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May 12, 2023
Akira Shimada, President and Chief Executive Officer, Representative Member of the Board
Also in attendance:
Kazuhiko Nakayama, Senior Vice President, Head of Finance and Accounting Dept.
Takashi Taniyama, Senior Vice President, Head of Corporate Strategy Planning Dept.
First, let me explain our Financial Results for the Fiscal Year 2022 and our forecast for the Fiscal Year 2023.
For 2022 Fiscal Year, NTT Group reported higher operating revenues, operating income and net income compared with the previous Fiscal Year. Each set a new record.
Operating revenues increased by 979.7 billion yen year on year to 13,136.2 billion yen, mainly due to an increase in revenues from the Global Solutions Business Segment and an increase in electricity revenues from Ennet. Of this increase, the impact of foreign exchange was approximately 280 billion yen.
Operating income increased by 60.4 billion yen year on year to 1,829 billion yen, offsetting the impact of rising electricity costs by increasing profits and reducing costs.
Net income increased by 32 billion yen to 1,213.1 billion yen, mainly due to an increase in operating income. The overseas operating income margin improved 0.9 percentage points from the previous fiscal year to 7.2%, due to an increase in operating income associated with higher revenues and cost reductions through structural reforms. This means that we achieved our medium-term financial target of 7% one year ahead of schedule.
In terms of operating revenues and operating income by segment, first of all, in the Integrated ICT Business Segment, although there were some factors that contributed to the decline in operating income, such as the impact of price cuts in the consumer communications business, we recovered by increasing operating revenues and reducing costs in the corporate business and the smart life business, resulting in an increase in both operating revenues and operating income from the previous fiscal year.
In the Regional Communications Business Segment, although there was an impact of the elimination of the one-time cost increase factor in the previous fiscal year, the decline in operating revenues and operating income was due to the impact of higher electricity costs than expected, as well as the delay in cost reduction measures at NTT West following a major communication failure in August.
In the Global Solutions Business Segment, the increase in operating revenues and operating income compared to the previous year was due to the capture of robust digitalization demand and the expansion of high-value-added services at NTT Ltd., as well as cost reductions through restructuring at NTT Ltd.
In the segment encompassing other businesses include real estate and energy, operating revenues and operating income increased year on year due to an increase in electricity fee revenues reflecting higher fuel prices at Ennet.
Next, I will explain our forecast for the Fiscal Year 2023. In terms of Fiscal Year 2023 earnings forecasts, we expect operating revenues to decrease from the previous year and operating income and net income to increase from the previous year. We will continue to aim for record operating income and net income, and work to achieve our medium-term financial target of EPS 370 yen. Operating revenues decreased from the previous year due to the impact of foreign exchange rates and a decrease in electricity revenues at Ennet. Excluding these impacts, we plan to continue to increase operating revenues in each of our major segments.
Operating Income is projected to increase by 121 billion yen year on year due to the increased operating income of NTT DOCOMO and other group companies, although the impact of the sharp rise in electricity costs is uncertain. We plan to increase net income by 41.9 billion yen year on year due to an increase in operating income, despite an increase in interest expenses.
Then operating revenues and operating income by segment. As for the Integrated ICT Business Segment, in addition to the growth of the corporate business and the smart life business, NTT DOCOMO plans to increase both operating revenues and operating income in the previous fiscal year as a result of the reduction of decrease in operating revenues due to the expansion of users of medium- and large-capacity plans in the consumer communications business and the realization of synergy effects through cost efficiencies.
In the Regional Communications Business Segment, in addition to implementing cost-efficiency measures that were delayed in NTT West, both NTT East and NTT West plan to increase operating revenues and operating income from the previous year by expanding growth areas and reducing costs further.
In the Global Solutions Business Segment, despite a decline in operating revenues due to the impact of the foreign exchange rate, we plan to increase both operating revenues and operating income from the previous fiscal year as a result of cost reductions through structural reforms, in addition to continuing to increase operating revenues by capturing digitalization demand.
