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Nippon Telegraph and Telephone (NYSE:NTT)

H1 2014 Earnings Call

November 08, 2013 4:00 am ET

Executives

Kazuhiko Nakayama

Hiroo Unoura - Chief Executive Officer, President and Representative Director

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

Hiroshi Tsujigami - Senior Vice President, Director of Corporate Strategy Planning Department and Director

Yoshikiyo Sakai - Senior Vice President, Director of Finance & Accounting and Director

Analysts

Hitoshi Hayakawa - Crédit Suisse AG, Research Division

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

Hitoshi Hosoya - JP Morgan Chase & Co, Research Division

Yoshio Ando - Daiwa Securities Co. Ltd., Research Division

Kazuhiko Nakayama

[Japanese] Thank you very much for coming out of your busy schedules today. We would now like to start NTT's Second Quarter Financial Results Presentation Meeting for the year ending in March 2014. I am the moderator, Nakayama of IR office. It is a pleasure.

First of all, I would like to introduce to you the members present from NTT today: Representative Director and President and CEO, Mr. Unoura.

Hiroo Unoura

My name is Unoura.

Kazuhiko Nakayama

Representative Director and Senior Executive Vice President, Mr. Watanabe.

Hiroki Watanabe

My name is Watanabe.

Kazuhiko Nakayama

Director and Senior Vice President, Director of Corporate Strategic Planning Department, Mr. Tsujigami.

Hiroshi Tsujigami

Tsujigami is my name.

Kazuhiko Nakayama

Mr. Sakai, Director and Senior Vice President and Director of Finance and Accounting Department.

Yoshikiyo Sakai

Sakai is my name.

Kazuhiko Nakayama

And nextly, I would like to confirm the handout materials. There are 3 handout materials. The first is copy of slides entitled Financial Results for the 6 Months Ended September 30, 2013; secondly, another copy of slides, Accelerating Innovation and Collaboration for the Next Stage; and the third is a thick white booklet of financial results meeting material.

Further, on Page 1 of the copy of slides, Financial Results for the 6 Months Ended September 30, 2013, disclaimer is written regarding projected numbers and forward-looking information included in today's handout materials, presentation, questions and answers. We ask you to have a read of the disclaimer.

Today's presentation meeting will be webcast live on our IR website and the recorded video is also planned for on-demand distribution for a later date. We ask you for your understanding beforehand.

For today's schedule, first of all, Mr. Unoura will deliver a presentation regarding financial results and others. Afterwards, we would like to entertain questions from the audience.

Now to you, Mr. Unoura.

Hiroo Unoura

[Japanese] Thank you very much. Unoura is my name. I'm the CEO. Thank you very much for joining us despite your busy and demanding schedule.

Two years ago, the performance of NTT is lowest. Then last year it was DoCoMo's performance, and this year, now, NTT DATA's performance. We know that we're causing anxiety.

The unprofitable business transactions of NTT DATA. When I was informed about this, I initially thought that perhaps, this room will be now referred to as the room for declined revenues, but fortunately, we do not have to revise our corporate performance and guidance, and I'm able to share with you our results. And with that, maybe, you might say that that's all the presentation you want to hear. However, as you are here, allow me to share with you a few points of explanations, if I may.

I will start with Pages 2 and 3, although, I think the Page 3, you have already observed that page, so I will not get into the details about Page 3. So I would like to focus primarily on Page 2.

At this juncture, operating revenue and operating income remain mostly unchanged from the previous fiscal year. That is the language which we are using on this page. The net income increased 10% year-on-year. Network operating income is concerned, as you're already familiar, we experienced a JPY 25 billion decline due to unprofitable business deals in the Data Communications segment. However, Regional Communications segment enjoyed an increase in operating income and we're able to offset that.

And we'll talk about this later on But on the fixed line business, there was some temporary expenses which were incurred. And I don't want to talk about if this does had not happened, but I don't want to talk about if not. Perhaps, my facial expressions would have been somewhat different as I explain to you the financial highlights. But I would like to offer more detailed comments about this so when I talked about the projections.

Turning to net income. Well, the operating income declined by JPY 9.9 billion. However, we have made effective utilization our fixed assets in the form of sales, and also we've made efforts to reduce our interest burden. So at the end of the day, our nonoperating income actually increased. So therefore, the net income increased by JPY 30.1 billion, up to JPY 323.5 billion. Now when we announced the Medium-Term Management Strategy last year, we talked about expansion of global cloud services, and also about enhancing competitiveness of our network services. I'll talk about the both in greater detail. But in any event, our overseas sales increased by JPY 97.2 billion year-on-year. So if you take a look at the increase in operating revenue, well, declined in domestic sales. However, our overseas sales continued to increase so that's the breakdown of the operating revenue.

