KDDI Corporation (9433) Earnings Call Transcript & Summary

Thank you for waiting. We will now begin the financial results briefing and Q&A of KDDI Corporation for the first quarter of fiscal year-ending March 2025. Thank you very much for taking time out of your busy schedule to join us today. I am [ Miyakawa ] of Investor Relations department, and I will serve as the moderator today. This briefing will be broadcast live on the Internet with simultaneous Japanese to English interpretation. The presentation will be available on demand on our IR website at a later date. Thank you for your understanding in advance. Let me introduce the participants today. Kuwahara, Executive Vice President and Executive Director of Business Sector; Matsuda, Managing Executive Officer, CDO and Executive Director of Advancing Business Technology Sector; Saishoji, Managing Executive Officer, CFO and Executive Director of Corporate Sector; Takezawa, Managing Executive Officer and Executive Director of Personal Business Sector; Aketa, Executive Officer and Executive Director of Corporate Management Division. 3 financial results related materials are posted on our IR website. Please refer to the disclaimer in the material regarding statements made in those documents, performance targets and projected subscriber numbers, et cetera, explained in the Q&A session today. Managing Executive Officer, Saishoji, will first explain the financial results summary followed by Q&A. Ms. Saishoji, please.

Thank you for taking time out of your busy schedule to attend the results briefing today. Before the Q&A session, I will explain the key points of the Q1 financial results for the year-ending March 2025. Consolidated revenue and income increased in Q1 of FY ending March 2025. On the left, operating revenue was JPY 1,389.1 billion with progress towards full year forecast of 24.1%. In the middle, operating income was JPY 277 billion with progress rate of 25%. On the right, profit for the period attributable to owners of the parent was JPY 176.9 billion with progress rate of 25.6%. Next are the factors for change in consolidated operating income. From the left, group MVNO revenues and Rakuten roaming revenue is down JPY 6.2 billion year-on-year; multi-brand communications ARPU revenue, up JPY 2.9 billion; financial and energy businesses, up JPY 4.6 billion; Lawson's equity method investment income, up JPY 2.2 billion; DX and Business Services segment, up JPY 5.4 billion. Communications ARPU revenues increased and focus areas such as DX are driving growth, resulting in an increase of JPY 10.3 billion. Next, key points of consolidated financial results for Q1 of fiscal year-ending March 2025. On the left, communications ARPU revenues exceeded Q1 of fiscal year-ended March 2023 level, offsetting the impact of price cuts and are trending upwards. On the right, operating income of Business Services segment increased by 11.2% year-on-year and is progressing as expected toward full year double digit growth. Next is regarding momentum for mobile. On the left, smartphone subscriptions is increasing which is the foundation of ARPU growth. On the right, the churn rate for multi-brand ID is rising, while churn rate for au, our main brand remains small. Next is the status by brand towards communications ARPU growth. On the left, ARPU of both au and UQ mobile is growing. Many subscribers choose unlimited data plan of au or medium to large capacity plans of UQ mobile. On the right, conversion from UQ mobile to au was approximately 2.2x of those of a year ago year-on-year. Percentage of UQ mobile users who migrated to au contracts is also increasing. Next regarding the Business Services segment. By promoting communication plus value-added strategy, our value-added growth area grows steadily. On the left, operating revenue was JPY 333.4 billion, up 16.3% year-on-year. Among those, gross area was up 39.2%, making a double digit growth. Our strengths such as IoT-related services, data center and digital BPO are all making double-digit growth. On the right, CAGR of IoT connections was 29.8% which is growing and we are expanding customer contact points for data collection and utilization. Last is the summary of the first quarter results. Consolidated results and key points were already explained. As for the satellite growth strategy, we are number #1 in the number of Sub6 base stations for high speed 5G, making au the customer's choice for connectivity quality. Through partnering as strength, we promote the use of generative AI in companies and business transformation. As for Personal Services segment, since steady growth and positive momentum in each brand's ARPU, we are aiming for sustainable ARPU revenue growth through communications plus value-added synergies. Growth areas drive the overall growth of the Business Services segment. We will accelerate initiative of wakon-cross business platform for AI era. That concludes my presentation and we will take questions.

