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Nippon Telegraph & Telephone Corporation (NYSE:NTT)

Q4 2013 Earnings Conference Call

May 14, 2014 05:00 ET

Executives

Hiroo Unoura – President & CEO

Yoshikiyo Sakai – SVP & Director, Finance and Accounting Department

Analysts

Hitoshi Hayakawa – Credit Suisse

Daisaku Masuno – Nomura Securities

Kei Takahashi – Mizuho Securities

Tetsuro Tsusaka – Morgan Stanley

Yoshiyuki Kinoshita – Merrill Lynch

Ikuo Matsuhashi – Goldman Sachs

Hideaki Tanaka – Mitsubishi UFJ Morgan Stanley

Unidentified Company Representative

Thank you very much for gathering today out of your busy schedules. We should now like to start the financial results presentation for the year ending March 2014 of NTT. I’m the moderator of today’s meeting Nakayama of IR office. First of introduce the members present today, President and CEO Mr. Unoura, Senior Executive Vice President, Mr. Watanabe. Senior Vice President, Director of Corporate Strategy Planning Department, Mr. Tsujigami. Senior Vice President, Director of Finance and Accounting Department, Mr. Sakai.

Please make sure you have all the hand out materials, there should be three. First is a copy of the slides titled financial results for the fiscal year ended March 31, 2014 and financial forecasts. Second is also a copy of slides Fiber Access Collaboration Model and thirdly a booklet financial results reading material.

Further disclaimer is written on page one of the presentation material related to the forecast numbers and future outlook included into this handout materials presentation and questions and answers. Please have a read of the disclaimer. Today’s presentation meeting is webcast live in our IR website, further the recorded video is scheduled to be distributed on demand basis at a later data. We ask for your understanding beforehand. And for today’s schedule proceedings first our President Unoura will give a presentation of financial results outline and financial forecast and then receive questions from you. Mr. Unoura, please.

Hiroo Unoura

Thank you for joining us. This is a very busy schedule. I appreciate your kind attendance. Without further ado I would like to present to you the financial results for the fiscal year end of March 31, 2014 as for the financial forecast for fiscal year ending March 31, 2015.

As you’re probably aware of the numbers let me rehash and explain to you the numbers. Starting with the fiscal year 2013 highlights and at the highlight of the financial results is that they are driven by the growth in the overseas business, we were able to realize increase in operating revenues for fourth consecutive year. Net revenue reached ¥ 10,925.2 trillion, an increase of ¥24.4 billion. Operating income as you’re aware due to the unprofitable transaction impact in the data communication segment and also the loss or the decline in profit in the mobile communication segment. Although there is such impact from that, the group of -- was able to offset that through an increase in other sector inclusive of regional communication segment and we were able to realize growth in operating income.

As for net income we were able to realize record high in the last six years. As you’re aware the valuation gain and due to redevelopment of automotive district, sales of property -- maintenance due to compression of financial expenses we were able to realize increase of ¥63.5 billion year-on-year and reach ¥585.5 billion. So therefore EPS as a result reached ¥509 representing 18% increase year-on-year so therefore EPS is also growing in a very robust fashion.

Turning to global cloud service. Let me review the trend of the global cloud service overseas revenue as a result of sematic cross selling and also due to promotion acquisitions increased to ¥141.9 billion year-on-year and reached ¥1.2 trillion now accounts for 10.9% of the consolidated revenue. Let me now talk about network service competition enhancement [ph]. As you’re aware the user base for smartphone strategically and collectively is increasing in a steadfast fashion and also as we have been talking about since last year, Wi-Fi platform also shows robust growth and the number of area owners and I suppose refer to them as a partner such as company’s local government.

The number of these partners are now increasing triple fold compared against the previous year. As for cost reduction we’re ready to access network against the medium target of ¥500 billion cost reduction and by March 2015 we have already realized 80% progress against the plan, as for shareholder return is concerned we implemented ¥156.5 billion share repurchase centered on the buyback of government owned shares back in the third quarter and the total share repurchase reached ¥406.5 billion as for dividend as we announced at the time of the interim financial results we’re going to increase the year-end dividend by ¥10 so for the full year the dividend will be reach ¥170 million per share.

