KDDI Corporation (9433) Earnings Call Transcript & Summary

Thank you for waiting. We now like to start a meeting on KDDI Financial Results of the Third Quarter for the Fiscal Year ending March 2025, followed by the Q&A session. Thank you for joining us out of your busy schedules. So at the 11th hour, the starting time has been changed. We would like to apologize for that. I'm [indiscernible] from IR department. This meeting is broadcast live on the Internet with Japanese and English simultaneous translation. Please be advised that the meeting will be later made available on our IR website for on-demand distribution. Let me introduce today's attendees. Senior Managing Executive Officer, Executive Director, Business Solutions sector; Kuwahara. Managing Executive Officer, Director, CEO, Executive Director of Advance Business Technology Sector; Matsuda. Managing Executive Officer, CFO, Executive Director, Corporate Sector; Saishoji. Managing Executive Officer, Executive Director, Personal Business Sector; Takezawa. Executive Officer, Executive. Director, Corporate Management Division, Corporate Sector, Aketa. 5 items uploaded on our IR website, 3 related business results, presentation, transient detailed materials. Please read the disclaimer in each document about what is listed in the material our performance including what will be shared during the questions and answers and subscription targets. Managing Executive Director, Saishoji will brief you on the summary of the business results followed by the questions-and-answer session. The floor is yours.

Thank you for viewing the business results meeting out of your busy schedules. Let me explain main points of the business results of the third quarter for the fiscal year ending in March 2025 before the Q&A session. The third quarter cumulative consolidated results for the fiscal year ending in March 2025 enjoyed a good progress in line with full year forecast. The left shows the operating revenue, which was JPY 4,364.2 billion, up 2.3% year-on-year. The progress ratio versus the full year forecast was 75.6%. The center shows the operating income, which was JPY 864.6 billion, up 2.0% year-on-year. The progress ratio was 77.9%. The right shows the net income with a progress ratio of 77.8%. Excluding a temporary impact due to reorganization of subsidiaries and affiliates, it was plus 0.6% year-on-year. Next, let me explain factors for change in the consolidated operating income. The consolidated operating income grew with steady increases of communications ARPU revenues and main businesses, such as finance, energy and DX as well as brisk performance of Lawson. From the left, group MVNO and Rakuten roaming revenues were minus JPY 12.2 billion year-on-year. Multi-brand communications ARPU revenues were up JPY 3.5 billion. Financial business and Energy business combined were plus JPY 12.6 billion. Lawson's equity method accounted income was up JPY 18.2 billion, DX and Business Services segment were plus JPY 12.3 billion. The income increased JPY 16.9 billion by absorbing technology costs and an increase in sales promotion advertising costs. On total ARPU revenues, both communications and value-added ARPU revenues increased, communications of revenues up to the third quarter were plus JPY 3.5 billion year-on-year. Value-added ARPU revenue plus JPY 27.9 billion year-on-year. As for the outlook for the fourth quarter communications of revenue, we are forecasting an increase in revenue with new plants in UQ Mobile and AU. Next is about momentum. Please look at the left last November and December, we introduced a competitive Komi-komi plan plus in UQ Mobile money activity plan in AU and the new topping in povo, where 30 gigabyte can be used per month at the least expensive price in the industry. Moving to the right. With these new plans, monthly net addition of the multibrand IT has recovered the momentum, since November. In total ARPU, both communication and value-added ARPU are maintaining an uptrend. Value-added ARPU on the right grew mainly in settlement and loans, thanks in part to the effect of the money activity plan. Communications ARPU by brand was up 2.1% year-on-year for AU and up 3.3% for UQ Mobile. Both brands are growing. In addition, the number of migration from UQ mobile to AU is increasing steadily by 1.5x year-on-year. Our collaboration with Lawson is also progressing. As shown on the left, Ponta Pass has been well received with new acquisitions increasing by about 20% quarter-on-quarter since its launch in October and enrollments from users of other carriers are also increasing. Povo data Oasis is also popular used by 100,000 people in total at over 90% of Lawson stores. E-SIM sales are scheduled to start soon at all Lawson stores. Right side, these successful initiatives are leading to the increase in number of customers visiting Lawson stores and contributing to Lawson's daily sales increase by 3.4% year-on-year. Lawson is considering a goal of 30% reduction in store operations by 2030 and increase in daily sales. We will continue to promote collaborative initiatives between communications and convenience stores to achieve growth for both KDDI and Lawson. Next is on Business Services segment. Business Services segment is expanding steadily, driven by growth area. Left side, year-to-date consolidated operating revenue for FY March '25, reached JPY 1,012 billion, driven by 19.9% year-on-year growth in the growth area. IoT-related services are showing particularly strong growth in the growth area. Right side, operating revenue was JPY 122 billion up 20.8% year-on-year and the cumulative IoT connections were up 22.2% year-on-year, showing steady growth. Next is on AI utilization. Tama Data Center on the left, begun operating GPUs and preparations to provide AI services are progressing steadily. In addition, to meet the growing demand for GPUs, we decided to introduce NVIDIA's latest GPU, which offers significantly higher performance than conventional GPUs at former Sakai plant site, which is scheduled to begin full-scale operations next year. We will make full use of this AI platform to accelerate our customers' digitalization through wakon-cross. Lastly, today's summary. Consolidated results for the 3 quarters of FY March '25 are progressing in line with the full year forecast. In Personal Services segment, total ARPU revenues increased steadily. New pricing plans are introduced for multi-brand and both communications and value-added ARPU revenues are expected to grow. We will promote initiatives of communications and value-added services, such as financial services and Lawson to generate synergy. In Business Services segment, growth area is expanding steadily, driving growth. In addition, we will strengthen communications, AI, infrastructure, operations and security, which support wakon-cross. We will strengthen our initiatives for the future to achieve sustainable growth and enhance the power to connect with our partners in order to realize a sustainable society. Thank you very much for your attention. Thank you. We will have a Q&A session.