Thank you very much, Ms. Saishoji. We will now take your questions. [Operator Instructions] First question is from Mr. Tokunaga from Daiwa Securities.

This is Tokunaga from Daiwa Securities. I have 2 questions. First is regarding cash flow. In your Q4 briefing, you talked about the buyback, JPY 300 billion will be completed by October and there are some headroom you said. After that in the shareholder briefing you said many other things. So regarding this point, as of first quarter, do you have any updates, especially the headroom?

Thank you for the question. So regarding cash flow, regarding the share buyback policy, your question was whether there's any change in our policy. First, regarding cash flow allocation, we just ended Q1. So in our medium term 2 year cash flow plan, we have no major changes, and our policy remains unchanged. Now share buyback, up to the ones that we have executed so far, we've also said that we have possibility of conducting more buybacks. It's not that there weren't any changes. So nothing has been decided at this point. So I hope this answers your question.

Yes. So the fact that you still have some headroom remains unchanged.

Q1 is now trending favorably, in line with the plan. So regarding the headroom or further possibility of further buyback, on that point, we have no changes.

I understand. And my second question is on ARPU. By brand, ARPU is rising, which is good news. But it is flat year-on-year, so is this in line with the company plan? In this year, the access charge impact will probably emerge. And so can you increase ARPU on that basis? So could you elaborate on ARPU on the Q1?

Thank you very much. Personal ARPU. So Mr. Takezawa will answer that question.

Thank you for the question. Let me answer that question. As you rightly said, Q1 ARPU is JPY 3,930, so on a year-on-year basis, it is basically flat. On the other hand, as you also rightly mentioned, au and UQ are 3% and 8%, respectively, so they're up. Now what is related to this is the brand mix. Compared to last year, UQ to au conversion is more than double on a year-on-year level year-on-year basis. And therefore, regarding this unit price, it is basically in line with our initial plan. Thank you. I hope this answers your question.

Yes. If I could dig this deeper, this au, 3% and UQ, 8%, this will be -- this will continue for this year or the medium term plan period?

Regarding ARPU, our ARPU -- like ARPU total revenue, we need to also focus on the unit price. So this level, au subscription, the yield, we need to take more measures so that this au yield will remain unchanged and also grow further.

So this will be by brand basis and the yield will be the improvement factor going forward?

Well, yes, yield accounts for a bigger portion than we think. So this will be an urgent matter that we need to address. But as I mentioned earlier, au proportion of total, the decline is becoming milder and so we want to take more measures on this point.

Mr. Tokunaga, thank you very much. We will move on to the next question. SMBC Nikko Securities, Kikuchi san.

This is Kikuchi. 2 questions, please. First, in regard to the Personal Services segment, the contribution from Lawson, which will be the equity method investment earnings that contribution has been made. But what about the business side? Are there any initiative or actions that may contribute to the contribution of your business performance? Aren't there any prospective actions that may positively affect your business performance?

Thank you very much for your question. So Lawson's business contribution, are there any and are there any actions that we are taking? For that point, we will invite Takezawa san to answer your question.

Thank you for the question. Well, Lawson -- well, closing is expected till the end of September. Therefore, it is too early to communicate the detail about what we are going to do. But we -- in terms of higher or enhanced relations with Lawson, back in July from KDDI, there is a group of 10 people who were seconded to Lawson's headquarters and there is more than 10 working groups were started and they are trying to discover the potential area for making positive contributions. So hopefully, soon, we will be able to communicate more detail. Thank you very much.

Second question is Business Services segment. Now so increase in profits in DX, for example, acquisition of the data centers and also integrating the BPO companies will probably affecting. And during the first quarter in the Business Services segment, were there any specific quantified results which proves the positive contribution from such actions initiatives?

