NTT, Inc. (9432) Earnings Call Transcript

We will now start briefing on NTT's financial results for fiscal year 2020 third quarter. Please go ahead.

Thank you very much for participating today despite your busy schedules. I am Fujiki from the IR office and will be the facilitator today. I would like to introduce today's attending members. First from NTT. Mr. Shimada, Representative member of the Board, the Senior Executive Vice President; Mr. Nakayama, Executive Officer, Senior Vice President, Head of Finance and Accounting; Mr. Taniyama, Executive Officer, Senior Vice President, Head of Corporate Strategy Planning. From NTT DOCOMO, Mr. Fujiwara, Executive Vice President, Member of the Board of Directors, General Manager of Corporate Strategy and Planning Department; Mr. Kobayashi, Senior Vice President, General Manager of Accounts and Finance Department. Today's briefing session, voice, will -- is streamed live. This will also be streamed on our company's website on a later date, so we kindly thank your understanding. Today's presentation materials are posted on our company's IR website under presentation materials. On the first page of the presentation material, points to be considered are stated. So we kindly ask you to read through them. After this, Mr. Shimada will explain the outline of the results and others followed by opening the floor for questions from all of you.

Thank you very much. Shimada is my name. Thank you for joining us at this web-based meeting, despite your busy schedule. So allow me to explain the financial results for the 9 months ended December 31, 2020. I'll be very brief in my presentation. So Pages 4, 5 and shareholder return on Page 14. For this, I will be focusing on these 3 pages. So let's start with Page 4. As for the third quarter, we saw a decline in operating revenue, but increase in operating income. Net profit was achieved record high as the third quarter. At this moment, both operating revenue and operating income is proceeding better than our annual plan. As for our operating revenue, as a result of decline in DOCOMO's handset sales as well as overseas system integration business revenue, as well as the change in accounting method for part of the revenue, whereby net amount instead of total amount will be recorded. Operating revenue decreased by JPY 124.7 billion year-on-year and reached JPY 8,738 billion. As for operating income, while there is decline from impact of COVID-19 as a result of increase in profit in DOCOMO smart life business as well as improved profitability in our overseas business, operating income increased JPY 51.9 billion and reached JPY 1,502.3 billion. As for net profit, there was increase due to increased operating income. Also, there is contribution from absorptions of minority interest income related to turning DOCOMO into wholly-owned subsidiary firm. So profit increased JPY 34.3 billion and reached JPY 831.2 billion. As for overseas sales, there has been decline due to change in accounting method as well impact from COVID-19. But, on the other hand, operating margin improved due to streamlining exercise at NTT Ltd. Right now, we're making very strong progress. We need to continuously monitor the possible restriction on economic activities around the world due to COVID-19. We will not be revising the annual plan at this juncture, but we'll make an effort to exceed the plan. Now as far as the impact of COVID-19 during the third quarter results are concerned, the impacts on operating revenue is JPY 160 billion and JPY 30 billion on operating profit. Please turn to Page 5. Contributing factors by segment for the third quarter. As for mobile communications segment, decrease in operating revenue, but increase in operating income. Decline in mobile communication service revenue due to decline in handset sales and global [indiscernible] revenue and expanded impact of the new rate plan was offset by increased profit in smart life business. So revenue declined year-on-year, but operating income eased year-on-year. As for Regional Communication segment, while revenue increased due to strong fiber sales at both NTT East and West, there is disposals property related to expanded capacity at NTT West. So increase in revenue but decline -- increase in revenue but decline in operating income. But for the second quarter, third quarter, they showed both increase in operating revenue and operating income. So very strong. As for long distance and international communications segment, change in accounting for part of the revenue at NTT Ltd. did take place. And so there was impact of COVID-19. So there was decline in operating revenue. On the other hand, improved profit -- there was improved profit from structural reform in overseas business. So revenue declined, but income increased as a result in this segment. As for telecommunication segment, this was already announced by NTT DATA just yesterday. They recorded increase in both operating revenue and operating income year-on-year. Let's turn to Page 14. This is regarding the shareholder returns. In the midterm management strategy, we have announced our basic way of thinking of continuous dividend increase. Therefore, this is reflecting the steady progress of this fiscal year performance against annual performance forecast, profit increase from wholly owning NTT DOCOMO and improvement of cash flow. And given this, as for dividend, fiscal year 2020 year-end dividend will be JPY 55, a JPY 5 increase from the dividend forecast at the beginning of fiscal year and the annual dividend of JPY 105 per share, and it is a JPY 10 increase compared to the previous year. We'll now start the Q&A session. As we have announced beforehand, with regard to Q&A we'll be receiving questions only those who have already registered and connected to the telephone conference system. For those -- for questions, please -- the operator will explain how we will be taking questions from now on.

