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CEO Press Conference

May 13, 2016 (Friday)

Financial Results for the Fiscal Year Ended March 31, 2016 and Financial Forecast for the Year Ending March 31, 2017

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 core points of the comments given at the press conference.

(Hiroo Unoura, CEO)

<Financial Results for the Fiscal Year Ended March 31, 2016 and Financial Forecast for the Year Ending March 31, 2017>

I would like to explain the Financial Results for the Fiscal Year Ended March 31, 2016 (FY2015) and to provide the Financial Forecast for the current fiscal year.
The highlights of the Financial Results for FY2015 are as follows.

Operating revenue grew by ¥445.7 billion to ¥11,541.0 billion, which was an increase of 4.0% year-on-year. This was the sixth year of positive growth and the highest operating revenue ever recorded. This increase was created by growth in overseas operations, as well as increased revenues in domestic business, namely the mobile and SI businesses.

Operating income grew by ¥263.6 billion to ¥1,348.1 billion, which was an increase of 24.3% year-on-year. This increase was created by cost-efficiency measures implemented in the regional communications business, increased revenues of mobile communication service in the Mobile Communications Business, and increased profits in the Smart Life business and thorough cost-cutting measures in business operation. Two years ago, financial results suffered greatly after the introduction of NTT DOCOMO’s new rate plan, but after recovering from this setback income has now improved sharply. Income passed the ¥1,300 billion mark for the first time in eight fiscal years, since FY2007.

Current net income grew by ¥219.7 billion to ¥737.7 billion, which was an increase of 42.4 % year-on-year. This increase was created by growth in operating income, as well as by tax effects such as the recording of deferred tax assets in relation to local taxes at NTT West.

In global cloud services, cloud services and security were the triggers for an expansion in cross-selling orders, which was achieved through collaboration between group companies. In the fourth quarter, large orders were received from manufacturing and other customers in Europe and the United States, and total cross-selling orders received in FY2015 reached approximately US$440 million.

As a result of these efforts, overseas sales grew steadily by ¥309.4 billion to ¥1,894.8 billion. Overseas sales accounted for 16.4% of consolidated sales, up 2.1 points on the previous year. Overseas operating income grew by ¥11.8 billion year-on-year and continues to increase steadily.

In network services, we are steadily expanding our user base in both our mobile and fixed-line broadband service.

In mobile services, net additions grew by 1.3 times year-on-year to reach 4.37 million subscribers as a result of efforts to promote multi-device contracts using tablets as a second device. The new rate plan also continued to grow, reaching 29.70 million subscribers for net growth of 11.88 million subscribers.

At FTTH, combined net additions at NTT East and NTT West reached 540,000 subscribers. The Hikari Collaboration Model gained 820,000 net new additions, and the cumulative number of subscribers reached 4.69 million. There were 400,000 new lines in the fourth quarter (January - March). This was 1.5 times the number of new lines achieved in the third quarter (October - December) and steady growth continues to be achieved.

There has been strong growth in Wi-Fi services, and the number of area owners working with NTT Group has grown by 2.4 times since the end of the last fiscal year to reach 393 area owners. This reflects the active work on the part of businesses and local governments to implement Wi-Fi as a powerful tool for their own information services.

Regarding shareholders returns, in the last fiscal year we acquired 21.00 million treasury shares for ¥93.6 billion. The dividend was increased by ¥20 year-on-year to ¥110 per share per annum.
I will give an explanation on this year’s shareholders returns shortly.

As I explained in the summary of the consolidated financial results, NTT Group is aiming to grow our EPS (earnings per share). EPS rose by ¥113.49 to reach ¥350.34, which was a 47.9% increase year-on-year.

Next, I will explain the results for each of our individual business segments.

In the regional communications business, voice revenues continued to decline. However, reductions in marketing costs and decrease in depreciation through more efficient capital investment helped us to increase operating income by ¥96.1 billion, for a 56.9% year-on-year increase.

