3. BUSINESS RESULTS AND FINANCIAL CONDITIONS |
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(1) Business Results During the consolidated fiscal year ended March 31, 2005, the Japanese economy continued on a steady path to recovery, as evidenced by a gradual increase in personal consumption and growth in capital investment. In the second half of the fiscal year, however, growth in personal consumption began to slow and exports began to weaken, resulting in an uncertain outlook for some sectors of Japanese industry. Dramatic changes are taking place in the telecommunications market environment due to such factors as the rapid advance of broadband communications. Fiberoptic access services-the mainstay of the broadband business-are steadily spreading while ADSL services are also continuing to grow in the quickly expanding and intensifying broadband market. In the mobile communications market, growth in the overall number of subscriptions continues to slow. However, the shift from second-generation to third-generation mobile communications services is accelerating, bringing about an intensification of service and fee competition. At the same time, the market for conventional fixed-line telephone services continues to shrink due to the accelerated expansion of fixed-rate Internet connection services and IP telephony services. Under such circumstances, the competitive conditions in the fixed-line sector became even more severe as other telecommunications carriers made a full-scale entry into the basic monthly charges market by providing direct subscriber telephone services using dry copper lines. Amid these conditions, the NTT Group vigorously promoted the wider use of fiberoptic access services and third-generation FOMA mobile communications services. In order to reinforce the revenue structure of its broadband businesses, the NTT Group made every possible effort to increase sales of ultra high-speed fiber access services that are superior in interactivity and stability through such measures as reduction in fees and the provision of IP telephony with the same quality as fixed telephone lines. These initiatives were reinforced by a sales promotion campaign that included active marketing activities to attract potential customers in condominium complexes and limited-time discount offers. In addition, the NTT Group initiated fixed-rate packet communication services for FOMA i-mode services, as well as expanding and upgrading terminal services and functions. In the fixed-line telephone market, the NTT Group sharpened its competitive edge by reducing basic monthly charges and introducing new rate discount services to address increasingly intensifying competition. 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. The accelerated growth of the information and communications market has spurred a greater diversity in customer demands. On the other hand, a number of issues are becoming evident, including the need for secure Internet communications. Finding solutions to these issues is essential for the ubiquitous broadband society to develop. As these developments suggest, the information and communications market is experiencing a period of significant transition and change. Against this backdrop, in November 2004, the NTT Group announced "NTT Group's Medium-Term Management Strategy" aiming to develop a safe, secure, and convenient ubiquitous broadband service. The Strategy outlines medium- to long-term management objectives, specific actions, and other measures. With regard to the personal information of customers, the NTT Group, as the responsible corporate leader in the information and telecommunications industry, has committed to rigorous data management, as the responsible corporate leader in the information and telecommunications industry, in response to the April 2005 Law concerning the Protection of Personal Information, NTT took further steps to protect the security of information by formulating the NTT Group Information Security Policy, engaging in educational activities designed for Group company directors and employees, and improving security manuals. As a result of these activities, for the consolidated fiscal year ended March 31, 2005, the NTT Group's consolidated operating revenues amounted to 10,805.9 billion yen (a decrease of 2.6% from the prior year). The decrease was due to the fact that the East and West regional companies and NTT Communications reported declining revenues as a result of continued shrinkage in the conventional fixed-line telephone market, and NTT DoCoMo recorded decreasing revenues due to lowered communication charges and the launch of i-mode fixed-rate packet communication services. On the other hand, income before income taxes amounted to 1,723.3 billion yen (an increase of 12.8 % from the prior year), resulting from NTT DoCoMo's sales of shares in AT&T Wireless Services, Inc. and NTT's sales of equities in NTTUD in connection with the company's listing on the First Section of the Tokyo Stock Exchange. Consolidated net income was 710.2 billion yen (an increase of 10.3 % from the prior year). The