KDDI CORPORATION Q1 FY2027 earnings call

Overall Financial Performance

• Q1 delivered year-over-year growth in both revenue and profit, marking a strong start to the fiscal year against the full-year forecast. Operating revenue YoY growth hit 5.1%, with a 23.2% progress rate against full-year guidance. Adjusted operating income grew 21% YoY (26% progress rate), and adjusted net income grew 21.6% YoY (26.5% progress rate). The full-year adjusted operating income target of 1.021 trillion yen remains unchanged.

Core Mobile Business Initiatives

• Management shifted to a lifetime value (LTV) focused strategy, which has delivered improved core KPIs. Penetration of the new AU Value Link Plan and Komi Komi Value campaign is progressing better than initial forecasts, driving improved plan mix and higher communication revenue. Promotional expense efficiency has improved: management reduced acquisition spending on short-term contract customers to reallocate resources to higher-LTV long-term customers, with this efficiency gain contributing roughly two-thirds of the profit growth outside core mobile communication revenue. This policy will continue through the rest of the fiscal year.

Growth Business Expansion

• AI and cloud services are a top growth priority: new KDDI IRED has seen three times higher new project demand than prior periods, and cloud infrastructure expansion is accelerating to cover all major hyperscaler providers (AWS, Google, Oracle, Microsoft) to meet growing enterprise AI implementation demand. AIDC is successfully capturing growing AI inference demand, with strong EBITDA profitability. The Ponta Pass membership migration from the legacy light tier to the full offering is ongoing, enabling deeper customer collaboration with Lawson. Credit card growth is focused on expanding gold card membership, which hit 2 million contracts in May, driving higher customer stickiness for the banking business.

Governance and Operational Improvements

• Completed comprehensive inspections of 110 target group companies by June 2025, and implemented new governance rules and monitoring structures. Top management has held direct dialogue sessions with leadership of major strategic subsidiaries to strengthen alignment. New AI-powered tools for credit screening and financial anomaly detection have been introduced, with plans to expand AI use across governance systems.

Capital Structure and Portfolio Management

• Core free cash flow margin and operating cash flow margin (21.6% in Q1) remain stable, strengthening the foundation for growth investment. 11 divestments have been approved in FY27 Q1, generating approximately 150 billion yen in cash to fund future growth. KDDI is planning to host an IR Day in mid-September 2025 to provide deeper strategy updates.

1. Mobile Communications Core Segment: Q1 operating revenue grew 5.1% year-on-year (YoY). It drove overall quarterly profit growth. Key KPIs improved YoY: active smartphones reached 33.3 million (up 390,000), churn rate fell 0.06pp to 1.17%, and mobile ARPU rose ¥160 to ¥4,400 (3.8% growth).
2. Personal Growth Segment: Q1 operating income grew 9.3% YoY, with all five sub-segments performing well. Leading growth drivers include device warranty/guarantee services, Ponta Pass, and Lawson-related business.
3. Business Growth Segment: Q1 operating income grew 21.6% YoY, with all five sub-segments seeing revenue and profit growth. Combined AI integration and cybersecurity revenue grew 19.2% YoY, with cloud infrastructure revenue growing over 30% YoY. Connectivity Data Center (AIDC) operating revenue grew 20.6% YoY, with EBITDA margin exceeding 40%.
4. Financial Business (AU Financial Holdings): Q1 operating income fell 3.7 billion yen YoY. This decline was fully expected and factored into initial forecasts, driven by mark-to-market losses from rising long-term interest rates (approximately 2.4 billion yen in losses) and temporary balance sheet rebalancing. Excluding these factors, core credit card and banking businesses grew steadily.

• Management reaffirms the original full-year FY27 adjusted operating income target of 1.021 trillion yen, and expects all business segments to meet their current full-year projections. Q1 performance came in above internal plans, but management will retain upside to fund planned strategic growth investment rather than revising the full-year profit target upward at this time.
• Growth areas (personal growth and business growth combined) remain on track to hit the full-year target of double-digit operating income growth.
• For the Rakuten roaming agreement, management took a conservative forecasting approach and did not include any post-September 2025 roaming revenue in the current four-year guidance, despite planned limited continued service in rural areas.
• The mid-term strategy maintains a target of 1 trillion yen in total growth investment over three years, with AI-related investment prioritized within the existing capex-to-sales target cap of 12%.

• A recent unauthorized access incident affecting the company's ISP email system received administrative guidance; management has committed to strengthening security across the business, including the use of AI-powered vulnerability diagnostics, and working to improve industry-wide security standards.
• AU Financial Holdings faces ongoing challenges in growing retail deposit balances to fund loan growth, and is currently engaged in balance sheet rebalancing that temporarily suppresses profit growth in the segment. Management expects this transition to continue through the remainder of FY27, with resumed growth targeted for FY28.
• Terminating the national Rakuten roaming agreement requires prioritizing KDDI's own customer network quality, though no quantitative estimate of quality improvements has been provided.
• All new AI growth investment will be evaluated with a disciplined capital allocation approach focused on ROIC, with only high-return projects selected for investment.

Q: What is the status of the Rakuten roaming agreement, what is the financial impact of its planned termination, and will KDDI customer quality improve after termination?

A: The current seven-year roaming agreement will terminate at the end of September 2025, as Rakuten has built out sufficient coverage and KDDI needs to prioritize network quality for its own customers. Limited roaming service will continue for Rakuten in a small set of rural areas for a defined period while Rakuten completes its own infrastructure build. Q1 YoY roaming revenue impact is 800 million yen, and no post-September revenue is included in guidance for conservatism. KDDI confirms network quality for its own users will improve after termination, but declined to provide a quantitative estimate.

Q: After last year's price hike, does KDDI plan a second round of mobile price increases, and what conditions would drive this decision?

A: Penetration of the new value-linked price plans introduced with last year's change is progressing better than expected, and improved plan mix is already driving revenue growth. Management says it will continue to act as an industry trendsetter and always considers further pricing changes if appropriate, with a focus on delivering improved service and value to customers. No specific second round of price hikes has been decided at this time.

Q: What is the scale and allocation plan for AI-related strategic growth investment, and will divestment proceeds be used for shareholder returns?

A: AI-related organic capex will stay within the existing 12% capex-to-sales cap, and fits into the mid-term plan's 1 trillion yen three-year growth investment target. Divestment proceeds will be used to fund high-ROI AI and growth investment opportunities, with capital allocation disciplined by return requirements. No specific commitment to additional shareholder returns from surplus divestment proceeds was made.

Q: What progress has KDDI made on its portfolio review and divestment program, and how will the Kakaku.com sale process be managed?

A: 11 divestment decisions have been made in Q1 alone, with a formal review structure and timeline in place, but management declined to provide an overall percentage completion for the full portfolio review. For Kakaku.com, competing TOB offers are currently under careful review by all relevant parties, and KDDI will make a final decision based purely on economic rationale and prioritizing the interests of all shareholders, including KDDI's own.