KDDI Corporation (9433) Earnings Call Transcript & Summary

We will now begin KDDI Corporation's March 2027 1st quarter earnings briefing and Q&A session. Thank you very much for taking the time to join and view our briefing today. My name is [ Miyakawa ] from the IR Department, and I will be serving as today's moderator. This briefing is live streamed with simultaneous English Japanese translation. Today's content will also be available on demand at a later date on our IR website. Now let me introduce today's attendees. CFO Executive Director of Corporate Sector, Saishoji; and Executive Director of Corporate Strategy Division, Katsuki; Executive Director of Business Solutions core sector, [indiscernible]; Executive Director of Personal Core Business sector, [ Sasaki]; General Manager of Corporate Management Division, [ Akita ]. Today, we have posted 5 documents on our IR website, 3 earnings-related materials and 2 TSE disclosure documents. Regarding the content of the materials as well as the performance and subscription targets that will be discussed in today's Q&A, please refer to the disclaimers in each document. First, Saishoji will explain the FY 2027 March 1st quarter earnings summary followed by Q&A. So Executive Vice President, Saishoji, please go ahead.

Thank you for taking the time out of your busy schedules today to join us for our FY '27 March Q1 earnings presentation. I will focus on the key points for investors and analysts in my presentation. Quarter 1 saw growth in both revenue and profit, marking a strong start to the fiscal year. Relative to our full year forecast. On the left, operating revenue was up 5.1% year-on-year, and the progress rate against the full year forecast was 23.2%. In the middle, adjusted operating income was up with a progress of 26%. It was up by 21%. On the right, adjusted net income was up by 21.6% progress rate, 26.5%, respectively. Next, here are the operating revenue figures for each segment. For the first time, we are disclosing revenue for the new segments and subsegments. For the first time, reflecting our confidence and determination to steadily expand each area. As you can see, operating revenue increased across all segments. And our core businesses, including mobile communications revenue are growing steadily. Additions, the factors affecting the change in adjusted operating income. In Q1, mobile communication revenue drove the increase in profit. Growth areas also made steady progress toward double-digit growth for the full year. For the full year, as shown on the right, we are firmly aiming for our initial forecast of JPY 1,210 billion. Key KPIs are improving, thanks to our lifetime value LTV focused initiatives. From the left, the number of active smartphones in Q1 was JPY 33.3 million, an increase of JPY 390,000 year-on-year. Additionally, the churn rate was 1.17%, a significant improvement of 0.06 percentage points year-on-year. On the right, mobile ARPU in Q1 was JPY 4,400 year-on-year increase of plus JPY 106, a substantial 3.8% growth. The number of subscribers on top-tier plans across all brands is expanding steadily, laying the foundation for profit growth in the second half of the fiscal year. Next, here's an overview of our growth areas for FY '27 March. On the left, personnel growth, first quarter operating income for personal growth grew 9.3% year-on-year with all 5 sub segments performing well. On the right, which is business growth, operating income grew 21.6% year-on-year with all 5 segments reporting increases in both revenue and profit. Following this, I will explain the key points for each business segment. First, regarding the financial business. au Financial Holdings operating income for Q1 was down JPY 3.7 billion year-on-year, but this was in line with our expectations. In addition to the challenge of increasing deposits, a key issue for our bank, we had factored in the impact of mark-to-market losses due to rising interest rates into our forecast. At the start of the fiscal year. Excluding these factors, our core credit card and banking businesses are growing steadily, and we are moving forward with measures to further strengthen them. Next, I will discuss our devices business and Ponta Pass. On the left, revenue from device-related services and Ponta Pass is growing and active user rates are also improving. On the right, we are making progress in creating value in partnership with Lawson. Next is AI integration. Combined AI integration and cybersecurity, Q1 revenue grew a solid 19.2% year-on-year. A secure cloud environment is a prerequisite for AI implementation and we leverage the group's strength to accelerate implementation support. At present, we are focusing on expanding our cloud infrastructure with Q1 revenue growing by more than 30% year-on-year. Connectivity data center is capturing AI inference needs with Q1 operating revenue growing a solid 20.6% year-on-year. EBITDA also grew similarly year-on-year with the EBITDA margin exceeding 40%. We will continue to capture growth opportunities accompanying the spread of AI. Next, in relations to inappropriate transaction on the progress of our group governance strengthening and recurrence prevention measures. At the top, by June of this year, we completed comprehensive inspections of the 110 target companies and have been developing new rules and structures. We are now operating and monitoring the new rules under the new structure. In the middle, to build relationships of mutual trust, the top management visited major strategic subsidiaries and held dialogue sessions with the top executives of group companies. At the bottom, in terms of AI and system utilization, we have introduced an AI system for credit screening and an anomaly detection tool using financial data. Going forward, we will begin using these under the new rules and continued development for the comprehensive use of AI and systems. Regarding the recent unauthorized access incident affecting the e-mail system provided to ISP operators, we take the administrative guidance seriously, and we'll do our utmost to prevent recurrence, and we will work to improve and raise awareness of security standards across the industry. In light of the issues brought to light, to strengthen security, we are using frontier AI to conduct vulnerability diagnostics, among other measures. I will also report progress in improving management quality, which is one of the important themes of this midterm period. On the left, core free cash flow, the source of funding for growth investments and its margin have remained stable. The operating cash flow margin also stands at 21.6%, and further strengthening the fundamentals for growth investment. In addition, we are strengthening our review structure for growth investments and expanding our pipeline. On the right, so far, this fiscal year, we have decided on 11 divestments, which is generating approximately JPY 150 billion in cash. We will continue to review investment efficiency and strategic rationale and proceed with the review of our business portfolio. Finally, today's summary is presented here as shown. In addition, as an opportunity to further deepen your understanding of our strategy and businesses, we are also considering holding an IR Day in mid-September. We will provide the details once they are finalized. We will continue to drive our initiatives forward to achieve our full year forecast. Thank you very much for your attention.