In the Long Distance and International Communications Business, operating revenues grew by ¥252.3 billion, an increase of 12.6% year-on-year, as the overseas business recorded steady growth. Of the increased revenue, ¥187.6 billion is accounted for by income from Dimension Data. Operating income fell by ¥16.9 billion, down 14.9% year-on-year. Factors included increased operations associated with expanding sales in existing businesses and increased anticipatory costs in growing segment in Dimension Data, and impairment costs at Solutionary, Inc., a security service company based in North America.

In the Mobile Communications Business, mobile communications services achieved increased revenues. Results were strong in the Smart Life field, which helped to increase operating revenues. Cost-efficiency measures were implemented, including reducing network costs achieved through more efficient investments. As a result of these efforts, income increased by ¥152.6 billion on a consolidated basis, up 24.0% year-on-year. A healthy recovery is being achieved after the major decline in income recorded in the Fiscal Year Ended March 31, 2015 (FY2014).

The Data Communications Business achieved an increase in income of ¥26.4 billion on a consolidated basis, up 30.5% year-on-year. This was the result of sales growth as well as an improved cost rate.

Next, I will discuss the Financial Forecast for the Fiscal Year Ending March 31, 2017 (FY2016).

Photo of CEO Press ConferenceRegarding operating revenues, until now the decline in income in the domestic business has been compensated for by growth in the overseas business. However, in the current fiscal year, the exchange rate effects of a stronger yen will mean that sales in the overseas business remain flat in yen terms. For this reason, a fall in revenues of ¥91.0 billion is forecast, down 0.8% year-on-year, to ¥11,450.0 billion.

The impact of the recently-announced acquisition of Dell’s systems business by NTT DATA has not been included in this forecast, but we intend to incorporate this impact once closing is completed. Unless exchange rates fluctuate sharply, it is expected that revenues will have started to increase again by the end of the fiscal year.

Regarding operating income, an increase in income of ¥81.9 billion is forecast, up 6.1% year-on-year, to ¥1,430.0 billion. This is the result of growth led mainly by the Mobile Communications Business and the ongoing implementation of cost-efficiency measures.

As of the current fiscal year’s financial forecast, the depreciation method will be changed from the declining balance method to the straight line method. As a result of this change, depreciation costs will fall by ¥480.0 billion. However, ¥460.0 billion of this amount is planned for use in mitigation measures in later fiscal years. Accordingly, the profit plan for the current fiscal year includes +¥20.0 billion to cover the difference resulting from the change in depreciation method. Excluding this amount, operating income is forecast to be ¥1,410.0 billion.

Current net income is forecast to increase by ¥12.3 billion, up 1.7% year-on-year, to ¥750.0 billion. The growth in current net income appears low in comparison to the 6.1% increase in operating income. However, this apparently low growth can be explained as a reaction to tax effects in the previous fiscal year. When transient causes in the previous fiscal year are excluded, effective current net income grew by 6.7%, which is a similar level of growth to operating income.

As a result of the above, EPS is forecast to grow by 12.66 yen, up 3.6% year-on-year, to 363 yen. This takes into account the acquisition of government-owned treasury stock, which will be explained later.

Next, I will explain the forecasts for each of our individual business segments.

In the Regional Communications Business, revenues have continued to decline as a result of the fall in voice revenues, but we plan to increase operating income by ¥25.0 billion, up 9.5% year-on-year, to ¥290.0 billion as a result of ongoing marketing cost reductions and more efficient capital investments.

In the Long Distance and International Communications Business, we forecast an increase in operating income of ¥13.3 billion, up 13.8% year-on-year, to ¥110.0 billion as a result of returning to a year-on-year increase in income. This is the result of growth in the overseas operations of NTT Communications, which is our key data center business, and the profit contribution made by the IT outsourcing business, in which the Dimension Data business has invested anticipatory costs.

In the Mobile Communications Business, despite the impact of lower charges, we forecast an increase in operating income of ¥116.6 billion, up 14.8% year-on-year, to ¥905.0 billion. This is the result of increased revenues from the mobile communications service achieved by slowing the fall in revenues from monthly support services, an ongoing increase in revenues from the DOCOMO Hikari and Smart Life businesses, and income arising from the change in depreciation method.