Thank you for the question. Our business segments DX, during the first quarter, were there any actions or movements that may result in positive impact going forward? For that, we will invite Kuwahara san.

Thank you for the question. First of all, for operating revenue and operating income growth during the first quarter is coming mostly from the growth area. The growth area have grown tremendously and nearly 40% of growth of the operating revenue that we observed and the operating income made a similar growth. So composition of that is a data center, IoT and the BPO equally. And compared to the previous fiscal period, now since September of the last fiscal year, Altius Link started and former Relia Communications were fully integrated and that had a major impact. In regard to the data center, Canadian data centers were acquired through M&A and the income contribution started in September. That concludes my explanation.

So it is a simple addition of some businesses during the first quarter. But in regards to the contents of the business, were there any activities that may result in substantive profit increase going forward? That was the intent of my question.

Thank you very much for clarifying your question. In regard to the substance of the businesses, well, I think each and every line is performing quite well. DX, even if compared with other SIR, everyone says that demand for DX is increasing in steadfast manner. We are capturing that demand and therefore resulted in increase in operating revenue and income. Like I mentioned earlier, as a case example, other lines of business is also contributing to the growth both in revenue and income.

We will take the next question. Mizuho Securities, Mr. Hori, please unmute yourself and ask your question.

This is Hori from Mizuho Securities. I have 2 questions. One is related to the earlier question on Business Services segment. So if you could elaborate on the profit further. Growth is growing, but data center -- the new established -- after new establishment, there will be higher depreciation. So maybe the accounting basis profit will not follow right away. And BPO, in addition to new consolidation, this is not where the marginal profit is high. So life cycle will be suppressed and get more business for the future. So this -- but on the other hand, base is profit declined slightly. So the equipment sales decline and communication increases, then that will be a bigger impact in pushing up the profit. So revenue -- in relation to revenue increase/decrease, what part contributes to profit increase? So that's my first question.

Thank you. So Business Services segment, revenue and profit increase, if you could elaborate, please?

Yes. Thank you for the question. So first of all, the 3 categories, so the growth, IoT, data center and BPO. First of all, IoT, the connections is growing steadily in Q1, JPY 44 million. And on a full year basis, it is growing at JPY 7 million to JPY 8 million. And so this is one big contributor. Regarding data center, I mentioned the Canadian data center M&A impact. We have more than 45 data centers, and they're all trending strongly in Europe, in Thailand, data center opened last year. So those are big contributors. Regarding BPO, labor intensive, but going forward, we will digitalize and enhance the efficiency. And this higher efficiency will be shifted to the higher added-value areas to achieve higher revenue and income.

Thank you. I hope this answers your question.

Yes. So the base, the total revenue is slight decline. What's the content? So communication is increasing? Or could you elaborate on that part?

Well, on the base side, on a full year basis, we plan for both revenue and income increase. But in Q1, Denki -- au Denki for corporates, the number of customers is declining slightly, so that is negative. So on a full year basis, our plan is to increase both revenue and income.

Understood. My second question is Personal Services, communications ARPU. So on the right side of Page 14, you talked about the UQ to au conversion is 2.2x. So against your plan, how is this progressing? I received campaign notice and initially, it may incur some cost and reduce the ARPU, but after a while, this will be positive impact. So on your full year plan, you see ARPU slightly decline. But how do you see au, UQ, and how do you view the current status?

Thank you. So UQ to au 2.2x. So the progress against our plan, Mr. Takezawa will explain.

Thank you for the question. So first of all, 2.2x. This is basically in line with our forecast. But as I said earlier, the brand mix impact is large. So now it is 2.2x, but the key is how we can offer value to our customers. And measures to convert to au. We need to increase au portion earlier more. This will push up the unit price further, so we are aiming for higher. Thank you.

Understood.

Just one additional piece of information. In the Business Services segment, one is digital BPO that is pushing up the revenue. Altius Link and Relia was integrated in September. So on a quarter, our first quarter to first quarter basis, last year, we did not have Relia and this year Relia is included in our revenue and income, if we compare the first quarter of 2 years.