business results of the principal companies of the NTT Group during the consolidated fiscal year ended March 31, 2005 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 a step to the realization of a plan titled "Vision for a New Optical Generation", NTT formulated "NTT Group's Medium-Term Management Strategy" 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 0.2% 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 efforts were also made toward the development of cutting-edge basic technologies. Consequent to these R&D activities, NTT earned 139.2 billion yen (a decrease of 5.2% from the prior year) in basic research and development revenues. In connection with NTT DoCoMo's public repurchase of its own shares (total of 1,912,568 shares scheduled for repurchase), NTT sold 1,748,000 NTT DoCoMo shares, worth 319.8 billion yen, to NTT DoCoMo. NTT also sold 83,277 shares of NTTUD, worth 35.6 billion yen, in connection with NTTUD's listing on the First Section of the Tokyo Stock Exchange in November 2004. As a result of these activities, NTT's operating revenues for the fiscal year ended March 31, 2005 amounted to 323.2 billion yen (an increase of 25.2% from the prior year) and recurring profit amounted to 151.7 billion yen (an increase of 92.8% from the prior year). NTT's net income amounted to 455.6 billion yen (an increase of 89.6% from the prior year) due to the recording of gains on the sale of NTT DoCoMo and NTTUD shares as special profits of 319.1 billion yen and 31.4 billion yen, respectively. Additionally, in accordance with a resolution passed at NTT's 19th General Shareholders' Meeting held on June 29, 2004 authorizing NTT to repurchase up to 1 million shares of its own common stock at a cost of up to 600.0 billion yen, NTT repurchased 800,145 of its own shares at a cost of 366,466,410,000 yen. 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 adopting strategies to enhance competitiveness in the fixed-line telephone market, and to improve management efficiency. In the field of broadband services, in order to increase the number of subscribers to fiberoptic access services, NTT East and NTT West began providing a high-quality "Hikari Denwa" IP Telephony Service which provides low-priced voice transmissions with the same quality as fixed telephone lines, first to condominiums, and then to single-family dwellings. With regard to the Corporate IP Telephony Service introduced to respond to the growing IP telephony demand of large corporate customers, the two companies eased usage conditions so that corporations with fewer telephone lines can also benefit from this service. Besides these measures, NTT East and NTT West strove to gain a better position in the fiber access market through such measures as rate reductions and limited-time discount offers. With a view to spurring the demand for fiber-optic access services, NTT East and NTT West promoted sales of a newly introduced IP video telephone terminal, while playing an active part in the launch of video distribution services offered by companies both inside and outside of the NTT Group. The video distribution services will enable customers to enjoy film and music video content using home TVs. The fixed-line telephone sector is experiencing even harsher competition as a result of other telecommunications carriers' full-scale entry into the basic monthly charges market by providing direct subscriber telephone services using dry copper lines. In order to deal with this new competition, NTT East and NTT West worked to improve competitiveness through such measures as basic monthly charge reductions and the provision of a new flat-rate intra-prefectural call discount service called "Ichirittsu." NTT East and NTT West also continued to advance their structural reforms and to improve managerial efficiency by taking further cost reduction measures and expanding the scope of operations entrusted to the Group's regional outsourcing companies in order to reduce consignment costs. Despite these managerial efforts made under difficult business conditions exemplified by the keen competition in the broadband market and a shrinking and intensified fixed-line market, the operating revenues at NTT East amounted to 2,180.9 billion yen, (a decrease of 3.8% from the prior year) and the operating revenues at NTT West amounted to 2,098.0 billion yen (a decrease of 3.2% from the prior year). NTT Communications Corporation During the fiscal year under review, NTT Communications actively engaged in the promotion of IP services in the global markets and at the same time strove to strengthen the competitiveness of fixed-telephone services. For individual customers, NTT Communications made efforts to increase the number of IP service subscribers. Specific measures taken included the expansion of B FLET'S-compatible OCN services and the provision of the "OCN Music Store" music distribution service and "OCN Theater" video distribution service. For corporations, the company met the diverse needs of customers by launching the ".Phone Business V" videophone service for video communication between personal