Financial Results for the Six Months Ended September 30, 2019

Financial Results for the Six Months Ended September 30, 2019
Jun Sawada, Representative Director and President, Chief Executive Officer
Also in attendance were:
Takashi Hiroi, Senior Vice President, Director of Finance and Accounting Dept.
Ryota Kitamura, Senior Vice President, Director of Corporate Strategy Planning Dept.

Summarized below are the key points of the explanations and comments given at the press conference.

(Jun Sawada, CEO)

First of all, I would like to express my condolences to those who died due to Typhoon Faxai (No. 15) and Typhoon Hagibis (No. 19) and other large-scale disasters across Japan, and my sympathy to the victims of those disasters.
The Group has been making the utmost efforts for recovery and assistance activities in order to ensure reliable telecommunications. Recovery of mobile phone services is almost complete and fixed-line telephone services can be provided to the fullest extent.
Even NTT, which looks after information infrastructure, has not experienced such large-scale disasters to date, and I will provide an explanation about our specific countermeasures for disasters later.

Now, I will give a brief summary of our consolidated results for the second quarter of the fiscal year ending March 2020.

Our financial results can be summarized as higher revenue and lower profits.
Business revenue set a record high for three consecutive fiscal years. However, operating income decreased by 87.9 billion yen compared with the previous fiscal year, but the decrease had already been factored in our initial plan. In addition, although the plan for the first half has not been disclosed, both business revenue performance and operating income performance are ahead of the plan.
Operating income decreased year-on-year due to a drop in revenue from mobile communications services of NTT DOCOMO and incurring of costs for Group reorganization in our overseas business.
Our overseas ratio of operating income to sales declined by 0.9%. The operating income ratio decreased slightly due to increasing investments in digital offerings and other fields, a delay in shifting to high value-added services, an increase in expenses for enhancing our brands, and other factors, although this is an ad hoc event limited to this fiscal year. Overseas sales were strong and increased by 460 million dollars, up approximately 5% despite the reorganization.

Next, I would like to explain the status of financial results by segment.
With regard to business revenue, increases in revenue from the long distance international communication business and the data communications business, as well as a revenue increase due to consolidation of ENNET as a subsidiary into the Group, more than offset decreases from the mobile communications business and the regional communications business.

On the other hand, operating income decreased in the mobile communications business as stated at the time of announcing NTT DOCOMO's financial results. With regard to the regional communications business, operating income decreased year-on-year in the second quarter under review, but we expect the income to turn positive in annual terms. Operating income from the long distance international communication business decreased year-on-year due to incurring costs for reorganization in overseas operations, but we will promote structural reforms to drive profit growth. I would like to skip information on the data communications business and the "other business" segment.

The next topic I would like to cover is our outlook for the year's results.
We will revise the outlook for business revenue upward by 60 billion yen. This is because net additions of mobile phone subscribers at NTT DOCOMO for the first half were more than expected and revenue from sales of terminal equipment was more than planned, although the revenue decreased from the previous fiscal year.
Meanwhile, we will not revise the outlook for operating income, taking into account the fact that the gross margin for terminal equipment is not particularly large. This has caused an increase in revenue to increase sales-related expenses. The outlook also takes into consideration measures to strengthen the Smart Life business segment and responses made at the time of Rakuten's entry into the mobile phone business.

Next, I will report on the main topics of our efforts listed in the medium-term business strategy.

As for promotion of the B2B2X model, our plan is to have 100 projects in three years; currently the number of projects has increased to 54. Since we announced the plan when reporting the financial results for the second quarter of the last fiscal year, the number of projects has increased by 41.

Examples of projects include: NTT DOCOMO providing a lending platform, and NTT West offering solutions for analyzing VOC (Voice of Customer) data to contact centers.

Regarding 5G services, we launched 5G pre-commercial services on September 20. At the Rugby World Cup 2019™ Japan, we provided high-presence live viewing and other services, and are considering accelerated expansion to establish at least one base station in each of the 47 prefectures by the end of June 2020 and deploy 10,000 stations by the end of June 2021.

Next, I would like to explain our own digital transformation.

NTT Ltd. started business this July. On October 1, we changed the names of our overseas subsidiaries to ones containing "NTT" and switched their logos to the NTT logo. Also with regard to our sub-subsidiaries in each country, we are planning to finish changing their names to ones that contain "NTT" by the end of December, and are moving ahead with unifying all Group companies under the NTT brand. Furthermore, we are aiming to shift our core business from product sales (which is our current focus) to managed services, and will move forward with structural reforms. In line with this, we will promote streamlining and reform our operations to achieve improvement. In addition, introduction of cloud-based integrated ERP will be promoted over a two-year period to enhance group management. This is a big challenge for us, and we are currently formulating a plan.

As for partnerships with worldwide sports organizations, we concluded a technology partnership agreement with MLB in September. To date, we have provided support to the IndyCar Series and the Tour de France, and add MLB in the US and J-League in Japan to increase our stable of partners, highlighting the variety of support we provide to enhance sports events. We will continue to offer new fan experiences by taking advantage of NTT's technical strengths.

