Hiroo Unoura, President, and CEO
Also in attendance:
Hiroshi Tsujigami, Senior Vice President of Corporate Strategy Planning Department
Takashi Hiroi, Senior Vice President, Director of Finance and Accounting Department
The following are the key points of the comments given at the Nov. 7th CEO Press Conference.
(Hiroo Unoura, CEO)
Today I will explain NTT’s financial results for the six months ended September 30, 2014. (This six-month period will hereafter be referred to as “FY2014/2Q”.)
The highlights of the financial results for FY2014/2Q are as follows.
Coming after NTT DOCOMO’s financial results announcement, NTT is reporting very harsh Consolidated Results for FY2014/2Q. Operating revenues, driven by overseas operations, increased 2% (¥107.6 billion) year-on-year. This was the fifth consecutive year that operating revenue increased. However, due to NTT DOCOMO’s decline in profits, NTT’s operating income dropped to ¥590.9 billion, down 9.5% year-on-year.
Cross-selling of global cloud services succeeded in securing orders from the U.S. financial industry and a German automotive company, steadily growing the business to approximately $117 million USD in FY2014/2Q. The level of recognition for the NTT Group’s cloud services is growing, and although sales primarily relied on cross-selling in the past, recent months have seen the number of new clients increasing as well.
In M&A, an NTT subsidiary in August entered a contract to acquire Australian IT services company Oakton, and we are currently working toward completion of the acquisition process. This move aims to boost our capabilities in business consulting and application development.
Recently, NTT Group data centers were named the largest in world in terms of space provided (October 2014 report by TeleGeography, a U.S. research firm). As of the end of September, there were 239 NTT data center locations in 19 countries that amass a total floor space of approximately 1 million square meters. I believe that we can properly exploit this economy of scale in our future projects.
Due to initiatives such as these, overseas sales grew by a healthy 34.2% (¥190.6 billion) year-on-year to ¥747.5 billion. The fact that overseas sales grew by ¥190 billion but consolidated sales grew by just ¥107.6 billion points to the extent of negative domestic sales. However, this is an outcome expected since the beginning of the year. NTT’s plan of covering domestic decline with overseas results, achieved at a faster rate that increases revenue, is progressing smoothly.
Next, I will explain the factors that contributed to results in each individual segment.
In the regional communications business, income grew by 3% (¥2.2 billion) year-on-year. This is despite the impact of FLET’s Hikari rate discounts, which were offset by the success of initiatives like the one to improve operational efficiency.
In the long distance and international communications business, NTT has planned from the beginning of the year for a decline in income due to increased competition in domestic markets and NTT Communications’ ongoing transition from legacy lines to new lines. However, due a variety of primarily overseas initiatives, sales have increased and income has improved from FY2014/1Q to FY2014/2Q.
Within the long-distance / international segment, sales at Dimension Data increased by a healthy 23% year-on-year on a local currency basis. In terms of income, the company’s upfront investments to expand cloud services and strengthen IT outsourcing, and its particularly recent effort to strengthen personnel, have resulted in a small growth in income.
In the data communications business, the reduced effect of last year’s unprofitable business deals combined with an improvement in gross margins from increased sales and a decrease in sales administration costs to bring large ¥21.1 billion year-on-year increase in income.
In summary, all segments but the mobile communications business continued to be strong in FY2014/2Q, and even more improvement is expected for the year as a whole.
However, the mobile communications business is in a very difficult period. I do not intend to evaluate specific NTT DOCOMO initiatives and especially its new billing plan on the basis of a single fiscal year. NTT DOCOMO issued its new billing plan in advance of other companies due to a variety of market conditions, and I believe that this new billing plan will contribute greatly to putting NTT DOCOMO’s business back on its feet again.
In that sense, we will grab hold of the fact that customers chose NTT DOCOMO in numbers greater than expected, and aim to restore income primarily through cost-cutting measures. We will also offer new value-added services and build customer retention through initiatives like the new billing plan and the “Hikari Collaboration Model,” aiming for financial improvement in the company.
Next, I will discuss our earnings forecasts for the future.
