| 3. BUSINESS RESULTS AND FINANCIAL CONDITIONS | ||||||||
During the consolidated fiscal year ended March 31, 2006, the Japanese economy continued on a steady path to recovery, as evidenced by an increase in capital investment in conjunction with higher corporate earnings, expanding improvement in employment despite the persistence of some difficult circumstances, and a moderate increase in personal consumption. Dramatic changes are taking place in the telecommunications market environment in conjunction with the advance of ubiquitous broadband communications. In the broadband market, which is experiencing continued growth, use of optical access services--the mainstay of the broadband business--continues to expand at an accelerated rate amidst intense competition, with the net increase in the number of optical access subscribers now exceeding the net increase in the number of ADSL service subscribers. In the mobile communications market, growth in the overall number of subscriptions remains sluggish, and competition in both fees and services is fierce, but the number of subscriptions for third-generation mobile communications services is increasing steadily due to expansion of rate plan and discount service options and application enhancements. The market for conventional fixed-line telephone services is shrinking as a result of the continued shift from fixed-line telephone services to IP telephony services. Under these circumstances, rate competition including competition in basic rates, is becoming increasingly severe. Amidst these conditions, the NTT Group continued its efforts toward realization of the NTT Group Medium-Term Management Strategy (announced November 2004). Specific business activities undertaken during this fiscal year include expansion of service areas and enhancement of services for high-quality IP telephony using optical access services, and measures to bolster marketing through collaboration with Internet service providers and broadcasters. With respect to third-generation FOMA mobile communications services, NTT introduced new, easy-to-understand rate plans, enhanced its handset and service lineup, and took steps toward the provision of credit card payment services using cell phones as part of its initiative to promote the diversification of cell phone use based on the concept of "Seikatsu Keitai" (lifestyle cell phones), with the goal of securing new sources of income. In addition, NTT moved forward with efforts to improve convenience for customers and NTT Group's business efficiency through the development of services representing a convergence of fixed-line and mobile communications, the introduction by NTT East Corporation and NTT West Corporation (the NTT East and West regional companies) of a mutual roaming service for public wireless LAN services, and the sharing of base station facilities among Group companies. In May 2005, the holding company reinforced its managerial structure by creating a Medium-Term Business Strategy Promotion Office, Next-Generation Network Promotion Office, and Business Process Reform Office to carry out medium-term management strategies. In November 2005, NTT released a document entitled Promoting the NTT Group Medium-Term Business Strategies, describing the Next-Generation Network Construction Roadmap and the development of ubiquitous broadband services, and NTT Group is currently engaged in proactive measures to carry out those strategies. In addition, the NTT Group is actively engaged in corporate social responsibility (CSR) activities. To clarify managerial structure, we created a CSR Committee and issued a CSR Report. As a result of these activities, for the fiscal year ended March 31, 2006, the NTT Group's consolidated operating revenues amounted to 10,741.1 billion yen (a 0.6% decrease from the previous year). Although NTT Data and NTT Communications posted higher revenues, revenues for NTT East and West regional companies and NTT DoCoMo continued to decline. Consolidated income before income taxes and consolidated net income were 1,305.9 billion yen (a decrease of 24.2% from the previous year) and 498.7 billion yen (a decrease of 29.8% from the previous year, but this was largely due to the effect of the 501.8 billion yen gain from NTT DoCoMo's sale of shares in AT&T Wireless Services, Inc. recorded during the prior fiscal 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) NTT continued its focus on promoting and disseminating the results of fundamental research and development. In its capacity as a holding company, NTT strove to engineer the efficient development of the businesses of the NTT Group through the planning of overall strategy and redistribution of managerial resources in line with changes to the business environment. In practical terms, in November of last year NTT released a document entitled Promoting the NTT Group Medium-Term Business Strategies to explain its Next-Generation Network Construction Roadmap and the development of