Ms. Saishoji, thank you. Now we would like to entertain your questions. [Operator Instructions]. Daiwa securities, Tokunaga-san.

Can you hear me? Tokunaga from Daiwa Securities.

Mr. Tokunaga connection is a little bad.

To Mr. Matsuda, the new CEO, 2 questions. First, towards the era of AI about efforts. In the press conference, the preparation for the new era with AI, you mentioned that on AI. In terms of absolute amount of investment compared with other 2 carriers, it's relatively low. So towards the era of AI. Sakai will be operating. So are you planning to really step on the accelerator. Or on the convention rather than investment, are you thinking of efficient investment regarding our efforts towards the era of AI, please?

Thank you for your question. Regarding our effort was the era of AI. Matsuda will answer your question.

Thank you for your question. JPY 100 billion, spending JPY 100 billion, large-scale computation or resources will be built. We already made that announcement. Regarding the scale of this, you might be questioning that regarding the future of AI, using AI utilizing AI and including operation, without doubt, it will be utilized. But to what extent do we want to do so? We haven't changed our thinking. You might call us cautious or -- I mean various kinds of new AI technology are emerging. So we would like to first look at them carefully and then decide to make an investment. So first, AI data centers are being built. And was that end, we have been making efforts?

Second question, about the life design about communication into the life design under the new top management system, focal areas in the life design what will be banking, energy, you have strength? Are you planning to improve upon them? Or will it be more or less focusing on what you are lacking AI investment, life design investment regarding the balance between the 2, could you share that with us?

Thank you for your question. Life design going forward, what would be our direction. Again, Matsuda will answer your question.

Thank you for your question. In principle, regarding our line of thinking, first, midterm management strategy, I mean, the current plan, we want to really implement the current plan. In the next term without many changes as Orbit One, finance, energy and DX will be focusing on this. And beyond that, and then concerning the next midterm management plan, with the new management system, we would like to study them, where can we find the green shoots of the new businesses. We would like to look at them and then devise the plan. Thank you.

SMBC Nikko Securities, Kikuchi-san.

This is Kikuchi speaking. I have 2 questions. First, is on Q3 financial results. Lawson profit is growing significantly, so from your perspective, where do we stand? And what do you think it will happen from Q4 onwards? And in others, of the waterfall chart, SG&A and advertisement and promotion. I don't know, if the same definition can be applied. But Q3 -- compared to Q1 and Q2, Q3 is higher as cost expenses. Any extraordinary items? And what will happen from Q4 onwards? I'm sorry, I have 2 questions in my first question. So Q3 financial results. That's my first question.

