We upgrade our recommendation for Nippon Telegraph & Telephone Corp. ( NTT - Snapshot Report ) to Outperform following its strong financial results for the first quarter of fiscal 2011. Despite facing intense pricing pressure from smaller telecom service providers, we believe Nippon 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 Nippon’s acquisition of cloud computing giant 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.

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 will be purchased during May 16, 2011 to September 30, 2011. The remaining shares will be acquired before the close of fiscal 2011 (March 31, 2012). Furthermore, the stock is at present trading at attractive multiples compared with S&P 500 average and its peers with respect to several valuation metrics.