3. BUSINESS RESULTS AND FINANCIAL CONDITIONS |
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(1) Business Results During the half-year ended September 30, 2005, the Japanese economy continued on a gradual path to recovery with the expansion of capital investment, improvement of employment conditions on a wider scale, and the gradual personal consumption. In the telecommunications market, great changes are taking place in the telecommunications market environment due to such factors as the development of broadband communications that enable the high-speed transmission of large-volume data and the advancement of ubiquitous networks--the ability to send and receive a wide range of information anytime and anywhere. In the rapidly expanding broadband market, the spread of fiber optics access services accelerated and the trend of higher growth in the number of subscriptions compared to ADSL became more prevalent during the period under review. In the mobile communications market, while growth in the overall number of subscriptions has slowed, competition for rates and services have become more severe with the development of the shift from second-generation to third-generation mobile communications services. In the shrinking conventional fixed-line market, the full-scale entry of other common carriers providing direct subscriber telephone services has resulted in even more intense competition of overall communications charges, including basic monthly charges. At the same time, there is an ongoing trend toward linking communications networks with intelligent consumer appliances, fixed-line with mobile telecommunications, and telecommunications with broadcasting (represented by the IP (Internet protocol)-based multi-channel TV broadcasting). Amid these conditions, aiming at the rapid realization of the NTT Group's Medium-Term Management Strategy, announced in November 2004, the NTT Group has strengthened its organizational structure by establishing in its holding company the Corporate Management Strategy Division, which reports directly to the president, as well as the Next Generation Network Promotion Office and the Business Process Innovation Office. As specific measures to promote its business, the NTT Group made concerted efforts to increase sales of ultra high-speed fiber optics services, which are superior in interactivity and stability. The Steps that were taken include expanding its range of IP telephony services that provide the same high voice quality as fixed-line telephones, conducting active sales campaigns, and further upgrading video services. To maintain and increase the number of subscribers to the third-generation FOMA mobile communications service, the NTT Group has expanded and upgraded its handset services and functions, and proactively conducted sales promotion campaigns to coincide with the receipt of orders for new rate discount offers. Furthermore, in an effort to integrate fixed and mobile communications, the NTT Group augmented its solutions services by providing wireless LAN-compatible FOMA handsets that can be used in the office as high-quality IP telephones and outside the office as mobile phones. Regarding public wireless LAN services, which enable high-speed Internet communications via access points, the NTT Group has aimed at offering mutual roaming services by Group companies and integrating base stations for shared use of equipment, in order to improve customer convenience and operational efficiency. As a result of these activities, for the half-year ended September 30, 2005, NTT Group's consolidated operating revenues amounted to 5,231.5 billion yen (a decrease of 1.7% compared with the same period last year), while income before income taxes amounted to 833.6 billion yen (an increase of 7.7% compared with the same period last year). Consolidated net income for the same period was 330.7 billion yen (a decrease of 4.0% compared with the same period last year). NTT DoCoMo publicly repurchased 1,506,000 of its own shares from NTT during the period under review at a total cost of 249,996 million yen. As a result, NTT's ownership ratio of NTT DoCoMo voting shares decreased from 63.0% to 62.0% as of September 30, 2005. The business results of Nippon Telegraph and Telephone Corporation (Holding Company) and the principal companies of the NTT Group during the half-year ended September 30, 2005 were as follows. Nippon Telegraph and Telephone Corporation (Holding Company) With the active participation of Group companies, NTT has promoted various measures to realize the NTT Group's Medium-Term Management Strategy. As a result, it has received total payments of 10.1 billion yen (a decrease of 3.1% compared with the same period last year) from the Group companies during the period under review. With regard to R&D, NTT has implemented a "comprehensive production function" program for planning and promoting the commercialization of basic technologies, and has been involved in a wide range of R&D projects that support the Group's efforts toward the achievement of the Medium-Term Management Strategy. Specific projects include developing fiber-optic cords that can be bent, folded and tied, and connected to equipment easily. Activities such as these have enabled the company to earn 63.4 billion yen (a decrease of 8.9% compared with the same period last year) in basic research and development revenues. In addition, NTT earned a total of 110.3 billion yen in dividend income from its Group companies (a decrease of 2.7% compared with the same period last year). As a result of these activities, NTT's operating revenues for the half-year ended September 30, 2005 amounted to 192.3 billion yen (a decrease of 3.9% compared with the same period last year) and recurring profit amounted to 118.6 billion yen (a decrease of 5.4% compared with the same period last year). Its net income amounted to 339.6 billion yen (a decrease of 16.9% compared with the same period last year) due to the registering of revenues from the sale of NTT DoCoMo shares as special profits of 249.3 billion yen. Additionally, in accordance with a resolution passed at NTT's 20th General Shareholders' Meeting held on June 28, 2005 authorizing NTT to repurchase up to 1.25 million shares of its own