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CEO Press Conference

November 6, 2015 (Friday)

Financial Results for the Six Months Ended September 30, 2015
The State of Fixed-Line Telephone Services Going Forward

Hiroo Unoura, President, CEO
Also in attendance:
Hiroshi Tsujigami, Senior Vice President, Director of Corporate Strategy Planning Department
Takashi Hiroi, Senior Vice President, Director of Finance and Accounting Department

Photo of CEO Press Conference

The following are the key points of the comments given at the Press Conference.

(Hiroo Unoura, CEO)

First I would like to explain the financial results for the three months ended September 30, 2015,
the highlights of which are as follows.

Operating revenues increased by 4.0% (¥215.3 billion) year-on-year, the first half registering the highest ever sales for the sixth consecutive year, thanks to the growth of overseas business as well as increased domestic revenues due to a revenue increase from NTT DOCOMO’s Smart Life and SI businesses. Operating income increased by 24.1% to ¥733.5 billion year-on-year thanks to effective cost control in the regional communications business and the mobile communications business. In the first half it had registered a decline for 4 consecutive years until the announcement of today’s earnings.

As for our global cloud services, they are growing steadily. Overseas sales increased by ¥182 billion year-on-year to ¥929.5 billion, accounting for 16.6% of consolidated sales, up 2.7 percentage points year-on-year, showing steady growth. Also, overseas operating income which had been set forth as a target in the “Towards the Next Stage 2.0 ” increased by ¥5.4 billion year-on-year, thus marking a steady accumulation of income.

Photo of CEO Press ConferenceAs for our efforts to enhance the operating revenue from the network services business, the user base of mobile and fixed broadband services is growing steadily. In the mobile services business, net increase amounted to 1.9 million subscribers, a 60% year-on-year increase, thanks to good sales of the data plan for the use of the second tablet. Net increase for FTTH amounted to 320,000 contracts. It is to be noted that net increase for the Hikari Collaboration amounted to 2.08 million subscribers, including 0.27 million new subscriptions, bringing the accumulated number of subscribers to 2.35 million. The operational deficiencies which affected NTT East and West at the start of the provision of services have already been resolved. Also, the number of firms for the Hikari Collaboration at the end of October has significantly expanded to about 200 companies, with an increase of about 60 companies in the last three months, and I believe the conditions have been set for an increase in subscribers.

As for Wi-Fi, companies and local governments are actively introducing it as a powerful tool of their own information services, and the number of area owners at the end of September has increased by 93 from end of the last FY, reaching a total of 248 owners, marking a steady expansion.

In addition, cost reduction in the fixed-line/mobile access network has been progressing steadily with an achieved cost reduction of ¥225 billion year-on-year.

In the course of the announcement of “Towards the Next Stage 2.0, ” I mentioned that, making an opportunity of 2020, we will accelerate the transformation into the B2B2X Model of the NTT Group business in order to guarantee the sustainable growth of our domestic businesses. In the second quarter, following our alliance with Panasonic Corporation, we aim to work together with Hitachi, Ltd., to contribute to regional revitalization by supporting the development and construction of a safe, secure, comfortable and efficient urban infrastructure utilizing ICT, and we presented the business partnership on October 1. In addition, after a similar agreement in the past with Fukuoka city, we concluded the “Comprehensive partnership agreement Sapporo city-NTT Group” with the city of Sapporo with the aim of expanding our business domain by working together with government and other companies to address a variety of social issues in the region with the use of ICT.

As for shareholder returns, we conducted the stock repurchases announced in the Financial Results for the first quarter and by October 1 we had acquired 21 million shares for a total of ¥93.6 billion. In addition, at Board of Directors meeting today, we’ve agreed to the retirement of treasury stock. As a consequence of the retirement of the current treasury stock, the government will end up owning more than one-third of our shares. Since the number of shares held by the government will amount to about 59 million, as more than one-third of the total, I believe they will make the decision to sell in the future. IF budgeting is scheduled for this year’s supplementary budget or next year’s budget and the government decides to sell, we would like to respond with stock repurchases.

