KDDI Seeing Some Stabilization in Mobile Competition

KDDI is Japan's second-largest telephone company, and Japan is one of our favorite wireless markets. In addition, the firm is now addressing most of our concerns regarding its long-term wireless strategy. Japan has three incumbent wireless operators, all of which have traditionally competed more on service and handset features than on price. Industry regulation in the country has been fairly benign, and the industry has traditionally successfully weathered threats to this competitive balance. In 2008, a fourth carrier, eMobile, entered the market, but it was acquired by SoftBank after only gaining about 3% share. This relatively benign competitive environment has allowed the industry to operate as an oligopoly, as evidenced by churn rates among the lowest in the world at less than 1% per month. 

KDDI announced a medium-term plan in 2019 which targeted EPS of JPY 388 in fiscal year ended March 2025 largely driven by expected growth in its noncore Life Design products. Our forecasts are below the company's, which we attribute to an expected larger impact from Rakuten having to grow its customer base to reach critical scale and risks from further government intervention in pricing. 

In mid-December 2017, Rakuten announced plans to raise debt of a maximum of JPY 200 billion to build out a mobile network in Japan which it subsequently launched in April 2020. While Rakuten only planned to spend around JPY 530 billion on its network compared with property and plant and equipment levels of around JPY 3 trillion for the incumbent operators, it had spent around JPY 2.7 trillion in cumulative EBITDA losses and capital expenditure by end September 2023. By this stage Rakuten had only around 5.5 million customers, with only 5.1 million of those on its own mobile network so needs to add more to build the scale to be profitable. KDDI has benefited from a domestic roaming agreement with Rakuten to provide roaming outside Rakuten’s network, and if Rakuten delays its network capital expenditure to preserve cash, then KDDI will likely benefit as the roaming partner.

Business Strategy & Outlook

We believe KDDI has a narrow economic moat based on efficient scale in its mobile network business, which we estimate generates 46% of the company’s revenue and around 66% of its operating profit. KDDI has generated ROICs averaging over 13% over the past 10 years and the other two established mobile operators, NTT DoCoMo and SoftBank have also consistently earned above WACC returns. 

The Japanese mobile market was a three-player market for most of its history except for a period between 2007 and 2012 when Emobile entered the market. After gaining only 3% market share Emobile was taken over by SoftBank in 2012. In terms of returns the Japanese market has been mostly a cozy oligopoly. SoftBank Group did not disclose enough information to calculate domestic telecom ROICs prior to the year ended March 2016 but its returns have been over two times its Weighted Average Cost of Capital or WACC since then. While NTT DoCoMo and KDDI have not generated returns as high as SoftBank they have still been above WACC. Despite earning higher operating profits, NTT DoCoMo and KDDI have greater invested capital of JPY 5.3 trillion and JPY 4.5 trillion respectively compared with SoftBank's JPY 3.3 trillion. 

Of course the risk for telecom companies in this situation is that governments or regulators start to get concerned that the incumbents are not competitive enough and are charging consumers too much money. Indeed, in August 2018, Chief Cabinet Secretary Yoshihide Suga was widely quoted as suggesting that competition was not working and that Japan's mobile carriers could lower fees by around 40%. At its result at the end of October 2018, NTT DoCoMo dropped a bombshell in announcing as part of its mid-term plan that it would be lowering its prices in the quarter-ending June 2019 to return up to JPY 400 billion (around 10% of its revenue) to customers so that its profits would decline and would not recover to those levels until fiscal 2023 (fiscal year ending in March 2024). 

Understandably, this announcement immediately hit the share prices of all three Japanese telecom companies. If the largest telecom operator in the market talks about dropping its prices by 20-40% for low end customers and reducing its overall revenue by around 10% then it is likely to impact on the other operators. The Japanese mobile market also went through several more bouts of price competition over the years to 2022.

