3. BUSINESS RESULTS AND FINANCIAL CONDITIONS (1) Business Results During the year ended March 31, 2003, while there were signs of a mild recovery in certain areas such as corporate earnings and capital investment, Japan's economic conditions remained severe overall as the unemployment rate held at a high level and personal consumption was still weak. Major changes are occurring in the telecommunications market environment, beginning with the rapid advance of broadband communications. The wider adoption of ADSL services has been the main driver of broadband market growth, amid the expansion of IP telephone and other services and the intensification of price competition. In addition, the competition over fiber optics access services, which are the mainstay of broadband services and are steadily spreading, is intensifying with the market entry of electric power companies and other new providers. The mobile communications market has seen a slowdown in new subscriptions, while the competition is mounting for new mobile multi-media services, such as video clip transmission. The market for conventional fixed-line telephone services continues to shrink as demand shifts to mobile communications, and with the spread of fixed-rate services and the sudden growth in IP telephony. In overseas telecommunications markets, the business environment remains extremely harsh due to the prolonged IT recession. Amid these conditions, during the year under review, NTT Group companies pursued the objectives of the NTT Group Three-Year Business Plan (fiscal years 2002-2004). The Group companies actively implemented measures to expand service areas and reduce fees for ADSL and fiber-optic access services, to provide a wider range of services such as IP telephone functions, to develop broadband markets, and to otherwise challenge the competition. Additionally, NTT established an internal Broadband Promotion Office. With an outlook toward the full-scale arrival of the ubiquitous broadband era, NTT drafted a "Vision for a New Optical Generation" toward realizing a new fiber optics resonant communications environment, and creating new demand therein. Meanwhile, structural reform efforts were steadily implemented to enhance cost competitiveness and reinforce the Group's financial foundations. For instance, regional firms were established to handle equipment maintenance and the receipt of orders for Nippon Telegraph and Telephone East Corporation (NTT East) and Nippon Telegraph and Telephone West Corporation (NTT West), which are now outsourcing these to the new firms. This structure will help NTT to develop new businesses in response to regional IT-related demand, and to reduce costs, limit capital investment, and reorganize unprofitable services. As a result of these activities, the NTT Group's consolidated results for the year ended March 31, 2003 were as follows. Operating revenues amounted to 10,923.1 billion yen (a decrease of 0.9% from the prior year) due to the intensified competition faced by NTT East, NTT West, and NTT Communications Corporation in the fixed-line communications businesses, the contraction of this market's scale, and the slow pace of revenue growth at NTT DoCoMo, Inc. Income before income taxes, however, registered a large profit increase, amounting to 1,405.0 billion yen (compared with a loss of 90.5 billion yen during the prior year), thanks to the cost reductions achieved through structural reforms. Net income amounted to just 233.4 billion yen (compared with a loss of 834.7 billion yen during the prior year) due to a loss of 329.5 billion yen registered as equity in net losses of affiliated companies in connection with the write-off of losses of overseas affiliates. The business results of the principal member companies of the NTT Group during the year ended March 31, 2003 were as follows. [Nippon Telegraph and Telephone Corporation (Holding Company)] As the Group holding company, NTT has been striving to promote effective Group management by advancing basic research and development, spreading the results of these R&D efforts, governing and coordinating Group companies, planning overall Group strategies, and reallocating the Group's management resources. During the year under review, NTT established a new NTT Group Three-Year Business Plan (fiscal years 2002-2004) and otherwise worked to strengthen its financial standing and to contribute to the advance of the IT revolution. The NTT Group united to establish a corporate ethics policy and to improve Group risk management, for example, by holding disaster countermeasure drills. NTT provided advice and mediation to Group companies covering such fields as the further development of broadband services, the advance of international businesses, and the development of new businesses. NTT received total payments of 22.0 billion yen (a decrease of 7.8% from the prior year) for these efforts. NTT also vigorously conducted basic technology research and development initiatives in line with the Group's long-term business strategies, and toward the realization of a safe, reliable, convenient, and comfortable information-sharing society. Through these initiatives, NTT earned 183.0 billion yen (a decrease of 7.1% from the prior year) in basic research and development revenues. During the year under review, NTT DoCoMo acquired 870,000 of its own shares in order to turn its eight regional affiliates into wholly owned subsidiaries via a share exchange. NTT supported this effort by selling 551,000 NTT DoCoMo shares, worth 148.2 billion yen, to NTT DoCoMo. During the year, NTT also earned a total of 11.8 billion yen (a decrease of 85.0% from the prior year) in dividend income from its Group companies. As a result of all these efforts, NTT's consolidated operating revenues for the year ended March 31, 2003 amounted to 222.0 billion yen (a decrease of 29.3% from the prior year) and recurring profit amounted to 15.4 billion yen (a decrease of 83.4% from the prior year). Meanwhile, NTT's net income amounted to 81.1 billion yen (a decrease of 6.5% from the prior year), including extraordinary profits of 147.9 billion yen from its sale