Kddi Corp Unsp/Adr

Now we will begin the KDDI Corporation's F526 March term financial results briefing. I am Hiraoka from the KDDI's Public Relations Department, and I will serve as today's moderator. Today's briefing is being held both on onsite and through multiple online streaming platforms, including YouTube. Today's financial materials, And related documents are available on KDDI website. A total of eight materials are posted on the web. If you are on the conference room, please check your handouts. Let me introduce today's speakers. President, Representative Director, CEO, Hiromichi Matsuda. Senior Managing Director, Executive Officer, Director, CFO, Executive Director, Corporate Sector, Nanae Saijoji. Managing Executive Officer, Director, CFO, Executive Director, Corporate Strategy Planning Division, and Executive Director, Tomohiko Katsuki. Executive Officer, Deputy General Manager, Corporate Sector, and Executive Director, Corporate Management Division, Kenji Akita. A total of four will be the speakers.

Mr. Matsuda, please.

Thank you very much for taking time out of your busy schedules to join us today at KDDI's earnings briefing. I will present our financial performance for the year ending March 2026 and the new medium-term management plan. First, the financial results for the year ending March 2026. On the financial results for the final year of the previous medium-term management strategy, we achieved growth in both revenue and profit, hitting mid-term EPS target through underlying performance driven by business growth. Operating revenue for the year ending March 2026 was 6,071,000,000,000 yen, up 4.1 percentage points year-on-year. Our underlying performance in terms of operating income was 1,164.3 billion yen, up 6.0% year-on-year, excluding the external outflow and cost of impairment for the contracts associated with the fictitious circular transactions we explained as part of our Q3 earnings at the end of March. Likewise, our net income attributed to the owner of the parent was 756.7 billion, an increase of 13.6% year-on-year. Because the amount of net income required to attain our EPS target, which was set at 1.5 times, our net income 7.9%, our revenue 1.1%. And I said, because the amount of net income required to attain our EPS target, which was set at 1.5 times the level of March 2019, is 748 billion, we were able to achieve net income well above that. Next, I will discuss our consolidated operating income and its factors for change. Starting from the left, mobile, the personal services segment base, rose 31.7 billion a year. Excluding the impact of access charge, the increase was 45 billion yen, a major growth due to our initiative to create a value of Finance and energy businesses, as well as Lawson's equity method income combined, increased 17.4 billion yen. VX increased by 28.6 billion yen, growing substantially in the second half. We controlled technology structural reform and impact of prior year's promotional expenses. In total, income grew by 66.4 billion yen, with all the business domains maintaining solid debt performance. This slide is on a mobile structural transformation we have been focusing on for the past year. Structural transformation to shift towards focus on LTV and creation of value have succeeded, resulting in a strong growth in our mobile revenue. As shown on the left, mobile revenue in the personal services segment increased 32.6 billion yen year-on-year, excluding the impact of access charge. The increase was 50 billion yen year-on-year, which was much greater than our initial forecast. Shown on the right is our value creation ahead of our competitors, which underpinned our success. KDDI was rated number one in connected experience in terms of telecommunications quality for an unprecedented consecutive four years. Furthermore, AU Styling Direct, which is marking its first anniversary, exceeded 4 million connections, and the 5G pass lane is being used by approximately 2.5 million users On a cumulative basis, as a result, mobile ARPU was up 100 yen year-on-year with a stable churn rate. The number of smartphone subscriptions was up 360,000 year-on-year, enabling us to achieve increasing both ARPU and the number of IDs. Next on financial business and DX, which are our areas of focus, by promoting the satellite growth strategy during the prior medium-term management strategy between We are addressing the issues identified in the review so that they are remediated by June. Next, toward the year end, we will invigorate actions to enhance the quality and quantity of our communication. Executive-level dialogues with group companies have been initiated to establish a relationship on an equal footing with them and to better understand their perspectives. Additionally, to embed KDDI's philosophy as the common language, by the end of the first half of this fiscal year, KDDI's top management is scheduled to visit 14 of our strategic subsidiaries in person. I myself have visited Big Globe and G-Plan. 260 employees participated in the meeting I attended there. I had more than 10 instances of interactions with them during the Q&A sessions. discussing our hopes and expectations for the employees, the future of telecom business, mindset change, and so forth, with the majority of the views expressed being positive, reminding me of the importance of having a dialogue. By embracing the genuine opinions of the group company's employees and responding to them sincerely, we hope to enhance their trust in KDDI and improve their psychological safety. Because there is a possibility that simply trying to strengthen the control processes will only increase the burden and cause fatigue on the part of the employees on the ground, we will try to alleviate the burden by leveraging AI and managing creatively so as to make it positive. Let me talk about the organizational change we're implementing to make these initiatives more effective. As is on the lockdown side, Although we put in place a framework 10 years ago when we had the DMX case to manage the subsidiaries across the group from a unified perspective, as reorganization repeatedly ensued to respond to changes in the environment, subsidiary management functions within the corporate department have come to be dispersed. This time, to correct this situation, we installed a division to advance governance in all the companies across the group and to integrate the departments in charge of finance, group governance, and risk management. This division will be headed up by our CFO, Sai Shoji, who will double head as CFO and Head of Governance Division, enabling centralized management, assessment, and as a result, effective control of financial activities and governance risk related information. This division will also play the role of passing down the lessons learned from the inappropriate incident to the new employees and group of companies.