The outline of our consolidated financial results is as I previously reported and now I would like to go over the quarterly net income. The quarterly net income, due to the increase in the operating income and to the effect of tax rate reductions following the revision of the tax system, increased by 30% year-on-year to ¥377.3 billion, marking an increase of ¥87 billion.

Next, I would like to talk about the situation in each individual segment.

For the regional communications business, even though the declining operating revenue trend persisted, thanks to reduced marketing costs, a decreased discount on FLET’S Hikari, as well as reduced depreciation costs due to investment efficiency, operating income increased by ¥76.3 billion year-on-year, an all-time record.

In the long distance and international communications business, operating revenue increased by ¥147.3 billion, marking a 15.5% year-on-year increase, due to the steady growth of the overseas business. Operating income decreased by ¥8.8 billion year-on-year primarily due to an expansion of operations following an increase in sales of Dimension Data’s existing business and an increase in up-front expenses towards growing segment. As for the overseas business, in the medium-term management strategy announced last spring I had mentioned our efforts to improve profits in the medium term.

In the mobile communications business, operating income increased by 15.9% year-on-year (¥63.4 billion), thanks to the fact that operating revenue has increased under the influence which the mobile communications service operating revenue which had been experiencing a year-on-year downward trend in the past few years has turned positive in the second quarter, due to the continuously improving MNP trend and the reduced negative impact of the new rate plan, and which the Smart Life business has also become very strong and, and also thanks to cost-reducing efforts such as improved investment efficiency, etc. Recovery from the ¥100 billion negative impact caused by last year's introduction of the new rate plan has now been achieved.

In the Data Communications Business, operating income has increased by 38.6% year-on-year (¥10.6 billion) due to an increase in sales and a reduction of unprofitable projects.

Next, I would like to go over the business forecast.

As for the business forecast, both operating revenue and operating income have been revised upward based on increased revenues and profits in the first half. Thanks to an increase in overseas sales as well as increased revenues in the Smart Life sector and the domestic SI operation, we are now aiming for an operating revenue of ¥11.4 trillion, a ¥50 billion increase on the initial forecast and an another all-time record.

As for operating income, since cost-control expenses in all segments centered around the regional communications and mobile communications businesses had been held to the initial plan, it has been revised to ¥1,250 trillion, a ¥50 billion increase over the initial prediction, marking a ¥165.4 billion year-on-year increase.

Moreover, net income for the current period has been revised to ¥655 billion, a ¥25 billion increase on the initial forecast, as a consequence of the increase in operating income. As a result, EPS is expected to reach ¥311, a ¥13.5 increase on the original forecast. The current fiscal year is listed as a major target year in the last mid-term management strategy announced in November 2011. We expect that one of the major goals contained there, “ EPS growth of 60% or more (compared to March of FY 2012),” will be substantially exceeded. Furthermore, this is the first fiscal year of the new medium-term management strategy, “Towards the Next Stage 2.0, ” which was announced in the spring of this year, and I believe we’re off to a very strong start.

This will be all for the explanation of the financial results.

<The State of Fixed-Line Telephone Services Going Forward>

Photo of CEO Press ConferenceIn following, I will explain about “the future of “fixed-line telephone services” in order for us to continue providing “fixed-line telephone services” on a sustainable base.
In the spring of this year, I mentioned as medium-term challenges Reconsidering “Universal Services” and “General outlook on PSTN Migration” Today, with this address titled “The future of “fixed-line telephone services” I will give an explanation focusing on what’s going to happen to fixed-line telephone services in the future.
The gist of my address will be that we want to continue providing “fixed-line telephone services” as much as possible. In the past I have received requests for interviews on the subject from many of you and I said I would like to talk about it comprehensively. We have no intention to terminate “fixed-line telephone services.” Our idea is to make the metal phone IP-based. All users will be able to use it in its IP form without having to do anything. Before I start explaining, I would like to ask you not to write articles that can encourage fraudulent marketing by saying that something is needed, when in fact it will be possible to use phones as they are.

