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CEO Press Conference

November 11, 2016 (Friday)

Financial Results for the Six Months Ended September 30, 2016

Hiroo Unoura, Representative Director and
President, Chief Executive Officer
Also in attendance:
Takashi Hiroi, Senior Vice President, Director of Finance and Accounting Department
Eiichi Sakamoto, Senior Vice President, Director of Corporate Strategy Planning Department

Photo of CEO Press Conference

The following are the core points of the comments made at the press conference.

(Hiroo Unoura, CEO)

I would like to explain the Financial Results for the Three Months Ended September 30, 2016.

The highlights of the Financial Results for the Three Months Ended September 30, 2016 are as follows:

I’d like to announce that the current Financial Results show a decrease in revenue and an increase in profits.
Operating revenue fell by ¥64.6 billion to ¥5,524.3 billion, a year-on-year decrease of 1.2%, due primarily to the effects of the strong yen on sales from overseas operations.
Operating income grew by ¥193.0 billion to ¥926.5 billion, a year-on-year increase of 26.3%. The increase in operating income of ¥193.0 billion includes approximately ¥84.0 billion in profits resulting from the change in depreciation method from the declining balance method to the straight line method. Profit increase aside from that resulted from cost-reducing efforts and sales growths in the respective segments.

Overseas sales declined by ¥61.2 billion year on year to ¥868.4 billion due to the effects of a decrease of approximately ¥109.0 billion resulting from the appreciation of the yen. Overseas sales, calculated in US dollars, grew by $250 million year on year to $7.98 billion. This could reflect steady growth on a local currency basis.

Overseas operating income also decreased by ¥1.8 billion year on year to ¥36.9 billion due to the effects of a decrease of approximately ¥4.0 billion resulting from the strong yen. Overseas operating income, calculated in US dollars, rose by $20 million year on year to $340 million.

Next, let me explain our major initiatives.
Orders received in cross-selling for global cloud services amounted to a record high of $730 million on a semiannual basis, thanks primarily to orders from the Australian public traffic organization.

In network services, mobile services subscribers increased to 72.94 million, registering a net increase of 1,980,000 subscribers, while the number of “Kake-hodai & Pake-aeru” subscribers also continuously grew to 33.42 million, registering a net increase of 3,710,000 subscribers, leading to a revenue increase in mobile communication services.
The net addition of FTTH is 440,000, 120,000 more than in the previous year, resulting in the number of subscribers reaching 19.7 million. NTT East surpassed 11 million subscribers at the end of October. The Hikari Collaboration Model continued to expand its number of new lines, and its number of subscribers is growing steadily. The full-year earnings forecast was changed to raise the total net increase target subscribers of NTT East and NTT West to 700,000 subscribers, as NTT East’s target was revised upward by 100,000 subscribers.

In terms of Wi-Fi area owners, companies and local governments have been actively promoting Wi-Fi introduction and the number of area owners working with our Group has grown to 488, an increase of 95 area owners in the first half of the current fiscal year compared with the end of the previous fiscal year.

Next, I will elaborate on the results of each of our business segments.

Photo of CEO Press ConferenceIn the regional communications business, operating revenue continued to decrease, but income increased thanks to the advancement of cost streamlining, coupled with reduced decrease in fixed-line voice revenues. In addition, profits stemming from a difference between the change in the depreciation method and the mitigation measures for later fiscal years had a positive impact of approximately ¥45 billion. As a result, operating income grew by 77.6 billion year on year to ¥232.2 billion.

In the long distance international communication business, the NTT Communications Group marked an increase in profits of ¥14.8 billion backed by a revenue increase in the data network and the growth of its subsidiaries centering on data center operations, as well as a cost-reduction initiative. On the other hand, impairment losses were reported due to the change in business model resulting from the integration of security operations and the establishment of NTT Security. In addition, Dimension Data began a structural reform, incurring temporary expenses. As a result, for the long distance international communication business segment as a whole, income decreased by ¥5.4 billion year on year to ¥42.2 billion.

In the mobile communications business, income grew by ¥122.6 billion year on year to ¥583.7 billion thanks to the positive impact of approximately ¥50 billion stemming from a difference between the change in the depreciation method and the mitigation measures for later fiscal years, combined with a revenue increase in the mobile communications service, the growth of the smart life field, and the effects of cost reduction.

In the data communications business, income grew, reflecting a sales expansion and a reduction in unprofitable operations seen in the last fiscal year, but decreased by ¥2.3 billion year on year to ¥35.9 billion due to M&A-related temporary increases in expenses.
For NTT DATA, which adopts domestic accounting standards, M&A-related temporary expenses were included as an extraordinary loss. Therefore, operating income marked a year-on-year increase of ¥14.2 billion.