Next, as shown at the bottom,

Whereas before, only the investment management department was responsible for managing investee companies. ...ahead of our piece in the industry and shifted our full focus to proactively rolling out 5G, we were able to build a best-in-class network Other main businesses also made a strong progress, as you can see. In particular, inviting Lawson into our group as a partner brought us valuable customer touch points in the form of close to 15,000 Lawson stores, which serves as a foundation for us to create value. Generally, despite marked changes in our business environment, including mobile tariff reduction, rising fuel prices, and political upheaval in Myanmar, we have realized sustainable growth and established a solid foundation for the next phase of growth. Regarding the telecom failure in 2022 and the recent inappropriate transactions, we will make vigorous company-wide efforts to prevent recurrence and to pass down the lessons so as not to allow the memory of these incidents to fade. I was tasked to see through the final year of the previous medium-term strategy, aiming to balance offense while running and cementing defense at the same time. But as it turned out, I had to face the elapsing governance as it came to be exposed. I personally acutely felt that in such instances, 100 minus 1 could be 0, as I often say internally. We will utilize this experience as an opportunity to learn a tough lesson and for the entire group to deepen unity and evolve into a resilient corporate group. Allow me to take this opportunity to ask for your continued support for KDDI going forward. Next, I will explain our new three-year medium-term management strategy that we have formulated.