Now in terms of enhanced competitiveness of network services, I'll talk about this later on, but the -- we see very strong expansion of Wi-Fi platforms to date. Smartphones, tablets, TV, you see the numbers here and also in relation to cost reductions. Again, when we announced our Medium-Term Management Plan last year, we mentioned that we will be seeking more than JPY 400 billion reduction in costs. That was the maximum target. And against that plan, we have already achieved 70% cost reduction. So in the remaining 1.5 years, what are we going to do in relation to the cost reduction? In spring, we were actually saying that we will be sharing with you more bullish figures. So I will talk about these again later on, and also in terms of shareholder return.

In spring this year, we mentioned that we will carry out stock repurchase up to JPY 250 billion for this fiscal year. And we have already completed JPY 250 billion worth of stock repurchase in the month of October. So again, what are we going to do? Subsequently, I'm sure that this is a point of interest on your part, so I will talk about this in greater detail later on.

So all in all, in the first half, we cannot say that our operating income increased on a year-on-year basis, again, because there is some unprofitable business transactions at NTT DATA. But if we exclude that, I would say that we have made strong progress against the targets contained in the Medium-Term Management Strategy.

So next, let me talk about contributing factors by segment. I think that's Slide #3 in your handout. Let me first start with the regional communication business entity, East and West primarily.

We made efforts to expand corporate Network Services, such as Business Ether WIDE and FLET's VPN WIDE. And also efforts were made to expand discount services which led to containment of churns or cancellations. On top of that, efforts were made to control costs, such as maintenance and marketing cost. So with strong progress on this front, operating income in the segment increased by 23 -- JPY 25.3 billion year-on-year.

Long distance and international communication business experienced a decline of JPY 4.7 billion year-on-year in terms of operating income. However, there are some temporary factors. There's a company called -- a security company called Integralis, which was acquired by NTT Communications. And this year, the name was changed to NTT Communications segment. So the name of that company was changed to NTT Communications Security. So we've had to amortize up to maybe JPY 3 billion worth of intangible assets. And also at Dimension Data, it's not so much a temporary factor. But a company called Plessey which is a communication -- construction company in South Africa, which is part of their noncore business, their performance was now very strong. And also, there's a company called Express Data in Australia that's involved in the sales of IT equipment. This other company, which is part of noncore business also, performance deteriorated. So all together, Dimension Data experienced a decline in operating income of JPY 1.1 billion. So therefore, in the segment, our operating income declined by JPY 4.7 billion year-on-year. However, I'll talk about this later on, but as far as these 2 companies under Dimension Data are concerned, the management is aware of this particular issue. So they are working to streamline the situation or what to do toward -- what to do going forward. So that consideration is being made, and I hope that we'll be able to talk about this result going forward.

But in any event, as far as Dimension Data is concerned, there -- our revenue actually increased by JPY 47 million year-on-year. In dollar terms, the growth isn't very strong. However, in yen terms, the growth is very strong. And so it's a very complicated structure which I alluded to in the previous session. But in the local currency terms, our revenue increased by 4%, so that's an information which I wish to share with you.

Next, Mobile Communications and Data Communication business segment. In this segment, DoCoMo -- NTT DoCoMo and NTT DATA have already expressed or announced their financial results, so I'll just offer a short comment in the Mobile Communications segment. As you're aware, even against this handicapped competitive landscape, they pursued 2-tom [ph] strategy and cost-reductions. So therefore, operating income, which is comparable to the previous year, has been secured. So therefore, now that the iPhone is part of the product lineup, they will continue to make efforts to expand sales, so this is a very critical point.

In Data Communications segment. There was -- so therefore, there was a JPY 25 billion decline in operating income due to unprofitable business, business transactions. However, in terms of orders placement, it's -- revenue is very strong. So therefore, the unprofitable business deals which we [indiscernible] here, we hope that we'll be able to resolve this as soon as possible and we'll continue to make efforts so that NTT DATA will be able to make efforts toward recovery of their performance.

Next slide, Page 5. We talk about the consolidated forecast for fiscal year 2013. As I mentioned at the outset, our guidance remains unchanged. Our projections remain unchanged. In the first half, as you're aware, operating income declined by JPY 10 billion year-on-year. And for the fiscal year, we're anticipating JPY 30 billion increase in operating income overall, so therefore, in the second half, we will have to actually achieve for an increase of JPY 40 billion operating income on a year-on-year basis.

Now we mentioned JPY 40 billion, bulk of this has already been identified, so that being the case, primarily through the major group companies, we'll make efforts to increase revenues and also to practice cost control so that we will indeed be able to achieve the consolidated operating income target of JPY 1.23 trillion which we set out at the beginning of the year, and I'm sure that we will be able to do this. Now as far as net income is concerned, there was increase in the first half and also toward the second half. We'll make efforts to secure income. So I think there's a potential upside for the net income. But then, as you are aware, there's the issue of the special corporate tax for reconstruction purposes, so there are some anticipated changes in the tax code. If there's to be a review of the special corporate tax for reconstruction, then we'll have to make a withdrawal, if you will, or a drawdown of the deferred tax assets.