I will explain the revised earnings forecast for the current fiscal year.
Operating revenue will increase by approximately ¥70 billion for three months through the acquisition of the Dell Services division by NTT DATA, but as we factor in a revenue decrease due to the strong yen, operating revenue is revised from the initial ¥11.45 trillion to ¥11.41 trillion, a decrease of ¥40 billion. I said in the business plan when financial results were announced in May this year that operating revenue will likely increase if NTT DATA acquires the Dell Services division. As a result of dealing with this matter very carefully, it is unfortunately extremely severe that revenue changes to an increase due to the shortening of the period for an increase in revenue of the Dell Services division and continued exchange-rate effects.
Operating income is revised to ¥1.47 trillion, ¥40 billion greater than initially forecast, in light of the strong results for the first half.
Net income is revised to ¥770 billion, a ¥20 billion increase compared with the initial forecast following the increased operating income. This is a year-on-year increase of ¥32.3 billion, or 4.4%.
As a result, EPS (net income per share) is revised to ¥376, which is ¥13 greater than the initial forecast of ¥363.

Next, I will explain revisions by business segment.
For the regional communications business, income is revised to increase by ¥30 billion compared with the initial forecast after reflecting the revision of an increase in income by a respective ¥10 billion considering the profit on sale of real estate in the first half and the first-half results of NTT East and NTT West. We will continue to strive to achieve the revised projection through the streamlining of operations.

For the long distance international communication business, income is revised to decrease by ¥10 billion compared with the initial forecast in light of impairment losses incurred by NTT Security in the first half. In the second half, we will strive to thoroughly reduce costs, coupled with continued sales expansion and promotion of various streamlining efforts in the growth area of cloud services and IT outsourcing.

For the mobile communications business, income is revised to increase by ¥30 billion compared with the initial forecast in expectation of the growth of mobile communications services and further promotion of cost reduction. In the second half, effects caused by the strengthening of returns to customers will increase, but we will focus on cost reduction and strive to achieve the revised projection.

For the data communications business, income is revised to decrease by ¥20 billion compared with the initial forecast in expectation of temporary expenses such as M&A and system-related costs occurring associated with the acquisition of the Dell Services division.

The above are earnings forecasts for the Financial Results for the Three Months Ended September 30, 2016.

To follow on, let me explain our initiatives for the Medium-Term Management Strategy “Towards the Next Stage 2.0, ” announced in May 2015.

Fast of all, I will explain the progress toward the Medium-Term Financial Goals.
EPS growth, streamlining of capital investment, and cost reduction are progressing very well.
For EPS growth, “No less than 350 yen, operating income of 1.4 trillion yen,” the goal set at the time of the announcement of the Medium-Term Management Strategy “Towards the Next Stage 2.0,” is expected to be achieved a year ahead of schedule. Operating income exceeding 1.4 trillion yen will be ensured, and a new goal of no less than 400 yen is considered as being achieved satisfactorily.

For streamlining of capital investment in the domestic network business, 150 billion yen will be reduced this fiscal year. We will strengthen our efforts and make sure we achieve the goal of no less than 200 billion yen in reduction.

For fixed-line / mobile access - related cost reduction, the goal of no less than 600 billion yen, which was set at the time of the announcement of the Medium-Term Management Strategy “Towards the Next Stage 2.0,” is expected to be achieved a year ahead of schedule on an existing base excluding the effect of review of the depreciation method. Also, we will strive to continue reducing no less than 800 billion yen in cost as the current goal toward the next fiscal year.

Overseas sales and operating income will be 17,600 million US dollars and 900 million US dollars, respectively, for this fiscal year. The figures of 22,000 million US dollars and 1,500 million US dollars, respectively, which are the goals of the Medium-Term Management Strategy, are large figures, but we will continue cross-group activities, such as full-year sales expansion through the acquisition of Dell Services division and streamlining undertaken continuously, and challenge the achievement of the goal.

In a bid for the creation of earnings from global business, a working group was launched last year mainly in the overseas subsidiaries, and it has been just one year since then. As desired results and several recommendations have been obtained from the working group, we are considering ending the activities of the working group soon.
Several recommendations have already led to some results, and efforts have begun in some cases. Some recommendations need to satisfy conditions, so I am reserving some of them. Examples of the results include the launch of the global account system shared in groups and the accelerated creation of new products through the integration of security businesses, thereby already starting wholesaling to the respective operation companies.
For procurement, the working group, as a core, compiled streamlining measures using the volume of the entire group. At present, the procurement cost for FY2017 is expected to be reduced by approximately 10 billion yen compared with FY2014.
We wish to continuously consider the execution of recommendations related to various themes. Jason Goodall from Dimension Data served as project leader of the working group. He assumed the position of CEO of Dimension Data in June this year. He was working actively as CEO and leader of the working group, but in the future, we expect him to dedicate himself to his role as CEO of Dimension Data and steadily perform the achievements of the working group. He is already working on a couple of organizational reforms.

