3. BUSINESS RESULTS AND FINANCIAL CONDITIONS
(1) Business Results
During the consolidated fiscal year ended March 31, 2004, while employment conditions remained severe throughout the economy, personal consumption picked up and an increasing number of companies reported improvement in corporate earnings. Consequently, the Japanese economy began to recover in the second half of the fiscal year.
Dramatic changes are taking place in the telecommunications market environment with the rapid advance of broadband communications. ADSL services are continuing to grow in the fast expanding broadband market. Fiber optics access services, which are the mainstay of broadband services, are also rapidly spreading amid intensified competition. These developments all point to the emergence of a full-fledged broadband age. In the mobile communications market, competitive conditions are being intensified with the introduction of fixed-rate Internet access services as well as by the increased sophistication and diversification of mobile multimedia services such as video clip transmission. On the other hand, the market for conventional fixed-line telephone services continues to shrink as a result of the accelerated expansion of fixed-rate Internet connections services and IP telephony.
Amid these conditions, the NTT Group actively implemented measures based on the NTT Group Three-Year Business Plan (fiscal years 2003-2005) in order to transform its revenue structure and to cut costs. In order to reinforce the revenue structure of broadband businesses, NTT Group made every possible effort to increase sales of ultra high-speed, interactive fiber-optic access services providing superior stability, while reducing fees and strategically improving facilities in high-demand areas. At the same time, the NTT Group worked at expanding sales of the third-generation FOMA mobile communications system by extending the coverage areas and upgrading terminal functions. Furthermore, to rapidly realize the new fiber optics resonant communications environment called for in the "Vision for a New Optical Generation," the NTT-Resonant, Inc. was established for the purpose of engaging in the development of new broadband markets.
Continued efforts were made toward structural reform centered on NTT East and NTT West (the East and West regional companies). Extensive cost reduction programs were implemented to achieve further improvements in management efficiency. Regional outsourcing companies in charge of order processing and facilities maintenance were enlisted in efforts to actively develop new IT-related demand in their regions.
As a result of these activities, for the fiscal year ended March 31, 2004, NTT Group's consolidated operating revenues amounted to 11,095.5 billion yen (an increase of 1.6% over the prior year), while income before income taxes amounted to 1,527.3 billion yen (an increase of 8.7% over the prior year). Consolidated net income came to 643.9 billion yen (net income in the prior year was 233.4 billion yen). While the East and West regional companies and NTT Communications reported declining revenues as a result of continued shrinkage in the market for conventional fixed-line telephone services, this was more than covered by the gains registered by NTT DoCoMo which were centered on the strong performance of "i-mode" services.
The business results of the principal companies of the NTT Group during the fiscal year ended March 31, 2004 were as follows.
[Nippon Telegraph and Telephone Corporation (Holding Company)]
As a holding company, NTT is in charge of advancing basic R&D and promoting the application of R&D results. Moreover, in its position of supervising and coordinating the NTT Group, NTT is responsible for achieving effective Group management through the formulation of strategies for the entire Group and the re-allocation of resources to match changes in the business environment.
As part of the efforts to ensure the speedy realization of a resonant communications environment, NTT formulated the NTT Group Three-Year Business Plan (fiscal years 2003-2005) and also engaged in creating proposals and intermediating in the development and promotion of broadband services and international businesses. For these management services, NTT received total payments of 20.9 billion yen (a decrease of 4.8% from the prior year) from the Group companies during the period under review. Other initiatives taken included the promotion of R&D activities centered on basic technologies for the development of next-generation network architecture and new services, and active efforts were also made toward the development of forward-looking cutting-edge basic technologies. Consequent to these R&D activities, NTT earned 146.8 billion yen (a decrease of 19.8% from the prior year) in basic research and development revenues. In connection to NTT DoCoMo's public repurchase of its own shares (total of 919,117 shares scheduled for repurchase), NTT sold 698,000 NTT DoCoMo shares, worth 189.8 billion yen, to NTT DoCoMo. In addition to the above, NTT earned a total of 71.5 billion yen in dividend income from its Group companies (dividend income from Group companies in the prior year was 11.8 billion yen).
As a result of these activities, NTT's operating revenues for the fiscal year ended March 31, 2004 amounted to 258.1 billion yen (an increase of 16.2% from the prior year) and recurring profit amounted to 78.6 billion yen (recurring profit in the prior year was 15.4 billion yen). NTT's net income amounted to 240.3 billion yen (net income in the prior year was 81.1 billion yen) due to the registering of revenues from the sale of NTT DoCoMo shares as extraordinary profits of 189.5 billion yen.