[Operator Instructions] From Nomura Securities, your question please.

Masuno from Nomura Securities. I'd like to ask the questions. With the second [indiscernible] in telecommunications. With regard to Harmony -- ahamo, just -- I understand MNP is now in the positive territory for MNP. How much impact did ahamo have? I understand the restoration of ahamo already reached 1 million that's what you said to the press conference. Can you give a breakdown between the new customers as well as current customers? What's the breakdown between non-DOCOMO customers and current DOCOMO customers? How do you see the trend going forward? So that's my first question with regard to ahamo .

Fujiwara from NTT DOCOMO. Let me respond to your first question about ahamo. Yes, at the press conference today, we mentioned that we have already exceeded top 1 million subscriber base -- or correction, 1 million reception. This is only for entry. So to what extent this will translate into act of subscription, we're not yet sure. This is simply the level of entry. But what we had intended is to capture customers in their 20s and 30s. And that customer segment was the target of the new lineup called ahamo. And we're now making preparations for this end. So the application from people in their 20s and 30s, they are actually relates to a substantial portion of the application. So I think ahamo is very attractive in that regard. At the same time, March 26, that is the day for the launch of the service. This was also announced today. So until the end of the year, inclusive of the promotion going forward, we hope that we'll be able to expand the recognition of this new service and expand the take up.

What about the impact of ahamo on the MNP December and January? I think right now, advertising is on YouTube. Will the advertising will be also focused on web-based going forward?

As far as the advertisement is concerned, well, yes, we have launched some primarily net-focused advertisement, but we are hoping that we can expand that. And we like to make preparations to expand these throughout our marketing. Yes, we'd like to get off to a good start. As far as the MNP is concerned, yes, we mentioned that we are in the positive territory when it comes to mobile number portability or MNP. So we're in the positive territory after third quarter. We will like to continue this positive trend. So that is what we would like to aim for.

May I -- I would like to follow-up as far as the third quarter is concerned. Well, with the positive territory aimed at December, I think for the third quarter, we're still in the negative territory for MNP, but positive territory for MNP in December. Thank you very much for that clarification. My second question is in relation to NTT Communications. MIC Advisory Group, based on the data, which are submitted there and just spend that towards summer, you're considering possible turning of NTT Communications into wholly-owned subsidiary firm for DOCOMO. One of the points is the backbone -- greater efficiency backbone network. To what extent is the overlap between the backbone network? And to what extent can you realize efficiency? What about sales and marketing? I think we have cooperatives imposed communications center DOCOMO. How much is the overlap between the corporate sales team between the 2 companies? And also, what impact can you see if you have a group-oriented structure going forward? I would appreciate your thoughts.

Thank you. Shimada here. Let me respond to your question. As you mentioned, Mr. Masuno, towards the summer of this year, we are considering turning NTT Communications into a subsidiary firm of NTT DOCOMO. Now against the backdrop, with regard to corporate sales team, we want to reinforce that, and if we want to consider greater efficiency in our facilities and thereby translating that into cost reduction. These are the 2 major targets for this exercise. As far as the facilities are concerned, in principle, as you're aware, NTT Communications has a network that connects between different prefectures. As for DOCOMO, naturally, they own all of the network. So therefore, core network into [prefecture] core network, NTT DOCOMO has as well. So can we immediately very simply realize efficiently? This is going to be a time-consuming exercise. But with regard to investment for future networks, I believe that we will be utilizing the efficiencies or the facilities of the 2 companies. And since we're in the era of FMC, fixed mobile convergence, we will be trying to integrate the core network down the road. With regard to corporate sales. In principle, NTT Communications has focused primarily on fixed line, so -- on delivery fixed line solutions. As for DOCOMO, in principle, they've focused on sales and marketing for handsets as well as delivery of solutions in relation to those handsets. So that being the case, as we get embark on 5G era, and we -- this requires new stand-alone services. So sourcing-related services will be required. So in that regard, the customer base that NTT Communications has can receive such services, and they can receive solutions services, which is based on fixed mobile conversions. So it's not so much overlap. I think the structure is that both companies will be cooperating in order to deliver new services. I think that's going to be the situation going forward.

So that means that you're not going to create one unified sales team. That is not what you're considering. Is my understanding correct?

