KDDI CORPORATION Q2 FY2027 earnings call

Financial Performance & Strategy:

• First-half results exceeded initial plans for both operating revenue and profit, marking a strong start under the new midterm management plan.
• Adjusted operating profit rose 13.9% year-on-year (JPY 77.4 billion), supported by organic growth in Telecom Core and robust expansion in finance, AI integration, and data centers.
• The company is shifting focus from excessive sales promotion to stabilizing revenue structures, encouraging long-term usage, and strengthening customer touchpoints.

Mobile Business Operations:

• Smartphone subscriptions reached 33.34 million (up 420,000 YoY), with churn rate improving to 1.18% (down 0.03%).
• Mobile ARPU increased 1.6% year-on-year (JPY 70), driven by brand migration toward au and higher-tier plan penetration exceeding 4 million subscribers.
• Frontline capabilities, AI-assisted service templates, and physical shop effectiveness are key drivers of these improvements.

AI and Data Center Strategy:

• KDDI is pursuing two data center models: a connectivity model leveraging TELEHOUSE infrastructure for high profitability per megawatt, and an 'AI Factory' model in Sakai, Osaka, which layers value using owned GPUs and computing resources.
• Introduction of NVIDIA Rubin GPUs is planned for next year to enhance local AI implementation capabilities.
• Established ELYZA Robotics to promote physical AI, targeting JPY 30 billion in R&D investment, over 300 specialists, and 1,000+ robots by FY2030.
• Signed a capital alliance with Newmo (Osaka taxi operator) to create a virtuous cycle of operational data feeding into AI learning for autonomous driving taxis.

Capital Allocation & Portfolio Review:

• Decision made to sell Kakaku.com; inclusive of tax effects, this is expected to generate approximately JPY 110 billion in cash inflow upon completion of the TOB and squeeze-out procedures.
• Adjusted profit excludes non-recurring items such as strategic facility renewals, business structural reforms, and portfolio review gains/losses (e.g., AEON, menu, Kakaku remeasurement).
• Interim dividend increased 5% year-on-year to JPY 42 per share, reflecting confidence in earnings stability.

Human Resources:

• Targeting hiring 3,000 AI specialists and 2,000 security experts within the medium-term plan.
• Restructuring HR systems to reward high-performing roles and balance headcount quantity with quality.

Telecom Core: Revenue grew 16.7% year-on-year, driven by a JPY 28 billion increase in mobile communication and a JPY 34.3 billion increase in other segments (largely due to cost structure transformation). Adjusted operating profit increased significantly, contributing to the overall group growth.

Personal Growth: Secured growth despite transient negative impacts from finance and energy businesses. Device-related business led the profit increase. Finance profits are expected to decline temporarily due to normalization of loan-to-deposit ratios but will turn positive in Q4 with mortgage interest rate revisions. Energy profits were affected by a cooler-than-expected summer and timing differences but are expected to recover in Q3.

Business Growth: Revenue increased 18.8% year-on-year with steady profit increases across all areas.

• Maintains full-year operating income target, confident that revenue from Rakuten roaming (materializing in H2) will offset current gaps.
• Acknowledges that reported IFRS profit is below consensus partly due to defense tax increases and higher interest expenses, but emphasizes growing future cash generation capability.
• Plans to invest excess first-half profits (approx. JPY 30 billion) into second-half growth investments, addressing external environmental changes, core stabilization, and Personal Growth enhancement.
• Expects finance segment profits to turn positive in Q4 and energy segment profits to increase in Q3 as timing differences resolve.
• Confident in achieving 5% plus alpha organic growth in the medium term through effective utilization of generated profits and cash.

• External Environmental Changes: Fluctuations in interest rates, defense taxes, and energy costs (e.g., cooler summer impacting energy profits) affect short-term performance.
• Portfolio Execution Risk: The sale of Kakaku.com involves prolonged TOB processes and regulatory approvals; delays could impact cash flow timing and realization of gains.
• M&A Integration Challenges: Past goodwill impairments indicate difficulties in fully leveraging acquired companies; management acknowledges the need for discernment and specialized M&A structures to avoid overpaying or failing to integrate synergies.
• Competitive Pressure: Intense competition in the mobile sector requires careful balance between acquiring new users and retaining existing ones without engaging in excessive, churn-inducing sales promotions.
• Technology Obsolescence: Rapid evolution of GPU technology necessitates continuous investment and strategic allocation of computing resources to maintain competitiveness in AI services.

Q: Tokunaga (Daiwa Securities) asked about the source of first-half overachievement compared to plan and how it will be utilized, specifically questioning if cost reductions in Telecom Core drove the surplus and if roaming profits would be reinvested.

A: Matsuda explained that the JPY 30 billion overachievement was largely due to delayed technological costs shifting to H2. This surplus, along with organic growth from brand mix and improved churn rates, will be invested in H2 for mid-term growth and to respond to external environment changes, excluding Rakuten roaming revenues.

Q: Masuno (Nomura Securities) questioned the feasibility of achieving a 3% annual core operating income improvement given the large base and asked for visibility on returns from the JPY 300 billion infrastructure investment.

A: Sasaki confirmed the 3% improvement target is achievable through LTV-focused restructuring, upselling to existing users, and efficient cost control. Matsuda added that while overseas connectivity data centers have longer payback periods (emerging in FY28), Japan's AI factory data centers using Rubin GPUs will generate returns within the current medium-term plan period.

Q: Yoneshima (Citigroup) sought details on what specific metrics in Telecom Core outperformed plans in H1 and whether the AI factory model yields higher ROE than connectivity models.

A: Sasaki highlighted that frontline capabilities successfully lowered churn and increased data usage among new customers, with Povo growth exceeding expectations. Matsuda clarified that AI factories likely offer higher profitability due to owned GPUs but noted that GPU obsolescence requires strategic distribution of capabilities, making connectivity models essential for older hardware reuse and broader reach.

Q: Kikuchi (SMBC Nikko) expressed concern over past M&A failures and goodwill impairments, asking if KDDI should shift focus from M&A to internal talent acquisition and hiring numbers.

A: Matsuda and Yoshimura emphasized a selective M&A approach focused on return and trust-building, rather than aggressive expansion. They stated that HR is critical, with targets for 3,000 AI and 2,000 security hires, aiming to balance headcount quantity with quality through revised compensation systems for key roles.