In mid-December 2017, Rakuten announced plans to raise debt to a maximum of JPY 200 billion to build out a mobile network in Japan which launched in April 2020. The business targets at least 10 million customers by the end of fiscal 2028. Rakuten's planned cumulative capital investment for the period from 2018 to 2028 was originally JPY 526 billion, but by September 2023 it had already spent JPY 1.6 trillion with a further JPY 1.1 trillion in cumulative EBITDA losses. KDDI has provided it with roaming in Japan in areas covered by KDDI, but not covered by Rakuten. Given the cash flow losses, KDDI has been able to extend its roaming agreement with Rakuten longer than first expected as Rakuten has had to slow its network rollout pace. 

We believe the impact of a new entrant is largely a function of how much money it is willing, and able to spend to enter the market. Rakuten currently earns an operating profit of around JPY 150 billion per year, less than 20% of the average operating profit generated by the incumbent telcos. Its current enterprise value is also less than 20% of the existing telcos. We also note that Rakuten’s core e-commerce business faces intense pressure mainly from Amazon and Yahoo Japan, with each company now having similar market share after Amazon has taken market share over the past few years. We believe its small size and pressure on existing business will limit how much extra capital Rakuten could put into the telecom business to increase its impact on the market.

Narrow

Economic Moat

KDDI Corp

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KDDI Corp. engages in the telecommunications business. It operates through the following segments: Personal Services, Business Services, and Others. The Personal Services segment provides communication services for individuals and energy; educational services; commerce; finance and settlement; and entertainment services. The Business Services segment provides communication services, ICT solutions, data center services for companies The Others segment handles communication equipment construction and maintenance, and research and development of information and communication technology. The company was founded by Kazuo Inamori on June 1, 1984 and is headquartered in Tokyo, Japan.

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KDDI Corporation (KDDIY) Q3 2024 Earnings Call Transcript

KDDI Corporation (OTCPK:KDDIY) Q2 2024 Results Conference Call November 2, 2023 2:30 AM ET Company Participants Makoto Takahashi - President, Representative Director, CEO Toshitake Amamiya - EVP and Executive Director of Personal Business Sector Conference Call Participants Yoshio Ando - Daiwa Securities Daisaku Masuno - Nomura Securities Satoru Kikuchi - SMBC Nikko Securities Hideaki Tanaka - Mitsubishi UFJ Morgan Stanley Securities Yusuke Okumura - Okasan Securities Shinji Moriyuki - SBI Securities Kaori Chiba - JP Morgan Securities Makoto Takahashi Thank you. Let me share with you the financial results of the first half of the year ending in March 2024.

KDDI Corporation (KDDIY) Q2 2024 Earnings Call Transcript

MENLO PARK, Calif.--(BUSINESS WIRE)-- #fortune100--Secret Double Octopus, the leading provider of workforce and desktop MFA solutions, announced the expansion of its strategic relationships with KDDI Digital Security (KDDI Group) out of Japan. Under the terms of the agreement, KDDI Digital Security will add SDO's FIDO2-compliant passwordless authentication solution to its managed security services. In recent years, the spread of remote work and cloud computing have created an authentication sprawl, with orga.

Secret Double Octopus and KDDI Digital Security Sign Agreement to Offer Passwordless Authentication Service in Japan

KDDI Corporation (OTCPK:KDDIY) Q1 2024 Earnings Conference Call July 28, 2023 2:30 AM ET Company Participants Makoto Takahashi - President, Representative Director and CEO Nanae Saishoji - Managing Executive Officer, CFO and Executive Director of Corporate Sector Toshitake Amamiya - Executive Vice President and Executive Director of Personal Business Sector Hiromichi Matsuda - Director and Executive Director of Business Exploration and Development Division Yasuaki Kuwahara - Senior Managing Executive Officer and Executive Director of Solutions Business Sector Conference Call Participants Yoshio Ando - Daiwa Securities Satoru Kikuchi - SMBC Nikko Securities Daisaku Masuno - Nomura Securities Hideaki Tanaka - Mitsubishi UFJ Morgan Stanley Securities Mitsunobu Tsuruo - Citigroup Global Markets Japan Unidentified Company Representative We will now begin the Financial Results Briefing of KDDI Corporation for the First Quarter of Fiscal Year Ending March 2024. I am [Nakoji] (ph) of Corporate Communications Division, and will serve as the moderator today.