computers and FOMA mobile phones, and providing an integrated maintenance and monitoring service made possible by effectively combining various VPN services. NTT Communications also started offering a security inspection service that provides constant monitoring of customers' communication networks and reports problems based on the analysis of such monitored data. NTT Communications also advanced the global development of its IP services especially in Asia, where many multinational corporations are increasing their presence. Specifically, the company became the first Japanese communications company to provide international IP-VPN services in India. For fixed-line services, NTT Communications launched the "PL@TINUM LINE" rate discount service for domestic and international calls as well as calls to mobile phones. Despite these diverse managerial efforts made in a severe business environment, with heightened levels of industry competition and the contraction of the fixed-line market, NTT Communications' operating revenues for the fiscal year ended March 31, 2005, was 1,090.0 billion yen (a decrease of 1.5% from the prior year). NTT DATA Corporation During the fiscal year under review, NTT DATA set its sights on promoting new businesses, together with its customer firms in the form of business alliances or joint investments, and providing customer value to become number one in customer satisfaction. With that objective in mind, it adopted policies designed to improve its basic organizational fitness and promote further growth. With regard to improving basic organizational fitness, the company worked to strengthen its marketing capability and improve the business process by ensuring that marketing managers steadily implement action plans developed based on the results of customer satisfaction surveys. At the same time, steps have been taken to promote effective systems development to improve competitiveness in system integration by improving and stabilizing the R&D process, accumulating business know-how, and creating system environments that support these initiatives. Concerning strategies for further growth, the company has taken steps such as expanding its hiring of skilled and experienced personnel in an effort to enhance its marketing and development capabilities in the enterprise systems area. It also conducted validation tests on a tracking system for the pharmaceutical distribution process using RFID tag technologies and developed solutions capitalizing on open source software. As a result of these efforts, NTT DATA's consolidated operating revenues for the fiscal year under review amounted to 854.1 billion yen (an increase of 0.9% from the prior year). NTT DoCoMo, Inc. During the fiscal year under review, NTT DoCoMo focused on upgrading its FOMA and other mobile communications services by enhancing its product lineup through the provision of terminals with superior functions and designs. The company also worked to lower call charges and diversify its price structure by increasing the discount rate for the "Family Discount" service and introducing a flat-rate packet option called "Pake-Hodai" to its i-mode services. Also, as part of its efforts to seize profit-earning opportunities, NTT DoCoMo initiated the "i-mode FeliCa" service that enables users to make electronic payments and sought to expand the penetration of visual communications using the FOMA videophone service. The company also promoted its global operations and expanded its global i-mode service alliances. Despite these managerial efforts made under difficult business conditions exemplified by the keen competition in rates and services in the mobile communications market, NTT DoCoMo's consolidated operating revenues amounted to 4,844.6 billion yen for the period under review (a decrease of 4.0% from the prior year). (2) Financial Conditions Cash flows provided by operating activities for the current fiscal year amounted to 2,829.8 billion yen (a decrease of 650.8 billion yen, or 18.7% from the prior year) resulting from net income and depreciation and amortization costs. The decrease in cash flows was mainly due to a decrease in operating income and an increase in cash paid for income taxes, net. Cash flows used in investing activities amounted to 1,768.4 billion yen for the current fiscal year (a decrease of 368.4 billion yen, or 17.2% from the prior year) due to acquisition of property, plant, and equipment. One of the factors causing the decrease in cash outflow was cash inflow from the proceeds of sales of other investments. Cash flows used in financing activities for the current fiscal year reached 1,112.0 billion yen resulting from repayment of debts and other activities (a decrease of 110.6 billion yen, or 9.0% from the prior year). This decrease was due to a decrease in the amount of repayments of long-term loans. among other factors. As a result, cash and cash equivalents at the end of the consolidated fiscal year ended March 31, 2005, decreased by 49.5 billion yen (3.5% from the prior year), to 1,382.0 billion yen. (3) Fiscal Year Profit Allocation NTT