KDDI Corporation (9433) Q3 FY2026 Earnings Call Transcript & Summary

Let us start the explanation meeting. Thank you very much for joining us today out of your busy schedule. My name is Miyakawa from the Investor Relations Department. I serve as MC today. Very nice to see you. Today's explanation, as is disclosed, is to present our preliminary results for the third quarter of year ending in March 2026 of KDDI. Today's presentation is being distributed live with Japanese-English simultaneous translation. It is also available on demand on our IR website. I would like to introduce attendees: Matsuda, President, Representative Director, CEO; Kuwahara, Executive Vice President, Representative Director, Executive Director, Business Solutions Sector; Senior Managing Executive Officer, CFO, Executive Director, Corporate Sector, Saishoji; Senior Managing Executive Officer, Director, Executive Director, Personal Business Sector, Takezawa; Managing Executive Officer, Director, CSO and CDO, Executive Director, Corporate Strategy Division, Katsuki; Executive Officer, Executive Director, Corporate Managing Division, Aketa. We have also put up 3 pieces of materials of financial results. Regarding the content of the materials of financial results and the contract and other targets we might mention during Q&A session, please refer to disclaimer. First, President Matsuda is going to explain using presentation materials, followed by Q&A. Mr. Matsuda, please.

Thank you very much for taking the time to join us today despite your busy schedule. I will now explain the results -- preliminary results for the Q3 of fiscal year ending March 2026. First and foremost, we sincerely apologize for the significant inconvenience and concern caused to our shareholders and investors, including those watching today, due to the suspected improper transactions at our subsidiary. We recognize this matter as a serious incident that could potentially undermine the trust in the entire KDDI Group. As the top management, I feel a profound sense of responsibility for the occurrence of this incident and for failing to prevent it. I will explain the purpose of today's briefing, the preliminary results explanation. Due to the ongoing investigation by the Special Investigation Committee on improper transactions, the financial impact remains undetermined at this time. Therefore, we have decided to delay the disclosure of the Q3 FY March '26 earnings release. Accordingly, today's briefing, the explanation session, is titled Q3 Preliminary Results Explanation. We will report on the facts currently recognized by the company, an overview of the financial impact and progress in Q3 business operations unrelated to this matter, along with initiatives for future growth. Please note that the performance figures, prior year results and financial impact amounts presented today are reference values based on facts currently recognized by the company. Final figures will be reported promptly upon completion of the investigation. At this time, we plan to receive and disclose the investigation report from the Special Investigation Committee by the end of March. In addition to disclosing the Q3 results by the end of March, we currently intend to proceed with the FY March '26 financial results without delay. These are the key highlights of today's explanation. First, on the inappropriate transactions at our consolidated subsidiaries. This was disclosed on January 14. It has been discovered that improper transactions were conducted by employees of our consolidated subsidiary, BIGLOBE, and its subsidiary, G-PLAN, within their advertising agency business. Regarding the advertising agency business, the discovery was that sales revenue and other figures may have been overstated. This was triggered by delayed payments from certain agencies in December 2025. A Special Investigation Committee has been established to clarify the facts and causes related to this matter. Next, an overview of the fictitious transactions identified by our company. So this left side is the expected transaction. The advertising agency and the publishing agencies are located in upstream and downstream. So upstream advertising agencies and downstream publishing agencies are connected by BIGLOBE and G-PLAN as an intermediary. Within this business, we've confirmed suspicions that employees of a subsidiary engaged in fictitious transactions within the advertising agency business, resulting in the recording of fictitious sales revenue and other figures over multiple years. So this is the originally intended business flow. So the advertising fee comes from the advertiser and commission is deducted and paid to the advertising agency. As you see on the right side, as a result of the internal investigations, it was revealed that the advertiser and the web media do not exist. So the upstream transaction goes to the downstream. And through the subcontracted party, it was circulated back to the upstream. So this is how the fictitious transaction took place. BIGLOBE, G-PLAN, commissions were deducted. After the circulation back, the upstream advertising agency's payment to BIGLOBE and G-PLAN was halted. This reached tens of