KDDI Corp
TSE:9433
Earnings Call Analysis
Q2-2024 Analysis
KDDI Corp
In the wake of some recent difficult years characterized by price reductions, the company is seeing a rebound in Average Revenue Per User (ARPU) and is experiencing a diminishing reliance on roaming revenue, previously bolstered by Rakuten. The executive expressed confidence that volatility in the sectors of DX (Digital Transformation), finance, and energy has now stabilized, allowing the company to concentrate on these areas for growth. Looking towards future challenges, there's an expectation that Japan's declining population will lead to a reduction in handset sales and total sales by fiscal 2024 and 2025, despite this, there is a plan to incorporate generative AI into new handsets, a strategy supported industry-wide.
The company envisions significant growth in the Internet of Things (IoT) business domain, where despite its current modest profit contributions, they see a substantial opportunity presented by their 42 million global connections. The aim is to expand beyond just revenue from these connections, envisioning telecommunications as a foundational element in numerous services and technologies. The executive underscored the importance of data-driven initiatives and generative AI in realigning the company's medium-term focus on growth and outlined plans to present an updated medium-term plan after announcing full-year results. Furthermore, new ventures like 'MasterLink' and Space are positioned as areas with promising potential.
There have been significant concerns regarding the impact on business performance stemming from the NTT law revision discussions. The executive clarified that in the short term, this revision is not anticipated to bring about any profound changes; however, there’s active opposition to the complete abolition of NTT legislation. Such a move could lead to an imbalanced competitive environment, potentially harming customer service levels. The company argues that maintaining some level of regulation is crucial to ensuring a healthy competitive landscape in the telecommunications industry.
Addressing the issue of share buyback strategies, the executive mentioned an ongoing dialogue with major shareholders, including Kyocera, stressing the importance of not disappointing shareholders. The company outlined its cash allocation strategy, indicating they possess substantial operating cash flow. They've allocated investments totaling JPY 2 trillion for growth investment, JPY 1.3 billion for strategic investment, and a plan for JPY 300 billion in dividends alongside JPY 200 billion for share buybacks over three years. With a cash buffer in place, the company is keen to consult with shareholders and continue making decisions that benefit its investor base.
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Thank you for waiting. We will now begin the financial results briefing and Q&A of KDDI Corporation for the second quarter of fiscal year ending March 2024. Thank you very much for taking time out of your busy schedule to join us today. I am [ Miyakawa ] of Investor Relations department and 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. Takahashi, President and CEO; Amamiya, Executive Vice President and Executive Director of Personal Business Sector; Yoshimura, Senior Managing Executive Officer, CTO and Executive Director of Technology Sector; Kuwahara, Senior Managing Executive Officer and Executive Director of Solutions Business Sector; Matsuda, Director and Executive Director of Business Exploration and Development Division; Saishoji, Managing Executive Officer, CFO and Executive Director of Corporate Sector; Aketa, Executive Officer and Executive Director of Corporate Management Division.
Three financial results related materials, presentation material, Tanshin quarterly report and detailed materials are posted on our IR website. Please refer to the disclaimer in the material regarding statements made in these documents, performance targets and projected subscriber numbers, et cetera, explained in the Q&A session today. President Takahashi will first explain the financial results summary, followed by Q&A.
Mr. Takahashi, please.
Thank you. Thank you very much for joining us. In this meeting, on KDDI's financial results out of your busy schedules before Q&A session, let me share with you a summary of the first half results of the year ending in March 2024 and our thoughts on the NTT law.
Next, please. The first half consolidated results of the fiscal year ending in March 2024, enjoyed the increased operating revenues and operating income, a good progress versus the full year forecast. The left shows the operating revenue, which was JPY 2.779 billion, up 1.4% year-on-year, the progress ratio was 47.9%. The right shows the operating income, which was JPY 560.3 billion, up 0.2% year-on-year. The progress ratio was 51.9%.
Next, please. Next, let me explain factors for change in the first half consolidated operating income. The first half operating income was up JPY 1 billion year-on-year. From the left, group MVNO and Rakuten roaming revenues were minus JPY 20.3 billion. Multi-brand Communications ARPU revenues were up JPY 800 million. DX was up JPY 5.4 billion. Financial business was down JPY 9.9 billion. Energy business was plus JPY 9.5 billion. Profit increased by growth in communications [ software ] revenues and focus areas despite a decrease in Rakuten roaming revenue.