ubiquitous broadband services and facilitate the implementation of our medium-term business strategies. We also provided advice and mediation services aimed at broadband service development and promoting international businesses. As remuneration for these services, the Company received 20.2 billion yen in Group management and administration revenue (a year-on-year decrease of 3.1%). NTT promoted fundamental research and development primarily into building new-generation network architecture while also working to further develop future-focused basic technologies. As remuneration for these research and development activities, NTT received fundamental research and development revenues of 126.8 billion yen (a decrease of 8.9% from the prior year). In connection with a public share repurchase by NTT DoCoMo Inc. (scheduled purchase of 1,686,746 shares) NTT sold 1,506,000 shares of NTT DoCoMo Inc., valued at 249.996 billion yen, to NTT DoCoMo Inc.. NTT received 169 billion yen in dividends (an increase of 17.3% from the previous fiscal year). As a result of these developments, NTT's operating revenues for the fiscal year ended March 31, 2006 were 339.3 billion yen (an increase of 5.0% from the previous year) and recurring profit was 171.9 billion yen (an increase of 13.3% from the previous year). NTT's net income amounted to 394.0 billion yen (a decrease of 13.5% from the previous year) as a result of recording an extraordinary gain of 249.3 billion yen on the sale of NTT DoCoMo shares as and other factors. 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 billion yen, NTT repurchased 1,116,743 of its own shares at a cost of 539,386,869,000 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 their active efforts 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, NTT East and NTT West actively worked to expand and improve optical access services including vigorously promoting the provision of high-quality "Hikari Denwa" IP telephony services using optical access, and launching a multiple channel service that enables simultaneous communications on two lines and an additional telephone number service that allows subscribers to use up to five different telephone numbers. In addition, NTT East and NTT West implemented a variety of measures to meet the diversifying needs of its customers including expanding the territory for wide-area Ethernet services provided to corporate clients and introducing mobile IP telephony terminals compatible with wireless LANs that can be combined with Hikari Telephone Business Type services. In the video distribution service business, NTT East and NTT West took measures to promote and expand high added-value programming using the broadband environment and to provide multi-channel broadcasting services. As the provision by other carriers of direct subscriber telephone services using dry copper lines becomes more widespread, NTT East and NTT West are working to lower their fees for fixed-line telephone services, including by offering discounts on the base fees (line use charges) to customers who pay fees on multiple lines. NTT East and NTT West continued to pursue cost-cutting measures to improve managerial efficiency. In addition, NTT East carried out a review of operational structures, which included the consolidation of its three outsourcing companies (providing marketing, facility, and administrative services) on a prefectural basis. Despite these managerial efforts made under difficult business conditions exemplified by the intense competition in the broadband market and a shrinking and highly competitive fixed-line market, operating revenues at NTT East amounted to 2,125.3 billion yen (a decrease of 2.5% from the prior year), and operating revenues at NTT West amounted to 2,029.6 billion yen (a decrease of 3.3% from the prior year). NTT Communications Corporation During the fiscal year under review, NTT Communications took measures to expand IP services in both domestic and global markets and to reinforce its global business structure. For corporate customers, NTT Communications made efforts to respond to diversifying customer needs, responding to calls from corporate customers for methods of secure access to internal information systems from mobile terminals by launching the Smart Biz Kit using FOMA, and providing management outsourcing services that offer centralized management of entire systems from networks to routers and servers. For individual customers, NTT Communications sought ways to improve customer convenience by putting a concerted effort into sales of OCN Hikari with FLET'S, a menu that caters for OCN's optical access services, and by launching a new OCN IPv6 service essential for intelligent consumer electronics devices. NTT Communications also created a new Global Business Headquarters and established a trilateral framework of local subsidiaries in Europe, the Americas, and Asia to enhance the competitiveness and increase the profitability of NTT Communications's