Thank you for the question. So including Lawson, Personal Services segment is the question. So Takezawa will answer the question.

Thank you for the question. So first, a status of Lawson. So as we announced this time, it is very strong. The other day, Lawson talked about their financial results year-to-date, 3 quarter results, which they say is trending very strongly. And related to that, the SG&A and advertising promotion is growing. Because when we joined hands with Lawson, Ponta Pass and the money activity plant, a preferential point. We pursued these simultaneously. And so with that back up, as mentioned at the presentation, the customer referral to Lawson and the increase in daily sales were realized, and that at least leading to strong results in Lawson and an increased cost on our part. In addition, in Q3 the competition intensified with our competitors and so our UQ, Komi-Komi Plus and money activity plan plus to launch these plans, we had to increase our sales promotion cost to ramp up the launch. From Q4 onward and towards Q4 -- in order to secure our momentum we will continue making necessary investments, but this will be the end of the fiscal year. So we will try to avoid excessive investment and control well. Thank you very much.

And the related question, under the new telecom business law, I don't think you will take the lead in introducing the trial discount. But of course, no impact on Q3 and the impact on Q4 is also unlikely. Thank you very much.

So the trial discount. The carriers have not made any move. And in Q4, even if that happens, we will watch the other competitors move and the impact thereof and study the implementation of this discount. But at the same time, towards the end of the fiscal year, the carriers are now launching various campaigns, including ourselves. And so the return to our users are included in the campaign. So rather than trial discount, we are focusing on implementing the measures thoroughly. Thank you very much.

Thank you. Sorry, I asked you many questions. My second question is maybe this is -- cannot be answered yet, but Matsuda-san. So technological aspects information had been provided to us from the past. So business management or our finance matters have -- we've not heard from you much. It's not the plan going forward, but we want to know what kind of financial view you have the shareholder return is maintained by NTT and SoftBank, open AI, maybe they have to fill the losses. So maybe they have to use money. In your case, you have a well-balanced stance you will not push yourself too much in financing and not too much debt, not much leverage and the shareholder return will be reasonable. So which direction are you trying to move into. We in this year stock market is trying to watch you closely. So Matsuda-san in terms of investment, will you do some upfront investment for the future growth in the AI era. So you will expand the investment or have a well-balanced manner or shareholder return, shareholder return oriented. It's okay if you change your mind 6 months down the road, what do you think at this point in time?

So in leading the company going forward, we mark new business include new seeds for improve business. Include them as an engine in the business and scale up. So the growth investment for new business yield will be pursued, but we need to have discerning eyes, we have to ascertain well. So we may seem cautious, but we will focus on new things, but of course, in a well-balanced manner. So we will try to strike the right balance, as we move forward. So of course, we will focus on the new areas to build our business for the future.

So you are younger than President Maeda of DOCOMO. So I have high expectations for you. Thank you very much.

[Operator Instructions] Next question, Nomura Equities. Mr. Masuno.

First question to you, Mr. Matsuda. 2,000 KDDI was borrowing JPY 2 trillion. Matsuda-san, from KDD to KDDI, you joined the company, you perhaps were concerned. But then there came 3G and then fixed price system was introduced. KDDI enjoyed such a great leap. And now you're aware, you look back 5 years, JPY 500 billion sales increase you can say that it was as much as JPY 500 billion or just only JPY 500 billion. Now in the next 5 years, unless the revenues go up, company cannot really grow. So JPY 500 billion to increase the sales by that much. Just like the past, I think that will be the very minimum you will be doing. Organic, non-organic, both included going beyond JPY 500 billion would be rather difficult. Business-wise, engineering-wise, financing-wise, including all these things, what will be the scale of expansion of company expansion of sales, what kind of image do you have?

Thank you for your question. Sales growth related question. Matsuda will answer your question.

At this moment, as a company, it's not really company wants to do. I think you asked me what I would like to do. Naturally, top line needs to be increased regarding where, that's the question. If you look back it could have been the new technology, new trend? And there are new changes with the smartphone ARPU increased. That's one. We have to look at where the tide goes and then have to incorporate that. And that's where we will be focusing on. As for the next step for the next growth, where do we want to find that. Obviously, sometimes we believe we are strong in this area or that area. But as we have communication with extra people from an external area, then perhaps objectively, we can find out, where we are strong. Just as an example, with Lawson, we are now working with an increase of touch points, for instance, and data generated from the increased touch points, those are really huge full utilization of generative AI is something that I talked about. Towards that end, we still have a lot of room for further growth. So objectively, looking at us, where our strength are combining that with new technology, AI and commercialize those businesses and then we would like to make sure that we can grow our top line.