In the other segment, operating revenues is planned to decrease from the previous year due to a decrease in electricity fee revenues due to the rationalization of sales volume in Ennet. Although there is a decrease in operating income due to the decline in sales, the increase in operating income over the previous year is mainly due to an increase in the real estate business at NTT Urban Solutions.
Progress on the current medium-term financial targets is generally on track. In the Fiscal Year 2022, EPS was 348 yen, exceeding the target of 340 yen. We aim to achieve our current medium-term financial target of 370 yen in Fiscal Year 2023. We plan to set new financial targets in our new medium-term management strategy, and we will switch to new financial targets for current medium-term financial targets other than EPS.
Then, the progress of our current medium-term management strategy and the progress of our initiatives since February are shown on Page 10.
Next, I will explain our medium-term management strategy. Its subtitle is "New value creation & Sustainability 2027 powered by IOWN." This medium-term management strategy is a five-year plan from the Fiscal Year 2023 to the Fiscal Year 2027. Please refer to page 1 of the New Medium-Term Management Strategy. The basic concept of the new medium-term management strategy is "NTT will keep trying. For New Value Creation and Global Sustainability."
Then see page 2. To that end, we will expand our investment in growth areas. Over the next 5 years, we will invest approximately 8 trillion yen in growth areas, up 50% from the previous level. The total investment includes existing fields is 12 trillion yen over 5 years.
See page 3. For the future, we will expand our ability to generate cash. We plan to increase EBITDA, which has been flat until now, by 20% to about 4 trillion yen in fiscal 2027, through the expansion of investments in growth areas I just explained.
See page 4. Next, we describe the pillars of our efforts to realize our strategy. It has three main pillars. The first pillar is "NTT as a Creator of New Value and Accelerator of a Global Sustainable Society." The second and third pillars are the mechanisms to support the first pillar, the second pillar is the enhancement of customer experience (CX), and the third pillar is the enhancement of employee experience (EX). The nine initiatives that make up these are explained below.
See page 5. I will explain the first pillar, "TNTT as a Creator of New Value and Accelerator of a Global Sustainable Society".
See page 6. It's the first initiative. "NTT as a Creator of New Value and Accelerator of a Global Sustainable Society." NTT Innovative Devices Corporation will be established in June 2023 with the aim of rapidly commercializing Photonics-Electronics Convergence Devices that achieve low power consumption as a solution to the increase in power consumption resulting from the increased use of AI and other technologies. We would like to start with an initial investment of 30 billion yen and gradually consider increasing the capital. In addition, we will invest approximately 100 billion yen in total in R & D for IOWN in the Fiscal Year 2023 to accelerate the commercialization of IOWN R&D, including 6G. Since then, we will continue to invest capital to accelerate the commercialization for servers and digital twin computing.
See page 7. The second initiative is "Data-Driven Creation of New Value". Aiming to strengthen the personal business, especially for individual customers, we will strengthen NTT DOCOMO's Smart Life business and aggressively invest more than 1 trillion yen in growth areas over the next 5 years. In addition to expanding and upgrading services in various fields such as finance, healthcare and medical, we hope to analyze various data obtained through these services to provide more personalized and optimal services.
See page 8. Next is "Strengthening the Use of DX/Data in Society and Industry." We will use technologies such as AI, Robotics, IOWN, Digital Twin, and Security to provide solutions and platform services to our corporate customers on a global basis, transforming them into industries that support life and society. We will invest more than 3 trillion yen in this area over the next 5 years.
See page 9. Next is "Expansion and Upgrade of Data Centers", which are important platforms for a data-driven society. In addition to further expanding the data center infrastructure of the NTT Group, which is currently the third largest in the world, we will promote further advancement by introducing IOWN technology. Toward that end, we will invest more than 1.5 trillion yen over the next 5 years to double the data center capacity from the current 1,100 megawatts.