Next please. Next is the key points of consolidated financial results. Looking ahead to the fiscal year ending March 31, 2025 and beyond, key businesses that will form the core of sustainable growth are steadily growing. From the left, 5G communications, multi-brand communications ARPU revenues rebounded in the first half. DX steadily expanded profit growth. Finance business enjoyed double-digit growth in the first half. And energy business profit increased in the second quarter.
Next, please. This is a summary of initiatives related to the second quarter results. I just explained the consolidated financial results. Towards sustainable growth, we will promote efforts to grow communications ARPU revenues and forecast areas. Communications ARPU revenues rebounded and initiatives for growth, including au money activity plan are progressing. We are promoting 5G area development along customers' lifeline and further refining our communication quality.
In financial services, we are expanding our financial customer base through synergy with telecom business and full lineup services. We are strengthening DX and LX efforts to solve issues faced by customers and society. In addition, we will accelerate business development and human resource strategy by promoting the use of generative AI within the company.
Next, please. Finally, let me explain our opinion and thinking on the entity law and how it should be implemented. As we have said at each hearing, we think it is necessary to review NTT law, in line with the times. For example, the provisions such as the obligation to disclose research results, authorization of company name change and the director appointment.
On the other hand, we oppose the abolition of NTT law, which jeopardizes the public interest and believe that careful policy discussions should take place on the following 3 reasons: the first is to ensure fair competition between NTT Group and other operators to prevent further integration and unification of NTT Group. The second is to protect the existing 60 million users to ensure the obligation to provide services nationwide.
The third is to ensure the government control over communications that are high public interest to protect NTT's special assets by foreign investment regulations. If these are not maintained, we are very concerned about the impact on the national interests and people's lives.
This concludes my explanation. We will now move on to the Q&A session. Thank you very much again for today.
President Takahashi, thank you. Now we would like to entertain your questions. [Operator Instructions]
Daiwa Securities, Ando. I have 2 questions. First, Page 5, the factors for change, especially the second quarter, just focusing on 3 months the energy and others, that part, what are the factors? What are the elements? Would you like to explain that, please?
Thank you for your question. Regarding this, I would like to ask Saishoji to address your question.
Thank you for your question. Just focusing on the second quarter and on energy. Regarding energy business. In the first quarter, versus previous year, it was negative in terms of the operating income. But in the second quarter, the income increased significantly. The fuel cost increased. To counter that, starting from June, the prices were reviewed. And as a result, the performance has stabilized. In the second quarter, the stabilization continued. In addition, we had extreme heat. Power usage increased. The electricity usage increased and it's reflected in the increase of income. As for others, the first quarter and the second quarter, this is common between the 2. In the midterm business plan, cost structural reform is one of the things we are doing. And CapEx is thoroughly controlled.
And depreciation, amortization reduction is now reflected in this fiscal year. And in this fiscal year, on a full year basis, it will be reflected as a reduction effect. In addition and product support for handsets, how to use the handsets that it's actually support service. As a service, it's going very well and revenues and income from that has -- have increased, which was significant in the second quarter. This concludes my answer.
Another question, please?
My second question. It's also about the factors for change concerning the income. Compared with the first quarter, in the second quarter, your income level sort of increased. Further, comparison against the first quarter, could you focus on that, not against the previous year, but versus the previous quarter? So income level increased. What are the factors contributing to the increase of income? Regarding the consensus numbers, they are actually becoming higher. So would you like to focus on that, please?
Saishoji will address your second question as well.
Compared with the first quarter, income level has increased, as I said, energy business increased, which was the most significant part. Also product support service. Again, there has been a shift to the second quarter. About sales promotion cost reduction, is reflected in the second quarter, profit increased significantly. Regarding the sales promotion, there's some seasonality and because of the campaign -- because of the measures we have they can either increase or decrease.
The second quarter, it has been reduced. But regarding the second half of the year, depending on the situation, it will be implemented. This concludes my answer.
Did we answer your questions?