To drive self-digital transformation in our domestic business, we are accelerating the implementation of new IT systems. To automate operations from receiving applications for services to starting to use those services and billing of fees, we will introduce common cloud-based IT systems at NTT East, NTT West, NTT Communications and NTT DOCOMO by FY2024. Separate IT systems will be used for NTT DOCOMO to provide services for the general public, but the other systems will be integrated as common ones in four and a half years.
Furthermore, we intend to take four years to introduce integrated ERP in related companies across Japan.
As for the RPA Tool, we introduced it into our own Group and recommend that our customers do so as well. As of the second quarter of FY2019, the number of robots was 17,000, up 42% year-on-year, and the number of operational processes in which a robot is used tripled to 1,500. More than 4,000 customers have already taken up RPA, and we will continue to promote its introduction.

The next topic is our new business initiatives using personnel, technology and assets.

First of all, I will turn to the enhancement and globalization of research and development activities. We, together with Intel and Sony, announced the launch of the IOWN Global Forum on October 31. These three companies serve as core members who are mainly in charge of devices for the IOWN vision, and intend to advance the future development of this vision.

Additionally, "W" of IOWN stands for "Wireless" and in this context, we announced a joint research project with JAXA today. We will develop optical and wireless communications infrastructure and optical and wireless space communications technologies that ensure seamless ground-to-space links. Moreover, we intend to develop new technologies, such as remote sensing and artificial photosynthesis, together with JAXA.
With regard to practical testing of DC power transmission, we plan to start the testing jointly with NTT Anode Energy in Chiba City in March 2020.

In July, NTT InfraNet, which had been a subsidiary of NTT East, was made a subsidiary directly under the NTT Group holding company. Our goal here is to provide a smart infrastructure platform; in other words, to create centralized infrastructure data in 3D format so that other companies can use the data. Furthermore, NTT GEOSPACE, a joint venture between NTT East and NTT West, will be reorganized as a subsidiary under NTT InfraNet in December. In doing so, we will link actual civil engineering facilities with digital map information and implement AI and other technologies, thereby providing location data solutions.
In addition, NTT Urban Solutions was appointed as an Executive Sponsor of the "Real Madrid Foundation Football School Japan." Through this sponsorship, we will work on urban development to create extra added value.

Let me move on to our contribution to invigorating regional societies and economies.
NTT East launched the "IoT Temperature Management Service" for companies that handle food products.
Furthermore, NTT West launched the "Regional Vitalization Cloud" service (in which applications are shared for use) for universities, starting with the Kyoto area.
In addition, NTT East began providing support for digital archiving of cultural properties to preserve and pass on local cultural and artistic assets and to vitalize regional communities. Group companies have engaged in many activities, as exemplified by NTT Communications performing 3D rendering of [stage actor] Mr. Mansaku Nomura and NTT DATA performing digital archiving for the Vatican Apostolic Library and Koyasan University. The NTT Group will promote digital archiving of cultural properties across the board.

Next, I would like to talk about efforts we will make for disaster countermeasures in the future. There are two key points: strengthening facilities and accelerating recovery support.
To strengthen facilities, we will increase the number of medium-zone base stations from 1,700 to 2,000 by the end of this fiscal year to respond to power outages. With regard to EVs, we plan to make all company cars electric by 2030, but are considering accelerated adoption of EVs because we hope to use them to respond to power outages at base stations and for other purposes. In addition, we will centrally manage approximately 400 mobile power generation vehicles owned by the NTT Group. Furthermore, we will consider moving cables underground, introducing wireless fixed-line telephone services, and other new formats.
To accelerate recovery support, damage forecasts are made in advance based on typhoon and other disaster forecasts, and fault rectification teams are organized in advance (this is a practice we have already put in place). For example, when a typhoon approached Miyakojima Island, we sent a fault rectification team to the island before sea waves became high. Going forward, recovery teams will need to interact with each other in each area and take advance measures. We will also implement measures such as using former employees, installing Wi-Fi and storage batteries in public telephone boxes and open 113 satellite offices.

Finally, I will explain returns to shareholders.
One point is that we have acquired 251.1 billion yen of treasury stock, including acquisition from the government in the second quarter under review, and the total amount of share buybacks for this fiscal year came to 501.1 billion yen.
We will continue to acquire treasury stock in a flexible manner in the future as well, and plan to implement two new measures geared to individual shareholders in particular.
The ratio of individual shareholders of the Company stands at approximately 15%. This ratio peaked at 24% in FY2001, and as such we think that it is now at a particularly low level. To date, we have held company information sessions, online information sessions in the evening, etc. but the rate of individual shareholders has continued to decrease. In response, we have decided to split each share into two shares, creating an environment where it is easier to invest in NTT's shares. This stock split is scheduled to take effect on January 1, 2020. Each share is traded at 5,500 yen as of today, and the price will be reduced to 2,750 yen. One share-trading unit of NTT's stock is 100 shares. As such, you can buy one unit for 550,000 yen today but soon buy one unit at half the price (275,000 yen). The guidelines of the Tokyo Stock Exchange state that a desirable price for one share-trading unit should be less than 500,000 yen, so investors will be able to buy our stock at approximately half that price.
The other factor is distribution of d points. Since many of our individual shareholders sell NTT's shares within approximately two years after purchasing them, we will grant 1,500 points in the second year and 3,000 points in the fifth year. However, in the first fiscal year of this program, we will distribute 1,500 points to those who have held our shares for at least two years but not more than five years and 4,500 points to those who have held for at least five years. The record date is March 31, next year.

That concludes my explanation.