KDDI ADR Earnings Call Insights: Communication Revenues and Increased Income

KDDI Corp. ADR (KDDIY) recently reported its third quarter earnings and discussed the following topics in its earnings conference call.

Communication Revenues

Tetsuro Tsusaka – Morgan Stanley: Thank you for your presentation, Morgan Stanley, Tetsuro Tsusaka. In Mobile now you are enjoying the long-awaited revenues growth, congratulations. Regarding the drivers, the growth of subscribers and stop of declining ARPU, maybe it’s a little too early to ask, but 1.2%, this figure is likely to actually go up in the next year, I think you mentioned that. In terms of Communications revenues, as a company how would you look out to communications revenues going forward? That’s my first question. Specifically concerning ARPU, prices strategy and sales strategy are both involved and to a certain extent, it can be controlled by the Company. So with certainty precision, I think, you can come up with a forecast, but on the other hand, the multiplication, the subscribers or subscriptions, there is always condition involved if it doesn’t work out or it might actually affect ARPU. In this fiscal year, you are doing fine as it is self-explanatory. But this is what I’m trying to say. DOCOMO is likely to introduce iPhone. So given that, you might actually lose the advantage you are currently enjoying. So, against the backdrop concerning the communications revenues, with what kind of scale are you confident that you can increase it? That’s my first question, please.

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Unidentified Company Speaker: This long-awaited mobile communications revenue growth, this has finally been realized. We are delighted about it. Regarding what’s likely to happen going forward concerning ARPU, this fiscal year’s commitment, the one where we already hit the bottom, it’s now increasing. So in the next fiscal year and forward, we want to see it grow. While we can control the discount concerning the price or pricing policy, we don’t want to do anything that’s excessive and Maitsuki Value or Maitsuki Discount, we believe that we are controlling it in the right manner in this fiscal year. We will, again, keep fighting in the fourth quarter. Again, we want to have the kind of a shallow monthly discount, that’s the instruction that we’ve been giving. So I don’t really think that you need to be overly concerned about this. Another thing, subscriptions, there were some examples you mentioned. Is DoCo really seriously going to introduce the iPhone? We are not confident; it’s possible that they may decide not to introduce iPhone. Just to separate it, it is still the hypothetical batter, but as we look at the third quarter, MNP is new (subscriptions). It’s true that iPhone is one of the drivers, but 40% of them are actually joining the Smart Value when they buy iPhone. So suppose – just suppose if that should happen this momentum that we are enjoying is something that we can maintain, I don’t really think we will be substantially affected by DOCOMO. So going next fiscal year, I think it actually slipped from my tongue, it would be 10% growth is what we – more than 10%, (the OB) growth is what we want to achieve in operations.

Tetsuro Tsusaka – Morgan Stanley: My second question is the following. With the stock split you want to introduce new shareholders, as I understand. With the new shareholders and there are also existing shareholders and they want to have more KDDI stocks. In such a case, the return to shareholders – as I look at the return to shareholders, as it stands now, in terms of the stock market it’s probably not that satisfactory, well, this is only my personal opinion. But concerning the return to shareholders, going forward, today we are of course talking about the third quarter business results. But in the full year financial results become available, will there be new policies announced by KDDI, because in the background, this fiscal year there was a J.COM deal, Jupiter Communications deal, there are some uncertainties perhaps that’s one of the reasons why you couldn’t say something to the detail, but the Group now has its good organization and shareholders are likely to have some expectations, can you comment on this?

Unidentified Company Speaker: First of all, JPY170, this is what we announced at the beginning of the term, obviously that’s the minimum level.

Tetsuro Tsusaka – Morgan Stanley: The next fiscal year?

Unidentified Company Speaker: Perhaps I already touched upon this before, facilities that are likely to be impaired is not existing. Turning to bottom, I talked about 10% before, but higher than 10% growth is likely. So even with 30% impaired ratio, in terms of the actual value, I think it is going to increase.

