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Nippon Telegraph and Telephone (NYSE:NTT)

2013 Earnings Call

May 10, 2013 5:00 am ET

Executives

Kazuhiko Nakayama

Hiroo Unoura - Chief Executive Officer, President and Representative Director

Hiroki Watanabe - Chief Financial Officer, Chief Information Officer, Senior Executive Vice President and Representative Director

Analysts

Hitoshi Hayakawa - Crédit Suisse AG, Research Division

Daisaku Masuno - Nomura Securities Co. Ltd., Research Division

Tetsuro Tsusaka - Morgan Stanley, Research Division

Ikuo Matsuhashi - Goldman Sachs Group Inc., Research Division

Daisuke Oshidari

Yoshiyuki Kinoshita - BofA Merrill Lynch, Research Division

Kazuhiko Nakayama

[Japanese] Well, thank you very much for waiting, ladies and gentlemen. First of all, I would like to thank you all for taking your time to attend this meeting to report the financial results for the fiscal year ended March 31, 2013. I shall be serving as the moderator. My name is Nakayama from the IR Department.

First, I would like to introduce to you today's attendees. Representative Director, President, CEO, Unoura; Representative Director, Senior Executive Vice President, Watanabe; Director, Senior Vice President, in charge of Corporate Strategy and Planning, Tsujigami; Director, Senior Vice President, Finance and Accounting Department, Sakai.

Next, I want you to confirm whether you have the complete package of materials. There are 2 materials: A slide presentation, a copy titled Financial Results for the Fiscal Year ended March 31, 2013 and the Financial Forecast for the Fiscal Year Ending March 2014; and the second one is a thick white booklet titled Supplementary Data.

Now regarding forward-looking statements and projected figures contained in the materials and referred to during presentation and Q&A session, please notice and read a written disclaimer in the first page of the presentation material. And today's presentation will be live broadcasted on the company's IR website, and recorded video will be available at a later date, on demand.

First, Mr. Unoura will give you a presentation on the overview of the financial results and the financial forecast of the coming year. And then we would like to entertain questions from the floor.

Hiroo Unoura

[Japanese] Ladies and gentlemen, thank you for joining us despite your busy and demanding schedule. We announced our meeting to our management strategy back in fall of 2012. This is the first presentation since then. So after the 6-month period, although I cannot say there has been substantial change, perhaps, you might feel as though there might be some changes and I hope that I'll be able to get your feedback later on. So without further ado, I would like to present to you the financial results for the fiscal year ended March 31, 2013. Please turn to page 2 of your presentation material.

[Japanese] I would imagine that these numbers are so evident so I would like to be very brief in my presentation. As far as our operating income is concerned, we were able to achieve JPY 1.2 trillion, which is the target revised in fall of 2012. To be very candid, DoCoMo had to revise downwards, so their operating income target by JPY 80 billion, and that has directly resulted in JPY 80 billion downward revision in entity consolidated operating income. And there were anticipations about possible write-downs back then. So therefore, we were wondering whether or not we would engage people to reach this target of JPY 1.2 trillion back then. But there were various efforts made the group of companies in order to secure profit, at the end of the day, and again to be very candid with you, we managed to achieve this JPY 1.2 trillion operating income target. So I think we've been able to achieve the first commitment that we made to you back in fall of 2012.

Now as far as topics are concerned. As for overseas sales, this increased by USD 600 million and reached USD 12 billion. I said this very casually. But then the target was initially USD 13 billion, so I suppose it could be a shortfall of sort. But it's just that in terms of our overseas sales, some of them are U.S. dollar denominated -- about 20% are U.S. dollar denominated. The other part are all based on local currency. So they have to translate U.S. dollars. And when the dollar is strong, it cannot grow. A couple of years ago, it was strong yen. And in certain cases, because the target was so stretched, we actually set them at U.S. dollars denomination. And we hope to continue on with this effort. Now despite the difficulties our user base is expanding.

As for shareholder return. As we announced back in September of 2012, we actually carried out JPY 150 billion share repurchase that we announced back in September. So at the end of the day, as you know, as far EPS growth target is concerned, we're aiming for more than 60% growth, and this time around, we were able to achieve EPS growth of 18%. So this shows a very steady growth towards our target. It's been 6 months since the announcement of the plan back in fall of 2012, I can say that we are off to a very positive start.

Let me now turn to page 3. [Japanese] Now this shows the highlights of consolidated results. As you can see, we -- operating revenue grew 3 years in a row, however, operating income declined. As far as operating revenue -- correction, as far as operating income is concerned, in the mobile communications segment, because of expanded impact from the monthly support program, and this will be shown on the following page, there is a decline of JPY 40 billion. However, as for telecommunications segment and long distance and international communications segment, they're operating income grew as a result of their efforts. So on a consolidated basis, our operating income was JPY 1.2 trillion. This represents a mere JPY 21 billion decline on a year-on-year basis. As far as net income is concerned, this was JPY 524.1 billion. Again, as you're familiar, on a year-on-year basis, there is change in the corporate tax rate, so therefore, we had a year-on-year increase of JPY 56.4 billion in net income.

Next, let me turn to contributing factors by segment. Starting with regional communications business. We say the same thing every single year. But the net addition for FLET’S Hikari was 740,000 and this could not offset the decline in voice service revenue. So operating revenue for regional communications segment declined by JPY 106.6 billion. However, as a result of rigorous cost control, operating income actually grew by JPY 5.6 billion.