Ms. Saishoji thank you very much for the presentation. At this moment, we would like to take questions from the audience. [Operator Instructions]. Tokunaga from Daiwa Securities.

Tokunaga from Daiwa Securities. I have 2 questions. Question number one is about [ Rakuten ] roaming. I think it's because of the press conference. But each media is saying that roaming service will end at the end of September. However, for some rural areas, the service will continue while some media also report that it's still under negotiation. So what here are the facts. If you could summarize them. If a decision is almost made, what would be the impact on your revenue? Would it bring down your revenue? And talking about rural areas, well, to what extent are you providing your roaming service outside of rural areas. So if you could please share these parts. That's my first question.

Thank you for your question. So our contract on Rakuten roaming, what will happen to that? And as changes are made, what would be the impact on revenue and our financial performance? I understood the questions to be those. Now first, regarding our contract with Rakuten, what we're saying is that -- we have already played a certain role for Rakuten already. That's our understanding. [indiscernible] in order to supplement population coverage for 7 years, we have been providing roaming services. Rakuten's service coverage is expanding based on that. We believe that we have already played a major role for them. So for the current agreement, at the end of September, it will be terminated. So why are we doing this? We have our own customers at KDDI. We want to maintain the quality for our own customers. au Mobile and [indiscernible] users, telecom quality must be protected firmly. So depending on the situation, we would like to take a firm attitude in order to protect the quality. So the current agreement with Rakuten will be brought to a close, but the way in which compete and collaborate will continue to be considered. And limiting to some of the rural areas for a certain period, we will cooperate with Rakuten so that they can maintain their infrastructure. That was what was agreed upon with them. For the limited rural areas, within a certain time line, Rakuten will be building their own infrastructure. That is what we have negotiated with Rakuten. That is where we are currently. What will happen to roaming revenue then? The impact on Q1 year-on-year will be about JPY 800 million. And in terms of our full year guidance conservatively, we have not factored in the agreement after September. So we're not factoring in that service in our performance, September and onwards to be conservative. But as was mentioned, for some rural areas, we will continue to provide roaming service for Rakuten. So in the second half, there will be some revenue generated from that. However, I'm sorry, but I will have to refrain if I'm giving you a specific number regarding that. That would be all.

Just one point of follow-up. So in order to protect the traffic of your own users, you said. So after September end, how much quality improvement can be expected for users' traffic? And may I expect the quality will increase also in urban areas?

Yes. Naturally, we're going to prioritize our own users and quality will be improved and at how much improvement? It's hard to say. So I shall refrain from making quantitative comments at this moment.

My second question is as follows. It's about your peers in the industry. So your price revisions went very well. And for this particular quarter, it contributed to increased ARPU, increased revenue and profit as well as reduction in turning rate. SoftBank has decided to offer price revisions and DOCOMO are also continuing to consider a price increase. So you have changed your prices once. But once that round is over, are you considering a second round of price hike? To what extent are you considering about that? The field that I have is that compared to your peers, you have relatively cheaper plans. So there may be a potential room for a price hike further? What is your thought?

So price increases -- would there be a second round of price hike was your question. Regarding that, I would like to turn to Sasaki-san for an answer who is responsible.