billions of yen in monthly transactions in the most recent period. In this fictitious transaction, as you can see on the right-hand side, in the color of orange, BIGLOBE and G-PLAN had the overstatement of the ad revenue and profit. And in the gray area, the upstream, the agency -- ad agency and the publishing agency, there are externally fluid amounts as well. As to this fictitious transaction, here we are showing the impact which is recognized by our company at this moment. At the top, reversal of recorded revenue from before FY '24 March, about minus JPY 96 billion; in FY '24 (sic) [ FY '25 ] March, about JPY 82 billion; in FY '26 March, about JPY 68 billion. The total of JPY 246 billion reversal happened. Below that, operating income. Reversal of recorded income, in the same order: about minus JPY 8 billion; minus JPY 17 billion; minus JPY 25 billion. In addition, we have fees which flowed externally and the provisioning for it. For FY '24 March, about JPY 5 billion; for FY '25 March, about JPY 11 billion; and FY '26 March, about JPY 17 billion. These are the provisioning amounts. As to these external float amounts, that we will make efforts to recover them. In addition, there's a possibility of recognizing impairment losses, including prior fiscal years. At the bottom, next steps, as I mentioned earlier, without delay, that we are going to publicize the result of investigation and publicize results-related information. In a parallel way, we are going to review and strengthen the company group's governance and examine recurrence prevention measures. Here is our commitment to future actions. First, we are fully committed to cooperating with the Special Investigation Committee, diligently uncovering the facts and thoroughly analyzing the causes. I myself will take the lead in actively addressing these issues to restore and strengthen the trust for our Group. Our company upholds the KDDI philosophy, which embodies the shared values and code of conduct that every individual should uphold. We will create an environment where transparency and fairness underpin our work, ensuring that these principles are communicated throughout the entire Group and practiced consistently. By doing so, we aim to foster a culture that enhances both our human capabilities and ethical standards. To meet your expectation and to regain your trust, of course, we will do our best to prevent recurrence. At the same time, on top of that, it is indispensable that we develop our business and operating in such a way that we can ensure sustainable growth. And from here, I'd like to talk about some specific initiatives. So here I would like to talk about consolidated results for the third quarter of FY '26 March as reference figures. Based on the impact amount from the matter recognized at this point, we have revised both the previous year and the current year. And at the bottom, you will see adjusted amounts. On the left-hand side, we have the actual amounts of results after the reversal of the fictitious transactions. As you can see, on a year-on-year basis, operating revenue, plus 3.8%; operating income, plus 2%; and profit for the period, plus 5.3%. This is year-on-year comparison with the actual numbers on the left-hand side. Now here, we have the change factors of the cumulative 3-quarter results. And you can see the Mobile, Personal Services segment, plus JPY 27.2 billion; and the Finance Energy Lawson, JPY 80.2 billion. And next slide shows the third quarter alone consolidated operating income factors for change. And we have settled down the impact of prior year's promotional expenses, as we can see here. First, Mobile revenues bottomed out in FY March '24 and growth accelerated on a 9-month cumulative basis in FY March '26, with an increase of JPY 29.9 billion year-on-year. Structural transformation is also progressing, and we are building a lean and mean operational base with ARPU growth driven by value creation, and churn rate reduction through longer contract duration. These are the key points of structural transformation of the Mobile business that we explained in our Q2 financial results. We are promoting initiatives to secure long-term contracts by creating value that motivates customers to sign up, shown on the left; and refining au's communication quality and differentiated value services, shown in the center. This shows creating value that motivates customers to sign up to maximize LTV. Left side, at UQ Mobile, device bundled contracts, which have higher ARPU and contract retention rate, are on the rise, 30% by ARPU and plus 4 percentage points on retention rate. So along with device, we will continue making this proposal. Right side, we are also working to differentiate our plans and services and Money activity plan, Ponta Pass and Netflix are all performing well. We are enhancing the value of the connected experience, which is the source of our competitiveness. Left side, we aim to expand the 5G SA area to over 90% population coverage by the end of this fiscal year, which will be one of the highest in the industry. Right side, we will cover au Starlink Direct is expanding its connections, compatible models and coverage area. This shows