Next, regarding that, I'm sure there is indeed a potential upside. However, as far as the concrete numbers are concerned, we would like to see how the tax code is changed. And hopefully, we'll be able to talk about this at the next opportunity.

Nextly, to talk about shareholder returns, that is on slide, Page 6. So that we can respond to your expectations, we have made a resolution to cancel treasury stock and also to increase this fiscal year's dividend amount. We made this resolution in today's board meeting. For share repurchases, over the past several years, we have bought back shares, resulting into 14% treasury stock. As we explained in the past, we also canceled it in fiscal year 2011, and we think that we have comparable amount compared to that time. Therefore this time, we also decided, resolved to cancel the shares. And for the dividends, we want to enhance dividend amount, dividends in the midterm. What is different this year is instead of the interim dividend, and as I mentioned in relation to net income this year, I think it is going to be the first time that we shall be increasing the year-end dividend amount this time. But to respond to your expectations, we have decided to increase the year-end dividend and as a result total dividend amount, which means this fiscal year, the expected or scheduled dividend amount was JPY 160 per share will become JPY 170 for next year. I will not mention anything yet. Please look forward as a pleasure for next year.

And then finally, progress of the Medium-Term Management Strategy. The next 2 slides will talk about this progress. Last year, we announced the midterm management strategy, and we also explained several of our financial targets. Today, I am going to talk about our progress.

Two business pillars, out of which 1 is expansion of global cloud service and the other is to strengthen network service competitiveness. For these 2 business strategies, I would like to give you our progress so far.

First of all, Slide #7, on global cloud services. In 2012, JPY 12 billion was overseas sales. Our target is to increase to JPY 20 billion in 2016. We made a declaration of this intent. For some time, we expected this to be rather challenging difficult target, but we are now seeing greater prospective. Prospects are becoming brighter. My personal confidence is more building up towards the future. This is the current situation.

We have on the left-hand side a chart explaining our cross-selling efforts. By the end of last fiscal year, $290 million of cross-selling was conducted. We were able to take order volume resulting from cross-selling of $290 million. Cross-selling amongst group companies, the amount was still small, although there were many such cross-selling cases, but starting from this fiscal year, which was starting from April, the order volume significantly increased. In the past 6 months, we saw increase of $500 million, out of which, $450 million are large cloud projects in North America. Already NTT DATA and other companies have already explained about this point, but we are now seeing large projects taken as our orders.

In this sense, as the first step for NTT's cloud services, I think we have mentioned this in the past too, but in our service layer and for our value chain and in the process of cloud migration, we are now able to respond to all of the needs of the users, and even if a user has partial needs, we are now able to respond, which I think is now bearing fruit as large orders in North America. Going forward, we are seeing many M&As. And in the autumn, we also announced many group companies M&As that will take place. For cloud service, M&A will be a part of the effort, as we have said from the past. M&As will result in more breadth that is increasing footprint. NTT DATA, for example, we want to have more footprint in South America, and we want to attempt more cross-sell and upsell to customers in South America and other places.

We also want to expand our strength. We want to have more breadth and be able to upsell. And then another aspect is we want to have more depth. Not only do we want to have breadth such as by increasing footprint and business domains, but we want to have more depth, and we also want to have operational efficiencies, that is through the acquisition of Virtela which is a network provider company. With these M&As, the group companies will be strengthening businesses altogether, and I think this will make us even closer to the JPY 20 billion target.

The next slide is about strengthening the competitiveness of the network services, as I mentioned, by the first half of the year. And this is 1.5 years of the efforts, we have seen JPY 275 billion in the progress of cost controls. This year's spring in this meeting, I said that this number has potential to be revised for further more ambitious cost savings target. And as I said, I will be more clear that is, instead of JPY 400 billion, we will change the target to JPY 500 billion for cost savings. When we talk about the JPY 400 billion existing target, we have another JPY 130 billion to save in the remaining 1.5 years, but we want to add another JPY 100 billion to our target. In the remaining 1.5 years, we have another JPY 230 billion to reduce our cost as a result. This is what we intend to do. This is all for the financial results related explanation.

As time is passing, I will make a fairly short presentation about the other material. Last fall, we announced our Medium-Term Management Strategy entitled Toward the Next Stage. The key concepts behind the strategy was that we will make a transformation from a provider to a value partner. And against that backdrop, we highlighted 2 highlights: global cloud services and enhancing network competitiveness. And so in relation to these 2 pillars, we announced some financial targets and indicators. Now what -- when will the next stage arrive? What does the so-called next stage entail? We received many questions about that. So therefore, this time around, we wanted to focus on the next stage and talk about the broadband infrastructure access. What we envision in this domain and also what about the timing or the timeline that we are envisioning? We hope -- we hope that with this presentation material, we'll be able to give you a brief outline. When will this next stage arrive? Well, in 2030, there's a very big event coming up. And by that, by that time, we hope that we'll be able to pursue innovation in relation to broadband and network access. The subtitle of this presentation material is Accelerating Innovation and Collaboration for the Next Stage, so let me try to share with you some thoughts about this.