[Operator Instructions] Line 1 person in the back, please.
Nomura Securities, Masuno is my name. In your medium-term management plan, I have 2 questions. So first question is in business, this year, ARPU rebounded in the Rakuten roaming revenue is stable and energy you passed successfully. And so your DX is growing as finance is growing. So you are building one by one, achieving your target, and I think you have a clear view on your direction. In 4 to 5 years, big pillar -- will you build a big pillar that will support your business? I think that will be great.
In the 3-year medium-term plan period, it may be difficult to build a big strong pillar. So in a longer timeframe, will you develop a big pillar and which part, which area will that be? If you could share with us your view. As things go, I think you will achieve the target next year. But one is whether the 3-year plan is sufficient in 4 to 5 years, if you're thinking of a big pillar, a big domain, could you share with us your view?
Like you said, Masuno-san, for the past few years, the price reduction stuff was difficult. But I think we are fairly -- the negatives are gone and the ARPU is rebounding and Rakuten roaming revenue saved us for the past few years, but this decline will be smaller. And the growth that will offset that DX, finance and energy, the volatility was big, but now it's stabilizing. And so we can just grow -- focus on the growth areas. So you're right.
Now if I could talk about my personal view, population in Japan will decline as you know well in fiscal 2024 and '25, the handset will decline. Total sales will decline. But we still have to work hard in this difficulty, but in the handset, the new generative AI will be incorporated into new handsets, and this is also worked on by all players, and we feel encouraged. So we want to grow this area.
But the big growth is in the business domain, IoT. IoT is big. The profit contribution is still small. But as you see in the presentation, 42 million connections on a global basis already. So we think this is an opportunity for us. We should not just stay still. We should not just stay with the revenue from the connections, the telecommunication is involved in everything. So we need to leverage that and the added value part need to become a business -- full-fledged business.
So data-driven and generative AI will play a huge role. So this will be the key -- the focus in the medium term, and that's the focus of our growth area. We are working on the rolling medium-term plan. So after this when we announce our full year results, we hope to present the latest version. And [ MasterLink ] and Space is also another promising area -- so we want to draw a good medium-term plan.
Second question is on the medium-term financial aspect. So in the 3-year cycle, you are doing shareholder returns. So your 3-year cycle is fixed. I wonder if that is the optimal portion? The cross-sell share holdings strategically held shares is now being reduced from the trend of the times. And I think there is a term for that. So if you could extend the shareholder return period to a longer period so that you can be more flexible. Do you think you need such a stance? What do you think?
We have to think that revisit that -- in the current medium-term, EPS 1.5x, we must achieve this. This is something we committed to. So but there was price reduction. And so we wanted a 1-year moratorium, if you will, and we talked about that to you. And on that basis, we want to achieve the goal.
Regarding cash allocation, the operating cash flow is JPY 5 trillion. So how we use for shareholder return and growth investment. We already showed that to you. So we need to think of that as a basis. But as you rightly said, the strategically held shares cross-sell shares, there are many changes. So we hope to be flexible. That said, the cash allocation for the medium term needs to be maintained, but I think we need to address flexibly. We will be aware of that.
[Operator Instructions] C1 please.
SMBC Nikko Securities, Kikuchi. NTT law revision you explained about this today. We are interested in the impact on the performance. That's the main interest. But just to NTT in the West and the East becomes integrated and integrated with the holding - NTT Holdings to your company, would that have an impact? I don't really think it's going to have a huge impact. The prices may remain high, but in that case, you might be able to win a greater share. About the NTT law revision but the especially reviewing the organization or reviewing the universal service to your company, in terms of performance, will it have any negative impact? Is there anything that we are missing?
Regarding this discussion, it's not -- I didn't really think that it has kind of a short-term impact from the telecommunications liberalization to regarding this big NTT has become separated split, and there has been the foundation for competition policies. And as the MIT, the ministry has been saying because of the competition policies. As a result, customer services improve, Rakuten and joining and full companies and then prices have come down. That's part of the competition policies, and it has been conducted and one giant NTT they have been sort of splitting but -- and this NTT law, in a way, curves that part. Why do they have some specific facilities, specific assets, I presume? If it's abolished that curving force will not function. So to a giant company, they will just go back to a joint giant company. And the competitive environment is somehow the harm, then the competition is not promoted. The service level to the customers may go down. That's a concern. So that's the history of the competition policy. As a [ reason depot ] of KDDI. This is something we have to take to our heart.