Extremely simple adjustments have been made to NTT’s consolidated forecasts to account for the declines experienced by NTT DOCOMO. In response to the ¥120 billion decline in NTT DOCOMO’s operating income, the consolidated forecast for operating income has also been adjusted down in the same way by ¥120 billion. We will continue putting forth our maximum effort to aim for every company within the NTT Group, including NTT DOCOMO, to ultimately arrive in the upper portion of our adjusted business plan.
In light of this reduction in operating income, NTT’s initial forecast for net income has been adjusted down ¥57 billion to a total of ¥529.0 billion. As a result, EPS has also been adjusted down ¥57 from its initial forecast.
Regarding shareholder returns, NTT has increased the cash available to repurchase shares of its common stock by ¥100 billion, increasing the total purchasable stock to a maximum of ¥350 billion from the previous maximum of ¥250 billion announced in May 2014.
The initial cap of ¥250 billion was set such that NTT could repurchase the entirety of the government’s divestment of NTT stock. The government divestment has not progressed, due a variety of factors, but NTT has decided to announce today an increase in the maximum value of shares of NTT common stock it will repurchase from ¥250 billion to ¥350 billion.
In general, NTT plans to purchase the additional amount of shares from the ordinary markets. However, because the timing of the government’s divestment has not yet been established, we have slightly extended the planned purchase period through to June 2015, to be safe.
Next, NTT is working on the formulation of its medium-term management strategy aimed toward May 2015, entitled “Towards the Next Stage 2.0”. I will comment briefly on the contents of this strategy.
In the fall of 2012, NTT announced its medium-term management strategy. At that time, we stated that the environment surrounding our business was changing drastically and would continue to change on into the future. Hence, we laid out the fundamental concepts of our strategy: our desire to transform ourselves from a simple provider into a “value partner,” and our desire to continue being the NTT Group that is selected by its customers.
I also remember adding a small addendum that, on the basis of these changes in the market, we would also like to change the competitive arena as well. On the basis of these core concepts, we will make global cloud services the cornerstone of NTT’s business operations and the engine of its growth. In addition, we will restore competitiveness to our network services-particularly our access network services-that have been struggling in the domestic market by advancing a comprehensive cost-cutting plan that aims to save what was previously announced as ¥400 billion but will ultimately be ¥600 billion in costs.
To strengthen the competitiveness of NTT’s network services, we offered NTT DOCOMO’s new billing plan, and then NTT East/West’s “Hikari Collaboration Model.” However, both NTT DOCOMO’s new billing plan and NTT East/West’s “Hikari Collaboration Model” will have their effect further down the road.
Still, although we expected migrations over to NTT DOCOMO’s new billing plan to progress for several years, the plan is already a big hit with over 10 million new contracts and is well-received by customers. We learned from this exactly how much NTT DOCOMO’s customers had been waiting eagerly for a new billing plan.
As a result, it now feels as though the financial effect of the new billing plan has been concentrated in a single fiscal year rather than across several. At present, it is becoming a certainty that our mid-term plan, with our target of 60% growth in EPS, may fall short of the expected level of operating income. Next fiscal year is the final year for this EPS target, but we recognize that we are in difficult circumstances for achieving it.
The final goal for this EPS target will be announced in the business plan for the next fiscal year. Although we will put forth our maximum effort, I would like for us to stop briefly here on the mountain we have been continuously climbing, reestablish our EPS target, and then continue climbing once again.
With that, I would next like to explain just the main points of our plan, “Towards the Next Stage 2.0”, the specific details of which will be announced in May of next year.
Naturally, NTT will continue with its fundamental business strategies. However, although we will continue expanding sales of global cloud services as we have thus far, we would like to increase the rate at which this business generates income. This is likely to be one of the pillars of “Towards the Next Stage 2.0”.
Second, in discussions of NTT’s network services, we would like to change the word “competitiveness” into the word “profitability.” In the future, the competitive environment surrounding our business is expected to change drastically from simply the sale of lines and the sale of devices. For this reason, in my explanation of “value partner” I stated our desire to develop a slightly different business model, including B2B, but we would also like to further increase the speed of this process.