We named this strategy Power to Connect 2028 based on the power to connect which we value most. First, let me explain the overall strategy. Until now, in line with each generation of mobile technology, we have refined our role as a social infrastructure provider centered on telecommunications while expanding our business. Since achieving the role of president last year, last April, excuse me, I have focused first on strengthening our core telecommunication business by redesigning its value through a combination of communication quality, pricing, added value, and partnership. With a proactive first mover mindset, we have created a value ahead of the others and strengthened our business foundation. Today, we stand at the entrance to an AI-native society. And I defined this AI-native society as follows. First, it is a society where AI penetration drives efficiency and sophistication expanding business growth and value creation However, AI itself will rapidly become commoditized making its differentiation increasingly difficult through AI alone Therefore, the key question is how companies will differentiate themselves once AI becomes commonplace In other words, I believe competitive advantage in an AI-needed society will depend on how effectively companies build value that is difficult for AI to replace We believe that refining physical assets that are difficult for AI to replace customer touchpoints, nationwide infrastructure, and human talent will be the winning strategy in this society. To achieve this, we advocate a value creation approach called fusion, which integrates different domains. Historically, Many services that transformed lifestyle emerged through combinations with fields that were initially underestimated. Our concept of fusion is based on this same philosophy. At the center is real-tech fusion, which reconnects the strength of a physical world with technology in an increasing digital society. This is most directly linked to our future growth, transforming customer lifestyle and experiences through technology while creating new businesses differentiated by real-world value. On the left is infrastructure fusion. servers and id technologies that are fundamental to network constructions and network design increasingly requires ai integration thus telecom infrastructure and the new ai infrastructure will be fused to realize the digital belt concept and finally toward the right there is human resource fusion We believe people are our most important assets and talent must continue evolving its skills in line with the times. We will cultivate the ambidexterous talent that combines existing strengths with new skills. The term fusion is inspired by nuclear fusion where the greatest challenge in nuclear fusion is maintaining an ultra-high energy state all the time. And within that high energy state, collisions generate explosive energy. Therefore, what matters is not simple combination elements, but building a management foundation capable of sustaining a high energy environment. Stronger governance is a fundamental Therefore, we will use recent incidents as an opportunity to further reinforce our systems, and our nationwide scale and partnership capabilities are also indispensable to drive fusion forward. Let me explain each fusion initiative. The first is infrastructure fusion, known as the Digital Belt Vision. Infrastructure development takes time, so we are planning toward around 2040, and think about planning and designing with a long-term perspective. Going forward, what will matter is having AI nearby and the degree of that proximity. In addition to already constructed Sakai, Miyazaki, Tama, and Oyama, we are planning that all telecom centers and data centers are connected fully by optical network in new sites such as Kansai and Itani. As the space industry develops, communications between Earth and space will become increasingly important. As the first company in Japan to realize space communications, we will roll out our power of connectivity to outer space. Furthermore, we will strengthen our optical submarine cable infrastructure that supports high-capacity and low-latency communications as AI increasingly demands faster responsiveness and real-time processing capabilities. We will leverage Japan's geographic advantage as a direct gateway connecting Asia and the United States while further expanding our submarine cable deployment, operation, and maintenance business. The digital wealth vision aims to establish a nationwide low-latency network and AI computing infrastructure spanning land, sea, and air. At the same time, by advancing operational efficiency improvements and ensuring the transfer of technical expertise, we will invest a total of 1.2 trillion yen over the next three years and contribute to strengthening Japan's industrial competitiveness. The second fusion is about people developing talents through skills integration. In this mid-term strategy, we position growth of our group companies as a key driver of execution. We will establish career paths and provide opportunities for experiences and advancement through assignments to group companies, overseas offices, and regional sites. We will also strengthen HR and compositional systems to support such approach. For instance, through skilled visualization of network engineering, we confirmed their strong adaptability to advanced technologies. By enabling employees to acquire new expertise through practical work, we were strengthening their ability to implement solutions in society. In AI fields, Engineers will increasingly work on-site with customers, rapidly deploying and implementing solutions. Therefore, operational capability and communication skills will become essential. Through a broader group, including KDDI, IRED, and security specialized LAC, we aim to cumulative approximately 3,000 AI engineers and 2,000 security engineers to be grown going forward. In sales as well, we will enhance customer engagement capabilities through nationwide sales companies. be it Sonic Falcon for personal sales and be it KDEI BizEdge for assisting SMEs for DX. Based on the belief that people are our greatest assets, we are promoting full-time employment and maintaining high sales quality. By combining strong field capabilities with AI-oriented thinking, we aim to become closer to customers and expand our fans in each region. The third is Real Tech Fusion. In an AI-native society, we remain committed to delivering value starting from the customer. We will provide AI workforce capabilities that support corporate growth, including physical AI and physical intelligence. We will also provide AI lifestyle capabilities that transform daily lives and experiences through lifestyle intelligence. By rapidly implementing these solutions in society together with partners, we will continue creating new, valuable customers. One leading initiative in providing AI workforce capabilities through drawn enabled digital trends of physical worksite. To the right, we are also building environments that recreate our vast customer data within digital trend space to simulate customer preferences and responses with high precision. Few companies possess this scale of data. We intend to move quickly in leveraging this scale. And through these initiatives, we will continue to evolve the value core to the future society that is difficult for AI to disrupt. And among one important component of that value is our brand. When KDDI was established in 2011, we expressed our determination in shape the future ourselves through the message of designing the future. And later, through Tomorrow Together, we entered a new phase focused on co-creating the future. At the same time, after the pandemic accelerated the digital transformation, communications become deeply embedded in daily life and our AI emerged, while AI emerged as a major turning point. In the same environment, We reconsidered what our brand value should represent. And as such a discussion, it means supporting each customer's life and aspirations so they can shine in their own way. And it also means continuing to evolve the power of connect, which we take pride in. We consolidated this promise to customers and our unwavering commitment So please, kindly watch this video.