Turning to long-distance and international communications business. Operating revenue declined by JPY 20.7 billion. However, telecommunications worked to improve cost efficiency and also with the improved performance of NTT Plala, increasing the Hikari TV business, there was year-on-year increase of JPY 4.6 billion in operating income.

As for Dimension Data, because of advanced investment for cloud and currency, they're operating income declined by JPY 1.6 billion. However, the sales for Dimension Data, if you exclude the impact from currency, actually expanded by 6%.

As for mobile communications segment and telecommunications segment, there has been financial results presentations already.

As for data communications, there is shrinkage of unprofitable business and expanded overseas sales, so there was an increase of JPY 14.3 billion in their operating income at data communications segment.

Next, let me now share with you the summary of forecast for fiscal year 2013. For this fiscal year, we are planning for increase in both operating revenue and operating income. As I mentioned, when we announced the medium-term management strategy, this is the year where we take the first step towards recovery to growth. As for operating revenue, due to growth in overseas sales by group companies and also due to expansion of DoCoMo's handset sales, operating revenue is expected to increase by JPY 300 billion year-on-year. And for the first time in 10 years, we are aiming for JPY 11 trillion in operating revenue. Of course, there's the impact of the currency, I have to admit. Later on, I would like to explain to you the impact of currency when we talk about our overseas sales.

As for operating income, NTT Communications, NTT Data, DoCoMo and Dimension Data are expanding their business in growth areas. So we are seeking increase of JPY 28 billion on a year-on-year basis and we will aim to JPY 1.23 trillion in consolidated operating income. So at least we want to go beyond the level which we saw 2 years ago.

As for NTT East and West, as you are aware, the demand for consumer fiber to the home services are reaching a plateau. On the other hand, as I mentioned in the previous press conference, business potential for SMEs are still strong and both NTT East and West feel that there's a very strong potential in the segment so, therefore, we want to organize the marketing structure targeted toward these businesses and also we'll make -- we will pursue alliances to reduce relevant cost. So through these efforts -- well, it may take some time before substantial improvement in the profitability for NTT East and West, but we believe that. We will continue to work during the fiscal year to maintain and secure our revenue and profit for NTT East and West in this area.

As for net income, and again, this was already announced, but there is impact from the redevelopment of Otemachi 2-chome district, the site of where the NTT Holding Company is located. And so with this rate, we are anticipating increase of JPY 60.9 billion. We're anticipating net income of JPY 585 billion.

[Japanese] Now I shall be moving on to the next topic regarding the mid-term management strategy and I would like to report to you the progress to date of the financial targets assessed in this strategy.

Slide #6, please refer to Page 6 of the slide. Sorry, my eyesight is weakening, so it is rather difficult for me to read the small letters. But anyway, the progress last fall, I think I -- we gave you all the available information in terms of the first stage. What we did is something I would like to report to you. The first topic is overseas sales. Starting this fiscal year, the overseas sales calculated, excluding the internal transaction figures you see here, look slightly different from those shown to you last year. Overseas sales of our corporation is impacted by the exchange rates, so it will exceed in terms of amount 10%. So starting with the new fiscal year, it will be subject to disclosure, so that's why we thought we should be -- we should present as accurate figure as possible.

Overseas sales reached JPY 12 million during the fiscal year 2012, an increase of JPY 600 million year-on-year. In the coming year ending March 2014, we are targeting at USD 13 billion, which means an increase of USD 1 billion year-on-year. It is rather difficult to explain to you the reasons behind. The exchange rate impact is such that if we calculate that figures based on the yen, then the number will be JPY 1.2 trillion, reaching more than 10% of the consolidated operational revenues. So it means, in other words, a 12% level growth was recorded. So yen-based, if we apply that in March 2014, JPY 1.2 trillion will be the target and the percentage of the consolidated revenues will be from -- will grow from 10% to 11%, JPY 246 billion increase will be recorded. This is mainly because this includes the exchange gains of JPY 140 billion. So the organic growth and M&As were other contributors.

But as I said earlier, cloud services, as of today, are still in preparation not fully developed yet and many companies -- every company is making investment assets, for example, Dimension Data told me that they are asking for the expenditure to renew the staffing involved in the sales and marketing. So in that sense, as far as cloud is concerned, various preparations are right on target and making good progress. For example, NTT Communications, if I take their example, virtualization is to be offered on the portal site, so that the users themselves to again make use of such services. Including such approach, we are trying to reinforce the cloud service capability as a team NTT with all out efforts. So we are still making good preparations. But of course, we should not spend too much energy and time just on preparations. We have to achieve the results, good outcomes. So the sales revenues and profitability, we would like to address these 2 challenges. $2 billion in -- $20 billion target, I believe, will be achieved rather in the latter half. And we also have the target of the ratio of corporate sales to overseas sales to reach 37% to increase. And it will grow from 32% in this fiscal year just ended to the 37% in March 2014.