Every single year, the data volume or traffic is increasing. And by 2020, how much traffic volume will be there?

That's on Page number slide -- Page #3. Changes in ICT environment. This is based on third-party forecast. I understand that the more than thirtyfold increase in data volume is expected. And when the Olympic comes around, I think the level is not going to be contained at thirtyfold because during London Olympic times, I understand the traffic was 7x the traffic volume back in the Beijing Olympic Games.

So Brazil and then Tokyo. So if you just referred to calculation, 7 times 7 so it could be fiftyfold data volume when Tokyo Olympic comes around. We're not generating that data per se. Inclusive of pook K [ph] broadcast industry will be generating a great deal of traffic. As indicated in the other pages, various infrastructures will be coming up. So the amount of information will be explosive. At the same time, security will become very -- will become a very critical factor. According to BT, during the London Olympic games, the main portal site which operated -- which was operated by BT received some JPY 241 million cases of tax and understand that BT was able to overcome that. So therefore, this is the level of broadband utilization that is likely to occur. So under the current capacity and infrastructure, can we really accommodate this level of traffic volume? I think we need disruptive or discontinuous innovation.

When we talk about making a challenge throughout the next stage, one of the major elements is, indeed, how can we reduce cost pertaining to broadband infrastructure access and evolve this. And on a similar vein, I think we will -- all our capacity in relation to security will also be questioned at that time. So therefore, in the following 3 pages, I will like to talk about some of the challenges which we want to address, and what we intend to do about some of these challenges.

As I mentioned at the outset, we want to have Internet access infrastructure which is the -- which is the world's highest. We want to offer the world's best and leading infrastructure access, and so there's several challenges. And there will be some technical terms on this page. I will not talk about this detail -- about the details during this presentation. I would just share with you some of the slogans involved. One, the first challenge we need to address is to make -- is to shift from reactive control to proactive control. And the second is to shift from a straightforward hardware incentive to software efficient network controls.

If you are interested, in the past occasions -- correction, with these themes, if you can interview us further, if you can inquire us further, we will be more than pleased. And then Slide #6 talks about the challenges in security. What are the security issues and the challenges we need to take up, we have written on Slide #6. In fact, security -- of course, our technology needs to become very strong, and we want to build up a lot of -- strengthen our technology but with people in various layers and with players in and out of Japan, we want to collaborate together to become stronger in security. What is necessary going forward is security integration with various players. Collaboration will become necessary. This is the main point.

And the next page talks about collaboration as value partner. We have a lot of collaborations mentioned in the next page. What I think is for the future, what they need is innovation and collaboration as set forth in the title at the very beginning. What does this mean? What is the consequence? Maybe this could be our only world. But in the past, we had our own centric world with fixed line telephone rule and its world. But in the future, there are various players services and users and furthermore, competitors. Innovation and collaboration with all these players will become very important in the future. Out of what you are interested in, the regulations from next year onwards, what will happen to the road to optical broadband? What is going to happen? Our stance is we should look at the longer-term future, and there is a need for communications regulation, for innovation and collaboration. The details of our thoughts will be provided after -- afterwards, after we have set forth at this basic stance. And the keywords will be innovation and collaboration as I have just mentioned. And not included in this handout material, but as one example of collaboration NTT BP made a press release today about Japan connected free Wi-Fi, which is 1 kind of collaborative group. There is an explanation on the right-hand bottom. What does this mean? Servicers, and if necessary, please take a look more in detail later but services such as airports, railways and local governments. These services provide free Wi-Fi and one authentication can be used across the various free Wi-Fis. For instance, the recent topic has been that Japanese Wi-Fi is quite inconvenient, difficult to use, for foreign visitors to Japan. NTT BP is now working at the background to support the Wi-Fi of the servicers. Once there is a download of the Wi-Fi application with very simple operation, the application Wi-Fi -- correction, Wi-Fi can be searched and Wi-Fi can be used without complicated authentication process. Wi-Fi use will be very convenient. Last year, autumn, we talked about Wi-Fi being the third access. In this way, we had collaboration from the servicers and pricing the servicers at the center. We have made this effort, and we have started working on this effort to make Wi-Fi more convenient to use. NTT BP company has made a press release about this free Wi-Fi. Please refer to that as well.

This is all from me. Thank you.

Kazuhiko Nakayama

[Japanese] Thank you very much. We would now like to take your questions.

When you ask your question, a microphone will be brought to you. Could you kindly state your name and affiliation before you speak? Then if you have any questions, please kindly raise your hand. We'll start with this gentleman.