of NTT DoCoMo shares and valuation losses (posted as extraordinary losses) of 13.1 billion yen on its shareholdings in NTT Broadband Initiative and other NTT subsidiaries. Additionally, in accordance with a resolution passed at NTT's 17th general meeting of shareholders held on June 27, 2002 authorizing NTT to repurchase up to 200,000 of its own shares at a cost of up to 100 billion yen, in October 2002 NTT repurchased 200,000 of its own shares at a cost of 86.2 billion yen. [Nippon Telegraph and Telephone East Corporation and Nippon Telegraph and Telephone West Corporation] During the year under review, NTT East and NTT West continued working to improve management efficiency and to strengthen their competitiveness, especially by expanding broadband service areas. In broadband services, NTT East and NTT West strove to increase sales by expanding service areas for their "B FLET'S" fiber optics Internet access services, adding a plan which provides access lines with a maximum speed of 100 Mbps to regular households at a comparatively low price, and reducing "B FLET'S" service charges (the price reductions were implemented by NTT West in March 2003 and by NTT East in April 2003). The two companies also worked to make "FLET'S ADSL" services more competitive by further increasing transmission speeds and lowering prices. Moreover, NTT East and NTT West initiated a new service utilizing regional IP networks that facilitates diverse voice and image communications among FLET'S service customers, and another new service utilizing wireless LAN technology whereby FLET'S service customers can access the same Internet environment that they enjoy at their homes from other locations. In addition, to respond to the diversification of customer needs accompanying the rapid adoption of broadband services, NTT East and NTT West expanded their regional IP networks (inter-prefectural connections within their respective service areas) and devised means to enhance the user convenience of the various FLET'S services. Turning to efforts to improve management efficiency, in May 2002 NTT East and NTT West radically revised their operating structures to solidify their financial foundations, primarily by outsourcing order-receipt and equipment maintenance works to regional firms newly established for these purposes. Key expenditure reduction items included the lower personnel costs achieved from outsourcing major works and diversifying employment contract formats, the restriction of capital investments, and reductions in various operating costs. As a result of these efforts, the operating revenues at NTT East amounted to 2,352.2 billion yen (a decrease of 8.6% from the prior year), and the operating revenues at NTT West amounted to 2,215.0 billion yen (a decrease of 8.0% from the prior year). While the management reformation efforts made solid progress, the results were limited by intensified competition and the shrinking fixed-line market. [NTT Communications Corporation] During the year under review, NTT Communications actively worked to expand domestic IP service areas and to develop globally IP services. NTT Communications increased the access speed for its OCN service, reduced OCN service fees, and enhanced its overall competitiveness through the provision of the new "OCN.Phone" service and of the new wireless LAN service "OCN Hot Spot." NTT Communications also actively worked on the global development of its IP services, for example, by launching a new "Global Broadband VPN Package" which combines IP-VPN, data center, and other services, and takes advantage of the company's vast IP network, which spans much of the U.S., Europe, and Asia. Meanwhile, NTT Communications intensified the allocation of its management resources, for example, by integrating the individual customer Internet access services formerly handled by NTTPC Communications, Inc. with NTT Communications' OCN services, and by purchasing all outstanding shares of the Internet provider DreamNet Corporation from NTT DATA Corporation and NTT DoCoMo. While these diverse management efforts proceeded, the heightened industry competition and the contraction of the fixed-line market affected earnings. For the year ended March 31, 2003, NTT Communications' operating revenues amounted to 1,152.0 billion yen (a decrease of 9.7% from the prior year). [NTT DATA Corporation] During the year under review, NTT DATA decreased its cost prices to improve its competitiveness in the systems integration field, and otherwise continued striving to provide stable systems services, support system updates, and expand functions and peripheral works. Furthermore, NTT DATA actively worked to expand its business related to electronic government initiatives by the government of Japan and regional government bodies. Meanwhile, NTT DATA developed new businesses, including the "IT Partner Business" for joint development with customer firms, primarily in the IT field, and the "Service Provider Business" which provides the ideal information network services to meet the specifications of individual customers. As a result of these efforts, NTT DATA's operating revenues amounted to 832.1 billion yen (an increase of 3.8% from the prior year). [NTT DoCoMo, Inc.] During the year ended March 31, 2003, NTT DoCoMo worked to promote wider use of its services by expanding its FOMA service area, providing dual-network services whereby the same telephone number can be used for conventional voice and FOMA transmissions, launching sales of an improved videophone with longer continuous stand-by time, and initiating the "i-motion mail" video clip transmission service. NTT DoCoMo also continued actively selling portable telephones equipped with cameras for its "i-shot" still-image transmission e-mail service. In line with efforts to build up its global operations, NTT DoCoMo provided technologies and business know-how related to its i-mode and third-generation mobile communications services not only to foreign firms that NTT DoCoMo has invested in, but to other overseas partners as well. During the year under review, i-mode services, which had been initiated in Germany in