Next, I would like to talk you about the access and network related cost-reduction CapEx. West, East and DoCoMo, in fiscal 2012, achieved JPY 125 billion. In the new year, in March 2014, on cumulative basis, a JPY 330 billion reduction will be achieved. In March 2015, our target is set at more than JPY 400 billion reduction. In that sense, I think we are making very good start towards that goal. Both East and West and DoCoMo are saying that they will be able to make further reductions. I cannot disclose to you what numbers they are citing but when we announced the interim results, I would like to -- I hope that I can give you a different numbers, new numbers. Now the breakdown, the JPY 100 billion personnel cost and about JPY 70 billion facility related cost and other cost of JPY 160 billion. These are their breakdowns.

The DoCoMo, I'm sure, will be accelerating their reorganization and the East and West are making their very best effort. Among the questions I received, you -- some of you are asking for the figures by company. Yes, we can give you such numbers but among the group companies, we are planning to have a cooperation. So if that is the case, it's very difficult to analyze the order numbers by company. So personnel cost and depreciation expenses and on top of those, maybe going forward, we should give you more detailed numbers, the breakdown numbers. We are aware of that. But for this presentation, please understand that these are the numbers available at this point in time. It is [indiscernible] for us to give you very detailed numbers because there are counter-parties. So I think as of today, we are able to achieve various cost reductions in terms of procurement as well. So I can't give you the specific names of our counter-party, but any numbers available for you will be updated.

Now regarding the CapEx. In March 2013, in that year, DoCoMo LTE investment rather pushed up our CapEx to JPY 1.97 billion, which was an increase of JPY 23.4 billion year-on-year but in March 2014, this number will be down to JPY 1.87 billion. So this means a JPY 100 billion reduction year-on-year. This is our plan and all the group companies are working very hard to pursue efficiency -- improve efficiency, especially the East and West are very keen on simplification of network, including transit and access, and DoCoMo is following suit. And the major item I should mention, is that there was an investment project required for distribution of these facilities and disaster prevention. This investment project is coming to an end. So NTT East and West and DoCoMo together, these 3 companies together, there will be about JPY 120 billion cost reduction achieved -- CapEx reduction achieved. So as a result, CapEx to sales in March 2014, supported by the reduction of CapEx and the increase of the sales for the first time, will be improved to 17.0%. Of course, we really haven't reached the ultimate goal, but covering all areas of procurement and investment, we are determined to continue with our efforts of cost reduction.

Now the last slide refers the shareholders' returns and EPS. Now treasury stock share buyback in March 2013, we exercised JPY 150 billion share buyback. In the new year, in March 2014, in that fiscal year, we should be increasing this size to JPY 250 billion. We are always asked by you to disclose the plan by the fiscal year but our intention is to forefront or advance this plan and we already decided that, so that's why we increased the number to JPY 250 billion. But fortunately, our share prices are going on very well and the number of share buyback compared with the time we decided on JPY 250 billion, the number will be smaller. So share buyback of JPY 250 billion, when it is completed, then, as we have promised to you, it will mean that we will have a certain amount of treasury stock. So we have to think about how to deal with such treasury stock. I can't give you the details but the schedules regarding such process will remain unchanged. So our fore-fronting, advancement of the plan, that is something already agreed on. EPS in fiscal year March 2013, was JPY 432, so an increase of 18%. In March 2014, it would be JPY 503, so versus the fiscal 2011, it was an increase of 37%. But as you see in the footnote, the EPS of March 2014 reflects nonoperating income amounting to JPY 60 billion in relation to the Otemachi 2-chome redevelopment project. So excluding that, the EPS then will be JPY 471.

So this concludes my presentation report on the financial targets and progress in the medium-term management strategy. As I said last fall, I think we are taking a very steady step towards the recovery followed by growth. This concludes my presentation. Thank you.

Kazuhiko Nakayama

[Japanese] Thank you very much. We'd like to take your questions now. A microphone will be brought to you. When you ask your question, please kindly identify your name and affiliation. So we'd like to take your questions now, please raise your hand.

Question-and-Answer Session

Hitoshi Hayakawa - Crédit Suisse AG, Research Division

[Japanese] Credit Suisse, Hayakawa is my name. It's a very strong performance and I think you gave some very encouraging remarks about shareholder return and also very strong plans for increase in profit and revenue. So I'm looking forward to the stock price when the new week opens on Monday. Two questions, if I may. On a consolidated basis increase of JPY 28 billion in terms of operating income. To the extent that you are aware of, if you add all the subsidiaries, you can't reach JPY 28 billion. So which companies are part of this increase? So how this increase of JPY 28 billion in operating income on a consolidated basis come about? Please provide us with this disaggregation or breakdown. That's my first question. Second question. In relation to your cost reduction, you mentioned, JPY 80 billion and JPY 70 billion, altogether JPY 180 billion and also, JPY 180 billion for other expenses. So personnel JPY 70 billion, 80 billion in facilities, so the others seems to account for a very large proportion. Of course, cost reduction as a result of consolidation of bases will probably become evident toward the second half of this fiscal year. Is that included in the human resource cost or in other channel expenses? And also, what is the extent or the scale of impact from the consolidation of operational centers in NTT East and West? I would appreciate your comment on this point as well. And if I could ask additional questions sir. Recently, investors around the world raised this issue, the impact of avenomics [ph]. And the resale prices are increasing and there's talk about asset bubble. Since NTT has a lot of real estate, and actually because it's our own office, we have the former Akasaki [ph] branch office of NTT, which remains idle. A part of that is being used by operation called The Park Company [ph]. But as a result of the consolidation of your work centers, then you'll probably have a lot of idle branch offices. Now there might be some utility poles on the rooftop but do you have any plans for effective utilization of these idle properties? These are my 3 questions.