Thank you very much for the question. Last year, we led a price change. We increased our prices. It's been accepted by our customers and our peers in this industry are making the same move. They're changing their plans to appeal quality over quantity and AU's price has changed. That was back in August. It's almost a year since. And what's going to be our next asset measures. In the plans we introduced [indiscernible] value link plan. We also had a campaign [ Komi-komi ] value. The prices for these plants are penetrating quite well. There's been good progress made with that. It's not just the impact from price revisions. But with improvement in plan makeup communication revenue is up. So by increasing the penetration of these plants, we would like to continuously raise revenue from communications. So that is what we will continue to do. And for the next round of price hike, there's nothing that we have decided at this moment. However, from our perspective, we would like to focus on value. How can we translate value into the price that customers pay? We would like to continue to be the trend setter. We are always considering that aspect. And so by looking for opportunity by taking action, if necessary. If we can change the price again, we would like to return part of that to our partners, and that cycle should continue. So there's nothing decided specifically with respect to the next round of price hike.

May I ask a follow-up the question. So in this particular quarter organically, mobile communication, how much is it increasing? And I'm sure you're considering a second round of price hike. As you do so, what are the terms and conditions that you are most focusing on, if you can disclose them? Just to share a thought on that as well.

Well, thank you for your question. Telecom revenue this quarter has gone up. And of course, large part of that is because of the price hike. But value Link plan penetrating more and Komikomi plan is also making good inroads from Q2 AU sell-up for migration compared to last year, it's been up substantially. So such effects are also included I cannot give you a specific breakdown of such effects, but they're making progress above what we initially expected in our plan.

So what about the conditions for the second round of price hike?

I'm sure there are lots. Well, going forward, well, prices will we consider in the financial business area, which we are competing harshly with our peers and quality of telecommunication services. We would like to continue to create value centering on those assets. We will continue such efforts.

So next question is from Mr. Masuno from Nomura Securities.

Masuno from Nomura Securities. I have 2 questions. So first question, as you have discussed, you are now shifting gears to value-added management. So as a result in the first half in terms of prices and in terms of planned mix, I think you are able to become sufficiently profitable. So you will make a progress in the second half. So as you say, you need to accelerate the growth area, and as you see on Page 15, you have business and growth personnel. You have the 4 integration, connectivity, data center, financial business, Lawson, how much can you accelerate these businesses in the second half? So you have the first half, good results and you have the basis improving it's become a cash card. So what is your [indiscernible] in terms of the acceleration of the growth?

Thank you very much for the question. So in terms of the first half, let me speak about the first quarter. In terms of performance, it is trending extremely well, and I think it's finishing off quite nicely. And with regards to the situation, as Mr. Sasaki said, we naturally believe that this will continue in the second half as well. And we will leverage improving value, increasing value to make it more positive. However, business and personnel how much can we grow when we combine the 2? It's difficult to say specifically, but in principle, the business performance will achieve the current projection that we have disclosed. So the plant is to expect a certain level of growth with some level of cost and make sure that we will be able to achieve the basic target. So putting aside the numbers on Page 15, what sort of initiatives do you plan to engage in, in the second half? So let me talk about the specific initiatives in terms of personnel, as Mr. Sasaki said, well, let me ask Mr. Sasaki to speak about that.

So in terms of personnel growth, we are slightly behind the plan, but we are progressing nearly in line with the plan. And in terms of the good performance right now, this is driven by device businesses, with device guarantee, warranty and Ponta Pass and Lawson business. These are the drivers -- in terms of the device business, because of the foreign exchange impact and the material component cost is increasing as well. So there's a lot of needs for repair of the devices and needs for warranty and therefore, I think we are now developing a plan in order to improve. And so this is a great opportunity for us. In terms of Ponta Pass Lawson, we had the convention on the pass light. We are trying to migrate the members to Ponta Pass, we're in the process of that procedure. With that, we will be able to build the customer base furthermore, and we will be able to collaborate more with Lawson to promote Ponta Pass, and therefore, we will be able to see some sight on this as well. And with regards to financial business, this is, at this point in time, a decrease in profit. But this is already included in the plan. It's expected. Therefore, we will control deposit and loan balance as well. But in terms of the payment centering on credit, we're seeing a nice progress in the growth of this business. We have Paytobank strategy. We will have the customers holding open [indiscernible] credit card, open bank account, and then we will be able to increase sticky bank accounts. And the key here is the gold card. With regards to the Gold Card, in May, we have been able to achieve 2 million contracts. And [ UQ ] has [ Comicon ] value [ Otoku ] discount plan, which we started last month. if they can actually continue to sign up with [ Goldcar ] 1 year later, they will be able to continue with the current tariff plan. And so this is a campaign that we're implementing. And as a result of this effect we have seen higher issuance. So we will grow Gold card issuance, and we will be able to realize growth in financial business, including [ Jibun Bank ] as well. So we are in line with our plan, very steady. So with regards to the business growth, [ Josee ] will answer that question.