Regarding the detail, if NTT becomes just a single NTT, group management. So what access challenge can be increased, connection charge can be increased significantly. For instance, DOCOMO, it's negative, the NTT East and West, they will have the positive results that all the other companies can suffer from the negative part. I mean you could manipulate it. But in terms of the short-term income, I don't really think that that's to be eroded. But as part of the competition policy, we are, in principle, opposing the abolition of the NTT law.
I hope you will keep us informed. My second question. I think you were just saying it rather softly. Your share price compared with peers, it's slightly lower because yesterday, there was an explanation from Kyocera. Just a slight impact, I believe, Toyota and Kyocera. How can you sort of reorganize this JPY 300 billion buyback, but 2 companies mentioned this, then JPY 300 billion will not be enough.
So regarding your policy about your share buyback and JPY 300 billion, such a limit. Last year JPY 200 billion, this year JPY 300 billion regard is there such a limit of the share buyback? That's my second question, please.
Well, to be honest with you, doing -- about noon, I heard about this formerly from Kyocera, we haven't heard anything formally. So it's rather difficult for me to comment on this. So -- but I heard about that comment being made by Kyocera. Once we hear that formally, we can start conversation. It's the same thing with Toyota. They said something and then we had the discussion. And for both Kyocera and Toyota, to shareholders, it's not a good idea to give trouble to shareholders handed to us. To the extent that doesn't give us any trouble, that's always -- that's what they are always saying, so we would like to have a good conversation in a manner that's not going to disappoint shareholders, we could study this. About cash allocation, JPY 5 trillion operating cash flow, that's there, for the time being, an investment, JPY 2 trillion growth investment, JPY 1.3 billion. And the strategic investment to JPY 300 billion. So this is what we have shared so much. So JPY 300 billion dividend for 3 years and JPY 200 billion by share buyback, again for 3 years. That's how we designed it.
With this calculation, in terms of cash, we still have buffer and to shareholders, Kyocera or this time, it's Kyocera you talked about Kyocera. But once we hear formally from them, we would like to consult with them, and we don't want to disappoint the shareholders, and we would like to address this. I think that will be the direction.
[Operator Instructions] So C line 2 front row, please.
Mitsubishi UFJ Morgan Stanley Securities. I'm Tanaka. I have 2 questions. So let me go one by one. First is on the financial results. In the detailed material Page 2, personal business. Others revenues in the 3 months to second quarter, it grew significantly JPY 32 billion, JPY 33 billion, your subsidiaries are active, I think. So which companies are they? And how much profit contribution do you have?
So Amamiya-san, please.
So that's about revenue, and profit, the income as well. So contribution on both because I'm not interested in just sales growing shop channel vital or something, if there's any particularly active, strong area and the sustainability thereof. So our subsidiaries from first to second quarter were strong. Most of our subsidiaries were strong. In numbers, I cannot mention numbers, but some strong au financial holdings, which is doing the financial business. And J:COM, from first to second quarter, the increase was big.
And BIGLOBE, and overseas subsidiaries, MobiCom and Myanmar, second quarter profit was higher than the first quarter. So au Financial Holdings, this is included in added value ARPU, but excluding that, yes. Some fall under the added value ARPU and other areas are also growing.
Which areas are strong?
I'm sorry, I would like to refrain from going into detail.
What about non-au loan, the non-au areas, maybe?
Loans and other related financial services, everything that is not in ARPU are here. So loan and card, credit card, those are in added value, those peripheral, miscellaneous items.
My second question is on the main material, Page 6. 5G communication. So communications ARPU revenue rebounded. Second quarter last year, communications charge was JPY 5.9 billion. In third quarter, the hurdle will be higher in comparatively, maybe this is a small question, but your medium to large capacity is growing, so it's stable. Can you keep the momentum in third and fourth quarter?
Amamiya will explain.
Thank you for the question. So JPY 5.9 billion from the service outage. So excluding that, it is positive. So including that, it is a slight negative. But on a quarter-on-quarter basis, JPY 2.9 billion is down to JPY 2.2 billion. So we are making steady progress.