Hiroki Watanabe

I'll address your first question. JPY 28 billion increase in our operating income. How did that come about? Well you probably saw the results by each company, you'll find that each group company has shown improvement and for NTT Communications, on a nonconsolidated basis and also on a consolidated basis, will show improvement, inclusive that of subsidiaries and also DoCoMo, Data, will also show improvement. Data will show improvement by JPY 4 billion. Also, fiscal year 2012, there will still be impact of the earthquake. There was a extraordinary loss, but they will no longer be the case in fiscal year 2013. So we'll come close to this JPY 28 billion, but there are of course some variances that we have to be prepared for. So we will naturally make an effort to reach this JPY 28 billion increase in operating income. Second question?

Hiroo Unoura

As for as the consolidation of NTT East and West operations are concerned, what is the cost and to what extent will this take place? I think that was the gist of your question. Well, we will review the organization and we will consolidate the work. And through this, we hope that with lesser number of the headcount we'll be able to pursue operations. So that being the case, NTT East and West, their workforces always shrinking every single year but on top of that, we need to pursue further operational efficiency also through consolidation of work space, then cost pertaining to space can be reduced. So general expenses will also benefit from this. So in any event, as far as concrete numbers are concerned, we do not have them on hand, so I'm afraid I will not be able to give you detailed answers at this juncture. Thank you. Then let me offer my additional comments about operating income. Not just major subsidiaries but also NTT facilities, for example. Because of the boom of solar power, we are now the company that has the #1 capacity to install solar power generation. So their order taking and order placement is very strong at this moment. So it's not just solar power generation. Various companies and various local governments are actually coming to NTT facilities for maintenance work and also for system integration in relation to solar power. Also, NTTBP WiFi services. Last fiscal year, their sales doubled. And for this fiscal year, we anticipate doubling of their sales at NTTBP. So if you add all of these little elements and then for the group as a whole, we anticipate and we believe they'll be able to secure increase in operating income. Now JPY 180 billion in other expenses in terms of cost reduction. This is a plan which will kick in going forward. So if we announced half year results and full year results, we hope that we'll be able to provide you with more breakdown, more detailed breakdown, at that juncture, if possible. Well, I suppose this is being videotaped, but as far as marketing expense is concerned, this will be included in the cost reduction in relation to other expenses. So more efficient marketing will be pursued and various group companies will be reviewing their marketing expenses, so this will kick in, in the other elements -- in other segments, rather -- in other simulation to cost-reduction. And also, real estate. As for idle property, we will make attempt to have effective utilization of these properties. Some may be converted to parking spaces. As for NTT West, they have various ideas for innovative usage of available real estate. So effective utilization of real estate and the property, and the revenues that relate to that, we do anticipate. Now as far as consolidation of branch offices are concerned, actually, going forward, when we confer the potential migration from PSTN, this is going to be a major challenge. Now against that backdrop, the NTT central office building spaces can be shrunk, so how do we utilize that space? It means that we have a prime retail asset throughout Japan nationwide. It's not just about the buildings. We have underground facilities as well. So therefore, since we own underground facilities, the effective utilization of land will of course be limited. If we can actually transfer some of these assets, then I suppose that's probably possible. But before we can do that, I think it's going to be quite time-consuming. But we will pursue consolidation of facilities, but where do we place those consolidated facilities? We have to consider the most optimal location for the NTT Group. It may not be in the main center, in the urban centers, it might be outside the urban centers. So we are undergoing various considerations and studies at this moment. But it's not something that's going to become that widespread in a couple of years. So some of you are concerned, but I think we still have sufficient capacity and capability within our group.

Kazuhiko Nakayama

Yes, please, next question. Yes, gentleman in the center or the very front row, please.

Daisaku Masuno - Nomura Securities Co. Ltd., Research Division

Masuno from Nomura Securities. I have 2 large questions. One relates to the income. March '14 operating income you are expecting a 2% increase but the cost reduction involving access and network, if you look at March '14 only, maybe JPY 200 billion or something. So I think you are doing -- you are making very best effort. Both East and West and DoCoMo's operating income, I think you are planning it to be flat. So those measures aforementioned, whether they can contribute to the increase of income, that is my question. What kind of solutions can you think of? Now talking about the CapEx, there was JPY 100 billion reduction, but March '12, it showed some increase. So including all of these factors, so what kind of good ideas can be devised by DoCoMo and East and West. Regarding the growth into the future, overseas sales for this year, 130 -- $13 billion. So the March 2012 -- and so if you think about that target, in 3 years' time, you have to achieve $7 billion. So considering today's base of $1 billion, then how can you enhance that rate to $2 billion instead of $1 billion? Now the shareholders' returns, JPY 250 billion is the size. I think this is quite a huge amount but as I said, if you say -- can you explain, elaborate on what you meant about fore-fronting. So JPY 250 billion continuously or in combination with the dividends? Can you think about various different packages, I think there could be many answers, so can you elaborate on this matter?

