapEx. As CapEx it's going to increase to some extent. What are the factors behind the increase? By strengthening these facilities and equipment, about differentiating yourself from other players could you share with us some ideas about the differentiation.

I've been occupying the microphone, so could you jump in, could you do so Mr. Richard [ph] about the CapEx, that's page 19. 1.68 trillion for three terms and then it's going to be a little higher for the next three years. About 3G - 5G to March 2022 they were going to make a suggestion - that's 3G - that's 4G March 2019 period. Yes, we made some of the investment because we had to increase the quality among others.

But March 2019 period regarding 4G we have come to a certain place that going forward it's going to decrease. Now about 5G. So what's going to happen? In this term investment is not that significant and the next fiscal year and onwards there's going to be some significant - some investment, but 4G will be reduced and no investment for 3G. So for reduction to 5G will be allocated - the increase for the 5G, but with regard to this balance some increase is envisioned, some increase is envisioned.

If you look at page 20, I think it's mentioned, virtual networking and cost reduction. For the network of virtualization internally we have made some trials and test. The operation has become solid and with some reduction, a significant reduction can be envisaged.

And page 20 again, you can talk – look at the automating operation and maintenance. There's the operation cost which is not so little. And - but we have know-how. We've been doing LTE for seven to eight years.

So from 4G combined with 5G, we've been thinking about having a good operation combining them. It's not about the facilities for per se, facilities, equipment, the virtualization network will be done, but for operation - for expenses we would focus on the operation.

Page 19, number three, promoting efficiency by sharing facilities with other telecommunications operators, as you can see each player with 5G the deployment will be rather difficult. So working together with them if we could do so, I think there's going to be some increase for 5G. The investment is still committed, but significant. This is all. Thank you.

Keita Horii

Other question. Yes, please?

Satoru Kikuchi

From SMBC Nikko. My name is Kikuchi. My first question is the allocation of financial sources related to Masuno’s question. The full free cash flow ¥550 billion is your plan for this year. As Anderson said earlier in his question compared to depreciation CapEx seems to be greater.

Given that situation 500 to 600 billion free cash flow, I think will be generated every year. As a moral case, you talked about ¥150 billion of share buyback. As sort of a standard still you will have abundant money left. M&A target are not set. I understand, but if there is any good deal you'll be interested. I understand.

Am I right to understand that you would rather use the remaining money for M&As and if you contain your M&A activities then the financial resources will be used for share buyback. Well you talked about ¥150 billion yen as a moral case, but maybe you can do more. But for this fiscal year the profit is kind of leveled and you would be flexible as in terms of the amount of share buyback. How are you going to allocate financial resources?

Unidentified Company Representative

I think it's rather difficult to answer your question directly, but looking at this fiscal year where there is some uncertainties, but still we could raise both revenue and profit and by December we would do ¥150 billion. And then we will add - we might add more and that's different from our approach last year.

So in other words, we will be more positive, more aggressive about shareholders return compared to last year and for the current fiscal year, the additional ¥5 for dividend payout and with that payout ratio exceeded 40%.

So specially for the fiscal year there are uncertainties. So please understand, I'm talking about just the direction. So both customers and the shareholders will be in a view when we develop our new plans.

Satoru Kikuchi

So it's case by case and the deal by deal, I understand. But compared to the previous mid-term plan, you will use more for shareholders return rather than M&As. Am I right understand that way.

Unidentified Company Representative

I am sorry, I cannot answer that directly. But for the - now we have EPS the target and there several potential scenarios, of course without increase in revenue. Well, though we need to do a good job for the other shareholders return and that commitment, its shown in the other EPS target.

Satoru Kikuchi

My second the question is about financial business. I asked similar question as to time and I'd like to repeat that question on this occasion. For example in the case of DOCOMO based on D-card, the D-payment that really exists and for SoftBank using Jasco [ph] they do some lending. But the mainly they are focused on settlement or payment business.

In your case, in the case of KDDI business is - has a wider scope. But the banking or securities when it comes to these lines of businesses, when you want to expand your financial business, banking or securities will need some additional investment.

Now you have a very good lineup of financial businesses, but with the current lineup, with the current resources and increase your financial business, focusing on the settlement business is that your approach or you will try to strike a good balance among the different types of financial business. And I think for that you will need more investment. What is your current thinking or stance for the financial business? Morita will answer the question. And here is Morita answering your question.