Hitoshi Hayakawa - Crédit Suisse AG, Research Division

[Japanese] Hayakawa with Crédit Suisse. First of all, the first time increase in dividend toward the second half, thank you very much for that news. We appreciate it. And also I would like to ask a question. It relates to the acquisition. 2 major questions about M&A. You have been promoting global cloud division. You are aiming to pursue M&A in the cloud domain, and I have the impression that acquisitions in this area is doing very well and that you're acquiring companies with positive performance. So I think this is based on the lessons that you learned from your past experiences. So I think you have seen series of good transactions. But turning to the infrastructure side of the business. For example, recently, AT&T is beginning to show interest in Vodafone, for example, so -- and also Softbank has acquired Sprint. So it seems that on the infrastructure and on a global scale, you see some, if you will, consolidation. Now within NTT, or maybe in the case of wireless domain, it might be DoCoMo. But at this juncture, do you have any intentions to make a good investment into other carriers or possibility of acquiring other carriers? I would like to hear Mr. Unoura's views and stance or position about that -- about those possibilities. That's my first question. And also on a related note, my second question. The decision-making process for acquisitions by various group of companies, I understand that in your case, you have some special committee to make decisions. But what is the position taken by the committee on various potential acquisitions that are brought forward by different group companies. Is it the management structure that's considered? What criteria do you consider before you give a go ahead sign to any acquisitions? Is it like a value threshold or is it an amount-based threshold? So can you share with us the group level M&A proposals when acquisitions decisions are made? What criteria? What procedures do you follow in making decisions even into group level M&A?

Hiroo Unoura

Thank you. You asked about M&A and whether or not we have any, shall I say, interests toward other carriers. So let me respond to your first question about whether or not we have any interest in relation to M&A related to carrier. I am hoping to avoid any misconceptions in responding to your question. I think I have mentioned this on certain occasions since the past, but we need to see what will happen after the penetration of the smartphone, and that is the basic principle that I have. I want to see what happens after the penetration of the smartphone. So at this juncture, the horizontal development and the area development of infrastructure business -- on that note, I have -- I do not have much interest on that front. Right now, that time, it's not that time -- right now, it's not the time. I know that there are various companies that are active globally, so I don't want to say anything definitive, so I don't want to say anything beyond that. But as far as I'm concerned, in relation to carriers outside Japan, I do not believe now is the time to make acquisitions. So that is the response that I want to share with you. Now on a related note, you asked about the decision-making process. Now within NTT, in terms of investment above a certain amount or value threshold, have -- we have had an exchange of information between NTT holding company and other companies since the past, in particular, cases outside Japan. And by the way, again, there are other listed companies that are part of the group, so it's very difficult for me to explain. But as far as overseas cases are concerned, we do have a team in place. And regardless of the amount involved, how shall I say? We are to have exchange of views. And the topics discussed will be, for example, in the case of this Spanish company, groups other than NTT DATA from the group naturally, based on confidentiality, will come together and discuss that and we'd discuss the potential for collaboration with that particular company, and also any information that the other group companies may have about the particular company or about the assessment of the management team of the particular company. So through such exchange of information, as we expect -- as we pursue depth and breadth in terms of our cloud, global cloud services, going forward, we will discuss whether or not various group companies can collaborate with that particular company. So that's the tone of the discussion that we have. So now recently, there have been 3 cases. And of course, NTT DATA has also acquired a small-scale SAP, SAP company. But actually, we have spent a very long period of time to -- and have had various group companies exchange views among each other. And at the end of the day, we were able to find very good, if you will, cases. So it's been a very time-consuming process. And we had actually made a decision. Really, perhaps these acquisitions could have made contribution to our consolidated performance, but that's not the end purpose. So as far as the target, the so-called potential target company is concerned, we take a very broad perspective. So it's not just discussions at the domestic level. We will hear feedback and views from those outside Japan and then make decisions. So I don't want to toot my own horn, but I think we have been able to make very strong, solid acquisitions. I hope you're satisfied with my response. Let me confirm. So at the end of the day, the proposals, M&A, that come up from different group -- from various group companies, the committee will discuss that.

Hitoshi Hayakawa - Crédit Suisse AG, Research Division

Simply put, unless Mr. Unoura says yes, the case will not be approved. Is that the procedure?

Hiroo Unoura

Well, it's not so much -- it's not myself. It's the group overall, I say group overall.

Kazuhiko Nakayama

Then the next question, the person sitting next, please.

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

Masuno. 400 -- JPY 40 billion operating income increase with cost control goals and with revenue increase achieved, what are the cost controls and the revenue increases? That is the first question. Second question is fiscal year 2014 fixed and mobile cost reductions, another JPY 100 billion addition for the cost-saving goal, you mentioned. So fixed and mobile, what is the mix between the 2? And then you have another -- over the second half of this fiscal year, next fiscal year, what is going to be the cost reduction pacings? The remaining first -- remaining second half of the year, next fiscal year? And then third question is overseas expansion. I feel that the current M&As are quite interesting myself too with this NTT DATA had -- now had South America. And according to NTT DATA, the remaining markets are the emerging markets. With the grasp of the emerging markets, NTT DATA say it they now have visibility, and the cloud area, security and consulting were the peripheral areas where the main thrust of M&A. So finally, we are seeing data centers and network virtualization, the main key components appearing in M&As which I think is very encouraging. Virtualization, data center and inside of the data center virtualization, and now, we are now coming to LAN and WAN. These are the quite interesting and rare attempts in the progress towards global -- a global cloud attempt. And only thing you need to do now is gain users. In the midterm management plan, NTT Communications, their cloud business development technology is wonderful too. In addition to Dimension Data, I feel that NTT Communications will do very well. What is going to be the role of NTT Communications in the midterm management plan? These are my 3 questions.