Hiroo Unoura

I will start with the latter question first. The fore-fronting, what I meant was looking at the rate of increase of income, share buyback, volume will be determined. That's what I told you last year and there could be many scenarios in achieving that. But anyway, what we have to do will be done. So the share buyback, regarding that, income growth is not certain. Then looking at the cash in hand, we will be doing whatever we can do regarding share buyback. So in that sense -- so we were not really thinking about a combination with the dividend but the gentleman sitting right to me may complain about such an answer. But regarding the dividend, so far, of course, we continuously pay very stable dividend, so in that sense, we increase the dividend steadily. So it's not just absolute amount of JPY 160 but regarding the dividend received from the group companies, our basic policy is to return that to the shareholders. So if we reach a certain level of our share buyback, then there will be increased amount of sources for dividend payout. So if we can ensure that in autumn, well, assuming that the share buyback scheme is completed, then I think we can talk about -- we can give you new information. Next question regarding the overseas sales growth, it could be quite difficult. But if we can't achieve this goal then our growth itself will be extremely difficult. So regarding this challenge, we will make a group out effort -- all out effort, across the board. Each service development, of course, are making good progress and R&D bases in North America was opened in April. The CEO is informally determined, so on the 20th of May, the name can be disclosed to you. Under this new CEO, under his leadership in the United States, we will be recruiting the talents. So in parallel, of course, needless to say, we already reached some agreement if I introduce as some cases NTT Com portal. If you have an opportunity, please have a look at it firsthand. Servers and network using virtualizers and technologies, uses themselves -- using their own equipments can determine the set up depending on the usage volume. So this is very excellent function. Operability could be quite better and I mentioned Data is trying to recruit the powerful staff. So including all of these measures and if I may refer to another possibility of M&A, as has been said, just like in M&A in the cloud area will be continued. We are quite positive about that. So including all these activities, we are still preparing -- in preparations. So we are very much serious about making good preparations to make successful outcomes. I think this is indeed a very important question. NTT East, West, and DoCoMo, yes, they are only ensuring their income through cost reduction measures only. Yes, you're right here but cost reduction can result in better competitiveness and of course, it will give them additional capacity to create new services. So the new stage, as I told you last year, will be a completely different stage from the past in terms of competition, in terms of market. So the ARPU increase through tablets and smartphones, of course, will make contribution, but sooner or later, it will peak. So beyond then, how much capability strength needs to be prepared and development capability will be very important. So in order to acquire all these ability for the future, I think, cost reduction must be continued. Cost reduction is not just for ensuring the operating income or profitability. So we are determined to continue on cost reduction. So please believe in our very fundamental core strength. And regarding CapEx, of course, we are taking every available measures. I think it was the meeting before or the meeting before that, I think Masuno-san talked about the costs -- the costs will be slightly inferior and we are also addressing the procurement area. So the CapEx reduction is not just for the sake of profitability, but higher efficiency will help us to gain the stronger capability and strength. So we are always constantly seeking a better and more efficient method, covering all areas of operations and procurement. Efficiency, better productivity is the challenge shared by all group companies and we are making all our effort as a team. It is rather difficult to give you a good convincing explanation but as I said earlier, at each critical moment, we are renewing our determination. And of course, sometimes we don't want to go into too much details about the numbers, the non-personnel costs and personnel costs details. Those details cannot be disclosed in full all the time. Thank you.

Kazuhiko Nakayama

Next question for the gentleman in the middle.

Tetsuro Tsusaka - Morgan Stanley, Research Division

Tsusaka from Morgan Stanley. I have actually many questions, 4 as a matter of fact. CapEx to sales, you're aiming for 15% and it's now down to 17% from 18.4%, which is a very encouraging downward trend in CapEx to sales but it means that you only have 2 years though, it means you have to actually decrease CapEx to sales by 1% per annum over the next 2 years to meet your target. So may I confirm that you are still maintaining this target? My second question, overseas, which is your growth area. USD 12 billion to USD 13 billion. In yen base, that's JPY 250 billion increase. Now an increase of JPY 250 billion should actually translate to your bottom line because unless that is the case, that you will probably be criticized as simply seeking scale for the sake of scale. So if you're going to increase your revenue, then how much contribution will this make in terms of profit? What about the fiscal year? And also as you're going to aim for USD 20 billion overseas sales, how will this translate to your profit numbers? Please let us believe that you're not simply aiming for size and scale. So if overseas sales is increasing, then how will this translate into profit? That's my second question. The third question. I am somewhat anxious, well, maybe anxious is not the word, but when we take a look at NTT Group, it seems that rationalization streamlining is being pursued at the group level owing to the strong leadership from NTT Holding Company. This is very clear from your presentation. But the profit driver of the group which is NTT DoCoMo, to be very candid with you, is losing its luster. They're actually on a path towards, if you will, attrition -- equilibrium based on attrition. So DoCoMo is a major variable and it's important that DoCoMo be a very strong player. But that being the case, how do you see the potential recovery at NTT DoCoMo? And how do you intend to guide NTT DoCoMo? Is it possible for you to implement leadership at the operational level? That's my third question. And the fourth question, this is a question which I was asked by investors and I could not respond, and actually, this overlaps with Mr. Hayakawa's question. If you have numbers available, please let us know. On a consolidated basis, I think [indiscernible] on the book in terms of the real estate property. But what is the market value? I could not respond to the question from investors. If you have any numbers, I would appreciate it. Those are my 4 questions. I do apologize for the many questions.

Hiroo Unoura

I'll start with your fourth question. This seems to be a hot topic among the analysts. We have prepared some comments to the extent that we can respond to. So I would like to ask my finance -- our director responsible for finance to respond to that.