Well, let me put it this way, next year -- well, this year, they will turn into a subsidiary. And 1 year, toward spring and summer of next year, with regard to the organization of corporate sales, we would like to consider integration of those teams at that juncture.

We would like to take the next question. Next question. [indiscernible] Research Center, Mr. [ Ishino ].

I have just one question. The data communications business, improving the efficiency of it. I have seen the past state of that business. It seems that the headcount is quite large, but the sales is not in line with that. Compared to the other average, it is lower. So in Amazon, throughout the year, they are investing $40 billion. That is the environment, and I think you need to improve the efficiency of this business area. And as Mr. Masuno pointed out, as a structural issue, fundamentally, how are you planning to change this business?

This is Shimada speaking. Thank you very much for your question. The data business currently, consists -- excuse me, as a group, overall, as a group, we have 330,000 employees. And out of that, data has about 130,000. So in the overall group, the data has a large number of employees compared to others within the group. But as we have been conveying into NTT DATA's large number of headcount is mainly in India. The U.S., there is a BPO service team are located in India. And there, it consists about 40,000 of headcount. And other than that, in Europe, in order to handle the BPO business, there's an organization located. Basically, the number of headcount is large. However, the personnel expense unit price is low in terms of it being a cost. Moving forward, the digitalization business. The India's support team is responding to the digitalization business, and they do have an organization that can respond to such a digitalization business and towards a more efficient business.

How are we going to utilize this offshore deployment more? We would like to enhance and strengthen the utilization of that. It's not just simply increasing the number of headcount is how I would like you to understand it. So the surrounding environment, the needs towards cloud or shifting over to cloud or compared to the growth in the United States, I did understand efficiency and headcount. However, in the mobile wireless business, the growth until now you're dependent on the mobile business. It seems that in terms of growth rate, this business was not focused on that much. I do understand the headcount efficiency part. But in terms of growth rate, when we compare to the U.S.A. business, it's behind, is what I feel, what do you think?

This is Shimada speaking. When you say behind, that feeling is different from ours. And currently, the data business also, as I have been saying, from the conventional outsourcing type of business, they are shifting over to the digital offering business. They are shifting their business model. Therefore, in that sense, steadily, in terms of human resources in the United States, they are shifting to a more digital human resources. And that is why we have been making investment or spending costs to acquire such a challenge. And in looking at the content of the orders we received from the customers, the order also is shifting over to the digital side of business. Therefore, I believe that we will be able to furthermore respond to the expectations of our customers and yours.

Next question from Daiwa Securities, Mr. Ando.

Ando here. My first question is this might be a very naive question. If you could once again, please talk about the impact of price reduction at DOCOMO. What are your thoughts behind this price reduction? And also, for the past 3 months, the competition has come up with a new rate plan. And against the backdrop, have you adjusted your thoughts and your position? If you could share that with us.

Thank you very much for your question. Yes, we announced -- sorry, Fujiwara from DOCOMO. We announced ahamo back in December. As you know, as a result, MNP performance improved as a result. So in that regard, although the service launch is not yet done -- it's not started, we're in a very good situation as a result of this announcement. And as a result, we've been able to stop the pouring out and outflow of current DOCOMO customers. So I think we're beginning to see improvement as far as subscription is concerned. With regard to price -- price plans, rate plans of the competition, they're now visible. It seems that they are actually more or less the same according to people in the media. As far as we're concerned, the rate plans -- the rates may seem same across the board. But when it comes to network quality and the area of coverage and also after sales support, we hope the customers will take a look at this issue in a comprehensive manner. So we need to communicate more about the appeal of our services. It is important that we continue to communicate our benefits to our customers. And that is the priority in the telecommunication area for us.

I see. Let me follow-up. I think the price reduction was quite extensive, which means that you have -- you mentioned that you want to do cost reductions. In what areas would you like to implement cost reduction efforts? You mentioned about the network in relation to NTT Communications. Can you please revisit your thoughts on these items, please?

Thank you. As far as cost efficiency is concerned, yes, we're naturally working on this for this fiscal year as well. Primarily, marketing-related cost reduction and also network-related cost reduction is something that we're working on. As far as marketing is concerned, this inclusive distributor commission, we're trying to review various unit prices. And also, this is something that we've been working on since last year, but web-based, online-based procedure, we want to shift to those processes. And we hope that we'll be able to achieve results as a result of those efforts. On the other hand, when it comes to the network, with regard to maintenance, we want to improve efficiency as well as the -- for unit price. And also in terms of indirect cost, we want to consolidate these efforts in operations. And as a result, we hope to achieve the cost reduction targets, which we have set for this fiscal year. And we'll continue on those efforts and support our conservation efforts and also accommodate price reductions.