Additionally, in accordance with a resolution passed at NTT's 18th general shareholders meeting held on June 27, 2003 authorizing NTT to repurchase up to 200,000 shares of its own common stock at a cost of up to 100 billion yen, NTT repurchased 190,460 of its own shares at a cost of 99,999,496,000 yen during the period under review.
[Nippon Telegraph and Telephone East Corporation and Nippon Telegraph and Telephone West Corporation]
During the fiscal year under review, NTT East and NTT West continued working actively to reinforce their revenue structures by taking such measures as expanding broadband services, and to improve management efficiency.
In broadband services, NTT East and NTT West made continued efforts to strengthen their competitive positions by introducing various types of discounts and improving support systems. Special efforts were made to promote the sales of "B FLET'S" fiber optics Internet access services by strategically improving facilities in areas of intensive demand and reducing the time required for installation works. The two companies also worked to make their "FLET'S ADSL" services more competitive by offering services capable of maximum download speeds of up to 40Mbps. Additionally, efforts were made to develop new broadband demand by providing users of FLET'S services with upgraded content such as games and theater.
NTT East and NTT West acted to respond to the growing IP telephony demand of corporate customers by launching "IP telephone services for corporate customers." The program features reduced rates for outgoing calls to the IP telephone network and to subscriber numbers, as well as the option to retain in-use subscriber telephone numbers for receiving incoming calls. New services were also launched enabling users to call from subscriber telephones and public pay phones to IP telephones with the prefix number 050.
The two companies endeavored to win new orders from corporate customers and local government organizations by launching a new VPN service. Named the "FLAT ETHER," the service enables customers to create flat-rate intra-prefectural WAN at economical prices.
Turning to efforts to improve management efficiency, NTT East and NTT West continued to further implement thoroughgoing cost-reduction measures, to expand the range of works entrusted to the Group's regional outsourcing companies for reducing expenditures for consignment tasks, and to otherwise advance their structural reforms.
Despite these management efforts, the results were affected by the severe business environment with intensified competition and the shrinking fixed-line market. The operating revenues at NTT East amounted to 2,267.1 billion yen (a decrease of 3.6% from the prior year), and the operating revenues at NTT West amounted to 2,166.8 billion yen (a decrease of 2.2% from the prior year).
[NTT Communications Corporation]
During the fiscal year under review, NTT Communications actively engaged in strengthening the competitiveness of its IP services and expanding its IP services globally.
In the area of OCN services, NTT Communications began offering the IP telephone "OCN .Phone" to users of ADSL and "B FLET'S" services as a standard set requiring no initial fees and monthly basic fees. It also endeavored to reinforce its competitiveness by introducing high-speed and low-cost ADSL-based services. Additionally, efforts were made to increase the use of IP phones by extending the service network to include mobile phones.
NTT Communications also actively advanced the global development of its IP services by launching a new "Global IP-VPN Solutions Package" which facilitates the construction of highly reliable virtual private networks across 138 countries, taking advantage of the company's vast IP networks in the U.S., Europe, and Asia.
Despite these diverse management efforts, the severe business environment with heightened levels of industry competition and the contraction of the fixed-line market affected earnings. For the fiscal year ended March 31, 2004, NTT Communications' operating revenues amounted to 1,106.6 billion yen (a decrease of 3.9% from the prior year).
[NTT DATA Corporation]
During the fiscal year under review, NTT DATA further reduced costs to boost its competitiveness in the systems integration field. At the same time, NTT DATA pursued structural reform by re-organizing NTT Group companies involved in regional businesses and in maintenance and operations services. It also actively endeavored to win orders for new systems, including electronic application filing systems across multiple government ministries and agencies.
NTT DATA has focused on the promotion of new businesses including the "IT Partner Business" program where NTT Data works together with its customer firms in the form of business alliances or joint investments to conduct IT-related businesses.
As a result of these efforts, NTT DATA's consolidated operating revenues amounted to 846.7 billion yen (an increase of 1.8% from the prior year).
[NTT DoCoMo, Inc.]
During the fiscal year ended March 31, 2004, NTT DoCoMo promoted the market penetration of its "FOMA" services by expanding the service area and offering a diversified menu of fees. NTT DoCoMo also introduced and aggressively marketed the "FOMA 900i" series, whose terminals feature improvements in the basic performance through size and weight reductions and standby time extension, as well as a variety of new functions.
