We downgrade our recommendation on Nippon Telegraph & Telephone Corp. (NTT) to Neutral following mixed financial results in the second quarter of fiscal 2011. Despite facing intense pricing pressure from smaller telecom service providers, we believe NTT will gradually improve its performance in future reporting periods, mainly due to its continuous effort to provide upgraded products with technological innovations.
The company’s mobile wing, NTT DoCoMo (DCM), performed extremely well due to growth of smartphones in Japan, which generated massive revenue from mobile data download. Management is selectively exploring international opportunities to drive long-term growth.
We remain highly optimistic regarding NTT’s acquisition of cloud computing giant Dimension Data.Nevertheless, the stock price soared nearly 17% in the last three months. We believe NTT is currently fairly valued and providing limited upside potential.
NTT has taken a major strategic move to boost its cloud computing and integrated communications services business. The company acquired South Africa-based leading global IT solutions firm Dimension Data.
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 virtually a complete suite of integrated communications and IT services to any enterprise in any part of the world.
Acquisition of Dimension Data will provide Nippon with the necessary scale and technology to formidably compete with other giant cloud computing firms. NTT’s revenue from its Business segment is expected to reach $8 billion in fiscal 2011 and further upward to $10 billion by fiscal 2013.
In a major strategic decision to obtain more independence from the state, Nippon has decided to purchase 99.33 million of its own shares from the Japanese government. Total consideration will be approximately $4.9 billion. Of this, $3.5 billion worth of shares was purchased during May 16, 2011 to September 30, 2011. The remaining shares will be acquired before the close of fiscal 2011 (March 31, 2012).