common stock at a cost of up to 600.0 billion yen, NTT repurchased 1,116,743 of its own shares at a cost of 539,386.86 million yen. Nippon Telegraph and Telephone East Corporation and Nippon Telegraph and Telephone West Corporation During the period under review, NTT East and NTT West continued to improve managerial efficiency, while working vigorously to expand their broadband services and build a solid revenue base in order to address tougher competition in the fixed-line market. In the field of broadband service, NTT East and NTT West have been actively engaged in sales promotion efforts. Examples include expanding the range of the "Hikari Denwa" IP telephony service, which provides the same high voice quality as fixed telephone lines cost efficiently; promoting sales campaigns oriented toward apartment dwellers; and offering limited-time discounts. The companies have also cooperated with content providers to offer a range of attractive video content in an effort to increase convenience of fiber-optic access services. With respect to meeting diversified needs of corporate customers, NTT East and NTT West launched the sale of wireless LAN-compatible mobile IP telephone handsets that can be used in the "Hikari Denwa Business Type" service. In an effort to deal with severe competition in the existing fixed telephony services, NTT East and NTT West offered discounts on basic charges (connection fees) to subscribers who have multiple telephone lines under a single billing address. With regard to further increasing operational efficiency, NTT East and NTT West have both continued to promote structural reforms and implemented thorough cost reduction measures. Specifically, NTT East integrated its three outsourcing subsidiaries (those responsible for sales, facilities and common back-office functions)* located in each prefecture or region into a single prefectural outsourcing subsidiary. Despite these managerial efforts made under difficult business conditions such as a shrinking fixed-line market and intensified competition, the operating revenues at NTT East amounted to 1,049.9 billion yen, (a decrease of 2.0% compared with the same period last year) and the operating revenues at NTT West amounted to 1,005.0 billion yen (a decrease of 2.4% compared with the same period last year). NTT Communications Corporation During the period under review, NTT Com has been making vigorous efforts to achieve its business vision of becoming a "Global IP Solution Company," and developing its IP services and solutions business to attract as many domestic and global customers as possible. For corporate clients, NTT Com has advanced the global development of its IP services. One of the initiatives taken was the launch of "Global Super Link," a high-bandwidth VPN service offered over the NTT Com's global IP network. Designed to meet the needs of multinational corporations fostering global collaboration in product development and design, this service ensures high-quality, secure and cost-effective communication among geographically dispersed locations. NTT Com also began providing the "Customer Connect" service, which helps corporate clients to easily set up customer centers that respond to inquiries made by fixed telephone, IP telephone or e-mail, or over the Internet without requiring them to install large-scale equipment. For individual clients, NTT Com has worked hard to further increase customer convenience by offering on a full-scale basis the "OCN Hikari with FLET'S," an IP telephone service compatible with the "OCN B FLET'S" service, and launched a new service enabling connection of ".Phone Personal" IP videophones and FOMA videophones. For existing fixed-line services, NTT Com has been providing "PL@TINUM LINE" and other rate discount services to address increased competition. As a result of these measures, NTT Com's operating revenues for the half-year ended September 30, 2005, was 547.8 billion yen (an increase of 4.3% compared with the same period last year). NTT DATA Corporation During the period under review, NTT DATA has set its sights on providing systems integration services that help raise customer value, in order to become "number one in customer satisfaction." With that in mind, the company continued to adopt policies designed to improve its basic organizational fitness and promote growth. With regard to improving basic organizational fitness, NTT DATA has taken steps to boost system-integration competitiveness. Specific measures include enhancing and stabilizing the R&D process and accumulating business know-how to reduce costs and improve cost competitiveness, as well as acquiring international certifications on project management. In an effort to expand its enterprise systems business and explore potential customers, NTT DATA formed a capital alliance with companies in the logistics, retail, and food-service industries to exploit their highly specialized industry know-how. Concerning strategies for growth, as part of its efforts to develop innovative solutions and services, NTT DATA, jointly developed with its customers, an inventory control system for automotive molded products, which allows users to read data of each product piled up in warehouses using RFID tag technologies. Other actions taken include concluding an agreement with several IT solutions companies on joint development of a highly extensive and flexible next-generation mission-critical system for financial institutions. This agreement gave NTT DATA an advantage to use its proprietary basic technologies. In these and other ways, the company has been actively involved in developing and improving infrastructure for the next-generation mission-critical systems. As a result of these efforts, NTT DATA's consolidated operating revenues for the half-year under review amounted to 389.6 billion yen (an increase of 2.0% compared with the same period last year). NTT DoCoMo, Inc. During the period under review, NTT DoCoMo has focused on increasing the number of FOMA subscribers by enhancing its lineup of handsets in the "FOMA901iS" series, compatible with the "i-mode FeliCa" function that enables users to make electronic payments, as well as of handsets in the "FOMA M1000" series, compatible with wireless LAN