the result of ARPU growth driven by value creation, which is a factor towards leaner and meaner operational base. Left side, regarding brand migration, UQ Mobile to au migration finally surpassed au to UQ Mobile migrations on a quarterly basis. These factors also contributed to the significant growth of Mobile ARPU by JPY 190 year-on-year, as shown on the right. The second factor towards leaner and meaner operational base is churn rate reduction due to longer contract trend. au contract retention rate is improving, as you see on the left. And these trends are accumulating and the momentum remains strong, as shown on the right. In particular, the smartphone churn rate in Q3 of FY March '26 fell by 0.01 percentage points year-on-year, showing steady improvement. We're making progress in addressing the financial business, which was identified as an issue in Q2 financial results. In Q3, credit card business mainly drove profit growth with operating income up by 30.5% year-on-year on a cumulative basis. As shown on the right, the bank's deposit procurement capability, which had been a challenge, has improved steadily and the personal deposit balance expanded by 1.3x year-on-year. The number of Gold Card members also increased steadily by 24.5% year-on-year. In the Business Services segment, each business area grew. As shown on the left, the growth rate for the third quarter alone was plus 7.7%, a steady increase. In particular, the BPO/SI-related business, which had been identified as an issue in the first half, turned around and achieved increased profits in the third quarter. On the right-hand side, IoT drove growth, increasing about 28% year-on-year. And the number of connections, including SORACOM, performed well, exceeding 66 million. About Real-Technology initiative, Lawson Town or TV Asahi, through those initiatives, we are expanding it as well. Now strengthening our management foundation. In light of inappropriate transaction of our subsidiaries, we will be even more conscious of governance and its importance to strengthen our management foundation. As shown in the upper left, KDDI has inherited its principles and systems represented by its philosophy. Furthermore, with the shift to a new management structure, we will further strengthen our core competencies by devising ways to combine this with our aspiration to be a company that inspires passionate challenges. Next, I will explain our efforts toward growth in the AI era. We will support Japan's digital society, and with both our cultivated communications infrastructure and our new AI infrastructure. As AI becomes more widespread in a variety of settings, the AI infrastructure that can process data securely and with low latency will be important. Left-hand side, with an eye towards this era, we ensure sovereignty and began operating the Osaka Sakai data center in January as a data hub for securely processing corporate data. Furthermore, next week, in Miyazaki in Kyushu, we are going to start another network center. We will leverage the knowledge gained at Sakai and expand into an AI data center. In addition to this, as right-hand side shows, we will expand our operations in the Kanto region and utilize our existing landing stations to connect AI data centers with our strong communications network, expanding our initiative to Kyushu Kansai and Kanto area as well. We call it AI Digital Belt concept, nationwide low latency network and AI computational infrastructure. We will also utilize landing stations and submarine cables across the country to enhance the value of the AI Digital Belt. We will also have more than 60 years of experience when it comes to submarine cable installation. We're still operating with 365-day availability. We possess world-class technological prowess in optical submarine cable connections, which would lead us to more value added. And by leveraging these assets, we will capture data traffic from neighboring countries and create a hub. Today, at the Board of Directors meeting, we have decided to start integration operating the company. So on top of AI Digital Belt, this new company will operate. It is called KDDI iret. And in fiscal year 2028, we aim at having 3,000, the personnel, including engineers, so that we can convey and deliver the high value-added services to our customers. Lastly, summary for today. The Special Investigation Committee is conducting its investigation into the suspected inappropriate transactions where the company reviews and strengthens its Group governance and examines recurrence prevention measures. The impact amount is expected to include the reversal of fictitious sales and profits as well as provisions of amounts that flowed outside the company. The company will make every effort to recover the externally flowed portion. In FY '26 March Q3, core business performed steadily. And we are going to, without delay, publicize the result of the investigation toward the end of March. AI social implementation initiatives, including AI Digital Belt and AI new company and AI development platform are making steady progress. With the performance of the business, there's no change in the dividend forecast for FY '26 March.