We have had a variety of discussions, including some with NTT DOCOMO, about what form competition will take in the mobile business in a mature market. We believe that NTT DOCOMO’s new billing plan will be absolutely necessary in future competition. We also believe that NTT East/West’s “Hikari Collaboration Model” is absolutely necessary in order to have customers utilize broadband services without consideration for whether it is fixed-line or mobile. We believe that it is time to firmly establish these elements of our strategy.
As stated previously, the “Hikari Collaboration Model” is not simply for the purpose of promoting NTT DOCOMO discount bundles of mobile services and residential communication lines. At present, various partners are engaged in in various forms of discussion on this topic, but we will take measures to further improve the value of our Hikari optical fiber product. I hope to show that restoring profitability to network services once again is a major pillar of our strategy.
Another pillar of “Towards the Next Stage 2.0” is to expand in the future not only our consumer business but our B2B2X business as well. The “X” here can stand for many things, including consumers, governments, and enterprises. We believe that NTT must be engaging in a variety of preparations for such an expansion of business.
We also think that efforts will continue toward the vitalization of local economies under relevant government policies. We believe that the entire NTT Group has something that can contribute greatly to these efforts. We wish to use the combined power of the NTT Group to contribute heavily to not only our global cloud services but also to the vitalization of local Japanese communities, including the promotion of ICT utilization and other initiatives. This is also planned to be a pillar of our new strategy next year.
The area that is in a sense our traditional core competency is the safe and secure usage of communications services and ICT services. Strengthening the security sector, the foundation of a safe and secure society, is an extremely important topic that includes topics such as countermeasures for cyberterrorism during the Olympic Games. This is another pillar we hope to develop through the following initiatives.
NTT recently announced that, as a security training initiative, we would be establishing a course on “Cyber-attack and Cyber-defense Technologies” at Waseda University. In reality, many universities have an interest in this topic and all companies face the serious task of securing personnel trained in cybersecurity. Beginning with this course held in cooperation with Waseda University, we intend to work with other companies and universities to train and improve cybersecurity personnel as well as increase the number of such personnel at NTT.
In this way, we are maintaining a focus on strengthening the NTT Group’s cybersecurity personnel roster. The NTT Group currently employs around 2,500 staff in Japan who are engaged in cybersecurity work and have some degree of ability in it, and this is still not enough. We have recently established and begun pursuing a plan for raising the number of such employees in the NTT Group to 10,000 through personnel shifts, new hires, and other means.
Overseas, acquisitions have brought around 2,000 “top gun” cybersecurity personnel and cybersecurity specialists into the NTT Group. However, this number is completely insufficient for Japan domestically. According to a government statement, there are 260,000 people engaged in the security field, but 160,000 of these are of insufficient ability and an additional 80,000 are necessary. The government reported that it is necessary to build up a total of 240,000 cybersecurity experts by 2020. All countries share this sense of impending danger with Japan. Those in the finance industry have also expressed a demand for having such cybersecurity personnel on hand. Moreover, the police have stated similar.
The training of cybersecurity personnel is not something done only in universities, as a variety of companies are pursuing on-the-job training in this field as well. Highly competent staff (so-called “white hackers”) within the NTT Group sometimes wish to work not only in communications but also in devices and services. This type of talent is very much active across all Group companies. In my discussions with the leadership of all of the companies, it was agreed that such talent should not be locked into one company but instead circulated globally across all companies, and that such personnel could be hired, trained, and finally shared through the mutual cooperation of the individual companies. We would like to use the establishment of our cybersecurity course at Waseda University as a starting point for these sorts of initiatives and further strengthen them in the future.
Additionally, in the future each company will offer its on-site cybersecurity personnel as teachers in “gacco” correspondence courses (“gacco” is a free service, provided by NTT DCOMO and NTT Knowledge Square, whereby anyone can participate via in the Internet in open lectures). These information security courses will be one of the ways that NTT accelerates its contributions to training cybersecurity personnel in Japan. We have proposed this measure to other companies and NTT has taken the lead in pursuing it.
This concludes my explanation of today’s report.