9433.T

Core Mobile Strategy: LTV-Focused Growth

• The company prioritizes lifetime value (LTV) of customers, shifting promotional spending away from short-term contract subscribers to long-term, higher-value customers, resulting in reduced promotional expenses and improved profitability.
• Penetration of the new au Value Link Plan and Komi-Komi Value campaign is progressing ahead of initial expectations, driving plan mix improvements and organic communication revenue growth beyond the prior year's price hike.

Growth Area Expansion: AI and Digital Services

• The newly launched KDDI iret AI integration service has seen threefold growth in new project demand, and the company is expanding multi-cloud infrastructure support beyond AWS to include Google, Oracle, and Microsoft to meet growing customer demand.
• New supply chain security assessment services will be launched in the second half to capitalize on growing industry focus on point-of-sale security, leveraging the company's existing cybersecurity capabilities.

Governance and Risk Remediation

• Completed comprehensive inspections of 110 target companies for inappropriate transaction risk by June, and has implemented new governance rules and monitoring structures, which are now active.
• Top management has conducted direct dialogue sessions with leadership at major strategic subsidiaries to build trust, and AI tools for credit screening and financial anomaly detection have been introduced to strengthen compliance monitoring.
• In response to a recent unauthorized access incident affecting the company's ISP email system that resulted in administrative guidance, the company is using frontier AI for vulnerability diagnostics to improve group-wide security standards and prevent recurrence.

Capital Management and Portfolio Review

• Core free cash flow margin and operating cash flow margin (21.6% in Q1) remain stable, supporting the company's growth investment pipeline.
• 11 divestments have been approved so far this fiscal year, generating approximately JPY 15 billion in cash proceeds. The company will continue to review business portfolio against strategic rationale and investment efficiency to identify additional divestment opportunities.
• An IR Day to detail strategy and business details is planned for mid-September 2025, with details to be released once finalized.

• Management reaffirmed the full-year adjusted operating income target of JPY 1.21 trillion, maintaining the initial guidance and leaving it unrevised despite Q1 outperformance against internal plans.
• Full-year double-digit revenue growth is still targeted for the Personal Growth and Business Growth segments, with management expecting the segments to meet their current projections.
• The company is on track to deliver on its midterm strategy commitment of investing JPY 1 trillion in growth areas over three years, supported by strong core free cash flow and divestment proceeds. AI-related infrastructure and application investments will be accelerated while maintaining disciplined capital allocation focused on ROIC targets.
• Management expects the planned balance sheet adjustment for the Financial Business (growing retail deposits and shifting lending to higher-margin products) to be completed by the end of this fiscal year, enabling resumption of profit growth from FY 2028 onward.

Overall: Consolidated operating revenue grew 5.1% year-on-year (YoY), with 23.2% progress against the full-year forecast. Adjusted operating income grew 21.1% YoY (26% progress), and adjusted net income grew 21.6% YoY (26.5% progress).

Mobile Communications (Core Telecom): Active smartphone subscribers reached 33.3 million, up 390,000 YoY. Churn rate improved 0.06pp YoY to 1.17%. Mobile ARPU was JPY 4,400, up JPY 160 (3.8%) YoY. This segment was the primary driver of profit growth in the quarter.

Personal Growth: First quarter operating income grew 9.3% YoY, with all 5 subsegments performing well. The Devices Business and Ponta Pass are key drivers, with growing device-related service revenue and improving active user rates. Migration from Ponta Pass Light to the full Ponta Pass is ongoing to expand the customer base.

Business Growth: First quarter operating income grew 21.6% YoY, with all 5 subsegments delivering revenue and profit growth. Combined AI integration and cybersecurity revenue grew 19.2% YoY. Cloud infrastructure revenue grew more than 30% YoY. Connectivity Data Center revenue grew 20.6% YoY, with EBITDA margin exceeding 40% as the segment captures growing AI inference demand. BPO has bottomed out from prior challenges and is now in an upward trend.

Financial Business: Au Financial Holdings Q1 operating income was down JPY 3.7 billion YoY, which was in line with management forecasts. The decline was driven by JPY 2.4 billion in mark-to-market losses from rising long-term interest rates on fixed-rate housing loan assets, plus ongoing challenges in growing deposit balances at the group bank. Excluding these one-off impacts, core credit card and banking businesses are growing steadily; gold card issuance hit 2 million contracts in May, with strong ongoing growth.

• The termination of the Rakuten Mobile roaming agreement at the end of September 2025 removes most roaming revenue starting in the second half, though limited roaming service will continue in rural areas for a temporary period; management has conservatively excluded most post-September roaming revenue from full-year guidance.
• Rising long-term interest rates created mark-to-market losses for Jibun Bank's fixed-rate housing loan portfolio, and the need to improve liquidity and balance sheet structure is temporarily suppressing housing loan growth this year.
• Inappropriate transaction risk in the group's portfolio of subsidiaries and investments has been addressed via a full review, but ongoing monitoring is required to prevent recurrence.
• A recent unauthorized access incident on the company's ISP email system resulted in administrative guidance, requiring ongoing investment to improve group-wide security standards.

Q: Can you confirm the status of the Rakuten Mobile roaming agreement, what revenue impact the termination will have, and will user quality improve for KDDI customers after September? / A: The main roaming agreement will terminate at end of September 2025 after 7 years of supporting Rakuten Mobile's network buildout, as Rakuten has now expanded its own coverage to meet its coverage goals. Limited temporary roaming will continue in rural areas while Rakuten completes its local infrastructure. Q1 roaming revenue is down ~JPY 800 million YoY, and no post-September revenue has been included in guidance for conservatism, though limited rural roaming will generate some small second half revenue. Prioritizing KDDI own customer traffic will improve service quality, but no quantitative estimate of the improvement is provided.

Q: After your 2024 price hike that drove strong ARPU growth, will you consider a second round of price increases now that peers are also moving to higher pricing? / A: No second round of price hikes has been decided at this point. The company will continue to focus on increasing penetration of its existing higher-value plans (au Value Link Plan, Komi-Komi Value) to drive organic revenue growth via better plan mix, which is already progressing ahead of initial expectations. Management will continue to evaluate the link between the value the company provides and customer pricing, and will act if an opportunity for further adjusted pricing makes sense, with no current changes finalized.

Q: What is the scale of AI-focused strategic investment, how will you fund these investments, and will surplus divestment proceeds be returned to shareholders? / A: Organic AI-related CapEx will remain within the existing 12% of revenue CapEx target, and the company has a midterm framework to invest JPY 1 trillion in growth over three years, which will include AI infrastructure, cloud, and application investments. Cash from divestments and strong core free cash flow will fund these investments, with disciplined allocation focused on ROIC and high-return projects. If there is surplus cash after filling the growth investment pipeline, the company will consider returning additional capital to shareholders, but no decision on this has been made at this time.

Q: What drove the profit growth in the Telecom Core segment outside of mobile communication revenue, and will this trend continue? / A: The largest driver of non-communication profit growth is a reduction in promotional expenses, driven by the company's LTV-focused strategy: cutting acquisition spending on low-value, short-term subscribers and reallocating spending to long-term customers. This change in spending mix, plus a change in accounting standards for short-term contract promotional costs, accounts for roughly two-thirds of the non-communication profit growth. This trend will continue through the second quarter and second half, as the LTV-focused strategy remains in place.