In the Data Communications Business, despite increased costs from supporting the expansion in overseas operations, we forecast an increase in operating income of ¥7.3 billion, up 6.4% year-on-year, to ¥120.0 billion. This is the result of increased domestic and overseas sales and further improvements to the cost rate in the domestic business.

Next, I will explain shareholders returns.

In relation to shareholders returns in the Fiscal Year Ending March 31, 2017 (FY2016), please allow me to explain the details of the resolution passed by the Board of Directors today. Firstly, regarding the acquisition of treasury stock in FY2016, as a result of NTT retiring 177 million shares of treasury stock in November 2015, it became possible for the government to sell 59 million shares in NTT, and this has been included in this year’s budget. We intend to buy a maximum of ¥350 billion of government stock. Regarding the dividend for FY2016, we plan to increase the interim dividend by ¥10 to ¥60 and to pay an end-of-term dividend of ¥60 for an annual dividend per share of ¥120.

Next, I will explain the revisions implemented in preparation for the IFRS introduction.

As I have just explained in respect to the Financial Forecast, from FY2016 the depreciation method will be changed from the declining balance method to the straight line method in preparation for the introduction of IFRS in consideration of the globalization of the business. Again, in FY2016 depreciation costs are forecast to fall by ¥480.0 billion and we plan to use ¥460.0 billion to retire equipment and implement other measures aimed at reducing the future burden.

Furthermore, in consideration of the fall in NTT share-trading volumes in the United States, we are planning to delist from the New York Stock Exchange and terminate our registration with the U.S. Securities and Exchange Commission, with a view to IFRS introduction.

This concludes my explanation of the Financial Results and Financial Forecast.

<Revision of Medium-Term Financial Targets>

Next, I will explain the revisions to our Medium-Term Financial Targets.

One year has now passed since we announced our Medium-Term Management Strategy “Towards the Next Stage 2.0 ”. In the intervening period, we have made steady progress in reforming our business structure and achieved a solid start. In view of this situation, we have reviewed some of our medium-term financial targets for the Fiscal Year Ending March 31, 2018 (FY2017).

Firstly, regarding EPS (earnings per share), in FY2015 EPS exceeded ¥350. However, when exceptional factors such as the recovery in profits at NTT West and tax effects from the liquidation of mmbi at NTT DOCOMO are excluded, the effective EPS was ¥334. Moving forward, we intend to continue implementing and strengthening “Towards the Next Stage 2.0 ” initiatives at the same pace. We plan to achieve a real EPS figure of at least ¥350 through real growth in profits and capital efficiency improvements realized through the acquisition of treasury stock. However, in view of the fact that the change in depreciation method will lead to increased profits, we have reviewed our EPS growth target to at least ¥400.

In respect to overseas sales and operating income, we have kept the targets unchanged.

Furthermore, regarding the promotion of more efficient capital investments in the domestic networks business, we have kept the targets unchanged. However, we will further strengthen measures to ensure we meet the targeted reductions of at least ¥200.0 billion, including additional capital investments made to reduce the burden in later fiscal years that will result from the change in the depreciation method.

Regarding cost reduction for fixed/mobile access networks, as a result of reductions to marketing costs and more efficient capital investments, we expect to achieve the original target of at least ¥600.0 billion of reductions in the current fiscal year, which is one year earlier than originally planned. Moving forward, we intend to implement thorough measures with a view to achieving further cost reductions, including thorough streamlining of work processes, with the target of achieving an additional ¥200.0 billion in reductions excluding the impact of the change in depreciation method, for total reductions of at least ¥800.0 billion.

<Vitalization of local economies and creating a B2B2X business model>

I would now like to speak about our contribution to the vitalization of local economies, which forms part of our efforts to create a B2B2X business model.

Please allow me to introduce a few examples of our “Smart Sports” initiatives, through which we aim to use the opportunities presented by 2020 in order to promote athletes, spectators, and local communities through sport, and our “Smart Communities” initiatives, through which we aim to revitalize industry and improve government services by using local governments as hubs for promoting the utilization of big data and open data.