See page 10. The third initiative is "Achievement of a Circular Economy Society". We will promote green solutions realized through the combination of green energy and ICT and invest approximately 1 trillion yen over the next 5 years. We also plan to expand our renewable energy power generation business and realize a stable supply of power that is optimized and efficient for local production and consumption using batteries and EMS.
See page 11. Next is "Creating Circular Economy-Oriented Businesses". In addition to renewable energy, we will promote the reuse of waste materials among various industries to achieve a sustainable society by recycling resources. In addition, by utilizing IOWN, 5G, IoT and AI robots, we will promote efficiency and value addition in primary industries, thereby contributing to industry promotion and regional revitalization.
See page 12. Next, "Progression towards Net-Zero". Toward Fiscal Year 2040, "NTT Green Innovation toward 2040" aims to expand its scope to scope 3 in addition to scope 1 and 2 initiatives.
See page 13. It's the fourth initiative, "further strengthen our business foundations". We would like to apologize once again for the inconvenience caused by the recent communication failure at NTT EAST and NTT West. Drawing on lessons learned from previous communications failures, we will enhance our social infrastructure by realizing resilient networks and systems in light of major failures and cyberattacks. In addition, we will strengthen our countermeasures against increasingly severe natural disasters. To achieve this goal, we will invest approximately 160 billion yen by Fiscal Year 2025.
See page 14. I will now explain the second pillar, "Enhancing Customer Experience (CX)."
See page 15. The fifth initiative is "Fusion of Research and Development with a Market-Focused Strategy". The R&D Market Strategy Division will be newly established in the holding company as an R&D organization that will combine and strengthen R&D promotion functions with marketing and alliance functions. In addition to strengthening product-out R&D, we will collaborate with customers and partners globally, from R&D to product delivery, and promote alliances with various partners.
See page 16. The sixth initiative is "Strengthening of Services that Emphasize CX". We view all stakeholders as customers and partners, and we will promote customer experience first. By constantly improving and updating our services in an agile manner while staying close to the customer journey, we hope to provide new experiences and inspirations that exceed customer expectations and become the NTT Group of choice.
See page 17. The third pillar, "Enhancing the Employee Experience (EX)," is explained.
See page 18. This is the seventh initiative, "Open and innovative corporate culture". With a focus on the customer, we will continue to promote a culture of openness, collaboration, and trial and error, while continuing to strengthen diversity and inclusion.
Then, see page 19. The eighth initiative is" Support Career Growth". We will support employees in their self-directed career development and expand human investment to support business growth. Based on the professional-based human resources system introduced in April of this year, we will support employees to obtain outside qualifications and enhance training menus in order to increase their expertise in 18 fields, as well as enhance career consulting functions to advise employees on career design. We will also provide support for total career development, including support for life events such as childbirth, childcare and nursing care.
See page 20. Finally, the ninth initiative. "Global Benefits for Employees and their Families". In the event of an employee's death, expand the program to support a portion of the tuition of their children's education through college. In Japan, we have been using the fund since 1988 to support the tuition of education for children in the event of employee misfortune. For the approximately 150,000 employees of our group overseas, we would like to consider introducing a support system similar to the one in Japan, with the aim of applying it from the beginning of next fiscal year.
See page 22. The medium-term financial targets are as shown. As I explained earlier, our goal is to increase EBITDA by 20% over Fiscal Year 2022. In the growth areas that will be the drivers, we will increase EBITDA by + 40% against the Fiscal Year 2022, and in the global businesses that we should focus on in the growth areas, we will individually set targets for overseas operating income margin 10% in Fiscal Year 2025. In addition, in anticipation of continued profit generation in existing fields, we will set a target of a 10% increase in EBITDA over Fiscal Year 2022 and a ROIC of 9% to improve capital efficiency.