Hiroo Unoura

Then, I would like to answer your questions in the reverse order. Overseas expansion, thank you very much for giving us credit on this. Thank you. We will continue to have more depth in this manner. We want to continue. Earlier, we talked about starting from North America and moving on to emerging countries. This is the directionality of our core business. In this sense, first, we want to establish our credibility and credit in North American markets. And this will mean that our existing orders will be positive. And where we have been rather behind, were typically assisted Gartner NTT group's cloud ability should be credited by them and be recognized by them so that we can build the brand image. I think this has now become possible although not that visible yet. By going forward with these efforts in the end result will lead to South America, not just the footprint, but to the financial services clients too. The company we just acquired have such company's user base. We can assist those clients to migrate to cloud. I think this will be a good stream, positive stream, of movement we can expect. And then NTT Communications role that you mentioned. As of this stage, NTT Communications, independent alone itself can expand business to some extent, but can also work together with Dimension Data or NTT DATA and other group companies and companies newly acquired. In collaboration with these companies, NTT Communication can work together for more businesses rather the NTT Group's cloud power in itself will lead to more profits. This is how we see. In this sense, the role of NTT Communications alone is not something we consider to be so important. But as a group, as a whole, we want to strengthen our presence and such efforts are necessary. And then coming back to your earlier question, the cost controls, cost expectations. I was not clear what was the intention of your question but JPY 100 billion additional target. I assume that your question meant was where do the JPY 100 billion come from and from what companies? Is this the intent of your question?

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

Yes, additional target. Will they mostly be realized next fiscal year or not? Maybe, this -- your second half could also be a period to cover the additional JPY 100 billion.

Hiroo Unoura

We cannot certainly accelerate cost reductions. Therefore, the addition will mainly be achieved in the next fiscal year, and this will be from NTT East and West and from NTT DoCoMo coming from Access Network. NTT East, West and DoCoMo. DoCoMo may have some explained but the additional part -- additional target this time covers DoCoMo portion too. I will not explain the breakdown. Next year, DoCoMo will be announcing in the end result. Overall, you will see what will happen, overall, inclusive of DoCoMo.

Unknown Executive

And if I may say a bit more. In the past 1.5 years, the number we have achieved so far sees more cost-saving pacing from NTT East and NTT West. We need to see more progress from NTT DoCoMo. We need DoCoMo to achieve earlier -- the additional target I mentioned earlier. And then, the breakdown of the full JPY 40 billion. This is rather difficult to explain. It is still difficult to explain, therefore please allow me and please bear with me that I will not be disclosing too much about the specific matters. JPY 40 billion is an appearance number or assuming number. There are also various risks too. Will we be enough achieving JPY 40 billion in the second half of the year. Because of the risk, we may have to do more. JPY 10 billion plus JPY 30 million, JPY 40 billion, if we talk about this total amount of JPY 40 billion under this assumption, about JPY 30 billion if you check clearly, what are apparent out of the JPY 30 billion is last year, in NTT Communications, there were impairments. This will disappear this year. And a more simple example is earthquake disaster-related expenses and costs that were experienced last year will not occur this year. These will rather cover the JPY 30 billion. And then one more thing to add is although still early, the pension system we intend to move to DC, Defined Contribution system. We are continuing review for this. In the third quarter results announcement, I think we'll be able to announce about this. In total, JPY 40 billion is what we expect, which means JPY 30 billion is quite identified, quite visible.

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

Then what will result in that additional JPY 10 billion, simply put?

Unknown Executive

Inclusive the company that revised JPY 30 billion this time, we need to see more profits from this company and also the other companies NTT East and NTT West as well. Cost control alone will not be able to cover JPY 10 billion. NTT DATA's orders -- actually, the loss-making projects are quite difficult and it takes a lot of manpower to process. These projects are requiring a lot of costs upfront to cover for the delays, but we can catch up in this aspect. And as you are aware, NTT DoCoMo, how can NTT DoCoMo do well in the second half of the year? We'll make a difference and all of these combined together, we think will make the JPY 40 billion number achievable. And as I said, in a form of a joke at the beginning, we are now able not to have to make revision to our guidance. But nevertheless, it's quite difficult. Two years ago, NTT East and NTT West were difficult. Last year, DoCoMo was in difficulty. This year, we saw DATA to see difficulty. If we have to not see something like this, I can be more cheerful, but I hope that everything will be in sync in a cheerful bright mode.

Kazuhiko Nakayama

Thank you very much. Next question, please. Are there any questions? Yes, please.