My second question is this, NTT East and West, against the expectations, has [indiscernible] general profit, different for NTT Communications as well. I hesitate to say but my question is this, when it comes to enterprise business, inclusive of the COVID-19 impact, how is this turning around? Can you elaborate on how it is that the corporate-related activities are beginning to turn for the better?

Thank you. Shimada here. Let me respond to your question. When it comes to corporate business, we cannot say that there has been no impact from COVID-19. Actually, we cannot say that. As you mentioned, Mr. Ando, in terms of the domestic market, the impact has been relatively minor. But then impact on corporate activities outside the country has been quite expensive. To be quite honest, we have seen that remote-based customer response has been very strong. We've been able to offer this in a very strong manner. So NTT Communications is the case in point. But at a fairly early stage, we have found that 80% people are now working from home. And when it comes to customer response, this is done on work-from-home basis. So this is, of course, for existing customers. [indiscernible] marketing -- sales and marketing to explore new customers that may be somewhat challenging. But I think in principle, we're talking about recurring business, that is something that we're focused on. So the impact of COVID-19 has not been too much on the recurring customer base because project-related businesses can be done on a remote basis, and we've done very well in this area. So compared to our initial expectation, we have found that impact of COVID-19 on corporate-related business has been quite relative. So impact on the income has also been relatively minor as a result.

I see. I understand about the negative impact. Has there been -- what about positive impact that you did not expect. Were there any unexpected positive impact?

I see the -- respond to that question. Inclusive of the corporate business, what we have found that various companies had to prepare environment for remote-based work, working from home. So finance, securities business. In these areas, we have found that there has been tremendous shift to business model based on working from home. So as a result, we've been able to benefit from that. And we've be able to receive many orders for such businesses. This applies to both NTT East and West as well as for NTT Communications as well as for DOCOMO. So businesses offer support for remote-based businesses. In fact, there is a demand for that. So in that regard, we have had very positive impact from COVID-19.

Fujiwara of DOCOMO here. You talked about remote business. Let me try [to give] some concrete business. Maybe this is limited to this fiscal year but GIGA school initiative project. That is something we've been doing. So tablets -- contract for tablets with schools have expanded, not just for DOCOMO, I would think. For NTT East and West as well. In case of telecommunication environment, we have found that local government and local education boards really want to expand their business. So I think that has been a special factor for this fiscal year, I would imagine.

We would like to take the next question. Next, Mizuho Securities. Mr. Hori, please go ahead with your question.

This is Hori from Mizuho Securities. I have 2 questions also. First is regarding NTT Ltd. I would like a bit more of elaboration. In the 9-month accumulated figure, there was the impact of foreign exchange and net, and the highly -- high-value added business or the ad service business, how is it changing? And also, right now, because of the lockdown, is there any impact in reality and you don't have to be concerned about that impact?

This is Shimada speaking. First of all, regarding NTT Ltd. surrounding environment, first of all, the impact of COVID-19, accumulated figure to the third quarter, it's about JPY 60 billion, a negative impact on the sales revenue. And also, the accounting standard change has about JPY 170 billion. So up to the third quarter, there's about JPY 130 billion impact. And regarding NTT Ltd., last year, it's been established since last year's second quarter. So from the first quarter to the third quarter, comparison is difficult. And if we just look at the second and third quarter, the COVID negative impact is about JPY 44 billion. And for the accounting treatment, net amount is about JPY 50 billion. So in total, there's about JPY 94 billion impact. That, with the increasing revenue, it's about JPY 81.8 billion decline in revenue. So JPY 792 billion is the situation. So in terms of the progress rate, it's about the 70% -- they're up to 70%. The remaining 30% may be quite difficult. However, like them to put their full efforts so that they can further progress. On the profit side, thanks to everybody's efforts, we did the rationalization last fiscal year and various measures have been implemented. And we're starting to see the fruit from those measures there. So from first quarter to the third quarter profit, it's a JPY 6.9 billion plus. So the plan -- it has exceeded the plan of JPY 5 billion. And regarding the third quarter, as for us, we are expecting that this trend to continue. However, having said that, regarding the structural reforms, we are going to do it within the next 2 years. Therefore, the further system enhancement is what we are working on right now also. Therefore, we would like to fully cover the cost and we would like to exceed the third quarter's profit level in the measures that we will implement moving forward. That is all.