Hey you guys. KDDI connects people, companies, The countryside. Connecting cities. What lies ahead is not a single future. More and more will create many opportunities. Each and every one of us will have the opportunity to create our own future. That's what I think. Everyone can access the information of the world. You can meet something you can be absorbed in. New friends are born, and unexpected possibilities open up. You discover a new self that you can do something like this. All the technology and quality of KDDI exists to make people shine. Your future will surely open up to you. And just by winning such a future, this country will become healthy. That's what I think. Please, in the throbbing of being born in yourself,

For tomorrow this time we have evolved these concepts into the expression of journey which embodies a sense of time this embodies a strong determination to walk alongside each customer's journey their very life itself to ignite the flame of their challenges they are taking on and to be a source of support for them to those taking the first step and to those diving into the unknown kddi will be the power that carries you forward spark your journey With this brand message, we are committed to creating value for the next generation. Please look forward to our future developments. From this page onward, I will discuss how we're going to implement the Power to Connect 2028. As we mentioned in our Q2 earnings last year, The key themes of our midterm management strategy are sustainable growth and quality improvement. On the left, in addition to maintaining growth in our core businesses led by telecommunications, we will continue to create new businesses. To that end, we will enhance infrastructure value by building a digital belt, promote growth in each business area through the full utilization of AI, create value through fusion and method of cost domain integrations, These initiatives will be key to establishing our competitive advantage. The other key element, as shown on the right, is return-based capital allocation. While growth requires not only capital expenditures, but also growth investments, this will make awareness about capital efficiency even more critical. This is a crucial point, so I will explain it in detail later. We aim to enhance corporate value by deepening our strengths in sustainable growth and improving quality in an AI-native society. Under the new mid-term management strategy to strengthen our commitment to growth, we are newly establishing segments and clarifying their roles. A telecom core segment, which is our core businesses, including telecom and infrastructure, The business growth segment, leading growth, and personal growth segment. Altogether, there are three segments that are set up. Telecom core segment at the bottom will pursue continuous transformation toward achieving stable growth and lean profit structure to create sources of funding growth. The source of funding will be utilized to further brush up the core businesses, but will also be allocated to growth domains to accelerate their growth. A favorable cycle to enhance the engagement of customers in the telecom core segment to create synergies for growth will be built. These are the growth targets for the consolidated company in each segment aimed at achieving sustainable growth in the New midterm period, we aim for a 5% CAGR in consolidated operating profit exceeding the figures of the previous midterm management strategy driven by stable growth in the telecom core segment and double-digit CAGR growth in both the personal and business growth segments. The two growth segments will expand their scale with the goal of accounting for one-third of consolidated revenue. First, the telecom core segment. We aim to achieve stable growth in operating profit by further accelerating the growth of the mobile business, which shifted to a revenue growth trend during the previous midterm period. We are to move away from competition in promotion to competition in terms of value. The key is to utilize AI to achieve both offense and strengthening marketing and defense, in enhancing cost efficiency. We will further accelerate our efforts to establish the services we have traditionally offered, such as financial services, energy, device repair and warranty, and services like Gapunta Plaza and Lawson as the foundation of our AI-powered lifecycle. Furthermore, in the global area, we will leverage the insights gained in Japan to expand our successful models overseas. This initiative aims to create new business models in the personal growth sector. In the financial sector, we will build a competitive advantage through the fusion of existing financial services where we have pioneers in mobile finance since the early days of smartphones and pioneering with free financial services geared toward the area of financial tokenization. As a first step toward this goal, we will establish new company collaboration with partners and begin offering a crypto asset wallet. In the center, Lawson will leverage Its store network expands sales channels with approximately 15,000 stores nationwide. A powerful customer touchpoint. Poverty that cherish has been well received by younger generations. They are selling nine times last year's level. And accelerating the expansion of mobile accessories and other products are happening. We will build a model that drives growth for both companies. On the right, we will turn the arrival of the next generation of smartphones into a new opportunity. In the future, AI agents will be installed in all devices. When that happens, the degree of proximity between AI and devices within the digital belt will become extremely important. I personally believe devices will become even more fascinating, so we will try to leverage them as a huge opportunity. Business growth will also define five areas to drive growth, to aim for double-digit CHR growth. In AI integration, to provide integrated solutions encompassing telecommunications, cloud, and AI, KDDI IRA was launched. What we used to call IoT in the previous midterm strategies remained as connected, and we will aim to achieve 80 million connections. With smartphones combined, the number will rise to 130 million connections. AI BPO, or Auteus Link, will leverage AI to enhance customer experience and drive business transformation. Data Center, as is on the right, will respond to to domestic and international demand for AI and traffic regarding data centers. And as a pioneering provider, we will steadily capitalize on opportunities. We will apply our expertise in deploying connectivity data centers overseas, built on years of experience to our domestic AI center. We were able to set up this within a very short period of time as a result of our expertise and experience. And inference design capabilities will also be expanded overseas. To further strengthen our infrastructure foundation, we plan to invest 300 billion yen over the next three years, both domestically and internationally. On the right, regarding cybersecurity, AI has given attackers a decisive advantage, making it critical to determine how we will respond to this. Another key point is the evaluation system CSS, both domestically and internationally. Client will verify and evaluate security measures of business partners. And in order to respond to this and capture business opportunity, like with 700 engineers, KDDI will join forces to advance these initiatives. I'd also like to touch upon our challenges in creating businesses. A smart drone has become firmly established and is growing steadily. and has become the top player in the drone market. When we first launched, we set a goal of 10 billion in sales within three years. There's been some delay, but we're expecting to achieve this in year five. Recently, it's been used for remote control and response to bear sightings, and we expect to realize solutions to social issues within the next year. And in the center will be an on-demand transportation service with the slogan, Quick Rise. I took the stage at the launch event and have a personal attachment to this business, but it is now moving forward. We will take over this business in July of this year, and as KDDI, Smart Mobility, leveraged physical local touchpoints such as AU shops and Lawson stores to provide autonomous driving and mobility services. On the right, we are promoting exporting... expanding solutions to Japan's challenges overseas and targeting this as a business opportunity. For our first initiative, we plan to launch the Pogo Success Story as a sub-brand of Vietnam's telecommunications carrier, VNPT, with a service set to begin within the year. I will explain the capital allocation necessary to drive our growth. To improve our quality, we will maximize operating cash flow, And we will continue to leverage the traditional strength of efficient capex by utilizing capex to sales and controlling it at 12% or below. And on the left, the basic free cash flow combined with investments and leverage will be utilized to generate funding. On the right, we will maintain stable dividend growth as a baseline while actively pursuing growth opportunities. Regarding share buybacks, we will respond flexibly, but we'll always evaluate them by comparing the returns against growth opportunities. And we will execute disciplined capital allocation with a focus on capital efficiency.