The “fixed-line telephone services” that you are currently using, will be migrated to the IP network step by step. This means making the current metal phone IP-based. The current “fixed-line telephone services” consist of the multiple layers of local switch, tandem switch, signal transfer switch, and interconnection switch. Of these switches, the switch and the signal transfer switch are expected to reach their maintenance limit somewhere around 2025. After presenting “General outlook on PSTN Migration” in 2010, consultations started with the related operators focusing on this point, and this has been the extent of progress of the transition from PSTN to the IP network until now. It should be noted that, at the time, someone mistakenly thought that metal phones would entirely change to the optical but metal phones will be made IP-based so as to be used as they are.
The “fixed-line telephone services” that you are currently using, will be successively migrated to the IP network, but the basic voice services will still be available. Also, no additional on-premises installation will be required. We will ensure that metal phones can be used as they are. As for the basic monthly charge, we would like to keep it as much as possible on a level with current fees. If the number of users were to decrease dramatically, I can’t rule out that a revision of basic monthly charge will be required, but it is way too early to tell. As for call rates, by switching to IP, if the number of users will remain in the present order, I believe it will be possible to introduce a fare system easier to use than conventional pricing based on distance and time. What pricing system to use will become a topic of consideration in the immediate future. Our idea is to switch to IP without having to raise current fees.
In order to maintain the “fixed-line telephone services” without adding additional burden to our customers, it will be necessary to revise several service features as well as traditional competition rules. Let me give you as examples something I mentioned as issues in “General outlook on PSTN Migration”: what to do about the switches of NTT East and West which function as hubs for the interconnection of major operators? And what to do about the My Line feature? What to do about the database features related to the number portability of “fixed-line telephone services” for which NTT East and West were responsible? All these issues were brought up as challenges five years ago. Since then we had many discussions with the companies involved but, in spite of a partial agreement on some issues, most of the major issues are still pending. However, I think that it’s now the time to steer things in one direction. Interconnection is not something to be dealt with by NTT East and West alone, it also carries the problem of what to do with the features of the other partner companies. This kind of problem is not compatible with the problem of an IP migration which provides the same features and quality as before without inflicting any burden to customers. There will definitely be costs to pay. Our stance is to carry on IP migration in a simplified form which won’t include certain features. In the course of discussions with all the other operators, several problems regarding rules have also emerged and a review of the Ordinance of the Ministry of Internal Affairs and Communications is expected. In the future we would like to hold discussions with the operators involved and the Ministry of Internal Affairs and Communications in order to overcome equipment limitations while minimizing the impact on all users of “fixed-line telephone services.”
As to when to implement the IP migration, we would like to set the X-day sometime between the end of 2020 and 2025. The IP migration of the tandem switches or signal transfer switches is not something that can be done all at once; it will take 3-4 years, possibly 5. However, if the Kyushu section, for example, switched to IP, with the traditional method costs would increase and users would be inconvenienced since PSTN-specific features would have to be provided. Instead, once the IP migration starts in one area, we would like to implement all at once the revision of the fare system and of the other aspects. After that, we believe that sequential IP migration of the switches in other areas will become an inevitable process. Also, several preparations are required before the X-Day which is expected to fall between 2020 and 2025. I’m thinking about an agreement on the IP network and on IP network interconnection rules, technical developments required to make IP devices as inexpensive as possible, etc. Even if the implementation period of the IP migration is still a long time ahead, a definite direction should be set and definite conclusions should be reached as soon as possible. By next summer we would like to have decided the general direction and to have started preparations for dealing with individual issues. I obviously think we’ll need to collaborate with other operators and the Ministry of Internal Affairs and Communications on a variety of issues, and I hope that clarifying our stance will facilitate the progress of these discussions.
Lastly, “fixed-line telephone services” will not be definitely eliminated. And we will not place a burden on users. Once again I would like to ask every reporter not to present the news so that it can be connected to fraudulent marketing.

Related information
Financial Results for the Six Months Ended September 30, 2015  
The State of Fixed-Line Telephone Services Going Forward