expects to offer a 3,000 yen year-end dividend. Combined with the interim dividend already distributed, NTT thus expects to offer dividends of 6,000 yen per share of common stock for the full year ended March 31, 2005. (4) Projections for the Next Fiscal Year (Ending March 31, 2006) While the Japanese economy is expected to continue to recover steadily during the forthcoming fiscal year, due to signs of uncertainty observed in some sectors of Japanese industry, careful attention must be paid to trends in inventory adjustment and international conditions. In the telecommunications market, ubiquitous broadband communications continue to spread rapidly. The market can be expected to grow even further as evidenced by the proliferation of network-compatible consumer electronics products and the introduction of various solutions combining fixed-line and mobile communications. 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. Possible alliances among companies from different industries indicate that competition will become even more intense in the future. Meanwhile, amid the rapid penetration of communications technologies as a new social infrastructure, including broadband and mobile communications, there are growing social expectations that information technology will help find solutions to such issues as the achievement of more secure and safer lifestyles. Under these conditions, the NTT Group will continue to harness its comprehensive strengths in accordance with "NTT Group's Medium-Term Management Strategy" and develop and provide ubiquitous broadband services that combine fixed-line and mobile communications. Through such undertakings, the Group will contribute to finding solutions to social issues, including providing enhanced support for nursing care, remote medical treatment, and preventive medicine. The NTT Group will also put efforts into creating a framework for achieving quality and reliable networks and guaranteeing connectivity with other telecommunications carriers in order to construct a high-quality, flexible, and security-assured next-generation network. By integrating this network with fiber optic access services, the Group will provide superior and highly flexible services that integrate the features of fixed-line networks and IP networks. The NTT Group will continue to make an all-out effort to market its optical access services by reinforcing its sales forces and upgrading services and expanding service areas of the "Hikari Denwa" IP Telephony Service, which has achieved low-priced voice transmission with the same quality as fixed telephones. The Group will also strengthen the competitiveness of FOMA services and, for this purpose, will provide attractive products and services, introduce an easy-to-understand fee structure, and improve network quality. Further efforts will be made to create a new revenue base by proposing various ways to utilize FOMA, including i-mode FeliCa electronic payment services that collaborate with shops and public transportation systems and the use of FOMA as a remote monitoring device. On the other hand, the NTT Group will continue to move forward on structural reforms and will aim to transform its business and financial structures by improving operating efficiency and expanding into new business fields. With regard to the personal information of customers, the entire NTT Group will be committed to conducting a continuous review of its personal data management systems to ensure a rigorous framework. NTT itself will use its status as a holding company to allocate the managerial resources of the entire Group with flexibility and conduct basic R&D activities to promote the Group's business operations, while providing all necessary advice and mediation, and implementing effective fund procurement. In the area of research and development, the NTT Group will direct all its energies toward the creation of basic technologies for supporting the development of safe, secure, and convenient ubiquitous broadband services. To steadily embody the fruits of our R&D efforts in our businesses, the "comprehensive production function" program being implemented by the Group will be fully utilized to further accelerate the pace of commercialization through active collaboration among NTT Group companies. NTT will also commit itself to disseminating results of basic R&D activities, contributing further to the creation of industry standards, and actively pursuing collaborative R&D with other research bodies. NTT's consolidated projections for the fiscal year ending March 31, 2006 are as follows. Operating revenues are projected to reach 10,590.0 billion yen (a decrease of 2.0% from the prior year). Income before income taxes is projected to amount to 1,080.0 billion yen (a decrease of 37.3% from the prior year), while net income is expected to reach 440.0 billion yen (a decrease of 38.0% 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, 2006. [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 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. |
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