In our new medium-term management plan, we are committed to disciplined growth investment and the further refinement of our portfolio management in light of the recent inappropriate incident. We will conduct a thorough review of our investment decision-making process and post-measure integration procedures as well. We will also place greater emphasis on ensuring alignment with our corporate culture and working environment as illustrated at the bottom left section. On this basis, we will actively consider investing approximately one trillion yen over the next three years, primarily in growth-oriented sectors. Regarding post-investment evaluation, on the right, whilst we have carried out this work previously, we will update our approach to include subsidiaries and second-tier subsidiaries and continuously verify strategic rationality. And should strategic rationality diminish over time, we will consider divestment or withdrawal as a matter of policy. Under this policy, we have already proceeded with the sales of Capcom securities and LifeNet life insurance as previously announced. We will do this type of exercise going forward as well. We have another announcement to make today. we have decided to commence discussions regarding a stock market listing for AU Financial Holdings, which was driven by the growth of our financial business. Our financial business has contributed to the development of mobile finance through the pioneering integration of telecommunications and finance and has been steadily expanding in both business scale and performance. taking into account the further growth of the AU financial group and the public interest nature of the financial business. We intend to proceed with discussions and preparations with the view to public listing. The listing is subject to approval by the relevant authorities, and we will continue to assess our financial stability and further refine our growth strategy.