Now towards the rebound of ARPU, we're taking various measures. One is in au, its money activity plan. We started that from September, which is trending strongly. Money activity plan, ARPU is high and money activity plan is raising the MAX -- unlimited MAX ratio. So ARPU is rising. So au money activity plan was launched in September. And since then, ARPU, we need to see further, but according to our analysis, we can enjoy higher ARPU than the existing users.
So if we progress, au ARPU will rise. And on the UQ side, in June, we introduced a new plan which is also trending strongly. ARPU this is contributing to higher ARPU. So all in all, basically, it is positive for ARPU. One negative factor is the au to UQ, but this number, this shift is now stabilizing. So in chronological, the sales and ARPU are both increasing as time goes by. There may be differences in speed -- but in any case, we are rising upward and that I can say for sure.
So what are the reasons that the subscribers go for MAX? Is it video? Is it because MAX because of money activity plan? Or what is the reason?
Money activity plan is limited, MAX is limited. So that's a good reason.
[Operator Instructions] C3.
Okasan Securities, Okumura is my name. I have 2 questions. First is strategic investment. Midterm plan during the 3 years, already about half has passed. At the moment, JPY 700 billion was planned. To what extent it has been actually allocated, used? What's the actual? And going forward, to reach the plan, I don't really think you try to manage to just reach that plan. But in terms of the scale, what domains, what areas, to the extent possible? Could you please share that with me?
Strategic investment, as I said before, it's JPY 700 billion for midterm plan, but -- at the moment, [indiscernible] we announced to JPY 200 billion strategic investment has been implemented. Specifically, Canada data center. Free cash flow, CapEx, we are looking at it a little less than JPY 550 billion. [ IIJ Evolver ] and [ Reliance ] and integration, we are not using so much cash in total about JPY 200 billion.
Other than this, the ARPU rebound is now in sight. So the large-scale deals are there. And it's not mission to use JPY 700 billion, but so that we can make announcement for such large deals. We are doing the preparation when the time comes, we would like to share that information with you.
So there are such possible deals. And after scrutiny due diligence versus plan, if you don't use all of that planned money. Mr. Takahashi, in the cash allocation, as you said, return to shareholders. Are you going to place more weight on the shareholders' return? What do you think?
As Matsuda-san said, yes, we would like to be flexible. It's the same. Cash flow allocation is concerned in the midterm plan. We have no plans to change them at the moment, but about share buyback JPY 200 billion 3 years by JPY 200 billion and then JPY 300 billion, as you said, that JPY 700 billion. Out of that, it's still JPY 200 billion. Of course, we would like to be flexible. At the moment, we don't have to say that we're going to change in this way or that way. So at the moment, just it remains unchanged.
My second question. Mobile competition environment. I have a question regarding that. July, September, the new plants and other new brands have been introduced by other peers, and churn ratio is deteriorating, I think, compared with peers about the MNP situation. Compared with the previous quarter, any changes you are looking at? What about your outlook going forward?
The way I feel is that it has stabilized significantly. In the past few years, yes, the various plans we have been introduced by other companies trying to be creative so that we can increase ARPU. Yes, do we introduced them, DOCOMO introduced them and SoftBank also introduced those. Competitive environment has somehow stabilized but iPhone commercial time in the fall, then it is becoming better again in this fiscal year. But 40,000 rules so-called the new incentive rule. That guideline is there it will be started from January.
So what will be the movement or development? But handset alone sales that sort of stabilized so that the liquidity, I don't really think it's going to increase. But towards the end of the year, we would like to again keep monitoring. Amamiya. Anything to add?
As Takahashi said, regarding the MNP, the market is -- has become smaller. Still, we've been winning and winning. In June, when we introduced that UQ plan, a bit weaker, but then started recovering in July and MNP, we would like to keep winning going forward as well. July and September, other companies introduced various new plans, some are similar, some are not. No significant impact has been felt so far with those new private brands, the iPhone and the handset-related changes have better impact. So we would like to compete and we would like to win.
Thank you for your detailed explanation. That's all for me.
[Operator Instructions] C Line 2 in the back, please.