Firstly, I would like to speak about creating a “Smart Sports” business model and using stadiums as a way of vitalizing local economies. NTT Group will “smartify” Nack5 STADIUM OMIYA. The stadium is home to J1 soccer team Omiya Ardija, which is owned by NTT Group. The goal is to smartify Nack5 STADIUM OMIYA into a state-of-the-art stadium and strengthen digital marketing. We aim to achieve a full lineup of best practice from Japan and overseas, in consideration of the stadium environment and regional characteristics.

More specifically, we will develop video services and CRM (Customer Relationship Management). In addition to multi-angle video, we will take on the challenge of offering player-following options and video edited for 3D. As part of CRM, we will develop accounts for fans, supporters and spectators, and develop a platform to allow users to make payments and collect points in partnership with local shopping districts. We will evolve digital marketing to provide a sense of affinity with the Ardija players and the local region, not just on match days but at other times. We plan to launch this service in three stages this year.

NTT Group will promote the smartification of sport not just in Japan but also overseas. At events such as The Open Championship in the United Kingdom, the Tour De France, and the Indy 500 in the United States, we will provide spectators and viewers with real-time data about contestants and the state of play. In Japan, in addition to pursuing similar initiatives at the Alpine Ski World Cup and World Triathlon Series, which is to be held this weekend in Yokohama, we will attempt to gather and share information about universal design at the Japan Walk, an open walking event for both disabled and able-bodied participants which is to be held in Tokyo in late May.

At Niconico Chokaigi, which was hosted by DWANGO on April 29 and 30, we worked alongside the Shochiku Company to take on the challenge of using video and sound technology to produce a new kabuki production in the “Super Kabuki” style. We took on the challenge of taking video and sound performance to the next level by using immersive telepresence technology “Kirari!” I spoke about at the R&D forum hosted in February, and combining tradition with new technology. I visited the venue in person on the day, and saw us meet the challenges of making a three-dimensional Hatsune Miku object sound as though she was really talking, and Shido Nakamura appear to split into four people and fight his enemies. We will continue to use these experiences to provide feedback as part of efforts to utilize know-how of the expressive arts in the field of entertainment, as we set about welcoming visitors in the lead-up to 2020 with moving and novel experiences.

Next, I will give some examples of using local governments as hubs for the use of big data and open data.

NTT group concluded a comprehensive partnership agreement with Fukuoka City in April 2015 and with Sapporo City in September 2015.
In order to allow Japan’s regions to enjoy the full economic benefits of the large increase in inbound tourists, in addition to developing the Wi-Fi environment and multilingual support, we are supporting digital marketing including the provision of information services such as coupons. We will promote the visualization of hidden value by using behavioral analysis to identify differences in behavior patterns by nationality and uncover “hot spots” in which overseas visitors display more interest than the Japanese. NTT Group will contribute to improving the telecommunications environment and vitalizing regional economies through the realization of “Japan Wi-Fi”, which is a free app for one-time Wi-Fi authentication, and by providing the “Japan Travel Guide”, which introduces tourist attractions, restaurants and shopping spots around Japan.

Moreover, we will collect and analyze regional data in the form of big data in a wide range of fields in addition to tourism, including transport, commerce, energy, health and agriculture. As part of these efforts, we plan to use local governments as hubs for improving regional government services, promoting a variety of industrial fields, and contributing to the prevention and mitigation of natural disasters. We will strengthen our initiatives in providing “backstage support” for Fukuoka City and Sapporo City, with which NTT Group has concluded comprehensive partnership agreements, as we set about creating a B2B2X business model “from the regions and from Japan” using big data and open data and overcoming social and global challenges. As a united group, we will use these initiatives to make a contribution to the realization of the 600 trillion yen GDP target that has been set out by the Japanese government.

Photo of CEO Press ConferenceLastly, I would like to announce that we have concluded a contract with tennis player Kei Nishikori to appear in commercials etc. as the icon of NTT for 2020.

We plan to promote the Olympics and Paralympics in partnership with Kei Nishikori, who has played tennis around the world and is extremely popular with people from a wide range of backgrounds. What’s more, we plan to accelerate our global business developments alongside a player who continues to take on bold challenges.

This concludes my explanation.

Related information
Financial Results for the Fiscal Year Ended March 31, 2016 and Financial Forecasts for the Fiscal Year Ending March 31, 2017