Thank you, Mr. Matsuda. We would now like to entertain your questions. [Operator Instructions] Mr. Tokunaga from Daiwa Securities.

I'm Tokunaga from Daiwa Securities. Can you hear me?

Yes, we can.

I have 2 questions. First question about inappropriate transactions. Question for clarification. What is the impact of the transaction? What segment will be impacted and what type of revenues will be impacted? Basically, I don't think business will be impacted, but Personal Service segment and [ IO ] or other segment, where will the impact be? In addition, after Special Investigation Committee's report, after provisioning beyond the next fiscal year, will there be no more impact?

This relates to BIGLOBE. So this is in Communications segment. And this fiscal year -- is there a table on the screen? Fiscal year ending March 2026, JPY 87 billion -- JPY 17 billion is provisioned. After this provisioning, there will not be any impact beyond next fiscal year.

Personal Services segment, other sales, is there going to be impact here, or Communications segment?

Personal Service segment, others. Under others. Yes.

I see. The second question is about medium-term thinking. At the second quarter session, disciplined investment and expansion of business portfolio were discussed, and including M&A, your outlook was to pursue further growth. This time after this incident, will you be more cautious or medium-term plan announcement may be delayed because you are very busy attending to the incident?

As for the suspicious improper transaction incident, we apologize. The Special Investigation Committee's investigation is ongoing, but there will not be a big impact on the cash flow. And we are currently not thinking of changing the medium-term plan. We would like to maintain the policy.

We will take the next question, SMBC Nikko Securities, Kikuchi-san.

Kikuchi speaking. I have 2 questions. First of all, the impact of this transaction. So you mentioned provisioning. So total JPY 33 billion provisioning. Will this be in each term, each year, or will this be posted in bulk, this fiscal year?

So as mentioned in the material, it will be in each year. We will revise each year. In total, JPY 33 billion. So up to Q3, the JPY 17 billion is included, up to Q3.

I understand. So this year is JPY 17 billion according to the current estimate. It's not JPY 33 billion. JPY 33 billion is for each year?

Yes, you're right.

My second question is business segment -- Business Services segment. So you enjoyed profit increase. What was the driver? Which area increased profit? Because I understand that this was falling behind. So how did you catch up? And what will the Q4 projection look like? And I want this to be one question together: iret, 3,000 people. So will this be increased according to the business scale? Labor costs alone will be over JPY 30 billion, I think, so -- and including fixed cost, it will be sizable. AI sales, can we have that much AI sales? There are not many companies that have that much AI sales. Like NTT said yesterday, there are many things included here. So is this AI-specific company, or including DX and other services for other companies? What kind of company do you want to make this company to try to gather 3,000 employees?

Kuwahara-san will explain.

First of all, Q3, the track record up to Q3, what area is strong? First, for Q3 alone, sales went up by 12.5% and profit 7.7% up. So the base mobile was strong. In addition, IoT and data center, this growth, this area is growing steadily. In Q2, this was slumping, but BPO, which was weak, and SI -- part of SI, those were slumping. But on profit base, they turned around. This is a big driver. And therefore, Q3 was strong. And to your second question, iret, KDDI iret. First of all, 3,000 people we're planning for. The feature and how we will increase up to 3,000, first of all, in terms of feature, we can use AI infrastructure. So that is a big strength. It's sovereign cloud, AI. We can use data internally in Japan, and we can manage. So this is a strong feature. Using that as a basis, we will combine it with communication. Cloud and AI development can be done. So that is a strong feature of this company. Furthermore, in the Group, we have flywheel where data can be generated and make AI-ready. So that is another strength. Regarding the scale, the headcount is now 1,700. And we have around 100 from KDDI. Sales and SE are transferred or seconded to this company to generate deals. So we have that in place as well. Now the base sales, what the sales will look like going forward, iret is now working on cloud, so that is one foundation. So using that as a basis, we will develop AI -- accumulate AI development. I hope this answers your question.