Turning to age number 3, this shows you the highlights of the consolidated fiscal 2013 results but I guess the plan unfortunately in terms of both revenue and income or profit we were not able to meet at the original business plan. At the time of the first half of the previous fiscal year there was a loss of profit in the data segment and we did announce that we actually offset the loss through group efforts. We have been able to offset that part, however unfortunately we weren’t able to cover the decline in Docomo’s profit. However we were still able to realize growth in operating income on a year-on-year basis.

As far as net income is concerned I recall saying that we want to exceed the original business plan. I’m somewhat ashamed but I think we’re more and less in line with the business as far as net income concerned. Let me now talk about the next slide, fiscal year 2013 contributing factors by segment at the communication data and DOCOMO has already covered this. If there are any questions I would be more than happy to address them during Q&A but I will not offer explanations on the mobile segment and the data segment.

As far as regional communication segment is concerned on a non-consolidated basis but NTT is in-line with the previous year but inclusive of the subsidiary firms of NTT is the must and also because of the gap between U.S. and Japan in relation to a pension related accounting and also in the previous year NTT East had reflected reconstruction related cost pertaining to the earthquake but these impacts are no longer there. So therefore based on U.S. gap business we were able to realize ¥34.3 billion increase in operating income for the regional communication segment.

Turning to long distance international communication segment NTT communications has shown very strong results. I would like to add a bit about the Dimension Data. As we have consistently Dimension Data is now involved investment in advance or proactive investment and also some of the subsidy from the Dimension Data is faced with not strong performance so as a result the Dimension Data is experiencing decline in operating income. However express data in Australia in the beginning of April this year this was sold so in that regard we will be able to reflect proceeds from the sale of that company for this fiscal year performance. So therefore some of the elements that had dragged down the performance of the Dimension Data no long exists.

As far as revenue is concerned if we exclude the impact of the foreign exchange and based on local currency basis Dimension Data's revenue has actually increased by 9% on a year-on-year basis. So it is enjoying very strong growth.

Next let me now talk about the fiscal year 2014 forecast summary if I may. As far as operating revenue is concerned due to the growth in over sales and business inclusive of cross selling and also due to the results of the impact of the acquisition last year in terms consolidation. We’re aiming to realize five consecutive years of increase in revenue. We’re aiming at ¥11.2 trillion which represents an increase of ¥270 billion year-on-year and on a consolidated basis this number would be record high revenue, we expect to realize that.

Turning to operating income as you’re aware DOCOMO is projecting substantial decline in their operating income for the year. On the other hand NTT Data expects increase in the operating income and on top of that a group as a whole intends to cover. So we’re aiming to realize operating income which is on par with the previous year. I will be very candid with this audience.

In the past, in this type of forum we have provided I personally had provided various numbers and I’m aware that this represents a bit of stretch compared against the previous financial results presentations. However, as I will talk about later on due to the Hikari collaboration model initiative, we hope that we will be able to realize a reduction in operating expenses. So all will hinge on to what extent we'll be able to realize reduction in marketing expense but please accept these numbers as an expression and illustration of my strong resolve to achieve these results.

So as far as net income is concerned we anticipate being able to achieve net income which is on par with the previous year and as we will talk about later on as far as EPS is concerned together with the share repurchase program we anticipate a ¥136 for the year representing 5% increase on a year-on-year basis.

Now on shareholder returns, today’s Board of Directors meeting made a resolution on share repurchases, and increase in dividends for share repurchases, a ceiling of ¥250 billion was approved. Last year November as you’re aware we cancelled our treasury shares following which the government had an overhang.

Out of the government overhang this year March we acquired 26 million shares. This was related to supplementary budget and this time the government is also including sales of 36 million shares in their budget to sell and this time our intention is to repurchase from the government.

For dividends, we also announced beforehand in the previous year ¥10 increase in interim dividend of last year and this year we will also do the same ¥10 increase in the interim dividend. This will mean full year ¥180 an increase from ¥170 to ¥180 this year increased from last year to this year; this will mean ¥90 first half and ¥90 second half.