Kei Morita

As you mentioned, basically we started with the settlement business. The smart money initiative has financial expansion behind it, potential expansion, why? Well, the settlement business itself is not a business which gives us a great deal of return. And going forward depending on different life stages of the customers we would like to offer different products and we would like to have a deeper engagement with our customers and then ensure one's loans and other financial products are needed.

So what is missing? Well, now we have – are finalizing the product lineup and it [indiscernible] was announced on April 25th. So it is already done. And with this the [indiscernible] we have a good line of financial businesses which will remain as our focus for the time being.

au WALLET was started and au WALLET app is doing very well because the customers using au to pay, the customers pay attention to points and now we are working on the customer traffic or cross marketing and so Life Design products that can be sold to the other financial areas as well.

Keita Horii

Any other questions please? The center. Second row please. Center row.

Jun Tanabe

Thank you for your presentations. Mitsubishi UFJ Morgan Stanley Securities, Tanaka. I have two questions. About the detailed materials page 8 please. I hope there's going to be some disclosure about value added ARPA Q3 to Q4 in the term ended ¥720. It was kind of flat. What are the factors behind this flat result?

Kei Morita

Sorry ¥720, it was ¥720, Q1 ¥660 and Q1 ¥690 and ¥720, it didn't really enjoy much growth, contrary to my expectations. On these it's almost stood out. We expected it to be. That in the case, our impression is not that they didn't enjoy how much growth,. Small plus premium. There is a structure and that's additional on. You have payments, maybe payment business is also growing, so that's additional top up content and others - that business did was not really robust. I think it's still open to interpretation.

In terms of breakdown, commerce, on commerce. Distribution situation was rather difficult at the end of the term. We see some effects from there. On the rest, it's almost along the line of our expectations. What do you mean by the distribution being tough, could you give me explanation?

Commerce distribution in terms of the value because of the sluggish economic status didn't enjoy much growth compared with our expectation and accordingly revenue also declined somewhat. To be more honest reviewing the fourth quarter, we have to come up with a certain finalized profit with commerce with certain points given, sometimes they need result in better distribution results, by controlling the profit we were able to sort of go through the fourth quarter.

Yes, it's true that there was some of the sluggish economic status, but we were able to control that. But in the next term [indiscernible] and Rakuten will be entering the market. We'd like to make sure that we will maintain our competitive edge. Thank you.

Jun Tanabe

My second about the mid-term business plan, page 13, about IoT the cumulative connections the term that ended to 8 million but in three years you increase to 18 million in three years. Before in the past you were talking about ¥100 billion about 18 million contracts. Can I tie these two - this new business segment I think this is a driver for the new business segment?

Kei Morita

Yes. it's right for you to tie them into one, but only partly. I mean, it's a big part, but it's still some part with just a connection to increase we are not trying to increase revenues simply by that. There are surrounding platforms, there are the value added services that we would like to get.

So in that sense the ¥100 billion divided by 8 million subscribed - subscriptions ARPU is 460. I shouldn't do this, or you shouldn't do that. So SORACOMs numbers are not covered here in principle, it's Toyota and Hitachi you did projects with them and that's covered here. Am I right?

Going forward SORACOM portion we would like to incorporate SORAOMs. If you look at the actual results SORACOM is not disclosing the number of connections. SORACOM will be incorporated going forward. So the growth includes that. We would like to grow it even more, but going forward it to be covered. Thank you.

Keita Horii

Any other questions. Yes please?

Unidentified Analyst

My name is Kenosha from Merrill Lynch. Two questions. First question is related to Anderson's question, 5G network on page 19, more competitive with the other competition, so you will be more competitive and 5G service offering or the profit. Do you have any specific strategies in that scheme or you assume that all the players will have equal footing and you would try to be more competitive than others? Could you please elaborate on that point?

Unidentified Company Representative

As to - if you look at our plan of 5G you will see the very clear direction. We wanted the global based band and we talked about it in our presentation. For example quitting to our plan 93.2% of data coverage and DOCOMO at 27%, SoftBank 64% and 56.1% is Rakuten. So in the case of 5G you need to compete with DOCOMO and the DOCOMO will be our competitor.

As to the number of the other stations, mix station, I don't - we have added a 30,000 of them. And on – but on the grid basis 30,000 is not so other big, I mean the other grid base it is on the seven or eight the base stations and our competitors do not have that many either. So we are taking rather aggressive attitude toward 5G deployment. That's the one thing.