Follow-up question. So you have 1,700 now, and you're trying to double the headcount, right? Am I right?

First of all, KDDI Divergence Holdings, that's where iret is belonging to. So under iret, KDDI Divergence Holdings subsidiary will come under iret. And with that, a total of 1,700 people.

Understood. I will try to study more. In your first half, you said the business driver for the profit growth. Price increase is contributing to mobile revenue, increased sales and profit. Am I right?

First of all, the price revision is one factor. But ARPU is already, including value-added ARPU, is rising, and ID, number of ID accounts, is rising as well. So those are big factors.

One additional comment, if I may, regarding iret. AWS and GCP, Google Cloud, there are certified members, around 150 are certified. So along with cloud, we will develop AI. And this is in line with the trend. Amazon, AWS and Google, they are trying to develop AI on the extension of cloud. So for iret, we are trying to do both, have both technology to operate and grow this company.

Masuno-san from Nomura Securities.

Here is Masuno of Nomura Securities. Can you hear me?

Yes, that's good.

I have 2 questions too. First one is about inappropriate transactions. The existing business has been performing very well, I understand. My question is whether this matter is going to negatively impact on the results of next year and beyond. And what about the impact on the business investment? Any negative impact on business investment coming from this matter? That is what I would like to have some clarification. That's my first question.

There will be no material impact on the future creation of cash flow. There's no change in the policies or measures for the next midterm management strategy.

So in May, as planned, you are going to present your new strategy?

Yes.

Second question, iret or other AI-related strategy, AI Digital Belt initiative. About 3 years ago, SoftBank worked on the -- diversified the computation platform. It looks like it is similar to that. And also it is also similar to sovereign cloud. What is the difference with SoftBank? What is the uniqueness of your initiative? What is the benefit? And sovereign cloud, the [ other meat is ] the budget, LLM, the platform using the digital cloud, more than the JPY 400 billion is earmarked for that purpose. The 10 companies are put together to make a joint venture or the MIC with JPY 150 billion giving financial support to the smartphone link -- Starlink rather. And so what is the difference with the SoftBank's initiative and the satellite, the telecommunication supported by the ministries? How is it different? How is yours different from those initiatives? So in this AI era, how the AI processing should be distributed?

So the mainstream -- as a mainstream, I think we are headed in the same direction. And of course, AI involves lots of electricity. So data center and telecommunication location that should be well deployed, which are to be connected with high-speed connection. I think that's where our strength lies. When it comes to AI, the latency or response time, that becomes very important. So how to design a nationwide network and how to deliver it to our customers, I think that is where each company needs to think about to show their strength. As to the government initiatives, we'd like to work on them firmly. We have some lead time for the Starlink and we have accumulated know-how and toward the direction where the government is heading, that we would like to go hand in hand with them. As to physical AI, the platform, for physical AI platform, what about that side? In this AI era, each company has data and how to make it AI-ready, how to make it possible to process data on AI. And to pursue that path will make you the winner. And so we would like to equip ourselves with capability to make that happen. And in that sense, we would like to participate in the initiative by the government as well.

We would now like to take a question from Henderson Matthew-san from JPMorgan Securities.

I'm Henderson. I have 2 questions. First about iret, also about iret. 1,700 people are already there and you will additionally have 1,300 people. Are you going to hire and add headcount as for these additional resources? Well, existing 1,700, I believe you will be educating and training them, but there will be contribution of revenue from other businesses. As for additional 1,300, I believe that these people may be in R&D for AI. What is the composition of the human resources? What will be the roles played by each respective human resources?