Next question, Nomura Securities, Masuno san. Please unmute and start your question.

Masuno of Nomura. 2 questions. First is the total picture about profit. Now in each segments and sectors are growing steadily and this is a well-balanced KDDI like number and EPS targets for the next year is probably the ultimate goal. So during this fiscal year, we will simply trying to move towards this line of plan. But next year, the cost reduction of JPY 20 billion is expected. On the other hand, the investment into data centers or investment into AI, there will be some extra investment items as well. So burden of investment and others, would you expect to recover that amount? Because probably, answer would be yes because the investment will not increase as much as JPY 20 billion, but what is the size of the investment increase? And also, AI datacenter will reduce the cost, and would we expect that cost will be restored through the efficiency gains. And Llama 2 was only finished in 2 months, although -- it took 6 months. However, for Llama 3, it was only 2 months. And the AI investment itself will recover the cost. So cost reduction next year and how to recover and pay back the investment into AI, if you could give us a total picture?

Thank you for the question. With regard to the total picture about operating income, now for this fiscal year, during the first quarter, against the internal company plan, we were able to see very steady progress. As I just mentioned earlier, the ultimate target will be the EPS targets of the next fiscal year, and currently, the progress so far is well in advance, and therefore, we can secure sufficient investment for the next year as well. Now for the investment items, AI data centers are expected to increase its investment. But as a part of the medium term management plan, as we explained, for such investment, in a few years' manner, JPY 100 billion of investment will be made. On a single year basis, it is not as large. It may be slightly happening on the front end manner. However, not the full amount will be invested at once in a year. And therefore, for the next fiscal year, as is planned, we are poised to achieve the EPS target. Now in regard to AI investment, are there any comments to add, Matsuda san?

Well, we already covered that topic earlier. Well, efficiency gains of the current facilities will be explored so that we will make investment into the cutting edge technologies. For example, sharing of a base stations or virtualization of existing technology will be applied so that AI technology will be more easier to be used, and that is the efficiency gains. And existing equipment facility will be sophisticated through AI so that efficiency gains will be reinvestment -- reinvested into AI and other areas. That is my supplemental comment. Thank you.

Did we answer your question?

Sorry, there were 2 questions. And so for over 4 years, JPY 100 billion will be investment. In the media press release, Sakai plant investment is expected next year and the Tama new data center will be made and all these were covered under this JPY 100 billion investment. Is this correct?

Yes, that is correct. And for the era of AI, well, we own network, so we'd like to capture the data center for sure as well. So JPY 100 billion includes the construction of a data center and also large computation capacity construction are all included.

My second question is the sales of au brand is growing from my point of view as well, and it was a bit unexpected, but how you are maintaining the utilization of au users? Why au subscribers are willing to stay in au and more people are willing to use au? Of course, the UQ provides lower charges and fees, but what are the motivations for the subscribers to use au brand?

Thank you. What are the strategies and backgrounds for the good performance of au brand? That will be answered by Takezawa san.

Thank you for your question. Now, well, there are many users who wish to use AI nowadays. The situation is that once they experience UQ once in the past, some are coming back to au. And we are taking action for that to happen. On the other hand, at the end of June, data traffic per person, when I monitor the data traffic per subscriber, both au and UQ, data traffic is increasing for both brands. For au, we provide mid to large capacity, but even if we provide such plan, the unlimited service is the choice of the customers nowadays. So that's why many users are migrating to au because au provides the unlimited capacity plan. That is all. Thank you very much.

So unlimited use is provided by au, but in the media session, a comparison with Rakuten was mentioned. Recently, the SIM only plan is increasing, yet they are not using the data a lot. But from your point of view, you're able to capture the heavy data users and you are successful in the area, is that right?

Correct. In fact, our company also provides SIM on these sales as well. But combined with the devices terminals, when the subscriber purchase SIM and device altogether so that they can use devices for sure and accessing to the rich contents of au and increasing the traffic. So that is something that we are confident.