And when you look at the prices, we would like to be a pioneer in terms of prices in the unbundled plans that we are the first to introduce such plan and this marks in the key area of 3G and the other we introduced at the fixed price plan or the other flat price rate plan as the first runner. And so as to 5G and we will continue to come up with max.

As to share buyback and EPS growth, the revenue target due for March 2022 is the last one and the EPS there you have the EPS target for the March 2025. Is there any intent behind it? And the - I think 7% will not be achieved that with the current other share buyback level. But for the next year and on it will be at 7%.

And as to share buyback, your stance is to do a share buyback if there is a budget for it. But this time your focus is rather on EPS and based on EPS that you will - you could be flexible for share buyback. Is that your intent?

As to EPS did the March 2025 were the other 1.5 times growth we thought has a big impact. And also we looked at our competitions. So we thought that the 1.5 times growth EPS for March 2025 seems to be the right thing.

And yes, that it would not reach 7% for this fiscal year because of some uncertainties, actually many uncertainties. So we believe that our plan is rather conservative. So the shortfall of this year will be recovered next year. That's our policy.

And as to the share buyback as you pointed out, we will be flexible compared to the - at the past three years. We would look aggressive and we will remain aggressive. Thank you.

Keita Horii

Any other questions. The second from the left? The first row please.

Unidentified Analyst

Goldman Sachs. Matalashi [ph] is my name. I have two questions. First, cost efficiency regarding initiatives to enhance cost efficiency. I just would like to get clarification of the background. So these have been shown as the question just to management.

When you look at KDDI as a whole, looking at peers and other players in some of your business there is some inefficiency, am I right. So that you would like to think outside the box by introducing various technologies and then practically reduce cost, am I correct in assuming this?

Unidentified Company Representative

That's right. As Morita mentioned if you just look at the technology for the efficient operation not just concerns technologies RBN technology or AI technological introduction as a network direction they are talking about introducing business this year in Rakuten [ph] by virtualization of network and so forth.

We would like to - we need to realize digital transformation ourselves. So including the enlightenment activities and internally we would like to do this ¥100 billion. But it's not just limited to cost reduction, in growth areas we need to increase growth areas. So with that included we would like to add to this ¥100 billion a year. So as it as a net, net you would like to do that at least, right.

Unidentified Analyst

My second question about Life Design, am I correct? About Life Design business?

Unidentified Company Representative

In today's explanation more or less KDDI au customers expanding in their business services to au, KDDI customers, yes in a way that's realistic, but there are - the overseas platforms is and those people who - they're companies who would like to do something here. They target certain users and then they will be pretty aggressive, I believe. So you have to see au cross merchandising deal, zone economic zone.

Depending on the business will there be something other than that the economic zone where are U.S. scopes to the extend possible, could you be more specific about Life Design domain. In principle it's going to be open. I think au base started in April but for au first we started this for au users by QR code. We guided QR code base payment. We would like to be open. Regarding the smartphone for example expanding that to other businesses, au ID we are studying and making it open. So in principle the direction would be making it open.

Telecommunication player is undoubtedly all the telecommunication players are going that DOCOMO point is now becoming open. I was wondering about the SoftBank and [indiscernible] has now become the one of their subsidiaries. So I think that's to be expected, making it open. But technology speaking au users are the closest. So the on the other hand if we focus on them. Thank you.

Keita Horii

Any other questions? Yes, please.

Unidentified Analyst

[indiscernible] from Morgan Stanley. I have a question about EPS. The President comment was rather nuanced, whether it is a commitment or not. So if he is being the target I understand that the - there are some flexibilities rounding it, NTT [ph] that is the commitment. And they said that that there is a plan B as well.

In other words when the profit does not grow the other day we do not need to worry about their business, they will be okay, said NTT and in your case even if the profit growth is zero, I think you'll be fine as well. You can attain that goal, but still you do not say clearly that it's a commitment.

The 5% - the growth cannot be achieved already at a profit is leveled for some reasons or not. You will revise the target down word. I mean that you could say that it is a commitment and why you cannot say it's a commitment. And I think that you can achieve the other EPS target. Could you please explain about your comment?

Unidentified Company Representative

I'm not cornered really. It's a direction for the mid-term plan, so we would like to go for it, but when you look at this fiscal year alone there are too many uncertain elements which make - might make me hesitate to say it's a commitment. It's four six years, so it's a long time and that there will be the different occasions of the announcement and to talk to you. So we will do our utmost effort.