So thank you very much for the question. With regards to business. In terms of the second half, we have AI integration, cloud security BPO. These are the things that we can expect. With regards to AI integration, from April, we have new KDDI IRET and we are able to capture a very aggressive demand, and we have a threefold in terms of the new projects, so received quite well by the customers. So we will leverage that to make sure that we will be able to proceed with these different projects on AI. And strong demand for cloud as well. Conventionally, it was primarily centered on AWS, but now we're expanding to Google, Oracle and most recently to Microsoft. So we will see acceleration in expansion of cloud infrastructure. With regards to security, what's been talked about in the world is POS. So we are ready as well. So in the second half, we have a new assessment or evaluation system for supply chain. So we will use this as an opportunity to offer new services to position ourselves well. With regards to BPO, we have bottomed out last fiscal year, and we're now turning around to quite positive. It was a very challenging time, but we worked very hard. And now we are now seeing better trends, upward trend. So going forward, as we see increased demand, especially in BPO market, we will make sure that we capture that demand. And that will be our theme for the second half. The second question, on Page 7, as you had explained in the second half you are planning to spend strategic cost for growth. And I think that's necessary for next year and 2 years down the road. So with regards to AI, you do need to make a certain level of investment. Otherwise, there will be no return.

So strategic cost investment, how much and what's the scale? And what areas are you planning to spend? Would you be able to explain, give more color on this?

Thank you very much. So this is strategic investment in mid- to long term. Would that answer your question?

Yes, please?

Then Kazuki will answer this question for you.

Thank you very much for your question. So with regards to AI investment, I need to break it down into 2. So first is organic CapEx. So AI integration, IRET, these are things that will be AI implementation in the conventional CapEx and also cybersecurity area as well like POS. This will be basically -- within the CapEx to sales 12% within that range. Meanwhile, in our midterm strategy. We're planning to invest JPY 1 trillion for growth in 3 years. So we have that framework in place. And we talked about core free cash flow earlier, but we are now seeing solid track record, and we're also doing well with divestment as well. So the cash that's generated from there will be spent for AI investment and we'd like to do so more proactively as well. So the contents of that is being discussed among the management. So with regards to AI growth investment, you have physical AI and other different types of cloud businesses, investment into applications. These are all included. With regards to this, as you can see from capital allocation based on return, we want to be very disciplined in our investment. And invest in high credibility projects. And we will keep ROIC in mind to determine the growth areas for investment, in particular, and I'm getting long. But in terms of IDC in [ Sakai ] there are many clients corporates that have already adopted this and there are companies that do soft driving. There are different use cases there. So we would like to select investment opportunities with these things in view as well. I hope that answers your question.

So in terms of the JPY 150 billion divestment, you will see gains in investment as well, right? So you would probably be able to absorb some of the investment cost, but you're not really depending on that much. Is that the case?

So in terms of the sales gain, of course, there will be something that we could use for investment as well.

[indiscernible] [ Hui ] SBI Securities, [indiscernible] from SBI Securities.

My name is [indiscernible], I have 2 questions regarding divestments. You explained that there will be progress made in divestments going forward. In terms of the review of the portfolio, how much of that is complete? What percentage of completion you may not be able to share specific numbers, but in which areas are you considering divestments? How many transactions? And in terms of capital allocation, although there may be overlap with earlier questions, but if more cash is generated from divestments could surplus be returned to shareholders? Or will it continue to be reserved as your funding source for investment? These are my questions.

Thank you for your questions. I would like to turn to Katsuki-san again for answers.

Thank you for your questions. Earlier, toward the end of the presentation that was made, as mentioned there, in Q1, the decisions made are as on the right-hand side, in total, there were 11 such projects or transactions we determined. Excluding 7 that are release of policy holdings, the 4 that remain we have stated the specifics of the 4 divestments. And at this moment, we cannot necessarily say what the percentage of completion in terms of our portfolio review is we would like to continue to increase investment efficiency and rationale behind divestments as we determine them going forward, we will be able to see how much of the review is completed. And we have already developed a structure for this and the time schedule as well. And so -- under what's been determined, we would like to continue to steadily proceed with these divestment projects. I hope I answered your question.