| 3. Business Results and Financial Conditions | ||
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| During the half-year ended September 30, 2006, capital investment grew against a backdrop of high corporate earnings and strong business performance, and the Japanese economy continued to expand despite some remaining sluggishness in employment, supported by exports and personal consumption. The telecommunications sector is experiencing dramatic changes amid intense competition, as the market continues to shift to broadband communications enabling the high-speed transmission of large volumes of data and ubiquitous networks enabling information to be exchanged at any time and anywhere. In the broadband market, which continues to grow, the number of ADSL subscribers is now in a slight decline, but optical access services, the mainstay of the broadband business, are spreading at an accelerating pace. In the mobile communications market, where growth in total subscriptions has slowed, the number of subscribers to third-generation mobile communications service is increasing, and with the introduction of mobile phone number portability, rate plans and discount services are diversifying and applications are being enhanced to maintain customer loyalty. The conventional fixed-line market continues to shrink in conjunction with the shift towards the use of existing dry copper lines for direct subscriber phone services and IP telephone services. Under these business conditions, NTT Group continued its efforts to realize the NTT Group's Medium-Term Management Strategy announced in November 2004. Specific measures undertaken during the period under review include the implementation of an aggressive marketing campaign and expansion and improvement of services in order to increase sales of optical access services. These efforts resulted in the number of B FLET'S subscribers surpassing 4 million. With respect to FOMA third-generation mobile communications services, NTT Group has expanded and upgraded its handset offerings and expanded services areas. As a result, FOMA subscribers now account for more than 50% of total mova and FOMA subscribers. The shift from second-generation mobile communications services is thus proceeding at a healthy pace. Moreover, supported by strong corporate sector demand, the solution related operations for business customers have grown steadily. Upper-layer services such as Internet connection, Internet portal services, and video distribution services were consolidated within NTT Communications Corporation ("NTT Communications") both to raise business efficiency and to realize synergies among the various services, thereby providing even more attractive services to customers. Through such measures, as a corporate group we have established the largest Internet connection service customer base in the industry and our "goo" portal site has the industry's second highest number of users. In August 2006, NTT Group also conducted a review of its customer service account systems with respect to services for corporate customers with the objective of providing customers with a single point of contact and to more effectively utilizing NTT Group's management resources. With respect to the construction of the next-generation network, in preparation for the launch of full-scale commercial services in accordance with the roadmap as set forth in the policy statement entitled "Promoting the NTT Group's Medium-Term Management Strategy" (announced in November 2005), NTT Group announced the interface conditions for, and has started to accept applications to participate in, field trials to be conducted to ascertain user demands and to test the new technologies. NTT DoCoMo leads a team of six NTT Group companies that began preparations for outdoor testing of WiMAX for broadband wireless Internet connectivity. As a result of these activities, for the half-year ended September 30, 2006, NTT Group's consolidated operating revenues were 5,249.3 billion yen (an increase of 0.3% from the previous year), consolidated income before taxes was 699.7 billion yen (a decrease of 16.1% from the previous year), and consolidated net income was 291.5 billion yen (a decrease of 11.9% from the previous year). The business results of NTT and the principal companies of the NTT Group for the half-year ended September 30, 2006 are set forth below. |
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Nippon Telegraph and Telephone Corporation (Holding Company) |
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| To implement NTT Group's Medium-Term Management Strategy, NTT applied its efforts toward effective group management, developing group-wide strategies and re-allocating business resources in line with changes in the business environment. As remuneration for these activities, during the period under review, NTT Group companies paid NTT a total of 9.8 billion yen in management and administration revenue (a decrease of 2.8% from the previous year). NTT's research and development activities continue to focus on the development of new-generation network architecture. Our accomplishments during the period under review included the successful testing of communications at the world-record speed of 14 terabits per second (the equivalent of transmitting 140 high-definition movies in one second), surpassing conventional optical transmission rates. As remuneration for these activities, NTT received 61.0 billion yen in basic research and development revenues (a decrease of 3.8% from the previous year). In addition, for the period under review NTT received a total of 139.1 billion yen in dividends from NTT Group companies (an increase of 26.1% from the previous year). As a result of these developments, NTT's operating revenues were 219.4 billion yen (an increase of 14.0% from the previous year), ordinary income was 147.6 billion yen (an increase of 24.5% from the previous year), and net income for the half was 143.9 billion yen (a decrease of 57.6% from the previous year). |