KDDI Corporation (KDDIY) Q1 2024 Earnings Call Transcript

Toyota Motor

Toyota Motor Corp has decided to sell about one-fifth of its stake in KDDI Corp worth about 250 billion yen ($1.80 billion), the Nikkei business daily reported on Friday.

Toyota to sell partial stake in KDDI worth $1.8 billion -Nikkei

Allied Properties Real Estate Investment Trust on Wednesday said it has entered into an agreement to sell its urban datacenter portfolio to Japanese telecommunications provider KDDI Corporation for $1.35 billion.

Allied to sell UDC portfolio to KDDI Corp for $1.35 bln

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May 18, 2023Company name: Internet Initiative Japan Inc.Company representative: Eijiro Katsu, President and Representative Director(Stock Code Number: 3774, The Prime Market of the Tokyo Stock Exchange)Contact: Akihisa Watai, Senior Managing Director and CFOTEL: 81-3-5205-6500

Partial Disposal of Shares of Common Stock Held by Nippon Telegraph and Telephone Corporation (Largest Shareholder), Acquisition of Shares of Common Stock by KDDI Corporation, Acquisition of Treasury Stock, etc.

KDDI Corporation (OTCPK:KDDIY) Q4 2023 Earnings Conference Call May 11, 2023 2:30 AM ET Company Participants Ikuko Hongou - IR Makoto Takahashi - President, CEO & Representative Director Toshitake Amamiya - EVP, Executive Director of Personal & Global Consumer Business Sector and Director Conference Call Participants Daisaku Masuno - Nomura Securities Hideaki Tanaka - Mitsubishi UFJ Morgan Stanley Securities Yoshio Ando - Daiwa Yusuke Okumura - Okasan Securities Shinji Moriyuki - SBI Securities. Yusuke Hori - Mizuho Securities Operator Thank you very much for the introduction.

KDDI Corporation (KDDIY) Q4 2023 Earnings Call Transcript

BARCELONA, Spain--(BUSINESS WIRE)--Sturfee and Mawari, in partnership with KDDI and Telefónica, are proud to announce the 5G MEC powered XR Digital Twin Store, a new project aimed at demonstrating the power of XR technologies in creating a sense of co-presence and togetherness. The project will be showcased at the Mobile World Congress Barcelona 2023. A video demonstrating the project is available at https://youtu.

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KDDI Corporation (OTCPK:KDDIY) Q3 2022 Earnings Conference Call February 2, 2023 3:15 AM ET Company Participants Ikuko Hongou - General Manager, Investor Relations Department Shinichi Muramoto - Executive Vice President Toshitake Amamiya - Executive Vice President Keiichi Mori - Executive Vice President Kazuyuki Yoshimura - Senior Managing Executive Officer Conference Call Participants Yoshio Ando - Daiwa Securities Daisaku Masuno - Nomura Securities Satoru Kikuchi - SMBC Nikko Securities Kaori Chiba - JP Morgan Securities Hideaki Tanaka - Mitsubishi UFJ Morgan Stanley Securities Yoshiyuki Kinoshita - BofA Securities Shinji Moriyuki - SBI Securities Ikuko Hongou Thank you very much for waiting. We will now begin the financial results briefing of KDDI Corporation for the Third Quarter of fiscal year ending March 2023.

KDDI Corporation (KDDIY) Q3 2022 Earnings Call Transcript

KDDI suffered a network outage in July 2022, but the negative impact on user churn appears transitory. The company has the scope to grow data ARPU via 5G, is well-capitalized, and remains a stable generator of free cash flow.