In addition, three sustainability-related targets will be set: the rate of new female manager promotion rate, greenhouse gas emissions, and employee engagement, based on the Sustainability Charter and the new Environmental and Energy Vision that have been announced.
See page 23. Our efforts to strengthen our ability to generate cash for growth are outlined below.
Then see page 24. Expanding the scale of investment to achieve further growth will increase the demand for funds, but we also want to pay attention to the efficiency of funds so that the level of Debt-to-EBITDA Ratio can be maintained and lowered by about double.
Page 25. In terms of our basic policy on shareholder returns, we will continue to maintain a basic policy of continuously increasing dividends, while flexibly conducting share buybacks to improve capital efficiency.
This concludes our explanation of our new medium-term management strategy.
Finally, we will discuss shareholder returns, stock splits and organizational changes. I will explain shareholder returns and stock splits. The Board of Directors today approved a dividend forecast of 125 yen per share for Fiscal Year 2023, an increase of 5 yen from the previous year. As a result, we plan to increase our dividend for 13 consecutive fiscal years beginning in Fiscal Year 2011. The Board of Directors also approved a stock split today. With an effective date of July 1, the NTT Group will make each share split into 25 shares, substantially reducing the number of investment units, creating a more investment-friendly environment for our company shares, and expanding the investor base across a wide range of generations that can identify with the NTT Group's sustainable growth.
We will conduct an organizational review at the holding company. As I mentioned, we set up a Research and Development Market Strategy Division. Under the division we will establish Marketing Department and Alliance Department and the Research and Development Planning Department will be transferred. In addition, the Strategic Business Development Division will be abolished. Apart from this, the Public Relations Office will be separated from the Corporate Strategy Planning Department and established as the Public Relations Department, which will be directly controlled by the president, in order to strengthen marketing and promotion on a global basis. In addition, the Legal Office will be established within the General Affairs Department to strengthen legal and risk management on a global basis. In addition, a Sustainability Office will be established within the Corporate Strategy Planning Department to accelerate initiatives under the Sustainability Charter.
That's all I have to say.
Please tell me the reason for the Stock Split.
We would like young people to invest in our company. The new NISA system will start in January of next year, and the government is also promoting the flow from savings to investment. In this context, there has recently been talk of elementary school students buying stocks as part of their future investment education, but NTT's stock price has recently risen to over 4,000 yen, which is hard to buy since the 100 units are 400,000 yen. By dividing it into 25 shares, the stock price becomes about 160 yen, and even if you buy 100 units, it becomes about 16,000 yen, so you can invest in shares on the same scale as Amazon and Google (Alphabet). The decision was made from the perspective of creating an environment in which a wide range of people from different generations can invest.
Employee engagement is included in the review of sustainability-related targets, and I would like to know the reason why you included it int the target.
Employee engagement was 57% at major domestic companies last year. The engagement rate is quite high overseas, but I think there are differences in the form of employment. As I have said since I took CEO position, employees are the driving force behind the creation of customer services, so I believe that engagement rates, work satisfaction and excitement are important, and I wanted to create an environment in which we can create new services and new products by increasing engagement rates, so I included them in this index. The target is going to be higher than the previous year, so this year we are going to be above 57% first.
I would like to know how much of the impact of rising electricity costs was factored in in Fiscal Year 2022 and how much will be factored in in Fiscal Year 2023.
Electricity costs soared by 60 billion yen for the year, about 40% higher than the previous year. While NTT DOCOMO absorbed the surge in electricity costs and increased operating income, NTT West suffered some failures and was slow to cut costs, making it impossible for the company to absorb the surge in electricity costs. Looking at the current market conditions, we expect to keep it at the same level and not rise further, and we have factored the amount of the increase in the previous fiscal year into this earnings forecast. Therefore, if they go up further, we have to absorb it again. Then It would be a tough situation. We hope the current level will be maintained.