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Nippon Telegraph and Telephone East Corporation and Nippon Telegraph and Telephone West Corporation |
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| During the period under review, NTT East and NTT West continued their efforts to secure solid revenue bases by enhancing their optical access and other broadband services and taking measures to improve competitiveness in the fixed-line telephone market. They also continued efforts to improve management efficiency. In the area of broadband services, so that more customers will subscribe to optical access services, a number of discounts and sales promotions were put in place to strengthen sales. To complement the existing "Hikari Phone" and "Hikari Phone Business Type" optical telephone services the "Hikari Phone Office Type" service, which offers up to a maximum of eight lines and 32 phone numbers was introduced. In the field of video distribution services, NTT East and NTT West are working to distribute attractive video programming at FLET'S Square, the Web site created exclusively for broadband service users. In the fixed-line telephone services field, amid intense competition resulting from the development of direct subscriber phone services, and as the shift to IP telephones continues, NTT East and NTT West focused their efforts on achieving efficiencies in their business. Also, during the period under review NTT West performed a review of its business operations structures, to ensure that it remains focused on the market place and raise the quality of services. The head office reorganized into a "matrix-type functional organization" to enable a specialized approach to broadband services and coordination of business activities across the entire organization. To promote business operations with closer local ties, the existing 16 branch set-up was overhauled, a branch was established in each of the 30 prefectures in western Japan and regional headquarters for developing and coordinating regional strategies were established in the Kansai, Tokai, Hokuriku, Chugoku, Shikoku, and Kyushu regions. Further, with the goal of achieving centralization in regards to operations relating to optical fiber lines, the three types of companies (marketing, facilities, and administration) established for the 16 regional branches were consolidated, and a single new regional company was established. Under these difficult business conditions, during the period under review NTT East's operating revenues were 1,013.1 billion yen (a decrease of 3.5% from the previous year), and NTT West's operating revenues were 959.8 billion yen (a decrease of 4.5% from the previous year). NTT East and NTT West take very seriously any inconvenience caused to customers due to temporary connectivity problems with the "Hikari Phone" service. The two companies have accelerated installation of additional facilities and are working to enhance reliability and reduce response times when problems occur. |
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NTT Communications Corporation |
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| NTT Communications provided integrated information and communication technology (ICT) solutions, worked with customers to create new lifestyle and business operation models, and applied itself to the expansion of domestic and overseas IP services and reinforcement of the solution business. Based on the policy statement entitled "Promoting the NTT Group Medium-Term Management Strategy", during the period under review NTT Communications bolstered its capacity to provide upper-layer services and also revised its customer accounts system to improve the one-stop services it offers to corporate customers. Other measures taken to improve services for business customers include the start of a data communications service using the wide-area Ethernets of NTT East and West as access lines and also expansion of the service territory for Global Super Link, a service that creates wide-area international Ethernet networks over high-speed, high-capacity global IP networks. In the field of virtual dedicated network services using IP communications, NTT Communications launched a high-security, high-speed, high-quality international IP-VPN service (MPLS type) in Vietnam. As the needs of business customers continued to diversify, NTT Communications provided a range of solutions designed to enhance customer convenience and reduce administration costs. With respect to services for individual customers, NTT Communications worked to strengthen sales of its OCN Optical with FLET'S, a service that allows customers to make combined monthly payments for the OCN Internet access service, B FLET'S, and other services. NTT Communications also launched a spam blocking service that automatically detects and isolates