Now I should like to talk about our progress against the financial targets and the mid-term management plan. For overseas sales last fiscal year March 2014 we booked ¥12.2 billion, a $200 million increase year-over-year and for this fiscal year in March 2015 with increased cross selling and through the consolidation effect of M&As we did last year we expect a ¥2.8 billion increase in oversea sales year-on-year at ¥15 billion.

This is dollars. A $2.8 billion increase to result in $15 billion, at last fiscal year we talked about $150 million cross selling first half of the year inclusive of outside of North America we booked $500 million, in the second half $200 million. In total full year we booked $700 million. We continue to expect big pipeline of large projects upcoming. I look forward to being able to give you good news going forward but some users regrettably do not wish to be named and to be announced therefore I cannot promise that I will be naming the clients. And for the proportion of corporate sales represented by overseas sales, last fiscal year was 37% and this fiscal year will increase to 43%.

And next, on access network cost reductions and capital investments, access network cost reduction in March 2014 I said was 80% progress to the midterm plan and this year we intend to further reduce costs by ¥190 billion. This means the midterm goal for cost reduction will increase from ¥500 billion to ¥600 billion. The foremost key point in increasing this goal is inclusive of DOCOMO NTT East and NTT West. We will have a new business model transitioned to the new business model is assumed.

This means the conventional sales promotion expenses and marketing costs to be reduced and how much we can reduce these costs are the key and the profit resolution I made earlier is also up to this point and if that should most substantially come in the second half of the year. This is where we will strongly emphasize and on CapEx to sales in March 2014 NTT East, West and DOCOMO reduced ¥115 billion in March 2014 and improved to 16.7%. This fiscal year we will continue to further streamline CapEx and we want to lower and streamline to a ratio in the 15% ratio.

The CapEx amount, the access network related, CapEx amount, we plant at record low level of ¥1.75 trillion and you can see in asterisk for the explanation and actually if you look at the graph of CapEx amount, the real estate investment with NTT Urban Development and NTT Facilities Investment for solar power generation. These investments are increasing, therefore, we include these numbers solar power generation real estate is one CapEx amount and we also have only communications CapEx amount included separately. Telecommunications, we’re making steady progress towards a 15% target and then the final explanation slide on EPS growth.

As I mentioned earlier EPS end of March 2014 was ¥509 compared to March 2012. We realized 39% growth in EPS and for this fiscal year March 2015 we shall expand to ¥536, this will be a 46% growth. As I have explained towards the financial targets in the midterm management plan whether it be global cloud service expansion and cost reductions in order to strengthen competitiveness of network services and in CapEx to sales streamlining EPS we’re seeing favorable progress in all respects and then this is all for the financial results.

Let us move on to the next set of slides. Let me now talk about the Hikari collaboration model contributing to the creation of new value. At the press conference which has carried at 3 PM, all the questions from the press were focused toward this particular material and I made the same statement at that juncture. The Hikari collaboration model as you’re aware is an effort to offer wholesale model FLET'S Hikari that's offered by NTT East and West. So today I would like to share with you the concept behind this model and also the backdrop and the intention as to why we decided to launch this new model.

As you’re aware, with NTT East and West launching this model not only NTT Group Companies but players and companies from other industries will be able to benefit from the so called bundled services. But if I could reiterate my intentions repeatedly, this bundled, discount or bundled services is simply a mere tool. This is not the end objective. That is not the reason why NTT still wants to migrate to the Hikari collaboration model. We do not intend to use this as a mere tool for over competition of our market share. It is important that this model serve as a tool to reintegrate the utilization of ICT. So this is the result of the ongoing discussions I had with NTT East and West.

So at the risk of repeating myself I would like to reiterate our intentions and then go on to the explanation of this material. Let me begin with the first slide. As you see on the top and this is something that is similar to what I have repeatedly mentioned in the past and many people have pointed out that the ICT utilization has not progressed so it is in response to that issue. As far as I’m concerned NTT boasts the most advanced optical fiber access infrastructure in the world. On the other hand sales of this fiber as a mere access tool that has become stagnant and also because of the structural challenges faced by NTT Group. NTT is still an optical access service; we continue to be fixated on that. By then fixed mobile convergence services will not flourish. That is the thing that we had on our part.