Hiroki Watanabe

Well, as you're probably familiar, well as for lease related property, between book value and market value, we do provide that. So on a consolidated basis, I think that's about [indiscernible] latent or unrealized profit. Now the calculation of market price, that is not being done. So in general terms, we do not know on a consolidated basis how much unrealized profit we have in relation to our real estate holding. However, if we estimate, we have the valuation which serves as the basis for property tax calculation, East, West and Communications, these 3 companies have JPY 1.5 trillion worth of assets that's been value. The book value is JPY 400 billion, so I suppose we can make some backward calculation. But again, the accurate valuation is not there because we have not done such valuation, but I suppose that's one way to take a look at our holdings. I hope that to suffice as your response. Again, that's the maximum extent possible service that we are providing to you.

Hiroo Unoura

Now going back to your other questions, I would like to address them and perhaps my colleagues may wish to supplement. CapEx to sales 15%. This was a stretch target to begin with. But then, as I mentioned earlier, our target is not 15.20%. It could be a little -- in the 15% range, I hope you will permit that. And by the way, 15% is not the end goal. So if you want to scold us for not reaching 15.20% at the target year, I hope that will be not be the case. So in that regard, I think we have more latitude than your assumptions, sir. And also in terms of overseas sales, the contribution to profit, I think that's the question we received in fall of 2012. In fiscal year 2012, we had the write down for Verio. So the actual numbers were not all that strong but if we exclude that one-off event, I think our operating margin could have been around 5%. So increasing this operating margin is the backdrop behind our wanting to further expand our activities in cloud. Operating margin in the infrastructure layer and operating margin available in the upper layer, they're totally different. Some layers are close to 10%, some layers are even exceeding that. So by combining these different layers, how much operating margin can we anticipate when we reach overseas sales of USD 20 billion? We talked about this last year but we hope that at minimum we'll be able to make efforts so that we could reach a minimum of 7% or 8% of operating margin at the juncture. Third question, in relation to DoCoMo. DoCoMo itself is aware of the many issues that they face. And you might -- and I also have the sense that maybe they could not be as bold as they could. But there are several reasons why DoCoMo cannot make bold statements. Please understand that there are several reasons why -- that they could not be that explicit with their statements. That the relationship between the Holding Company and NTT DoCoMo -- well, this is my 11th year since coming to NTT Holding Company and I've served many years involve in corporate strategy planning. And I can assure that between NTT Holding Company and between DoCoMo and also between NTT East and West, and also, we have the strongest level of communication this fiscal -- this year compared against the past. So I've been very candid with my colleagues at DoCoMo and DoCoMo accepts that and we have had very good dialogue. Of course, they don't have to necessarily follow word by word what I mention, sometimes I'm very extreme in my views. But I can assure you that DoCoMo and the management of DoCoMo has -- is fully aware of the situation. So that being the case, I hope that eventually DoCoMo will be able to make even more bolder statements and make more crisp and clear statements. At that juncture, I'm sure that you will understand the situation and so, I will continue to be very harsh in putting out challenges and issues to DoCoMo. For example, last year, they have disappointed both users and shareholders. And so I share your sentiment, myself, and DoCoMo, in essence, understands that situation. So in one sense, I can say that their awareness of the situation is even more stringent than the past and it's not just the top management. I know many people within the organization and I have the chance to have one-on-one exchange of views with many people. Of course, based on having received a permission from the President of NTT DoCoMo. So the sense of urgency on the part of DoCoMo, I believe, has been heightened. So in just a little while, I believe that DoCoMo will be able to make even more clear bold statements and that is my expectation.

Tetsuro Tsusaka - Morgan Stanley, Research Division

If I could follow-up, sir? You talked about overseas profitability. You mentioned operating margin of 5%, so simply -- so based on simple calculation, it means that I think the profit is JPY 60 billion, is that case? Is my simple calculation right?

Hiroki Watanabe

Well, are you talking of last fiscal year?

Tetsuro Tsusaka - Morgan Stanley, Research Division

Well, we're talking for this fiscal year. For this fiscal year, I think you are aiming for JPY 1.2 trillion, right?

Hiroo Unoura

Well, I know that you have many models that you're working with and of course, we have various variables such as local currency and so forth, but on a local currency basis, I think that is the strength that we have, that is the capability that we have. But of course, there are various accounting that has to be done. For example, in NTT Data, they have several accounting procedures that they have to follow, so I'm not sure. At the end of the day, I think we'll know more when we get to the end of the year. But as far as we're concerned that, that is the level of profit that we have in mind.

Kazuhiko Nakayama

We are ready for the next question please. Yes, the gentleman from there in the second row, please?

Ikuo Matsuhashi - Goldman Sachs Group Inc., Research Division

Matsuhashi from Goldman Sachs. I have 2 questions. The CapEx. The strength or limitation of the CapEx. The original intention behind that is, from a global perspective, 20%, the CapEx to sales is too much. So that was very -- must be the starting point. But if we take a similar logic, R&D expenses, needless to say, I think that similar logic can be applied. The worldwide -- when you look at the global telecom carriers, no one spend such a large amount of R&D expenditure as you do. So the products of R&D activities will result, sometimes, in many cases, the NTT's specific specifications and technologies. So the JPY 300 billion, JPY 400 billion is the size of R&D expenditure. In the coming several years, have you -- don't you have any plan of drastic reduction of R&D-related expenditures? So that is my first point. Question number two, DoCoMo -- in relation to DoCoMo. The iPhone has been long talked about. But on the other hand, the KDDI, because they still have the bundled service -- available for the bundled service, so I think that is some difference between KDDI and yourself. But if you -- of course, you cannot just openly unbundle the fixed and mobile so easily. So that's bundling of fixed and mobile, your inability to offer such bundle, is that something that tie your hands in increasing your profitability? So if that is the case, do you have any plan or do you have any ambition to break -- to seek a breakthrough?