Second question, business results. Corporate. Kuwahara-san, I have a question. When you look at the quarter-on-quarter results, data center sales more or less flat. Now if I look at the BPO quarter-on-quarter compared with 1 year it's flat. And the following year under the fourth quarter, you would have to really work hard to achieve the full year results. What's the background? Perhaps I'm sure that you came up with some measures from the last year. But what are the recovery measures you are implementing now? Could you elaborate on those?

Thank you for your question. Business Services performance, current situation and background. Kuwahara will address your question.

Thank you for your question. First of all, third quarter growth was not really powerful. You are right in pointing that out, DX market. What's happening in the market? Let me share that with you. Including both bonus, the DX market is decreasing or the demand is becoming weak? No, that's not the case. DX and also the onetime payment type of projects they have been increasing. If you look at the number of projects that's increased by 1.7x in terms of amount, it has decreased by 1.3x. The growth was lacking strength. Where we misinterpreted was the following. This time, we were focusing on buildings, facilities, solutions. Within the building, for instance, [indiscernible] WiFi security or interior furniture, we take the kind of a packaged business, there is a high demand. If you look at the number of such cases and also demand growth. Quite a lot of weight comes from those services building is, of course, it's related to a building. If you look at the delivery time, this lead time is much longer. And that's sometimes -- that's why the result is postponed. And there have been so much increase in the projects, a lot of operation is needed. And that was rather unexpected. So that was another major factor. As Masuno-san said, data center flat BPO is actually deteriorating. Regarding those, let me address those concerning BPO. When we devised the plan at the time, such a huge growth, innovation of AI was not incorporated in our plan. For existing customers, call centers, for instance, something like chatbot, they increasing digitally and no operators are necessary, and that's really moving far ahead of expected BPO digitalization. Those are the things that we said, and we've been working with existing users, the promoting digitalization in principle. It might go down a little, but new customers in this digital business by acquiring them, we wanted to expand them. But the sales expansion progress has been rather lagging behind concerning BPO other than call centers related corporate businesses, BPO, that's really outsourcing. To do such businesses were about what we had in mind. But again, they are not progressing so smoothly, partly because of those BPO is not really growing. It's actually in the negative territory. AI impact is significant, of course, but using Altius One, we have come up with certain measures, we believe that we can grow this further. As for data centers, there's a kind of individual situation circumstances. In terms of sales, third quarter in the previous year because fuel became so expensive on the data centers, electricity price was also included, and we received that cost from customers. But regarding that portion, if you will, because of the soaring fuel that effect became sort of relaxed because power prices have come down. And then we were also affected by those changes, including power, we used to build them including the electricity price. But going forward, so that we would not be affected. We would like to build them separately for electricity. And so we are now billing in a different way, and that's why the sales growth has been rather sluggish. Now concerning data center profits, Again, it's not that dramatically strong, but to a certain extent, it's been steadily growing. While it was lackluster, cost. We try to work on improving the floor areas, and we've spent cost. That's why the profit growth was lackluster. Anyway, growth areas -- the DX market mentioned -- was mentioned, the number of cases, projects are increasing. So we don't believe that situation is bad. We believe we can recover them. Every year, fourth quarter is a very important quarter. So we would like to make sure that we will do a good job. And security -- and connecting regarding the new business models, we see those emerging, and we would like to be fully prepared so that we can roll it out in the next term.

Just for clarification. So the number of projects cases are increasing. So the towards the next term, looking at the overall environment, your initiatives service lineup. We don't have to be concerned. Any modification changes necessary. That's not what you have in your mind. No changes necessary in your mind?

Thank you for your question. As I said before, concerning BPO, say, sluggish sales or with Altius One we are trying to work on the further digitalization. There has been a little bit of delay. We could catch up in these areas. I think we can do better in the next.

[Operator Instructions]. So next question comes from Okasan Securities, Okumura-san.

Okumura from Okasan Securities. Can you hear me?

Yes.