I will talk about this later on but in order to breakthrough this current situation and we have this intensive discussion over the past six month and since ever I became the President I have always been thinking about the transformation of the business model in my mind. So that is the backdrop, NTT East and West will launch the wholesale fiber access service.

As I mentioned earlier this is to stimulate the ICT market by supporting a variety of marketplace to create new value. We want to stimulate the ICT market and as I see on the top left we also want to contribute to the resolution of social issues and the enhancement of the industrial competitiveness of Japan.

As I mentioned during the press conference and I was asked why now, as a matter of fact last fall I mentioned that we should bear in mind the 2020 Olympic games and we are now seeing the acceleration, innovation, and corroboration when we made to that announcement back in fall.

Although we talk about the year 2020, we only have few years remaining. So in that regard 2020 is not the start of the new services. We should make sure that the new services will have flourished by 2020. If that is the case then these new services and business models should be explored together right now with the partners and in order to do that we really have to launch this type of service. I think we’re really at the deadline for that. So that is why at the timing of this announcement of the financial results I wanted to announce the launch of this new Hikari collaboration model and toward that end since last year I’ve had discussions with our colleague at NTT East and West.

Let me now go on to the following slide. Here we talk about the wholesaling of fiber access service, that’s why as far as fiber service is concerned this involved lease of facilities by bundling part of the facilities based on interconnection rules. But this time around it's not about lease of these facilities; it is of the core network. We want to offer access network as a core service if you will and offer this on a wholesale basis. And it will not just involve telecom players, but also a wide variety of players who don’t have their own facility so that’s why we want to aim at.

I believe that this is the world’s first nationwide wholesaling of fiber access services. So we’re the first to challenge that. Now in the launch of this wholesaling service we want to make sure that a wide variety of players will be able to use this, that is the assumption. We’re now focused on offering non-exclusive service within the group. Again the details will be offered at a later date but the wholesaling conditions and the pricing in particular.

We want to offer equal pricing for players within and outside NTT Group. And we also believe that the current -- this particular service can be provided within the current legislation and it does not require changes to the various governing laws inclusive the telecommunication business law and the NTT law. And also based on, we’re offering on a shared access basis, to various players and that access will continue. So therefore with these two models we believe that a wide variety of players will be able to engage in this business through a new collaboration and also competition. So therefore new collaboration and competition will take place in the marketplace which will stimulate the ICT utilization here in Japan. That is what we’re aiming at and we believe that NTT East and West for this very reason is tackling this major transformation in their business model.

Now it might take some time but from the existing B2C model we’re shifting to B2B to B2C model. And this will also entail changes in the NTT East and West business model and also this also entail movement of people. So this we'll do in parallel, but at the same time we'll continue to aim at world’s best broadband infrastructure.

Next slide, I think this is simply a given as far as you’re concerned but this Hikari collaboration model NTT East and West will offer a wide variety of market players their own integrated services to end users by combining their strength with the wholesale fiber access services of NTT East and West.

So therefore by using NTT East and West fiber these players will be able to offer their services under their own brand. In the case of mobile players they can combine this with their mobile services and of course Wi-Fi and Bluetooth and other wireless services can also be integrated in this model and also MVNO and ISP players will also be able to tackle this new service.

Now this is not just geared towards new users. People who are already existing users of FLET service will also be able to opt for this new service.

So when other players offer new menus users may shift to those new menus and services at that juncture.

Next slide, this is a slide that I explained when we talked about collaboration in last fall but if there is one difference is that with the launch of this new Hikari collaboration model, collaboration and innovation involving various service players can be accelerated that is our thinking.

Of course as far as this collaboration model is concerned the first customers for NTT East and West are projected to be telecom carriers in the middle and also MVNO and ISPs. So existing conventional telecom players are likely to be the first group of customers. However, companies in other industries and for that purpose actually we do need notification to MIC, but for players in the other industries we believe they will not be able to take part in the marketplace through these new regime. So this type of -- by use of this collaboration model rather we’re hoping that demand for optical fiber service will increase and that efficiency of the utilization NTT East and West facilities will also improve as a result.