3,000 people include sales and consulting, as noted above the figure. We believe that engineers must be developed towards AI era. Human development, resource development of engineers is important. Network engineer, IT engineer, there are engineers in different fields, including cloud engineers, and they need different skills and capabilities. And they have different skills and capabilities. How do we upskill them for AI era? In other areas, be it network or IT, we have a number of -- a large number of engineers. So this is reskilling, upskilling, upskilling internally as well. We would also like to consider that.

Second question about Communications business. Just yesterday, NTT announced their earnings results, NTT DOCOMO. Similar to Q2, they commented on increasingly competitive environment. It seems that our competition is increasing. However, it doesn't seem that, in terms of acquisition, they are lagging behind. As for competitive environment, I believe similar question was posed in Q2, do you see any change in the environment? As for acquisition efficiency, how is it trending?

In Q2, we showed illustration, and I've used the same illustration this time. ID acquisition, subscriber ID, we consider this in multifaceted way. One is sales promotion expenses. But we are not solely relying on sales promotion expenses. Area quality, communication quality and services. With added services, we can offer attractive plans to our customers. And that is one competitive edge, one of the competitive edges. So maintaining sales expenses -- sales promotion expenses at high level is not the only approach, as we have been saying from some time ago. So we would like to refine our services and have customers subscribe to our business, and we would like to retain them over longer term. As for sales promotion expenses, it is flat year-on-year. So we believe that our operation is well balanced.

Next question, Okasan Securities, Okumura-san.

Okumura from Okasan Securities. Can you hear me?

Yes.

I have 2 questions. One is a clarification of the previous question. I'm sorry I'm being repetitive about the fictitious transactions. What is the impact on your next fiscal year? No provision -- no problem with cash flow -- no problem with cash flow. But cost to enhance the internal structure and the negative impact on the non-advertising agency business. So when you build next year's plan, no large concerns for next fiscal year? That's my question first.

So the fictitious transactions happened in the advertising agency business. Our medium-term plan driver is communications and financial and DX and energy. Of course, the internal control and governance need to be enhanced. We will work on that for sure. But it does not impact the financial forecast for next fiscal year and onward that we are trying to build now.

Second question is next year and onward, the shareholder return and buyback. Let me confirm with you again your view, Matsuda-san. So cross-held shares will be sold by a large shareholder again next year. I think this is encouraging for the existing shareholder. But given this incident, you need to grow your profit even further. So rather than excessive buyback, we want you to invest in growth investment. I think that will be better for the corporate value, enterprise value in the long run. So what is your current thinking? I think you will talk about details in the full year results briefing, but anything you could share with us?

We are discussing -- continuing discussing with the large shareholders, and how we address this will be related to the capital allocation policy for the next medium-term plan. So I hope you could wait on the details.

Yoneshima-san of Citigroup.

Here is Yoneshima of Citigroup. I have a question about inappropriate transaction. So towards the end of March, you will have the report on the investigation and then you will publicize it and so on. Probably after the acquisition of BIGLOBE, it is after the acquisition this matter happened, I presume. If that's the case, I might be wrong -- so in addition to GPA, other subsidiaries, other Group companies, those other Group companies will also be subject to the investigation? Is there any possibility of seeing similar thing happening with other Group companies?

So it will be the part of the result at the end of March. And of course, in parallel way with the Investigation Committee, we are checking all the other Group companies to see if there's any similar matter or any examples where the transaction value is growing dramatically with any particular counterparties, for the whole Group level, we have been investigating it. And at this moment, we have not confirmed any other Group company involved.

I feel assured. Another question is about JPY 33 billion, and you said that you are going to make efforts to recover the amount. And as to the external flow, does this mean that the outside company was also involved in this matter knowingly or unknowingly? I think depending on that situation, the possibility of a collection would be very different.

Well, there are multiple number of the agencies, ad agencies. And it seems that some of them have colluded. But this Investigation Committee is doing investigation, including how accurate our internal investigation had been.

[Operator Instructions] No further questions? It seems that there is no further question. With that, we would like to conclude KDDI Q3 Preliminary Results Explanation session. Thank you very much. [Statements in English on this transcript were spoken by an interpreter present on the live call.]