Photo of CEO Press ConferenceNext, I will explain an initiative for the B2B2X model that is a main pillar of the Medium-Term Management Strategy.
In the previous fiscal year, we entered into a comprehensive appliance agreement with local gavernment, such as Fukuoka City and Sapporo City, and began efforts to solve social issues in the region using and applying ICT.
In addition, to revitalize local regions and make new businesses active by mutually providing technologies, we entered into a business alliance with Panasonic and Hitachi respectively.
This year, we have just started collaboration with Shochiku and J League. Moreover, for collaboration with Fanuc, we will begin an initiative to accelerate the realization of reforms and streamlining of the businesses of manufacturers through support for the early establishment of an open platform provided by Fanuc through the ICT services of NTT Group.
Through such efforts, we consider we could have accelerated specific collaborative projects with enterprises in various industries.

On September 29 this year, in an event referred to as “NTT IR Day,” NTT Group invited institutional investors and introduced a B2B2X initiative. Presentations were not only made by groups of our company, but Mr. Murai, Chairman of J League, and Mr. Sakomoto, President of Shochiku, also visited and talked about challenges in the sports industry and traditional performance arts and the possibility using and applying ICT, as well as expectations for NTT Group. Through these, we think institutional investors had opportunities to deepen their understanding.
To create services leading to the reform of personal lifestyles or solution to social issues and streamlining by an enterprise, we have been saying that we wish to be a value partner supporting the business model reform of the provider who provides them.
These efforts aim at not only creating a model that expands earnings through the direct provision of NW services and additional services to consumers, such as individuals and enterprises, but also creating a new business model that delivers the value created by the strength held by NTT Group to individuals and enterprises via broader service providers together with partners. Now it would be a bit easier to understand thanks to J League and Shochiku recently becoming a service provider.
Furthermore, I said that NTT Group serves as “backstage partner” and “catalyst” in this activity. At present, something like “backstage partner” is still many, but the “catalyst” I consider is the one that can combine different industries by service providers. Through these efforts, new services and business models could be created resulting in the expansion of consumption. Joint support by us and Panasonic and Hitachi of our partners for the service providers’ business expansion is our B2B2X model. I am beginning to feel a good response. We are talking with some partners about a new initiative and wish you to expect the future expansion of an initiative in this area.

Finally, I will talk about “medals of the Tokyo 2020 Olympic and Paralympic Games from urban mines through public participation.”
We, as a gold partner of the Tokyo 2020 Olympic and Paralympic Games, are making efforts to contribute to the establishment of a legacy together with the organizing committee.
Used mobile phones and smartphones have become topical as so-called urban mines. We will foster public cooperation for the organizing committee on an initiative to use urban mines to produce the medals of the Tokyo 2020 Olympic and Paralympic Games.
For this, various discussions on the use and application of urban mines have been conducted at the urban development / sustainability commission of the Tokyo Organizing Committee of the Olympic and Paralympic Games. Following the announcement of the “formation of a legacy by recycled medals” at the board of directors meeting of the organizing committee held the day before yesterday (November 9), we would like to provide full cooperation on this issue. The organizing committee announced it in the form of making a public offering, but we consider that we are able to make all of the preparations.
Assuming, based on past cases, about 8 million mobile phones and smartphones could be necessary. When I checked the number of mobile phones and smartphones in my house, there were 9 phones and I will provide all of these phones. I think there are mobile phones and smartphones that users have retained as mementos and phones that lie dormant in desks because the phones hold personal data. They are kept, and personal information, etc., are processed at DOCOMO shops. Thus, I consider the collection of 8 million units early. If 8 million units are collected, gold and copper will be in a bit of excess, but silver will be lacking. Because of this, it does not follow that all the metals will be covered by recycling. We think silver must be procured using gains from the sale of gold and copper. The organizing committee seems to consider it desirable that gold is supplied as ingots, so we will deliver gold in the form of ingots. We think 8 million units need to be collected in four years, but NTT DOCOMO has been recycling around 3 million units annually, so we will step up the pace a bit faster.
We ask the media to cooperate on the publicizing of this matter and provide support to us for the collection of the targeted 8 million units at DOCOMO shops as soon as possible. I have talked about this for the purpose of early dissemination to the public. Please take care of this matter.

That is all of my explanations.

Related information
Financial Results for the Six Months Ended September 30, 2016 
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