I have 2 questions. First is the large shareholders' trend the shareholder return policy based on the movement of large shareholders trend. This time, Kyocera is reviewing, revisiting from JPY 100 billion to JPY 250 billion sales of the shareholding. So if next year, Toyota sell their shares, in total return ratio, total payout ratio may exceed 100%. If that happens or if that is expected, what is your thinking on your current shareholder return policy?

Thank you for the question. So if large shareholders sell their shareholding, I would like to answer that question. First, Kyocera. When they announced their results in October last year, they said that over 5 years, they will sell about 1/3 of their shareholdings and also continue reducing their shareholding there onward. But 2 days ago, when they announced their results, they said that the period will be 2 years. And beyond March 28, they will reduce down to 20%. So Kyocera is the founding company, and we want them to stay as a long-term shareholder, but we understand their standpoint as well. So the amount per year and the financial position at that point in time will be taken into account and make the right decision. But our cash allocation until next year will be considered in the medium-term management plan. So no change from the cash allocation plan in the current MTMP. So total payout ratio, 100% will be the ceiling. Within that scope, we think we can manage and absorb. Now our measures after the year ending March 27, we will continue considering including the next MTMP and share with you our thinking at the right timing. Thank you very much.

Thank you. My second question is to Matsuda-san. This overlaps with the question to Kitano-san [indiscernible]. So this year and next year, which is the final year of the current MTMP, the total payout ratio and the shareholder return and growth investment, the balance between the 2. Do you think it's reasonable? And in the current MTMP, EPS is pursued. So what is your thinking on that? What is the view of Mr. Matsuda. That's my second question.

So in the next MTMP, what is our thinking so Matsuda-san would like to respond.

Thank you for the question. So in FY '22, I was involved in the management strategy. So the current EPS goal and the cash allocation policy, I understand them well, and we want to move solidly towards next term. So we will maintain the current policy into next fiscal year. And same for EPS. Yes. First of all, next year, the final year of our current MTMP, we will focus to achieve our EPS goal.

We are running it out of time. So the next question will be the final question. [Operator Instructions] Next question, Daiwa Securities Tokunaga-san.

Sorry for the second time. Just one thing about the impact of the new plans October, December, multi-brand IT monthly net addition. The momentum is now recovering. Of the new plans, which plan contributed? Is this going to continue? And then money activity plan plus the point, which are has been strengthened about this points to return in a way, outside of the communications ARPU, would it have an impact on that? Or will that trend actually be accelerated momentum and the impact on the P&L. That's all for me.

Thank you for your questions. New plans effects and future outlook. On this, Takezawa will address your questions.

Thank you for your questions. First, about momentum and the new plans relation between the 2. First of all, the mid-capacity area competition is intensifying. It's a fact to respond to that Komi-Komi plan Plus and UQ, we introduced that plan. Our response capability, acquisition capability, the momentum can be expected to strengthen in the third quarter, certain effect versus peers were felt, and that's shown in the number of IDs. And money activity plan -- AU came up with this money activity plan plus. From our perspective, we give points so that overall ARPU impact can be well blended or mixed. But regarding the major points, immediately, these points are not something that consumers use. But in principle Lawson and in many places, points through payments if they could use them for our entire economic zone, it's likely to have a positive effect. We are now enhancing the point regions and Ponta Pass is also deployed so that to Lawson about the impact on Lawson at the moment, it has a positive impact on Lawson. In the long term, enhancing fundamentals, we believe that it contributes to that. Short term, communication ARPU revenues, other outside of that, those revenues may actually go down as an appearance. In the short term, third quarter stand-alone I think you could discuss that. But partially, UQ Komi-Komi plan Plus by strengthening this Komi-Komi Plus transiently from AU to UQ, there is a migration that's increasing. As a result, partly, there's an impact on revenues, but mainly concerning this part in the previous term, communications ARPU revenues, what should be reflected in the -- it's been retroactively modified for the third quarter next term. So there wasn't a bit increase because of that operation. From UQ to AU migration, again, as was mentioned in the presentation, the number has been increasing. So short term, partly, there is an impact, while it's a fact going forward towards the fourth quarter revenues, we would like to increase that as well.

So it is time. With that, we'd like to close fiscal year ending March 31, 2025, Q3 financial results of KDDI Corporation. Thank you very much.