Next, I will explain our dividend policy.

In the fiscal year, we will continue to assess our financial stability and further refine our growth strategy. Our business in FY24 and impairment of contract costs related to short-term cancellations last year, we kept the dividends at the level of forecast announced at the beginning of the fiscal year. And by using adjusted profit as the basis, we will further clarify our commitment to stable dividends. We will explain later our thinking behind the FY27 dividend and the concept of adjusted profit later. Next, I will discuss strengthening capital efficient management. In this midterm strategy, we will place strong emphasis on disciplined growth investment. We will strengthen the investment initiatives to generate 1 trillion yen in investment capacity while enhancing our investment pipeline and ability to identify attractive opportunities. In growth areas, we will pursue growth investment while keeping benchmark companies in mind. We aim to improve IRE over the medium to long term without allowing it to decline even while making growth investment. We will also use ROIC spread as a formal indicator and work continuously to maintain and improve it. To support this, we have significantly devised management incentives and reflected them in the executive compensation. By incorporating ROE, ROIC spread, and the TSR relative to benchmarks, We aim to become a company that takes responsibility for delivering on its commitments. We plan to establish an IRD from this fiscal year and report on these policies and progress there. Let me summarize the midterm financial targets as I have discussed so far. On the left side shows the results of the previous midterm strategy, and under the new strategy, we will further enhance these strengths and achievements. In telecom core, we will maintain stable growth while in five areas of personal growth and business growth, we aim to achieve double digit growth and targeting overall operating income CAGR of 5%. And we will continue controlling capital expenditure levels while pursuing growth investments of around one trillion yen and reviewing our business portfolio. We will aim to maintain and improve ROE and ROIC spread. For shareholder returns, we will maintain a high payout ratio and stable dividend increases while conducting share buyback flexibly. Through these initiatives, we aim to achieve sustainable growth and further improve quality. Sustainability management serves as access for implementing everything that I have experienced so far. As shown on the left, we have changed the diagram, sustainability management, but the essence remains unchanged. We will continue to focus on the six material issues shown on right and aim to create a virtuous cycle of corporate value enhancement through their resolution. I would also like to introduce KDDI's management for work. We position Fusion as our growth structure in an AI-native society and will use it to open the path forward to sustainable growth.

I will now explain the concluded point of

and maintain or improve capital efficiency. When excluding non-recurring expenses, we will confirm the approach with our auditor firm in advance and apply it in discipline. And based on this premise, we forecast revenue of 6.41 trillion yen up 5.6% year-on-year. We aim for adjusted operating income of 1.21 trillion yen up 5% year-on-year. We aim for adjusted net income of 731 billion yen up 2.7% year-on-year. Net income growth appears somewhat lower due in part to the impact of the defense tax increases. Regarding the shareholder returns, DPS for March 27 will be 84 yen, up 4.0 yen, or 5.0% year on year. This demonstrates our commitment and confidence in stable dividend increases aligned with our business growth. And we will conduct share buyback up to a total of 300 billion yen, including a tender offer for share repurchases of up to 250 billion yen. We have... also resolved to cancel treasury shares exceeding 5% of total issued shares. We will steadily execute both business growth and capital allocation. These are the key points of consolidated operating income for March 27. On the left, Telkom Corp Mobile expected to continue growing significantly, contributing an increase of 37.5 billion yen year-on-year, including the negative impact of 9 billion yen from depreciation and other factors. Telkom Corp as a whole expected to increase 28.5 billion increasing year-on-year. excuse me, 28.5 billion yen year-on-year. Personal growth is expected to increase 22.6 billion yen. Business growth is expected to increase 14.1 billion yen. And other factors include impact of lower-racket enrollment revenue overall being an increase of 58.2 billion yen, or 5% year-on-year. Finally, let me summarize mission management strategy. This point I have explained so far as summarized here. And... We hope that you look forward to KDDI as it enters a new phase of growth, and thank you very much for your attention.