spam and fraudulent (phishing) emails. In the Internet portal service field, NTT Communications worked to expand and enhance services, including the launch of DoTV, a portal site for viewing lifestyle information and shopping using Internet-compatible digital televisions and other information home appliances. With respect to existing fixed-line telephone services, in response to intensifying competition, NTT Communications supplemented its Pl@tinum Line service, which offers package discount rates for domestic, international, and mobile calls, by adding the Sekai Wari with Pl@tinum Line service, which offers even greater discounts on international calls. As a result, NTT Communication's operating revenues for the half-year ended September 30, 2006 were 547.4 billion yen (a decrease of 0.1% from the previous year). |
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NTT DoCoMo, Inc. |
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| During the period under review, in anticipation of the introduction of mobile number portability, NTT DoCoMo made efforts to further strengthen its overall operations and capabilities. NTT DoCoMo moved to complete the provision of FOMA service at train stations and other areas with high concentrations of people and, in line with customer requests, worked to reduce the number of smaller service areas with limited reception. In addition, commencing with the 23 wards of Tokyo in August 2006, NTT DoCoMo is progressively expanding the service area for high-speed download packet access (HSDPA), which offers data downlink speeds up to 10 times faster than conventional services (a maximum of 3.6 Mbps). With respect to FOMA services, NTT DoCoMo continued its enhancement and expansion of the handset lineup, sought to enhance its music-related services, including the launch of "Chaku Uta Full", a service that enables downloading of a full piece of ringtone music using i-mode, and, in conjunction with the start of sales of HSDPA compatible handsets, launched the Music Channel, a service for downloading full-length, high-quality music programs. In order to bolster security functions NTT DoCoMo also began providing terminals with voice or face identification functions as well as a service for locking the "Mobile Wallet" IC card functions in the event of handset loss or theft. As part of its efforts to create new revenue sources, NTT DoCoMo also launched the DCMX credit service using "Mobile Wallet" equipped handsets. With regard to international services, NTT DoCoMo expanded its lineup of roaming-compatible handsets and expanded roaming territories. As a result, NTT DoCoMo's operating revenues for the period under review were 2,383.4 billion yen (an increase of 0.4% from the previous year) as a result of the activities described above. |
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NTT DATA Corporation |
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| During the period under review, with the goal of becoming first in customer satisfaction for customer value, and in accordance with its Policy for Improving Fundamental Capabilities, NTT DATA Corporation ("NTT DATA") implemented measures to bolster its marketing capabilities and raise its competitiveness in the system integration business and to aggressively create new products and services. As part of its Growth Strategy, NTT DATA took measures that included the strengthening of marketing and development capabilities in the corporate customer field, as well as development of advanced solutions and services, and development and refinement of the next-generation backbone system infrastructure. Through these efforts, NTT DATA engaged in vigorous marketing and effective system development activities geared towards obtaining orders for new systems and launching new services, and endeavored to continue providing stable services for existing systems. In the financial field, efforts focused on expanding the number of banks participating in the Joint Regional Banking Center, a shared-use type system for financial institutions. Based on the international settlement system in operation at the center, NTT DATA developed BeSTA-FX, an international system for leading and middle-tier regional banks, and began provision of a service that includes the outsourcing of everything from construction to operation. In the corporate sector, NTT DATA began provision of a service for supporting the strengthening of internal controls, in which services and strategies to enhance internal controls are systematized and a consistent approach is taken from the time of introductory consulting until operation of the final system is established. With a view toward growth in the corporate sector, NTT DATA formed capital alliances in the housing and travel industries to develop enhanced systems that combine highly specialized industry knowledge and the diverse resources of NTT DATA. In the public sector, NTT DATA worked towards maintaining stable provision of services under current systems and securing orders for newly-developed systems. As a result, NTT DATA's consolidated operating revenues for the period under review were 453.4 billion yen (an increase of 16.4% from the previous year). |