SBI Securities, Moriyuki is my name. So the communication ARPUs rebounding. And so you will have more positives, and that will be great if that happens. Is that really okay? Do you feel comfortable maybe another round of pressure from the government? So 5G investment is difficult if we think of the profitability. So communications, the CapEx, including 5G. Will the amount of CapEx increase or any changes in the amount?
We have been doing a lot of CapEx. So when price was cut, we wanted to do more CapEx -- we ought to suppress CapEx more, but there is the area opening plan, we have to do 91,000 this year. This is the peak. Once this is over, we peak out. So next focus will be the quality. So we do not think CapEx will increase significantly going forward.
Now sub-6 -- this is 5G spectrum, but the satellite interference is seen. At the end of March, by the end of the fiscal year, the satellite base station will move. So this interference will be resolved, so we can raise the output and quality will improve. So that is how we want to ensure quality.
So to answer your question, with that, we've been doing much CapEx, and we do not anticipate a big increase in CapEx going forward.
So I'm sorry to be the devil's advocate, but will there be another pressure if that -- this becomes a situation?
Well, MIC is now busy with the NTT law, but price reduction when all industries are raising prices and labor cost is rising and investment is increasing, this kind of pressure is unlikely.
Second question. So you are investing in 5G, building 5G. And the high-end plan is driven by the video, which is the extension of the current service. When do you launch new services? I think people are waiting. So if you could give us the image, the consumer service.
5G and the way customers using 5G is changing. More specifically, if I could use an example, there was the high school baseball tournament in summer. We used to watch it on TV, but from the preliminary match, everything is distributed, streamed by in the Internet. And the traffic is sky rocketing. So this high school baseball [indiscernible], it is now viewed by smartphones. Watching it by smartphone is a commonplace now. So KO, high school managers, did not say the viewers on TV. He said, viewers on the Internet.
So from the preliminary match, this can be done because it's Internet, the traffic rose rapidly. In addition of the spring high school volleyball and high school soccer, football, these preliminary match. This is now clearly done by smartphone, viewed by smartphone real time. So traffic will rise.
Second point, this is just my personal view, but -- going forward, content will be UGC -- will be user-generated content. So the users will post the content. We're in that era. With generative AI, this will become rich. Until now, it was simple content, but be it TikTok, be it YouTube, they were simple. But now it will become richer with more creativity where people can unlock and exert creativity.
And with that, I think traffic will increase. That will be one trigger. And the other is, Google announced this. The handset, the cloud-based generative AI is drawing much attention, but what's most clear for the user is the handset -- it's not like the eraser magic, but those will come out more and more next year. And so I think these will drive 5G. It's just my personal view, but that's what I think.
We are running out of time. So next will be the last question. [Operator Instructions] A2.
JPMorgan Securities, Chiba. Following the previous question, cost and CapEx inflation, the impact of the weaker yen, what's your approach? As I look at the performance results, and excluding energy cost, I don't really think it's negative. But actually, how do you look at this -- the procurement environment if you are making any efforts, what efforts are actually effective?
In terms of procurement, in the mid-term, the weaker yen will have an impact. But in principle, it's the yen-denominated funding or procurement. So at the moment, no significant impact. But as you rightly said, in the midterm, regarding this weaker yen, it becomes even weaker about purchasing prices. In many cases, we buy from the overseas, that's going to have an impact. But at the moment, it is all right.
With overseas vendors in the negotiation, it's not so disadvantageous to you. You don't have to lower the volume, the same scale purchasing it's still possible. Is that what you are suggesting?
In principle, based on the contract, the payment is yen denominated. So FX fluctuations are not felt. Also, overseas group companies, we have such group companies. When there is a weaker yen, it has a bad impact. One weaker yen against the dollar means JPY 100 million increase in our income. That's the structure. So the FX impact is not keenly felt in terms of the structure.
About CapEx? .
Virtualization will be progressed. So of course, we are mindful of the cost and also weaker yen, we would like to curb the cost.
Thank you very much. So with that, we will close financial results briefing for the first half of the fiscal year ending March 2024 for KDDI Corporation. Thank you very much for your attendance.
[Statements in English on this transcript were spoken by an interpreter present on the live call.]