Next slide is a sample case and we have actually several cases and several case images but we haven't progressed with actual specific discussions but this is the health care area image plus in addition to NTT East and West our R&D will not only restrict to telecommunications R&D but will also conduct R&D to be able to provide to players in other industry sector. For example, joint development with Dwango is something we have already announced, although not directly connected to this collaboration model.

But the other day with Mitsubishi Heavy Industries, our R&D also will be conducting joint R&D which is the thing we always announced to broadening at the exit of our R&D is something we want to emphasize going forward and the next slide is a repetition about the benefits of the fiber access collaboration model and the key point and the benefits for service players is inclusive of Wi-Fi and Bluetooth, by having communications environment that people do not have to be aware of fixed or wireless, be able to provide new services converging communications and their industry’s real business and the benefits for end users will be to be able to innovative services through the creation of value by a variety of market players and also be able to choose from a various pricing.

Finally, the schedule going forward, this is really a rough schedule but today we announced and following the story NTT East and West have been working on this business so far and by summer time we should be able to present outline of the service and the conditions. Afterwards those people who want to be partners and depending on the potential partners there can be differences and for the wholesale pricing we do not intend to differentiate in pricing but that can be different services as just maintenance service and for administrative work. Some clients may want to ask NTT East and West to do and other clients may want to do on their own, we will listen to the requests of the potential clients and I think we need some time for coordination as well.

Therefore the start of provision of the collaboration model, we aim to be somewhere in the middle of the third quarter. Just in case if you’re interested for companies who are interested we have contact enquiry point available. In the NTT Communications press conference there was also an interest mentioned. We very much welcome possible enquiries and proposals from outside of the group as well.

And to keep coming back to you with the NTT, acronym we have this new phrase for NTT Next Value Partner for Transformation by Trusted Solutions. This cooperation idea was a part of what I intended to be the new NTT. This is all for my presentation today.

Question-and-Answer Session

Hitoshi Hayakawa – Credit Suisse

Hayakawa from Credit Suisse. First, I would like to ask about the Hikari collaboration model. I think this is going to have a lot of damage on KDDI, NTT Communications, and NTT DOCOMO, if they all migrate to this. What is your thinking about the pricing for this model? In principle, comparing a FLET'S offer by NTT right now, it has to be less expensive. Unless that is the case, if players like SoftBank were to involve -- be involved, then there is no benefit. So as far as what you envision, comparing this to current FLET'S pricing, what level of pricing do you envision for the wholesale? I understand that you're going to be disclosing this in coming summer, but what's the level of pricing envisaged for this collaboration and wholesaling? Should I ask one by one?

Hiroo Unoura

No please continue.

Hitoshi Hayakawa – Credit Suisse

The next question is related to NTT DOCOMO. The net add for NTT DOCOMO is 33.7 million for the year. They are aiming at number one net add for the mobile industry for this fiscal year. So in essence, on a de facto basis, they are declaring they are going to aim at the number one net add for this year. Now this is Hikari collaboration model, may I take it that you had some prior consultations with DOCOMO so that NTT Group as a whole will be able to contribute toward improved net adds for DOCOMO? Is that the case? Did you have some internal discussions within NTT Group on this matter? Those are my questions. Thank you.

Hiroo Unoura

Thank you, I would like to respond to your question in the reverse order. As far as DOCOMO is concerned, with regard to bundled services -- and DOCOMO does have the willingness to be able to engage this service. However, we did not have discussions on this point with them. I'm sure starting from tomorrow; DOCOMO will be in a haste to have discussions on this model.

So DOCOMO's net add projection for this fiscal year does not reflect the impact from this Hikari collaboration model. Now what is my take on this? I do envision that the Hikari collaboration model will have a positive impact on DOCOMO's net add at the end of the day.

Let me now come to your first question about the pricing for the wholesale. In essence this will -- the pricing will have to be set on a bilateral basis, in other words between NTT and between the potential partner. Through bilateral discussions, the pricing will be set. However, as you are aware NTT Group will be questioned as to whether or not we are impartial and fair in terms of the pricing. So that is the case. So that being the case, how can we disclose and announce the pricing, we have not yet arrived at a specific answer at this moment. But the end objective of this model is not just to offer bundled services.