Hitoshi Hosoya - JP Morgan Chase & Co, Research Division

JPMorgan, just one question. I would like to turn to your material entitled Accelerating Innovation and Collaboration for the Next Stage. What you're saying is that by doing this, how much future revenue or profit is likely to occur? And maybe it's very difficult to translate to profit, but what positive can we expect in terms of your P&L, your profit and loss, going forward? In what area, what revenue will be possible, what's the size of the potential revenue? Unless that becomes visible for us, the words that you have on these pages, and we did hear your explanation, but upon first glance, it seems like simply a bulk of R&D expenses. That's how I see it. So in a nutshell, it simply is like a cluster of costs -- continued cost, that's going to be required going forward. So can you talk about the benefits of these efforts especially from the financial perspective, and when that's likely to be visible?

Hiroo Unoura

Well, as far as concrete numbers are concerned, I'm afraid we are not yet able to identify that at this moment. What we want to say is that if the current broadband -- if we are to try to maintain broadband infrastructure access as things stand today, then the costs we'll simply incur, we'll have to simply expand facility and also expand our capacity, and that will translate to increased cost for NTT East, West, and [indiscernible] for example. So that's why we don't want to depend on the hardware. We want to add software control to the situation. So we will be able to contain cost and that's the big element. Now by having sophisticated broadband infrastructure and by carrying -- we cannot -- and again, we cannot stop our efforts in relation to have this advanced technology in this area. That's part of our mission. So we want to create innovation so the cost can be reduced. We are not able to share with you concrete numbers, but without a doubt, this is -- these are not efforts which will simply lead to increase in cost. We hope that we'll be able to convince you of that. Then, what are the impact on the revenue side? I did omit this but various services are likely to be generated as a result of these efforts. For example, B2B2C is what we envision. For example, the Wi-Fi initiative that I mentioned. As a servicer, we'll be offering the infrastructure and will be having greater convenience to the users. So based on this sophisticated broadband infrastructure access, we'll be able to generate these new services on top of that. So against that backdrop, we'll be identifying new revenue sources. As I mentioned midway in my presentation, the stage of the competition is going to transform and it has to be changed. In a nutshell, it's not going to be a conventional type of competition between switches of -- consumers switching one carrier to the other. I think it's going to be a type of competition which requires collaboration. So with innovation, we'll be reducing our cost and also, we'll be introducing infrastructure that offers greater convenience. And as a servicer, we are going to end up being simply one of the pack. Although we're one of the pack, however, as a provider behind the scenes and as an enabler, we hope to identify new revenue sources. So therefore, these are the efforts required as we head toward the next stage. I'm afraid that we're not be able to share with you concrete numbers although you asked your question. But unless we are confident that we can do this, then, we will not emerge as a value partner. We cannot become viable as value partner unless we can achieve these efforts. So therefore, we want to be able to add capacity to ourselves and identify new business model along the way. And hopefully, we'll be able to share revenues, reaching ourselves and our partners. So that is the structure we're likely to see in the coming next stage. Unless, that is the case, our business will no longer be viable. We'll be ending up simply expanding our facilities. And this is a challenge which is commonly faced by all the carriers around the world, but we are going to pursue the -- we're going to pursue these efforts. After I became the President, in the second -- or in the first half of my tenure of these various ICT-related companies. And in the last couple of months, I had discussions with telecom carriers who can be potentially credible and reliable partners for us. So therefore globally speaking, within this collaborative environment, I think the telecom carriers are trying to business -- develop new business models. So we want to be a central player in that. So that's the intention behind this particular presentation material. I know that it's not a straightforward response to your question but I do hope that you will expect a great deal from our efforts.

Hitoshi Hosoya - JP Morgan Chase & Co, Research Division

Then, if I could ask, what about the time horizon? In the third page, you talked about 2020, for example. The -- I suppose you're envisioning the Tokyo Olympic Games in 2020, that seems to be the timeline. So you're talking about efforts that you're likely to achieve in this timeline.

Hiroo Unoura

Well, if you ask about the timeline, what's supposed to be the target here. It's quite clear, 2020. But please imagine what is going to happen. The users will be having diverse array of handsets and devices and they are going to be accessing the network through those devices. It's not just DoCoMo, it's not just NTT East and West. We are not going to be viable. We don't want, however, accommodate the increase in traffic simply just on increasing our facilities and capacity. We want to be more efficient. And that strength will allow us to enjoy benefits in the next stage. And I believe globally, our experience will -- can be leveraged and new business opportunities can be identified.

Hitoshi Hosoya - JP Morgan Chase & Co, Research Division

If I could ask another question, additional question. This relates to what Ms. Masuno mentioned and you responded to Mr. Masuno's question. You're talk about the next fiscal year?

Hiroo Unoura

It could be that DoCoMo will have to bring forward their profit.

Hitoshi Hosoya - JP Morgan Chase & Co, Research Division

No, I'm talking about the cost-related efforts, DoCoMo.