KDDI: Negative Impact From Network Outage Appears Transitory

KDDI Corporation (OTCPK:KDDIY) H1 2023 Earnings Conference Call November 2, 2022 4:15 AM ET Company Participants Ikuko Hongou - General Manager, Investor Relations Department Makoto Takahashi - President Toshitake Amamiya - EVP Keiichi Mori - EVP Kazuyuki Yoshimura - Senior Managing Executive Officer Conference Call Participants Daisaku Masuno - Nomura Securities Yoshio Ando - Daiwa Securities Satoru Kikuchi - SMBC Nikko Securities Shinji Moriyuki - SBI Securities Jun Tanabe - UBS Securities Kaori Chiba - JPMorgan Ikuko Hongou Thank you for waiting. We now would like to start the meeting on KDDI financial results of the second quarter of fiscal year ending March 2023, questions and answers session.

KDDI Corporation (KDDIY) H1 2023 Earnings Call Transcript

KDDI Corporation (OTCPK:KDDIY) Q1 2023 Earnings Conference Call July 29, 2022 4:30 AM ET Company Participants Ikuko Hongou - General Manager, Investor Relations Shinichi Muramoto - Executive Vice President & Executive Director, Corporate Sector Toshitake Amamiya - Managing Executive Officer & Executive Director, Personal Business Keiichi Mori - Senior Managing Executive Officer & Executive Director, Solutions Business Sector Kazuyuki Yoshimura - Senior Managing Executive Officer & Director of Technology Sector Makoto Takahashi - President Conference Call Participants Yoshio Ando - Daiwa Securities Daisaku Masuno - Nomura Securities Kazuaki Kikuchi - SMBC Nikko Securities Hideaki Tanaka - Mitsubishi UFJ Morgan Stanley Securities Ikuko Hongou Now, I would like to explain about the financial results for the First Quarter Fiscal Year Ending March 2023. Here, the financial results highlights the first quarter of the fiscal year ending March 2023.

KDDI Corporation (KDDIY) Management on Q1 2023 Results - Earnings Call Transcript

Japanese wireless carrier KDDI Corp said on Tuesday all telecommunications networks have returned to normal after a nationwide system failure.

Japan's KDDI: Telecoms networks back up and running after failure

KDDI Corp shares fell as much as 3.9% on Monday after a weekend outage, the biggest system failure in the history of Japan's No.2 wireless carrier which affected almost 40 million users nationwide.

KDDI shares fall nearly 4% after its biggest service outage

TOKYO (Reuters) -Japanese mobile carrier KDDI Corp said it aimed to restore services Sunday evening after nationwide network troubles affected up to nearly 40 million users, making calls and getting online difficult for more than a day.

KDDI aims to restore service Sunday after 40 million users affected

KDDI Corporation (OTCPK:KDDIY) Q4 2022 Earnings Conference Call May 13, 2022 4:30 AM ET Company Participants Ikuko Hongou - General Manager, Investor Relations Makoto Takahashi - President Shinichi Muramoto - Executive Vice President & Executive Director, Corporate Sector Keiichi Mori - Senior Managing Executive Officer & Executive Director, Solutions Business Sector Toshitake Amamiya - Managing Executive Officer & Executive Director, Personal Business Conference Call Participants Daisaku Masuno - Nomura Securities Co., Ltd. Kazuaki Kikuchi - SMBC Nikko Securities Hideaki Tanaka - Mitsubishi UFJ Morgan Stanley Securities Hiroyasu Eguchi - Credit Suisse Securities Ikuko Hongou Thank you very much for waiting.

KDDI Corporation (KDDIY) Management on Q4 2022 Results - Earnings Call Transcript

KDDI Corporation (KDDYI) Q3 2022 Results - Earning Call Transcript

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KDDI Corporation's (KDDIF) Q2 2022 Results - Earnings Call Transcript

KDDI Corporation (KDDIF) Management on Q4 2021 Results - Earnings Call Transcript

KDDI has a strong track record of improving profitability, sustaining free cash flow generation and allocating excess capital to shareholder returns. Our assessment is that future shareholder returns will remain predictable with an uptrend given management's focus and track record.

News for KDDI Corp Stock (KDDIY)