However, it's important that we set pricing which will allow us to maintain competitiveness. And I'm sure that that will be the request on the part of the partners. So we hope they will be able to arrive at a pricing regime which can meet those requirements. So how do we disclose that pricing? Inclusive of that, we're still giving some thought to this matter. And I'm sure that we'll be able to have discussions with potential partners, and I hope that through those discussions we'll be able to set the pricing. Now if or when we do launch this wholesale pricing, we don't assume that that initial pricing will remain constant over the years. I'm sure that NTT East and West will make efforts to eventually reduce that pricing subsequently. So as I mentioned at the outset, it's not so much what about non-group players. We really want to expand the players who can actually contribute toward the stimulation of the ICT market. For example, it just so happens that MIC has coincidentally launched their special study group discussions. So the timing was coincidental.

But I believe that the study group, special study group, is carrying out the discussions in a very forward-looking manner. Unfortunately the telecom players are still stuck in a discussion of four to five years ago. But I hope they will be able to graduate from this level of discussion as soon as possible. I'm sure that the partners will increase in number going forward. We want to go together with these partners to be able to expand the overall marketplace. As I mentioned at the outset, we don't want to use this model as a mere tool to simply expand our competitiveness over market share. The model transformation will involve pain on all fronts, and we hope that you will understand our intentions behind this model.

Hitoshi Hayakawa – Credit Suisse

It's a follow-up question, I’ve a follow-up question. You mentioned bilateral discussions with potential partner as far as pricing is concerned. Article 30 of telecommunication business law is that NTT East and West and DOCOMO are specified telecom players, meaning that NTT East and West, they probably are not able to set bilateral pricing under the current provisions of the telecom business line. So if that is the case when you consider this Hikari collaboration model down the road for example people buyers, bulk -- large customers, for those large-volume customers, are you able to set more flexible pricing?

Hiroo Unoura

Your question relates to consumer players, in terms of the regional business that’s difficult but for the business users for example on a de facto basis we already started this on a bilateral basis and this is not prohibited under the provision. I see, but let reiterate, we’re not going to provide incentives to the NTT Group players. That is not the stage that we have on mind. We want to make sure that a wide variety of partners will be able to enjoy these services on equal footing with DOCOMO for example but for small volume users of course we have to give thought to that but in principle for partners at a certain scale NTT East and West intends to offer equal footing conditions.

Daisaku Masuno – Nomura Securities

Masuno of Nomura Securities. Mainly I’ve two questions, the first question is this study collaboration confirmation question, looking around the market there is large scale potential users who are possibly DOCOMO NTT Communications and SoftBank, Yahoo. These can be potential large users plus MVNO and ISPs. I think there will be many but basically as long as the scale is not that different the pricing terms will be the same. Is this going to be the case? I want to confirm. And this was my first question. And then the impact NTT East and NTT West if the existing users switch from their own lines to this wholesale lines if the existing fiber lines switch to the wholesale line I think normally profitability will come down but you can reduce sales promotion expenses, on the other hand therefore you will do your best to be part of the profit wise and if there is going to be a total big volume of course because of the multiplication effect, there will be more which will be more profits. I think this path is insight, is this the case? I want to confirm, this was my second question.

Hiroo Unoura

The first part on whether the same condition or not, customers have a certain scale or more we want to have the exact same conditions and potential partners will not necessarily be telecommunications carriers. For example, companies with membership buss I think also will be a potential partner. As individual operators we have not discussed but for example Securities Company could be interested for an alliance. Industries who are outside of our industry are someone we want to approach to, this is the true intent. Possible partners can be competing operators which can be fine with as far as we’re concerned and that will have an impact on NTT East and NTT West, as we say the NTT East and West companies have not factored in at all the Hikari collaboration model at all in their business plan yet.

Daisaku Masuno – Nomura Securities

How will affect their business result and how things will change in the first year, second year?