March 2002, were launched in the Netherlands, Taiwan, Belgium, and France. Meanwhile, the first third-generation mobile communications services in Europe began in the United Kingdom in March 2003, and are now steadily expanding. As a result of these efforts, NTT DoCoMo's operating revenues for the year under review amounted to 4,809.1 billion yen (an increase of 3.2% from the prior year). (2) Financial Conditions For the consolidated fiscal year ended March 31, 2003, net cash provided by operating activities amounted to 2,438.5 billion yen (an increase of 125.5 billion yen, or 5.4% from the prior year), as a result of net income and depreciation and amortization costs. Net cash used in investing activities amounted to 1,987.0 billion yen (a decrease of 388.7 billion yen, or 16.4% from the prior year). The funds were used to acquire property, plant, and equipment. Net cash used in financing activities reached 454.2 billion yen, as a result of the payment of debt and repurchase of shares (compared with the 457.4 billion yen generated by financing activities during the prior year). As a result, outstanding amount of cash and cash equivalents decreased by 6.1 billion yen (0.5%) from the end of the previous fiscal year to 1,313.1 billion yen. (3) Fiscal Year Profit Allocation NTT expects to offer a 2,500 yen year-end dividend, in accordance with the basic principle concerning profit allocation presented above. Combined with the interim dividend already distributed, NTT thus expects to offer dividends of 5,000 yen per share of common stock for the full fiscal year ended March 31, 2003. (4) Projections for the Upcoming Fiscal Year (Ending March 31, 2004) While the Japanese government's various economic stimulus policies are expected to have some effect, it is not yet possible to project an optimistic outlook for the Japanese economy over the coming year because domestic demand may remain weak, and because of the great uncertainties regarding the global economy, which may be adversely affected by the slowdown in the U.S. economy and the international political situation. In the telecommunications field, broadband (which transmits huge volumes of data at high speed) and ubiquitous communications (which facilitates data exchange regardless of place or time) are expected to continue rapidly spreading. In Japan, there are growing expectations that IT applications will reinforce the nation's industrial competitiveness and improve the quality of people's lives. Overall, the telecommunications market has entered an era of significant change. We have prepared the NTT Group Three-Year Business Plan (fiscal years 2003-2005) to properly respond to this changing and challenging business environment. In line with this management plan, NTT is working to concentrate management resources to bolster our service development structure and rapidly realize the end-to-end, high-quality, high-security resonant communications environment advocated in our "Vision for a New Optical Generation." We have identified ultra high-speed, bi-directional, exceptionally stable fiber optics access services as the key use of broadband, and are diligently devoting our energies to expanding broadband sales. In the wireless arena, we are vigorously developing our FOMA services by expanding service areas and upgrading terminal functions. NTT is now providing multiple-location image communications services that enable Web-based collaboration through the sharing of documents and applications, as well as high-quality IP telephone services with diverse added functions. We are also developing our solutions businesses, with a highly secure smart-card platform that can be utilized for diverse purposes, in such fields as electronic trading, government, finance, and distribution. Moreover, NTT hopes to use the fruits of our resonant communications and research and development initiatives to contribute to resolving energy and environmental issues as well as social problems such as declining birthrates, the aging of society, and insufficient employment opportunities. We will continue advancing our structural reforms, reducing costs, and withdrawing from unprofitable services to make our business operations still more efficient, fully utilizing the advantages of our Group holding company administrative structure, and actively expanding into new business fields. In the research and development field, NTT will devote itself to the creation of basic technologies to support the resonant communications environment. We will also further explore the commercial viability of research findings in cooperation with Group companies and put a greater emphasis on developing competitive core technologies, to ensure steady application of research results in business operations. Our consolidated projections for the upcoming fiscal year ending March 31, 2004 are as follows. Operating revenues are projected to reach 10,920.0 billion yen (a decrease of 0.03% from the prior year). Income before income taxes is projected to amount to 1,235.0 billion yen (a decrease of 12.1% from the prior year), while net income is expected to reach 453.0 billion yen. NTT expects to offer dividends of 5,000 yen per share of common stock for the upcoming fiscal year ending March 31, 2004. [Note] The forward-looking statements and projected figures on the future performance of NTT contained in this financial report are based on the judgments, evaluations, recognition of facts, and formulation of plans by the current management of NTT based on the information at their disposal. The projected figures in this report were derived using certain assumptions that are indispensable for making projections in addition to historical facts that have been ascertained and acknowledged accurately. In view of the element of uncertainties inherent in future projections, the possibility of fluctuations in its future business operations, the state of the economy in Japan and abroad, stock markets and other circumstances, NTT's actual results could differ materially from the projected figures contained in this report. Copyright (c) 2003 Nippon telegraph and telephone corporation