Hiroo Unoura

No, regarding the R&D expenditure, Matsuhashi-san, I think I would like to tell you that there is a good positive impact of R&D activities. I think we are very much proud of heavily engaged in R&D compared with any other carriers. R&D, of course, traditionally emphasize a network aspect. Because of that, R&D costs and expenditures were contributed by NTT East and West. So the future directionality of R&D is now changing. So we are aware of such change. So from that perspective, what shall I say? The expenditure required for R&D, who should bear how much? Or maybe it's time for us to narrow down the R&D projects. We are addressing these issues already. So again, without spending for too long, I would like to give you more information about this. So -- but for today, please allow me to stop here. But just to ensure profitability, I have never ever thought of drastically reducing the R&D expenditure. But of course, I may be -- we have to think about the better usage of R&D expenditure going forward including narrowing down of the projects. And of course, maybe we can rely on the external R&D capability to continue with our work. Now the fixed and mobile bundling. I know that you have full understanding about this issue. I think I have -- we have taken up this issue before. I know that there is a certain level of impact, but this certain level of impact, if it becomes unbearable or not, that is the question. If it becomes unbearable, I don't know if direct breakthrough strategy will work or not, but fair competition. This is a rule for the users, not for our groups or for other carriers. So in that sense, in essence, if this existing rule hinders us from fair competition, then we have to think about some solution. What kind of impact, what level of impact exist. I think is not the question to me but you should ask this question to somebody else. But this is not a very simple issue. Fixed and mobile simple bundling is not a question. But we are entering the new stage, I think that in this new stage, this relationship between fixed and mobile would be slightly different. Well I didn't have any plan to go into this much detail but since considering your question, I think the rate will be different -- rate scheme will be different just like AT&T and Verizon data share plan will appear and service in different ways will emerge. It is not a simple question of rate or charge. I think the more convenient FMC-type as seamless as it will appear for the sake of the users. I don't know to what level this idea will be -- will grow but NTT Plala will soon launch a smart TV sales, including cloud games using network. Some of the games can be enjoyed with such a high level of response. And the, of course, search capability will be enhanced and the combination of smartphones and tablets will be enabled. I think this is the age arrives when the users accept this kind of services. These services then, I think, the full amount of bundling could be different. And Mr. Tanaka of KDDI, I think, used the expression, the new stage, so I think I confer with his view. So towards this new stage, what will the best rate scheme for the users. I hope that we shall enter that phase as soon as possible. Well, the very simple switching, competition for switching should not survive. We have to create a new forum of competition before too long. So with that in mind, what happens if we receive a very negative straight impact and at the same time, we have to think of the soon arrival of new stage at the same time.

Ikuo Matsuhashi - Goldman Sachs Group Inc., Research Division

I have 2 more questions. Regarding at R&D. You said that you never thought of reducing it, one-sidedly. But say tens of billions of yen, just an example, when you talk about the cost-reduction, I think that much reduction could be possible, am I my right to say that? And you also talked about the new rate or new service schemes. Your concept is very encouraging but user-friendliness, convenience, this is a word that which caught, arouse my concern. As a result, the communication market expansion, is that what you meant? Do you think that markets are going forward will expand?

Hiroo Unoura

Now regarding the rate charge, I think I can only give you a detailed story when we reach a certain fixed decision, but it won't be on single year basis it will take more than -- much more than -- longer than that. Now the second part, if the user so wishes, I don't know whether the market will grow or shrink, these are the video services, what will be the appropriate rate? The question is still pending. But basically, the user-friendly rate is fundamental and through the cost-reduction and at the same time, and sharing a sufficient level of profitability, we would like to offer the user-friendly convenient services for a reasonable price. That is the basic stance.

Kazuhiko Nakayama

Next question, please. Yes, yes, please.

Daisuke Oshidari

Oshidari from JPMorgan. Three questions, if I may. First, with regard to overseas sales, the USD 20 billion that you talked about, does this include the contributions from potential additional mergers and acquisitions or do you believe that this is enough that can be achieved through organic manner based on current structure? Are we considering more, if you will, nonorganic mergers and acquisitions, using more cash, is that still a potential? That's my first question. I'd like to confirm the point. And my second question, in relation to CapEx to sales. You mentioned that the target is some 15.0%, I think you mentioned that CapEx to sales ratio in the 15% range would suffice. I guess I've assessed that you have so much retreated because if you're reaching 15.9%, then that's actually close to 16%, isn't it? So that's questionable. Again, as this relates to construction companies and vendors, but I suppose in absolute terms, are you considering further reduction in terms of CapEx or inclusive of this USD 20 billion overseas sales, are you going to say -- or do you believe that if the overseas sales increase, then even though you don't increase -- even though you don't reduce the absolute terms, you will still reach this target? So can you elaborate as to your intentions. Are you going to go as far as reducing your CapEx in absolute terms as you aim to achieve CapEx to sales ratio of 15%? That's my second question. My third question. I hesitate to ask this question because someone else has asked. But having said that, 70% of your consolidated operating income is from DoCoMo and they're in a disastrous situation. That is because of the iPhone. It's been pointed out for over many years, Mr. Unoura, I think you mentioned that you'll make a decision toward the spring of this year. I thought that's what you mentioned. Maybe it's not -- I'm not sure whether or not it was your actual comments or whether or not it was simply the impression that I had. But now we are well into our spring, it's now May, but they have not yet made a decision. I realize that there is the other party to be involved, but as a clue, we take a look at look at the personnel management that was announced at DoCoMo, was this change in personnel at DoCoMo a key or a clue of things to come?