Tetsuro Tsusaka – Morgan Stanley: If we do some calculation, I think it is likely to increase, but what about the dividend payment in the next fiscal year?

Unidentified Company Speaker: As we promised, when the full year end results become available, we would like to make an announcement. So today – this all we can say today, as of today. Thank you.

Daisaku Masuno – Nomura Securities: Daisaku Masuno from Nomura Securities. First question is in the medium term, way to look at the medium term income profit. The environment is expected – various types of environment is expected in the medium term like the moves, actions by the competitors, and the competitive landscape, now JPY5 billion you raised as the operating income by JPY5 billion. I think there will be a message impact or signaling impact at least. So I would like to check – confirm your view on this. So given the competitive landscape and the market environment for your mid-term growth, you have a firm outlook towards the future, is that the background behind your upward revision of the operating profit of JPY5 billion, is that correct, if you could give us your view please?

Unidentified Company Speaker: This is a sensitive question. It’s very difficult to directly answer your question, but our view for the medium term is this year many things like 800 megahertz is done, J.COM deal was already announced. So we have been progressing very well this year. So this JPY5 billion upward revision is small, but by the end of this fiscal year including the cost towards next year we want to frontload the cost and the control that I mentioned earlier, we would like to do as much as we can this year, very strongly. For the medium term, there are very few negative factors that we can anticipate, so we think that we can increase steadily. In the segment, in the Value segment, the profit went down, but that was a one-off event. Once we shift, it will turn positive, so there is no concern here.

Daisaku Masuno – Nomura Securities: I hope you can rest assured with us in setting up your forecast, that’s my personal view. So my second question, shareholder return, I would like to estimate that on my own too, but there are some unforeseeable events, Free cash flow is down this year with the sales promotion and other factors, so next fiscal year you will sell many smartphones and if there will be more sales promotion cost, then free cash flow maybe impacted a little and the extraordinary loss with J.COMs joint purchasing, depending on when that will end, this extraordinarily loss of JPY65 billion maybe posted next year or this year, I don’t know. So my question is, this free cash flow status in J.COM extraordinary loss if this is posted next year, even if it occurs next year, this ordinary profit and operating cash flow level is going to be the level of shareholder turn level that you are trying to aim for. Actual figures will be announced at the end of the year, when we close the fiscal year. There are small factors, but I don’t think you need to be concerned about that.

Akita – GM, IR: Any other questions please? To the left, the person in the front row, please. Goldman Sachs.

Ikuo Matsuhashi – Goldman Sachs: My name is Matsuhashi. Two questions. Some rudimentary questions, sorry to say. About Smart Value target, the revision has been made, more or less concerning the fixed-line. There is some slowdown of the growth ratio and in Mobile, there seems to be some acceleration. What does that signify in terms of policies, for instance, concerning Mobile, can you expect acceleration or can you not expect acceleration because the trend is different now in the third quarter, so some additional explanation will be appreciated, may I?

Unidentified Company Speaker: First about the fixed-line services, in the past, area expansion has been done in parallel, but we are very close to sort of perfecting these efforts. So with the area expansion and the increase of acquisition, with area expansion we had seen some slowdown. So the fourth quarter, the landing figures, if you look at the differential, you might get an impression that there is a little bit of slowdown, but on our part – to put differently, in the past, the acquisition in the fixed-line services, beginning of the year target, it’s already higher than the target, it’s 110%. So we are not concerned at all. That’s how we look at this matter in-house. (Speaking) of the term target has not really been shifted, fixed-line service resource having actually too good. So it doesn’t mean that the target has been changed. Did I answer the question, about the mobile services? Chain reactions are being realized very well, so it doubled – doubly it’s been working out because it’s being growing very nicely.