My second question is regarding the situation of DOCOMO. Well, the 5G subscribers acquiring -- acquisition is not going well and the churn rate is low. And for the middle capacity users, you have ahamo, but what are you going to do about [ Gigalight moving forward? In December, you renewed the Gigaho, and for Gigaho, you said that you are going to review it. But after that, from [ Rakuten ], under 1 gig, it was a free of charge plan came out and the lower-aged smartphones have lowered their price between 1 to 3 giga. So -- and that is to actually protect or retain their subscribers. So maybe you don't have to take any action towards that. But it seems that the denominator is large. So even a slight decline in price, it has an impact. So can you tell me about your way of thinking regarding low usage or pay as you use?

Regarding Gigalight, what are we going to do about it. To respond to the competitors and looking at the competitor situation and thinking about the customers, so we do have to thoroughly review it and we take it as an issue that needs to be tackled. And when we announced ahamo the other day, there were 3 layers. So what we have showed you, there's premium and ahamo and economy. And regarding those plans, we have not been able to share the details with you yet. And regarding Gigalight, the premium plan -- it belongs to the premium plan category right now. But the low-usage users to make it comfortable for them to use it, we have the economy layer that we will be able to announce soon, probably in March, next month, we'll be able to announce the content of it, and we are preparing it to do so.

Mr. Hori, sorry, this is Shimada speaking. I forgot to mention this. Regarding the foreign exchange impact to limited is JPY 18 billion negative impact. Sorry about that.

Have we responded to your question?

Yes.

Next question will come from Mr. Kinoshita.

I would like to ask 2 questions, if I may. First is with regard to the impact of ahamo. Earlier, you mentioned that in December, the -- your EBIT achieved positive territory when it came to MNP. Now this positive trend, did this continue through January? Is my understanding correct? That's my first question.

Yes. Thank you, DOCOMO here. Yes. Our response is, yes. Yes, that is the case. And we want to continue this positive trend.

My second question is this. Your thoughts behind the impact on your performance. In the case of NTT, you have absorbed NTT DOCOMO as a subsidiary firm. So the situation may differ between the 2 companies. But when it comes to your competition like SoftBank as well as KDDI, they have launched their new rate plans, but they've be able to record increase in operating income, or they say that they want to aim for positive operating income. That is what they want to aim for in the next fiscal year as well. Now on the other hand, NTT DOCOMO as well as a combination with NTT Communications, when we consider the partnership between the 2 companies, I think you've been in a position to aim for increasing operating profitability. Is that the case? Or is this not the case? What are your thoughts? And as you talked about the so-called economy plan, what is going to be the scale -- the magnitude of this new rate plan? If you're able to stop the negative trend in the MNP through ahamo, I think that should be sufficient. But can you please share with us your thoughts about what you want to achieve as a performance next fiscal year as well as what your thoughts are with regard to customer acquisition?

Thank you very much. DOCOMO here. Let me talk about the second half-half of the question with regard to the so-called economy plan. With regard to ahamo with -- the premier services also are looking for large sizes, medium-sized bucket customers. So we want to offer accessible services for low volume customers going forward. In particular, we want to spur migration of future phone customers. So we want to offer something that will be attractive to this segment as well. So through this, we hope to stop the of our customers, which is quite substantial at this moment. If we can do this, then customers will be -- then DOCOMO customers can be retained. And I think we'll be able to offer such an environment to retain customers. So trying to control the outflow of customers and, at the same time, trying to capture customers who are subscribed to our competition. If we can spur inflow as well, then I believe our customer base will be very strong. And we both expand our customer base to non-telecommunication business segment as well. So that's our thought when it comes to consumer-related business.

Shimada here. Let me add. In principle, at NTT DOCOMO, like KDDI and SoftBank, they're focused on smart life business. Outside of telecommunication business, they want to strengthen smart life business segment. As for NTT Communications, if DOCOMO were to form the same group with NTT Communications, naturally, we can explore new possibilities. But this is going to be a time-consuming exercise. So we need a bit more time for that. In any event, for the next fiscal year, plans -- as far as the plans for the next fiscal year are concerned, as far as we're concerned, yes, we would like to further do better when it comes to MNP performance. And also, we want to expand smart life business as well. And when May comes around, we hope that we'll be able to make further announcements about our performance. Thank you very much for your understanding.

If I may, if I could add one question. The economy plan, will this be available at DOCOMO shops? Are you going to promote this?

As we have not yet -- so I'm afraid, we're still considering -- we're not able to share anything at this juncture.