Hiroo Unoura

Well, your final question, I was hoping that I could avoid this question, so I will respond to your final question at the very end. Well, your first question, about mergers and acquisitions, it's actually included. But then I mentioned earlier, acquisitions in the field of cloud. So therefore, it's not like the conventional acquisitions which were your concerns. So the acquisitions that we're contemplating is not like the conventional type of acquisitions that we carried out in the past. And by the way, it's not just NTT Holding Company, DoCoMo, Data, NTT Communications included. We will probably consider various possible acquisitions. And maybe this is not positive from your perspective but as far as we're concerned, under NTT Holdings Company, until -- at the end of certain threshold, it's important that we actually coordinate the positions of the group companies and beyond certain threshold if the group companies cannot coordinate, then we will not embark on that acquisition. So acquisitions will pursue but they will be in the field of cloud, I can assure you. Second question, 15.9%? No, that is not my intention. I'm not saying that 15.9% is okay, that's not what I'm saying. Now if top line increases, well, that's fine. Of course, we need investment to expand the top line. So if top line increases, can we maintain or can we contain the investment at the current level? I think we need to carry out investment and of course, CapEx to sales of 15% is always difficult as we expand sales, but we need to contain CapEx. So we will have certainly enough to tackle that and adjust this target. Also, what about in absolute terms? Reducing CapEx at the absolute basis. That was part of your question. Inclusive of that, the network access related investment at NTT East, West and NTT DoCoMo, this was actually been discussed at the absolute terms, and we did share with you the progress of the cost reduction in relation to access, inclusive of procurement and so forth, if we -- even if we reduce CapEx in absolute terms, we can still maintain competitiveness. So at given milestones, we intend to pursue this type of dialogue. And so we're not going to just work out the numbers just for the sake of numbers, I can assure you. At least that was your concern Oshidari-san. And your final question, I have to take accountability for my remarks and Mr. Oshidari, you mentioned that I mentioned this timeline was spring. I mentioned that in spring or by spring, the fact that DoCoMo would like to gain certain results or conclusions in relation to the effect of the [indiscernible] marketing expense introduction made by DoCoMo. And as far as the iPhone is concerned, my own awareness and my feelings, I have communicated that to DoCoMo. So inclusive of bearing that in mind, well, they don't necessarily have to bear that in mind, but DoCoMo is very seriously and earnestly addressing and concerning this issue. Now personnel management, I was wondering what you were meaning. I have not seen the announcement in relation to personnel -- management personnel at DoCoMo. Maybe you were talking to someone who was assigned [indiscernible] issue, that it's totally unrelated.

Daisuke Oshidari

[Japanese] If I could ask additional question? NTT Holding Company, do you have a position that you do not say anything about the operation at NTT DoCoMo? Is that position maintained?

Hiroo Unoura

Well, do we make remarks? Well, we have exchange of views. Considering the past 11 years with NTT Holding Company, the past 6 months and year, we have had the most intensive dialogue and exchange of views between Holding Company and DoCoMo. I'm not sure how DoCoMo views this dialogue, but that's the situation.

Kazuhiko Nakayama

[Japanese] Any further question? Yes, that gentlemen, please, in the fourth row.

Yoshiyuki Kinoshita - BofA Merrill Lynch, Research Division

Kinoshita from Merrill Lynch. I just have one confirmation to make. The share buyback. You said that you have an idea of fore-fronting this plan. Can you elaborate that, what you meant by that in terms of rate, pace? The plan for the end of this year, are you planning to forefront that or are you planning to -- the plans for the coming 3 years, the amount over 3 years would be exercised for this fiscal year ending March '14, which do you mean? And JPY 250 billion level share buyback, will it continue at the similar rate in the year after this or even after that? So I would like to ask if this is a rather special -- especially large size or not?

Hiroo Unoura

Well, it is very difficult for me to give you the specific figures, numbers, but as what I said in last autumn is that, within a certain limit of time, looking at the income profitability, we will determine the size, the number. What I meant is that in the last year, also it all depends on the operating income size then. But my feeling is that I would like to -- I don't want to be very hasty and rushed in the very last year. So this year, this much and next year, that much. Well, at this point in time, I can't disclose to you these numbers. So depending on the outcomes of year-by-year, I would like to determine the right number and if possible, I would like to accelerate this plan of share buyback.

Kazuhiko Nakayama

[Japanese] Any other question? If not, thank you very much. We would like to conclude the meeting at this time. Thank you very much for your participation. Thank you very much, ladies and gentlemen.

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