Hiroo Unoura

Well, let me put it this way. Maybe -- well, DoCoMo's cost-reduction target here was announced, which was one year later than the other group companies. So I'm saying something that they need to bring that forward by one year.

Hitoshi Hosoya - JP Morgan Chase & Co, Research Division

So you're saying that as the NTT Holding Company, you instructed NTT DoCoMo to bring forward their target here.

Hiroo Unoura

Yes, we're having discussions with DoCoMo. And depending on the marketing and sales, I'm sure that DoCoMo will have an opportunity to express their intentions and their plans. That's what I wanted to say.

Kazuhiko Nakayama

All right. Any other questions? Yes, please, in the front row.

Yoshio Ando - Daiwa Securities Co. Ltd., Research Division

Ando of Daiwa securities. I have been listening and you have been talking about 2020 Tokyo Olympics, a goal like timing. Probably, NTT shares are not considered to be Olympic-related name so far. But with Olympics, how are you going to move into the new stage? What will be the effects? What will be the fruits? And with BT, what were the effects that they experienced? Can you go back to their experience? Maybe BT's experience was what you based your expectations on. What effect -- what rewards do we want to reap? Is there any specific example you can raise to us what the Olympic can bring forward?

Hiroo Unoura

I'd said please imagine the big event in 2020. This was how I said. Why? Because at this stage, what is going to be the impact of Olympics on our business? If I talk about that, we will be penalized by IOC. If we did so at this stage, IOC and JOC, according to the current schedule, next year February, the organization committee will be established and next year, the partners will be sought after. Until this is complete, we cannot comment anything. Profit-wise, it is not going to be the profit opportunity just for the Olympics, but there will be business opportunities post-Olympics as well. In this sense, I am not able to give you the details about the 2020 Olympic event opportunities. That will be too risky for us.

Yoshio Ando - Daiwa Securities Co. Ltd., Research Division

Then, rather than details of the Olympic opportunities, what was the BT's experience? What were the benefits before and after the Olympics for BT? Anything that we can surmise? Maybe some other opportunity.

Hiroo Unoura

If you can come to interview me because I am not in a position to talk about BT in this meeting. From BT, we have heard some things which I am able to share with you but not in this meeting. After this financial results presentation meeting, I will go out on IR meetings. And this year, I will mainly visit Europe, and there will be a half day of time I intend to spend at BT.

Yoshio Ando - Daiwa Securities Co. Ltd., Research Division

And today -- there was not much mentioned today about fiber-to-the-home, with the recent situation of fiber-to-the-home, and cancellations, churns maybe coming down a little bit? What is the competitive situation compared to 6 months ago, competitive landscape may be changing? If you can clarify the situation, explain to us.

Hiroo Unoura

Yes, thank you. This is a wonderful opportunity. Therefore, instead of just speaking myself alone, I would like to ask my fellow colleagues to speak too as well. Mr. Tsujigami will explain.

Hiroshi Tsujigami

Then, fiber competitive situation and churns, I shall respond. Churn rate has improved compared to last year. Compared to first half last year in East and West, 80,000 cancellations -- improvement in cancellations were seen. The factors are, as you're aware, the discount service has been penetrating. This is one thing. Secondly, the well-established medium-size companies and SMEs are our focus areas we have been saying from recent past. In these corporate areas, the yield is quite good, they stay. Computer consumers, once they sign up, they stay with us and churns end up to be lower. And in this area, as you're aware, in NTT West as of October, 1,000 people staffing have been shifted to this area to strengthen this business. And NTT East, established medium-size companies and SMEs, there is more shift to these corporate clients. And we are seeing a good feel. And further, in alliance, B2B2C model is being pursued. By being embedded into the client's business, we are able to reduce churns. With these various efforts, we are seeing gradual effect in the churns. This is all.

Hiroo Unoura

One example we raised, Wi-Fi and servicers using Wi-Fi for their own business. This kind of effort is backed up by NTT's fixed line fiber business. In the past, we focused a lot on consumers' fiber business but consumer business is becoming more difficult to grow. Thus, in this sense, we are now focusing more on corporates in our sales efforts, resulting in less sales promotion expenses, contributing a lot to cost controls by NTT East and NTT West. In any event, fiber business in going towards the next stage fixed and wireless, fixed and mobile. Mobile is not just mobile alone in itself but inclusive of Wi-Fi. How can we improve convenience to the users will be the big theme in the next several years. In a sense, FTTH demand, we think we can get corporate demand for broadband. And as a series of not relying just on internal resources, DoCoMo has now started utilizing East and West Business Ether WIDE. DoCoMo is using more for the base station lines, NTT East and NTT West lines. Maybe I should not talk too much about this, but NTT East and NTT West fiber business is changing. And in the future, when we have 4D [ph] and 8K [ph] era, there will be a more stable business opportunity for FTTH, we think.

Kazuhiko Nakayama

Any other question? Thank you very much. If -- we would like to conclude the session at this juncture. Thank you for your kind participation. Thank you very much, ladies and gentlemen.

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