We upgrade our recommendation for Nippon Telegraph & Telephone Corp. (NTT) to Outperform following its second quarter of fiscal 2010 financial results that exceeded the company’s own guidance. The company’s fiscal year ends on March 31, 2011. Despite facing intense pricing pressure from smaller telecom service providers and having a leveraged balance sheet, we believe Nippon will improve its performance in the future due to its continuous efforts to provide upgraded products with technological innovations.
Nippon’s strategy is to maintain its leadership position in the domestic telecom market and capture selected international opportunities to drive long-term growth. Relative to the closest competitor in Japan, Nippon’s brand and wide presence enable the company to aggressively handle competitive threats. Nippon is responding with marketing campaigns and price-effective service plans that are in synergy with modernized network features and bandwidth expansion. Advanced telephony services and higher transmission capabilities are part of the capital intensive Fiber-to-the-Home initiatives that have been in development for several years.
Nippon’s major ownership in NTT DoCoMo (DCM) further strengthens the overall company dynamics. DoCoMo implemented a new business strategy whereby it reduces subsidies on mobile handsets while offering customers lower priced monthly plans and installment facilities. DoCoMo is all set to launch a super-fast 4G Long-Term Evolution (LTE) network in Japan by end 2010. We believe the deployment of LTE will significantly boost DoCoMo’s financials, going forward.
Nippon has taken a major strategic move to boost its cloud computing and integrated communications services business. The company has acquired South Africa-based leading global IT solutions firm, Dimension Data, for a consideration of about $3.23 billion. Dimension Data has over 6,000 customers in 49 countries, whereas NTT Communications has more than 3,000 global customers throughout the world. We believe the merged entity will become an international giant offering a virtually complete suite of integrated communications and IT services to any enterprise in any part of the world.
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