global businesses. In addition, in a first for a Japanese telecommunications company, NTT Communications established a local subsidiary in India, a country where global companies are becoming increasingly active, thereby laying the foundations necessary for responding rapidly to local corporate needs. For fixed-line services, NTT Communications continued marketing the "PL@TINUM LINE" rate discount service for domestic and international calls as well as calls to mobile phones and otherwise worked to enhance its competitiveness. As a result of these developments, NTT Communications' operating revenues for the fiscal year ended March 31, 2006, were 1,127.8 billion yen (an increase of 3.5% 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 business customers in the form of business alliances or joint investments and on becoming a top ranking business in terms of customer satisfaction by providing systems and services that can increase customer value. With these objectives in mind, NTT DATA implemented 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 improve competitiveness in system-integration by improving and stabilizing processes, 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 developed, in collaboration with its business customers, an inventory management system using RFID tag technologies, and created an infrastructure improvement utilizing open source software that performs all processes from system construction to operation. As a result of these efforts, NTT DATA's consolidated operating revenues for the fiscal year under review were 907.2 billion yen (an increase of 6.2% from the prior year). NTT DoCoMo, Inc. During the fiscal year under review, NTT DoCoMo unified the fee structures for its FOMA and mova services and introduced new rate plans that are easier for customers to understand. In addition, the company launched a Family Discount Wide plan that features low monthly basic fees and expanded the scope of application of the "Pake-Hodai" flat-rate packet option for i-mode services to improve rate plans and services in line with customer needs. NTT DoCoMo also strengthened its cell phone business by expanding its handset lineup, including the introduction of new handset models, and improving services. Service improvements include the start of the i-channel service for automatic display of the latest news, weather, and other information on cell phone screens while in standby mode and the Push Talk service that allows groups of up to five people to hold conversations simultaneously. Also, to promote further use of "Osaifu-Keitai" (mobile phones with wallet functions), NTT DoCoMo launched the iD credit brand, began providing new settlement platforms for Osaifu-Keitai phones, and took other measures to secure new revenue opportunities. In a business climate where competition in fees and services in the mobile telecommunications market is becoming increasingly intense, despite the implementation of the above initiatives, NTT DoCoMo's consolidated operating revenues were 4,765.9 billion yen for the period under review (a decline of 1.6% from the prior year).
Cash flows provided by operating activities for the current fiscal year amounted to 3,242.9 billion yen (an increase of 413.1 billion yen, or 14.6% from the prior 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) resulting from the fact that the impairment loss on the sale of shares AT&T Wireless Services, Inc. recorded in the prior fiscal year reduced tax payments in the current fiscal year, among other factors. Cash flows used in investing activities amounted to 2,077.3 billion yen for the current fiscal year (an increase of 308.9 billion yen, or 17.5% from the prior year) due to acquisition of property, plant and equipment. Other factors causing the increase were a decrease in proceeds from sales of long-term investments, compared to the prior fiscal year in which proceeds from the sale of AT&T Wireless Services, Inc. shares made a positive contribution to cash flows, and an increase in cash outflow for long-term investments, including as a result of the acquisition of stock of Sumitomo Mitsui Card Company, Limited and KT Freetel Co., Ltd. by NTT Docomo, among other factors. Changes in short-term investments due to fund management activities also resulted in increase of cash proceeds. Cash flows used in financing activities for the current fiscal year reached 1,139.9 billion yen resulting from repayment of debts, purchase of treasury stock and other activities (an increase of 27.9 billion yen, or 2.5% from the prior year). This increase was due to a decrease in the amount of repayments of long-term loans, as well as an increase in cash outflow for purchase of treasury stock, among other factors. As a result, cash and cash equivalents at the end of the consolidated fiscal year ended March 31, 2006, increased by 28.9 billion yen (2.1% from the prior year), to 1,410.8 billion yen.
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, 2006.