Regarding NTT Innovative Devices Corporation, I would like to know the investment structure, sales targets and the meaning of NTT manufacturing its own devices.
It is a 100% independent subsidiary. The sales scale is expected to be about 200 billion yen in Fiscal Year 2029. The figures are based on sales of devices alone, but we want to expand our business into areas other than device sales. We hope that NTT will create its own meaning because the story begins with NTT's laboratory developing the world's first photonics-Electronics Convergence Device. However, we have not yet decided whether we will make our own or fables-like shapes when we finally mass produce them. I think it's for future consideration.
Among the NTT group, NTT Electronics is a company with a hardware manufacturing function, but I would like to know the reason of the new company and the role that NTT Electronics will play in the IOWN concept in the future.
NTT Electronics will integrate into NTT Innovative Devices. We created a new company name and a new vessel because we wanted to show our spirit of focusing our main products on photonics-electrics conversion devices. Since components such as DSP are made by NTT Electronics, we intend to integrate them because it is more efficient to combine functions together. We will implement the consolidation around August 2023.
With regard to the establishment of the R&D Market Strategy Division, I understand that the Strategic Business Development Division has played a role in exploring the B2B2X process through group collaboration, but I would like to know the purpose of this reorganization within the R&D Market Strategy Division.
One of the reasons for the establishment of the R&D Market Strategy Division was that we had received various requests from overseas to our laboratories, and we needed to establish contact points with global customers. Furthermore, we need to create and check certain KPIs in order to stay close to the customer journey and brush up our services, so we put those functions in the Market Planning＆Analysis Department as well. We have been working on this within the Strategic Business Development Division since last year, and we have established it as one organization, the Market Planning＆Analysis Department. The Alliance Department basically intends to deal with the points of contact with external partners that the Strategic Business Development Division has come up with, as it has done in the past, and to strengthen its personnel and other personnel in order to raise the level further.
There is a lot of talk about AI around the world, and I would like to hear your thoughts on the development of large-scale language models (LLM) as the NTT Group and the use of AI by global companies.
NTT is already providing AI services to its customers. We do business under the brand name COTOHA, and we specialize in specific fields such as finance, and have been praised as lightweight and high-performance. In the process of brushing up services that include not only language processing but also image processing and speech processing, research on LLM has also been conducted in the laboratory. The LLM that people are talking about now has about 175 billion parameters for GPT3 and uses about 8 GPUs. As it is very large and consumes a lot of power, NTT would like to make the LLM a little smaller, improve the customizability a little, and also bring multimodal things like video, audio, and images to the world. It's about how hard the laboratories can work, but within this fiscal year, we would like to come out with something that is easy to use, lightweight and efficient. Of course, this will be for corporations. From perspective that we use open AI or not, we offer Microsoft's Azure open AI as a service overseas based on customer requests. It is not available in Japan, and we are in the stage of trying chat GPT. However, of course, we can't put confidential customer and company data into open services, so our basic policy is to use closed services.
President Miyagawa of SoftBank said that they intend to use GPT4 to incorporate various things while applying it, but I would like to know if President Shimada has any ideas.
It's quite possible that we can build closed services implemented in Azure into our customers' solutions, and there are quite a few applications for that. I think there are a lot of discussions going on in the group right now.
Please let us know about progress toward IOWN's goals.
I think we are making steady progress because we will establish NTT Innovation Device in order to bring out Photonics-Electronics Convergence Devices connecting boards. We will be well prepared to ship our Photonics-Electronics Convergence Devices in 2025, and we will be well on our way to IOWN3.0, which we are aiming for around 2029. We would like to make steady, step-by-step progress toward Photonics Chips.
Prices are rising due to increasing labor and electricity costs, but please tell us about the impact and how NTT will deal with it in the future.