Alliances developed with overseas affiliates and partners were utilized in promoting the global development of "i-mode" services and third-generation mobile communications services. As a result of these initiatives, "i-mode" services were newly launched in Spain and Italy, while third-generation mobile communications services were launched in Hong Kong. Steady progress is being reported in these undertakings.
As a result of these efforts, NTT DoCoMo's consolidated operating revenues for the fiscal year under review amounted to 5,048.1 billion yen (an increase of 5.0% from the prior year).
(2) Financial Conditions
Cash flows provided by operating activities for the current fiscal year amounted to 3,480.6 billion yen (an increase of 1,042.1 billion yen, or 42.7% from the prior year) resulting from net income and depreciation and amortization costs. Cash flows used in investing activities amounted to 2,136.8 billion yen (an increase of 149.8 billion yen, or 7.5% from the prior year) due to acquisition of property, plant, and equipment. Cash flows used in financing activities reached 1,222.5 billion yen resulting from repayment of debt and purchase of treasury stock (an increase of 768.4 billion yen, or 169.2% from the prior year). As a result, cash and cash equivalents at the end of the current fiscal year increased by 118.4 billion yen (9.0%), to 1,431.4 billion yen.
(3) Fiscal Year Profit Allocation
NTT expects to offer a 2,500 yen year-end dividend. 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 year ended March 31, 2004.
(4) Projections for the Upcoming Fiscal Year (Ending March 31, 2005)
While foreign exchange trends and international conditions leave some room for concern, the global economy will probably continue to advance at a relatively high pace of growth. Against this backdrop, the Japanese economy can be expected to enjoy a mild recovery during the forthcoming fiscal year.
In the telecommunications field, broadband and ubiquitous communications continue to spread rapidly. As seen in the rapid spread of electronic commercial transactions and administrative procedures and the proliferation of consumer electronics that are integrated into networks, advances in broadband and ubiquitous communications are penetrating wide areas of industries and consumer activities. Meanwhile, there are growing expectations that IT applications will help to transform Japan's socioeconomic systems, following the adoption of the "e-Japan Strategy II" by the government's IT Strategic Headquarters. Given the rapid pace of growth, it is expected that numerous new participants will continue to enter this market based on a wide range of business models. Together with the deregulation of the basic service agreement and fees, these developments indicate that competition will become even more intense in the future.
Under these conditions, in order to rapidly realize a resonant communications environment, the NTT Group established NTT-Resonant, Inc., which launched its operations in April 2004. Built on a concentration of development resources of NTT's research center and NTT Group companies, the new company will serve as an engine for advancing the broadband businesses of the Group. The aim is be to lead the industry in the development of easy-to-operate high quality interactive video communications services and broadband portal services equipped with new high-value functions, and to market these in collaboration with other NTT Group companies. The NTT Group will continue to make an all out effort to market its optical access services by reinforcing its sales forces and improving related services. "FOMA" services will also be aggressively marketed through the introduction of fixed-rate packages for packet communications in "i-mode" services and the continued improvement of terminals. NTT intends to contribute to the solution of social problems, such as declining birthrates, the aging of society and insufficient employment opportunities, and to advancement of the government's IT strategies by speedily realizing the resonant communications environment. On the other hand, the NTT Group will continue to go forward on structural reforms and will aim to transform its business and financial structures by improving operating efficiency and expanding into new business fields. Finally, the entire NTT Group will commit itself to attaining even higher standards in the protection of the personal information of customers and to thereby maintaining a secure environment for users.
In the area of research and development, the NTT Group will direct all its energies toward the creation of basic technologies for supporting the resonant communications environment. To steadily embody the fruits of our R&D efforts in our businesses, the Group's "Comprehensive Commercialization Functions" will be fully utilized to further accelerate the pace of commercialization through active collaboration among NTT Group companies.
NTT's consolidated projections for the fiscal year ending March 31, 2005 are as follows. Operating revenues are projected to reach 10,900.0 billion yen (a decrease of 1.8% from the prior year). Income before income taxes is projected to amount to 1,610.0 billion yen (an increase of 5.4% from the prior year), while net income is expected to reach 650.0 billion yen (an increase of 1.0% from the prior year).
NTT expects to offer dividends of 6,000 yen per share of common stock for the full fiscal year ending March 31, 2005.
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 uncertainty 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) 2004 Nippon telegraph and telephone corporation