While it is important to remain wary of trends in crude oil prices and other trends in international commodity and financial markets, the recovery in the corporate sector has spread to the household sector, and Japan's economic recovery, supported by domestic demand, is expected to continue. In the telecommunications market, as ubiquitous broadband communications continue to spread and the development of IP networks accelerates the integration of services, a richer communications environment for both individuals and society is emerging. To address the partnership and integration of fixed-line and mobile communications and of communications and broadcasting, domestic and international information and telecommunication businesses are promoting and implementing further business restructuring, including mergers and acquisitions and other business consolidations. Combined with the emergence of new business models, this restructuring activity is expected to further intensify competition. In such an environment, the NTT Group will continue to establish an efficient and flexible next-generation network while ensuring the conditions for fair competition under the current legal framework in accordance with NTT Group's Medium-Term Management Strategy announced last year. The next-generation network will combine the features of the existing fixed-line and mobile communications and will enable the provision of safe, secure and convenient services. We will construct this next-generation network to be an open network providing reliable connectivity with the IP networks of other firms, including Internet service providers. Prior to full-scale introduction of the next-generation network and starting in December 2006, NTT will commence field trials to make technical confirmation of quality control features and security features and to ascertain customer demands. Further, by deploying relay nodes and optical wavelength transmitters in the IP networks of NTT East and NTT West, we will begin construction of the relay networks within the next-generation network. In addition, starting the second half of the coming fiscal year, NTT will commence construction of edge nodes and introduce service control functions, as we work towards the provision of services using the next-generation network in a commercial setting. NTT will continue its efforts toward expansion of optical access services and the partnership and integration between fixed-line and mobile communications, and between communication and broadcasting. By efficiently utilizing NTT Group management resources to further enhance upper level services, such as Internet connection and portal services as well as services directed towards corporations, NTT will strive for further development of ubiquitous broadband services. Through such efforts NTT will aim to spread its services using the next-generation network, with a goal of 30 million optical access service users by FY2010. Specific business developments directed toward the full-scale dissemination of optical access services include enhanced sales and marketing in collaboration with other companies, enhanced sales of services in package with NTT's high-quality IP telephony service, Hikari Denwa, provision of new plans for optical access services that are in line with customer needs, and an improved and expanded lineup of services for corporate customers. Accordingly, NTT Group will continue to make an all-out effort in sales and marketing. With respect to FOMA services, NTT Group will promote increased use of new services such as Push Talk and i-channel, and will strive for greater overall competitiveness through the provision of new attractive products and services, improvement of network quality, and enrichment of after-service. NTT will also continue efforts toward securing new sources of revenue, by actively developing "iD" and other new services using the "Osaifu-Keitai." At the same time, with a view to enhancing marketing strength for optical access and other services, the NTT Group will strive to improve customer service through the establishment of business management systems offering swift response to orders from customers and a robust support organization, as we continue efforts towards enhanced managerial efficiency, including cost reduction. NTT will continue to apply the managerial resources of the NTT Group in a proactive and flexible manner and will take advantage of the benefits of NTT's holding company structure to promote unified research and development of fundamental technologies. NTT will also provide NTT Group companies with advice, mediation and other assistance, including assistance with their efforts to obtain cost-effective financing. On the research and development front, NTT Group will continue to focus its efforts on the creation of basic technologies required to support the development of secure, dependable and convenient broadband and ubiquitous services, and will utilize the "Comprehensive Commercialization Functions" to promote the commercialization of the products of research and development in collaboration with NTT Group companies. NTT will also continue to promote the dissemination of achievements in basic research and development, and to contribute to the standardization of technologies, including the development of industry standards, and will actively move forward with research and development activities carried out in collaboration with other research institutions. NTT's consolidated projections for the fiscal year ending March 31, 2007 are as follows. Operating revenues are projected to reach 10,800.0 billion yen (an increase of 0.5% from the prior year). Income before income taxes is projected to amount to 1,175.0 billion yen (a decrease of 10.0% from the prior year), while net income is expected to reach 500.0 billion yen (an increase of 0.3% from the prior year). NTT expects to offer dividends of 8,000 yen per share of common stock for the full fiscal year ending March 31, 2007. [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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