Keita Horii

Any other questions please. Second from the left, the third row.

Unidentified Analyst

Thank you. Citigroup Security, Stifel. There have been so many questions. So two questions about numbers. First about EPS and there are two parts to it. Sorry about this, as a follow up in the worst case debt to EBITDA multiple. And in terms of rating what would be the minimum level that you would like to keep. Could you care to comment if possible?

Another question the ¥100 billion cost reduction was mentioned in three years cumulatively ¥100 billion so that you would have the ¥100 billion profit. That's how I understand. Am I correct in assuming that if that in the year 1, year 2, year 3 I think it's likely to increase at the end by looking at your creative ideas could you - would you please elaborate on that.

Unidentified Company Representative

Regarding the second question, yes you are right and assuming this about the breakdown there. We're still in the midst of starting them. We would like to make it a stable growth. So regarding the first question net debt to EBITDA multiple it's 0.6 multiple has been for a while 0.6. If you look at the rating WA minus, we would like to keep this rating.

Yes we believe that there is some headroom. So we would like to be flexible looking at the finding needs. I hope I answered your question. Thank you.

Unidentified Analyst

Second question. Again about EPS growth, sorry about this. Organic [indiscernible] share buyback 2% growth then the remaining 5% that's the growth of after tax profit and you separate that to organic and inorganic, what kind of fixtures do you have. If you could to just to talk about what it was like in the past mid-term plan and how would you like to make it going forward. That would help me understand this?

Unidentified Company Representative

I hope that you will calculate it yourself profit growth - profit growth - profit growth, if you look at that. In this mid-term plan organic and inorganic there is a discussion of how to separate them, as growth areas Life Design is likely to increase. And then new business areas and the revenues number 1.5 trillion, 1 trillion as we shared with the already.

As for stability for each, if you look at the current profitability we would like to keep that to a certain extent. So you could calculate them ,I think you will get the general idea. I hope that you will be happy with it. I think you can directly - pretty directly get the numbers. Thank you.

Keita Horii

Any other questions. Yes, please.

Jun Tanabe

Tanabe from JPMorgan. Two questions, as to 5G so that you accelerate your CapEx to deploy 5G network, but the revenue will be coming in the in next year alone. So where specifically you will see the revenue coming up because B2B globally speaking it's rather difficult to start a business. Why are you accelerating your CapEx activities for 5G? What is your forecast for revenue and so on?

Unidentified Company Representative

For 5G in order to get the bond allocated though we needed to develop a plan which requires commitment and as to 5G expansion, it's not like 4G it would not be a one time replacement though when standalone, non standalone approach.

In other words 4G being the basis and the 5G the features that will be leveraged for the coming three years or so and the next the other 5G replacement of the core part will happen sort of for the first three years though we continue to use 4G network and we can also leverage 5G leverage is and that will be the differentiating factor. If our peers rather delayed to deploy 5G so that would affect the over all the - the product offering, service offering and as do corporate the business, it's true that in terms of IoT the prices of fees of ARPU is rather small.

As Mr. Mori said we need to have a good IoT platform so that we can build recurring business models which will contribute to our profit. And that is the content of our new return plan. I cannot talk about specific numbers but that is at a concept. Mori [ph] do you have any additional comments from the business side?

As Mr. Takahashi said 4G plus 5G period in that period. And of course there are needs for the large volume of data including the images and videos. And this area is the one that which will start first and then the low latency or the Matai [ph] connections the business model using these things will be prepared during the past three years. Put up question, in the B2B area the first visible business model how would it look like. Do you have any specific image?

For one thing - for the videos B2B B2C crossing these two for example in a stadium when so many people are present, or example in the factory or in an office or campus, 5G will also be useful.

Jun Tanabe

And second question simple question about some numbers EBITDA in your plan and free cash flow. Rather high numbers, I expect it in your plan. I'm sorry if I misunderstood anything. How did the IFRS [ph] the factor plays out in those numbers. So without IFRS element what would be that you are the actual the target for EBITDA and free cash flow?

Unidentified Company Representative

For this fiscal year free cash flow as you pointed it out IFRS 16 impact exists for the accounting treatment of lease, so EBITDA increase about ¥100 and so free cash flow race to buy ¥100 million. Thank you.

Keita Horii

We are running out of time, so next question will be the last question. Any questions from the floor please. If not. With this, we would like to conclude the meeting on KDDI the business results ended in March 2019. Thank you so much for your kind participation. Thank you very much.