OKINAWA CELLULAR TELEPHONE COMPANY Q4 FY2024 earnings call

• Company & Core Positioning

  • Founded in 1991 to drive Okinawa economic development, majority-owned (51.8%) by KDDI, focused 100% on the Okinawa market, holding 50% mobile market share and 30% FTTH market share as the leading corporate group in Okinawa by market capitalization and profit.
  • Benefits from Okinawa's top national youth population share, growing tourism revenue (up 20% YoY to over 85 billion yen in 2023), and future economic development from returned US military base land.
  • Competitive advantage: Focuses 100% of investment and network upgrade effort on Okinawa, unlike Tokyo-based competitors that prioritize the Tokyo-Osaka-Nagoya region; leverages KDDI's national core systems to avoid heavy duplicated infrastructure investment, driving high profitability.

• Financial & Capital Allocation

  • As of prior fiscal year: Total assets 115.5 billion yen, net assets 97.4 billion yen, equity ratio 82.3%, operating revenue 77.9 billion yen, net profit 12.1 billion yen, ROE 12.5% (outperforming the average of Prime market listed companies). Market capitalization exceeds 204.6 billion yen, with PBR over 2x.
  • Mid-term capital allocation (FY2022-FY2024): Total 50 billion yen planned operating cash flow, 20 billion yen allocated to core 5G and infrastructure investment (on track to meet plan), 30 billion yen allocated to growth investment and shareholder returns.

• Mid-term Strategy (FY2022-FY2024, final year ending March 2025)

  • Strategy: "Two-pronged management centered on communication": deepen existing core communication business, and expand new growth areas to solve Okinawan social challenges.
  • Progress: Almost all targets achieved ahead of schedule; remaining 40,000 new mobile contracts and 15 billion yen growth segment revenue targets are on track to be achieved by March 2025.
  • Prioritizes solution business as the primary growth driver: Okinawan private and public sector DX adoption is behind the national curve, so DX solution offerings can address Okinawa's severe labor shortage driven by the fast-growing tourism sector. The business has already won large contracts including the Okinawa Children's Zoo night content project, a container plant project on Tarama Island, end-to-end solutions for the relocated University of the Ryukyus Hospital, and Starlink Business for dead zone coverage.

• Shareholder Returns

  • Targets 13 consecutive years of profit growth and 24 consecutive years of dividend increases for FY2025; plans a 120 yen per share dividend for FY2025, with a payout ratio of 47.3%, maintaining the 40%+ payout ratio target.
  • Has actively implemented share buybacks: 22.4 billion yen in buybacks in recent years, including 11.4 billion yen in FY2024, and revised FY2025 buyback guidance upward from 4 billion yen to 5 billion yen.

• Sustainability

  • Achieved carbon neutrality 6 years ahead of the original 2030 target in FY2024, the first company in Okinawa to do so, and plans to expand renewable energy adoption by 2035.
  • Participates in marine biodiversity conservation projects for endangered species in Okinawa, and has received national certification for a natural symbiosis site.

1. Mobile Communication: 686,400 total contracts, holding an estimated 50% market share in Okinawa, contributing the majority of core revenue. 2. FTTH (Fixed Fiber): 30% market share in Okinawa, with the 10Gbps service launching in April 2025 seeing strong early pre-order demand. 3. Growth Segments (Solution, au Denki, Agri, Healthcare): On track to hit the 15 billion yen revenue target by the end of the 2024 fiscal year. Solution business delivered 42% YoY revenue growth in H1 FY2024; au Denki is the largest growth segment by current revenue but has low profit margins due to wholesale procurement costs.

• For FY2025 (ending March 2025): Expects operating revenue of 83 billion yen, operating profit of 17.5 billion yen, EPS of 257 yen (30% growth compared to FY2022, double the original 15% target), and ROE of 12.9%, which will mark 13 consecutive years of profit growth. EPS is expected to continue growing on an upward trajectory after FY2026.
  • Future mid-term capital allocation: Core communication infrastructure investment will remain at approximately 6 billion yen annually, consistent with the prior mid-term plan. Remaining cash flow after capital investment will be allocated to growth investment, or to shareholder returns if large growth investment opportunities are not available in Okinawa.
  • Growth guidance: Solution business is expected to lead overall growth, with additional upside from healthcare, agri, and (after profitability improvement) au Denki.

• Core operational risk: Large-scale communication infrastructure failure, which occurred in 2022 and impacted customers across multiple carriers. The company has prioritized infrastructure redundancy, investment, and operational overhauls to prevent a recurrence.
  • Regulatory risk: Mobile communication business is subject to frequent regulatory changes from the Japanese Ministry of Internal Affairs and Communications, requiring ongoing adjustment to operations to comply with new requirements.
  • Competitive risk: Competitors have intensified market share competition in Okinawa's mobile market, driving up churn rates. The company is responding by improving network quality and customer satisfaction to retain customers.
  • au Denki profitability risk: Procurement costs from Okinawa Electric Power have increased, eroding profitability and leading to a recent net decline in contracts. The company is adjusting acquisition strategy and working to improve cost structure.

Q: Why does Okinawa Cellular hold such a strong leading market position in Okinawa, and what is the advantage of its Okinawa-only focus? / A: The company was founded with investment from 43 leading Okinawan businesses, who originally acted as founding agents to secure early corporate contracts. This local backing allowed the company to build a retail shop network twice the size of its competitors, and focus 100% of network investment on Okinawa, unlike Tokyo-based competitors that roll out new generations of network technology to the Tokyo-Osaka-Nagoya region first. This full focus delivers better network quality to Okinawan customers, creating the company's current leading position.

Q: What explains Okinawa Cellular's unusually high ROE compared to peers, and why did EPS jump sharply in FY2024? What is the outlook for EPS after FY2026? / A: High ROE comes from leveraging KDDI's national core systems, which avoids the need for large, duplicated investment in national core infrastructure in Okinawa, keeping capital costs low and margins high. The sharp FY2024 EPS increase came from a large buyback of KDDI's existing stake that reduced outstanding shares. Management expects EPS to continue growing on an upward trajectory as the company maintains efficient operations and continues improving capital efficiency.

Q: Which business segment will Okinawa Cellular prioritize for future growth, and why? / A: While au Denki is currently the largest growth segment by revenue, it is a wholesale business with limited upside for margin growth. The company will prioritize the solution business, which addresses unmet demand for DX transformation in Okinawa's public and private sectors, and helps solve Okinawa's severe labor shortage. The business is already gaining traction with large new contracts, and has strong long-term growth potential as the primary driver of overall company growth.

Q: Is there any plan for expansion outside of Okinawa, for example overseas? / A: Core mobile and FTTH infrastructure businesses will remain focused exclusively on Okinawa, per the existing operating model with KDDI that leaves the rest of Japan to KDDI's national operations. However, growth segments including healthcare and agri business are not limited to Okinawa: the healthcare business can expand across Japan, and the containerized plant/agri business has potential to expand to ASEAN markets where the technology draws strong interest, so the company is building capabilities for future expansion.