Thank you. Next question is Citi Securities, Mr. Tsuruo, please.

Tsuruo from Citi Securities. I have 2 questions. First is about net addition smartphone growth or multi-brand ID, which should I look at? So Q1 status and MNP to Rakuten, if you could also touch on that point, I'd appreciate it. And second question is about generative AI, JPY 100 billion investment. Sakai plant construction, if you have any update on that. And out of JPY 100 billion, how much is the government grant? I'm sorry, I do not have the information at hand, so.

Thank you very much for the question. First is about our view on net addition and Rakuten matter also. So Takezawa will respond.

Thank you for the question. So our view on net addition. ARPU revenues base is the smartphone net addition, and this is growing steadily. Regarding the competitive landscape, we are not optimistic by any means. Including NMP (sic) [ MNP ], it's not that there is a large outflow to other peers. Our Q1, during the -- up until May, the spring season -- spring shopping season and June, so there is 2 timelines. But at the device handset, if the customers can join together, then ID multiplied by ARPU will become positive on our revenue. And so we focused on that point. For Rakuten, the situation is similar. President Takahashi mentioned this for the mass media. It's true that there is more momentum now, but the momentum may be too radical. So we will work on device and network coverage and the connectivity quality as differentiating factor, so that we can achieve further net addition.

Thank you. I hope this answers your question. The second question is on AI data center. So from social contribution aspect and government grants. So Mr. Matsuda will respond.

Thank you for the question. So AI data center, as I touched on earlier, the computing infrastructure, GPU, DPU and CPU, it requires power and high cooling capacity. And so it has to be equipped with such functions and LLM need to operate on top of that and network, which will serve as the basis of that. So this is what we call AI data center. Sakai -- former Sakai plant of Sharp, is a great location. As of today, I have not visited the site. It is a grand, it's a vast land. And so we're discussing on how this can be best utilized. At any rate, JPY 100 billion investment in the medium to long term remains unchanged. And the subsidy, the grant from the government is around JPY 10 billion, so we will move aggressively towards the completion of this data center.

We are open for the next question. [Operator Instructions] No further questions? From Nomura Securities, Masuno san, please unmute yourself and start your question.

Some additional question, just for the clarification. So Lawson, after the closing date, there will be new strategy, new synergy. Are there hold some press conference or the media opportunity in the future that I'd like to ask? And also in the second half, in regard to the additional return to the shareholder policy, well, you will carefully observe the interim results perhaps. And at the time of the interim results announcement, will you be expressing your plan in the future? So I just want to clarify the next step going forward.

Thank you for the 2 questions. In regard to the first question, for Lawson, after the closing, are there going to be briefing session or press conference? On that point, Takezawa san will answer.

Thank you for your question. At this moment, Lawson, Mitsubishi Corporation included, We are currently discussing what we are going to do after the closing, and our plan is to have some opportunity, a briefing or other forms, so that people will raise questions. And in regard to the second question for the second half of this fiscal year in regard to the shareholders' return policy, probably at the time of the first half results announcement, are there anything that company is prepared to make comments? Well, on that point, unfortunately, well, probably key point will be in the buyback. But we will make a flexibly -- execute flexibly buyback. So in regard to what timing we'll be able to announce additional buyback plan, answer would be no. So if a company regards that is necessary to execute additional buyback, then we will quickly share the information if that happens. Did I answer your question?

Well, sorry, my intent was that after the first half results announcement, would the company shares the idea of or feeling about how to achieve EPS targets and so forth and were there opportunity to share company's thoughts in the future?

Thank you for clarifying your question. In regard to achieving EPS, first, we need to grow the profits upfront the business, that is a first point. And the second is to acquire some of our own shares. And if the buyback front loaded as much as possible, that will be quite effective for positive impact on EPS next year. Of course, we will carefully monitor the timing and discuss in our company. Did I answer your question?

So it is time. So with that, we will close KDDI Q1 financial results briefing for the year-ending March 2025. Thank you very much for your attendance.