communications and with global roaming services that allow users to make phone calls and transmit data from abroad. These efforts were further reinforced by the expansion of FOMA service areas to make the service more available in the buildings and underground malls. With respect to the "i-mode" service, NTT DoCoMo has been promoting the widespread use of the service and formed a business alliance with global mobile carriers to expand the international "i-mode" services, with a view to increasing its sources of revenue. During the period under review, the company initiated the "i-channel" news and information service that allows subscribers to automatically receive various content delivered to the phone's standby screen. In Israel and Russia, the mobile phone operators, with which NTT DoCoMo has formed an alliance, launched "i-mode" services in their respective countries. NTT DoCoMo has also worked to provide more convenient services to customers through such efforts as the introduction of a user-friendly rate plan and the "New Ichinen Waribiki" yearly discount plan designed to offer preferential services to long-time users. Through these and other management initiatives, NTT DoCoMo was able to limit the effect of a severe economic environment characterized by intensified competition in rates and services, consolidated operating revenues amounting to 2,373.5 billion yen for the period under review (a decrease of 3.2% compared with the same period last year). (2) Financial Conditions Cash flows provided by operating activities for the current half-year amounted to 1,599.5 billion yen (an increase of 328.0 billion yen, or 25.8% compared with the same period last year) resulting from net income and depreciation and amortization costs. The increase in cash flows was mainly due to a decrease in cash paid for income taxes, net. Cash flows used in investing activities amounted to 1,210.7 billion yen (an increase of 176.1 billion yen, or 17.0% compared with the same period last year) due to acquisition of property, plant, and equipment. Some of the factors causing the increase in cash outflow were an increase in long-term investment expenditures following the NTT DoCoMo's acquisition of shares in Sumitomo Mitsui Card Company, Limited, and an increase in short-term investment expenditures made for efficient fund management. Cash flows used in financing activities reached 637.9 billion yen resulting from the repurchase of its own shares (an increase of 415.1 billion yen, or 186.3% compared with the same period last year). Some of the factors causing the increase in cash outflow were a decrease in the amount of repayments of long-term loans and an increase in expenses arising from the repurchase of its own shares, among other factors. In the previous fiscal year, NTT recorded expenses of 366.5 billion yen used in the repurchase of its own shares conducted in the third quarter. As a result, cash and cash equivalents at the end of the current half-year decreased by 243.7 billion yen (17.6%), to 1,138.3 billion yen. (3) Projections for the Full Fiscal Year (Ending March 31, 2006) While we must keep in mind trends in the global economy and how fluctuations in crude oil prices can affect the economies of Japan and other countries, it seems likely that the Japanese economy will continue to recover, driven by private domestic demand. In the telecommunications market, where efforts toward ubiquitous broadband networking have been accelerating, further development is expected with the emergence of network-connected intelligent consumer appliances; fixed-mobile convergence (FMC) services; services integrating telecommunications and broadcasting; "triple play" services combining the Internet, telephone and broadcasting services; and "quadruple play" (also known as "grand slam") services combining mobile services with triple play services. Under such market circumstances, it is likely that new players will continue to enter into the telecommunications market while also increasing alliances among companies from different industries, leading to even more severe competition. Against this backdrop, NTT considers it far more important to accurately assess diversifying consumer needs and take appropriate measures. Amid these conditions, we have put together a roadmap for building the next-generation network and developing ubiquitous broadband services to implement the "NTT Group's Medium-Term Management Strategy," which NTT Group announced in November 2004. With this roadmap, we will create a network environment that provides a ubiquitous broadband service that is fast and convenient, safe and secure, and offers connectivity anytime and anywhere - so that our customers can easily and conveniently access our various application services. We believe this will help create a rich communications environment for individuals as well as for communities, make corporate activities more efficient, and generate new business opportunities. Our intention is to build an open next-generation network that a variety of players outside the NTT Group can use to pioneer and develop a variety of services and business models. At the same time, we plan to actively move ahead with alliances with these players in a wide range of forms. Through such initiatives, we continue to maximize the Group's corporate value by making a contribution toward achieving the goals of the e-Japan Strategy and u-Japan Policy, so that Japan may have an energetic aging society in which the social problems Japan faces today, such as the decreasing birthrate and rapidly aging population, issues of nursing and medical care, employment mismatch, crime and disaster prevention, and energy NTT's consolidated projections for the full fiscal year ending March 31, 2006 are as follows. Operating revenues are projected to reach 10,705.0 billion yen (a decrease of 0.9% compared with the previous year). Consolidated income before income taxes is projected to amount to 1,255.0 billion yen (a decrease of 27.2% compared with the previous year), while consolidated net income is expected to reach 525.0 billion yen (a decrease of 26.1% compared with the previous 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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