As for overseas operations, our customers pay almost all the rising electricity bills for data centers and other facilities. In addition, with respect to rising labor costs, we basically develop our business in such a way that the customer is responsible for any system integration. In Japan, communication services are the main business, and there is a doubt that we can't get customer's understandings that we are going to raise electricity rates just because electricity costs have soared, so we have worked hard to absorb this by cutting costs. In this fiscal year, we hope the price of electricity remained at the same level, but if the situation were to rise further, we might have to think a lot about it. I think it is basic idea that we try to have corporate customers understand and factor in the price. But what we will do about services for the mass market, considering how far we can improve the efficiency of our business, is to do our best to continue to provide good services at user-friendly rates.
NTT DOCOMO has earned more than half of NTT Group's operating income, but could its mix change over the next five years?
About 60% of NTT Group's Operation Income are earned through the NTT DOCOMO Group. However, our global business has grown considerably thanks to our efforts, so we would like to look forward to the growth of the NTT Data Group, and we would like to invest in such a virtuous cycle in which new investments generate returns and cash. I believe that increasing EBITDA in new areas is really an accumulation of making new investments and accumulating the returns generated from them.
In relation to the stock split, what is NTT's current individual shareholder base? I also want to know what kind of structure you want to see in the future, and what is your ideal for young people to own stocks.
There are about 900,000 current individual shareholders in NTT as a whole. According to the sample survey, the majority of them are over 70 years old, and 80% are over 60 years old. On the other hand, investment in mini stocks is also increasing, and we want young people to invest in NTT as well as elderly investors, and we decided that we needed to lower the unit price by splitting the stock into 25 shares, including the fact that we need to create an environment where people can buy them cheaply just like U.S. stocks.
Can you tell me if there will be any major reorganization in the future?
Right now, I don't think the need for a major reorganization, but the world is changing rapidly, so if a reorganization is necessary, I would like to do it. Restructuring, however, requires a great deal of internal strength, so I would like to settle down the current organizational structure that was promoted when Mr. Sawada was president, and to draw out the new growth that will be generated from that organization first.
I would like to know if there is any possibility of outside funding for NTT Innovative Devices.
For the time being, we are not considering receiving investment from other companies. It's OK to create a joint venture under the new company, and I think there will be various forms. For now, I think it's better to have it as a 100% subsidiary because we can change it to any form with our decision making.
About 8 trillion yen will be invested in growth areas over the next 5 years, and I would like to know how much of this will be in the IOWN development.
In our medium-term management strategy, investment in R&D is about 500 billion yen, but we will have to invest more when we start mass production of Photonics-Electronics Convergence Devices, so I think R&D investment will be 500 billion yen and more. However, when we say that IOWN will need to make a serious investment, we assume that a significant scale will be required after IOWN3.0, when the equipment line is firmly built. I think it is likely that the next phase of this new medium-term management strategy will also require significant investment. When we move forward as needed, we will make sure to invest in manufacturing IOWN devices or equipment using such devices.
Please tell us how you view AI, including the current situation in Japan, the regulatory environment and competitiveness, as well as the need to consolidate AI talent in each NTT group.
The AI services themselves are embedded in various services. NTT DOCOMO needs it, and NTT Communications has AI services for corporate customers. The reality is that each operating company needs AI engineers in different fields. Of course, it's true that there are high-level researchers in the labs working on LLM, and we want to make something with a slightly different feature about the AI of LLM's algorithms that are getting the world's attention. Hopefully, we'll be able to launch some new products this fiscal year.
Regarding NTT Innovative Devices, I would like to know if they will make their own semiconductors or collaborate with foreign and Japanese semiconductor manufacturers.
The first thing NTT Innovative Devices makes semiconductor components. It is different from Photonics Chips because we start by making the connection with photonics from the parts. By enhancing devices in this way, it will eventually lead to Photonics Chips. It means that we will steadily take steps toward Photonics Chips, but we need to make them smaller and smaller, and we still have a long way to go for the time being, so we will wait a little longer before deciding whether to make semiconductors with this company.
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