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| During the period under review, cash flows from operating activities were 793.6 billion yen, down 805.9 billion yen (50.4%) from the previous year as a result of declines in net income, depreciation and amortization costs, accounts receivable, and unpaid personnel expenses. The decline in cash flows was primarily the result of an increase in net corporate taxes (in the prior year, NTT was permitted to deduct its impairment loss on shares of AT&T Wireless Services, Inc., resulting in net corporate taxes of 29.2 billion yen) and an increase in accounts receivable resulting from the fact that phone charges for September were carried over into the following month because the last day of September was a bank holiday. Cash flows used in investing activities reached 1,156.8 billion yen, due primarily to the acquisition of fixed assets. This is a decline of 53.8 billion yen (4.4%) from the previous year, resulting primarily from a decrease in long-term investments compared to last year, when cash was expended, for instance, to acquire shares of Sumitomo Mitsui Card Company, Ltd. Cash flows used in financing activities for repayment of loans and other expenditures were 343.3 billion yen, down 294.6 billion yen (46.2%) from the previous year. The decline was the result of lower cash outflows for the acquisition of treasury stock and an increase in expenditures for procurement and repayment of long-term loans. As a result of the above, NTT Group's balance of cash and cash equivalents at the end of the current half-year were 704.4 billion yen, down 706.4 billion yen (50.1%). |
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While it is necessary to keep in mind how fluctuations in the financial markets, other countries' economies and commodities prices such as those of crude oil can affect the Japanese economy, it seems likely that the Japanese economy will continue to recover, driven by private domestic demand as capital investment continues to grow and the effects of strong performance in the corporate sector are expected to spread to households. In the telecommunications market, as progress toward ubiquitous and broadband networking accelerates an environment offering a wide range of communication forms to both individuals and society in general is emerging. Both domestic and foreign telecommunications businesses are progressing with plans to restructure their businesses, to deal with the convergence of fixed and mobile services, collaborations between and convergence of communications and broadcasting services and with the merger and consolidation of competitors. In addition to the creation of new business models, these activities are expected to lead to even fiercer competition. Under these conditions, NTT Group is accelerating its implementation of a medium-term management strategy to respond to rapid changes in the business environment. Specific measures, taken with the goal of reaching 30 million optical access service subscribers by 2010, include new plans designed to meet customer needs and the expansion of services for corporate customers in the continuing effort to strengthen sales and marketing. With regard to FOMA services, NTT will expand and enhance the variety of handsets, and make efforts to improve network quality by increasing the number of base stations, and enhance and promote greater use of music-related, i-mode search, and credit business services in order to create new revenue sources. In the period under review, integrated provision of upper-layer services has resulted in efficiencies from the sharing of infrastructure and business expansion initiatives that take advantage of the synergistic effects of consolidation. We also intend to continue actively incorporation solution related operations for our business customers and aim to achieve 1,000 billion yen in sales for NTT Data. With regards to the next-generation network, NTT will begin field trials in December 2006 based on the roadmap set forth in the NTT Group's Medium-Term Management Strategy. The field trials will be conducted with the participation of information home appliance vendors, Internet service providers, and telecommunications carriers, and they are expected to lead to the development of a variety of video communication and information distribution services as well as services using information home appliances. In light of the temporary connection problems experienced by users of Hikari Phone services, NTT has made efforts to ensure that the reliability of the next-generation network is given the highest priority. NTT will make every effort through these activities to raise the corporate value of NTT Group. NTT's consolidated projections for the fiscal year ending March 31, 2007 are as follows: Operating revenues projected to reach 10,800.0 billion yen (an increase of 0.5% from the previous year). Income before income taxes projected to amount to 1,175.0 billion yen (a decrease of 10.0% from the previous year), while net income is expected to reach 500.0 billion yen (an increase of 0.3% from the previous year). NTT expects to declare dividends of 8,000 yen per share of common stock for the full fiscal year ending March 31, 2007. |
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Note |
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| The forward-looking statements and projected figures concerning the future performance of NTT contained in this interim 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 forward-looking statements and projected figures contained in this report. | ||
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