Increased Income

Ikuo Matsuhashi – Goldman Sachs: My second question, regarding the factors behind the increased income? You gave us some explanation, there are others, but that was a bit significant. As I look at those detailed numbers, revenues increased, against your handset sales, it’s actually significant. So it looks like this is one of the factors behind the increase of the income and the sales price per unit seems to be also high. First quarter, unlike the first quarter and the second quarter, concerning the third quarter, you have this rather different numbers, are there any technical reasons or fundamental reasons behind this difference did we see in the first quarter any additional explanation? These others, in the fourth quarter what’s likely to be, some like additional explanation will be appreciated.

Unidentified Company Speaker: I will not be the ideal person. Ishikawa, about the third quarter handset situation, would you like to explain about them please?

Yuzo Ishikawa – SVP: As you rightly pointed out to give you some detailed information, the gross profit increase of the handset, that’s true and there are many others. The commission of the work or contracting, we have seen some improvement in efficiency. So in total, that actually goes to others, about JPY13 billion, of which the significant was the increase of the gross profit concerning handsets.

Ikuo Matsuhashi – Goldman Sachs: So iPhones increased. About the gross margin of the handsets, what was the impact of the increase of iPhones?

Yuzo Ishikawa – SVP: The gross margin (NYSE:PER) different models, it’s not something that we can disclose but with iPhones, we don’t particularly enjoy higher gross margin. Obviously, a certain markup has been realized, but that has to be times number of units. So with the increase of units, it increased. So please take it in this way.

Ikuo Matsuhashi – Goldman Sachs: There have been increase in the new subscriptions. So what’s the sales commission?

Unidentified Company Speaker: We have to spend sales commission about JPY18 billion. Did we answer your question? Other questions please.

Hideaki Tanaka – Mitsubishi UFJ Morgan Stanley: Tanaka, Mitsubishi UFJ Morgan Stanley. Your KPI is going very well. From next fiscal year and onward, what is your biggest concern President, Tanaka the biggest risk factor as you see, please?

Takashi Tanaka – SVP: That is rather abstract question, but what is expected of us is iPhone launched by other competitors, maybe that’s what you’re expecting me to say, but it is true that that can be a risk factor. But it is not as certain as it is rumored, and as we pursue our operation, we are promoting 3M strategy very strongly. And we are operating to enhance efficiency further. The second concern is when users transfer to smartphone, traffic will be large. Next year, we want to offload that 50% of the traffic. So we wanted to offload 50% of peak traffic in the area – from area coverage which we have been pursuing to the network structure is now concentrating in where the uses are concentrating. So we need to deal with this kind of network configuration. We need to be flexibly deal with that. In other words, if other companies will launch a very competitive product that is one concern and the second is how we can control the traffic. So those two are going to be my concerns.

Hideaki Tanaka – Mitsubishi UFJ Morgan Stanley: CapEx?

Unidentified Company Speaker: JPY450 billion. We will maintain around JPY450 billion.

Hiroshi Yamashina – BNP Paribas: BNP Paribas, Yamashina is my name. Thank you. Two questions, please. First question, so conversely the environment is actually getting better. In the next fiscal year, I think you are confident about some good performance, but in the fiscal year after the next what kind of policies are you planning to have? Then for that growth, what do you intend to do in the next fiscal year?

Unidentified Company Speaker: Regarding your first question, concerning this 3M strategy, multi-network, multi-device, multi-use that’s what it is. Where we should focus on for the year after the next fiscal year multi-device environment, how best we can create that kind of an environment, to give the multi-device environment for customers, I think that’s one of the most important factors for future growth. So can we do this well. So this is one of the points. Next, when we talked about Smart Pass, I mentioned this, concerning the Smart Pass deal, subscription is about 80% of the smartphones. We believe that this is likely to grow briskly, but regarding this ARPU portion, we want to expand it further the real multi-use environment for customers so that customers can use various devices, enjoy various different fun things and at the same time they enjoy high satisfaction. So they use (PoD). This is another (PoD) that we really have to focus on.