Hiroo Unoura

Many apologies to you who are in this meeting but I think there can be various cases possible. Simply put as based upon the question maybe the wholesale price. I am sure it will be lower than the retail price, this means NTT East and West sales will simply come down. On the other hand, can there be greater marketing cost reduction to more than offset and by collaborating with other partners in different ways there could be possibly revenue sharing model and fee income model. This new patterns of income model can be possible but I don’t think this will happen in the first year. In this sense we have been connecting various simulations internally but to be very candid NTT East and West broadband access business, we want to make into a sustainable business and how can we make this sustainable business NTT East and West broadband business. This was the key question in my mind and this has been NTT East and West question too and this should not bankrupt, can bankrupt or be unsustainable. We need stable profits.

It could be the subsidiaries of NTT East and West but looking at the consolidated basis of NTT East and West we want to take up a new business model so that when we look back to today we feel that we’re happy that we made this decision.

Daisaku Masuno – Nomura Securities

And will there be lines that will be sold through the wholesale business as a whole? Follow-up question.

Hiroo Unoura

Yes that is going to be what we want to aim for.

Daisaku Masuno – Nomura Securities

And then my next question is financial results, when planning profits for March 2015, DOCOMO has already announced a big decrease in operating profit and this has to be covered or offset somewhere. How are you going to do that? And then share buyback of ¥250 billion is to respond to government sales but what about share buybacks from other than the government?

Yoshikiyo Sakai

In March 2015, operating profit I mentioned in a very candid basis that is in the past 12 years I have been present in this meeting and this is the most stretch I am making this time. But as I mentioned NTT East and West’s sales expenses and sales cost, how long are we going to continue to provide a free construction cost, how long will this continue? This is part of answer to your question and in the second half of the year as we discuss with partners how things will turn might be a part of a question but we will for your information stop providing free construction cost. Of course the partners will be paying for it, the construction cost but how can we minimize the construction cost, this is also a big challenge for NTT East and West.

In this way as long as we are having collaboration there will be need to make efforts by NTT East and West as well. In this sense for operating profit, yes this is a big stretch but this is my resolution we want to somehow achieve this target. And for share buybacks you mentioned, when we -- in this meeting please do not ask about long run future, in this meeting, but as I mentioned at the outset to the resolution this time is to respond to the government’s sales. We will respond to government sales and we will buy back from the government after which we will be explaining to you later in the future but I’m not ready to talk about that long ahead of the future at this moment yet.

Kei Takahashi – Mizuho Securities

Takahashi from Mizuho Securities. I’ve two questions if I may, first question relates to the wholesale. Indeed in the discussion taking at MIC, this has arrived -- emerged rather as an agenda. Now the direction of the discussion at MIC is not yet totally clear but the fact -- what is the objective behind announcement of this new model at this timing that’s my first question.

Hiroo Unoura

Shall I respond to your first question first then? As I mentioned in the beginning originally as far as this matter is concerned I had intended to announce this model in conjunction with the announcement of fiscal 2013 financial results. So therefore I did not intentionally link this with the progress of the discussion at MIC's advisory panel. However, transforming our business model will probably have an impact on the discussion taking place at the Ministry of Internal Affairs and Communications. Again this is possible within the current legislation but perhaps I believe they will be able to change the direction of the overall discussion with this announcement. As I’ve already mentioned within this special study group discussions are carried out in a very forward-looking positive manner so therefore as I’m concerned the new business model transformation that I have announced will probably be welcomed by the members of the special study group. However we have not yet provided official accommodation of this model to the members of the special study group and from tomorrow onwards I’m sure that they will ask us to explain this new model.

But as I’ve consistently mentioned this is an effort to explore new markets. In other words this is a model whereby the telecomm players in not at the forefront in the creation of a new marketplace. ICT Foundation should be a tool, in the past I mentioned that we should be aware of the fact that we’re no longer a player at the forefront but we’re actually one of the many players but we should be a very valued player and that’s part of the next value partner initiative that I mentioned earlier. So that’s the direction that we’re pursuing and together with various partners we hope that we will be able to work toward this end.

I had used the phrase that we’re actually a player behind the scenes. I understand that this doesn’t translate well into the English language but really want to be the behind the scenes but at the same time be able to expand our core business. That is the intention that we have and I’m hoping that our intentions will be well received by the people concerned.

Kei Takahashi – Mizuho Securities

My second question relates to a different topic. DOCOMO has announced a ¥500 billion share buyback and the -- this is share buyback which is on par with the cash on hand at DOCOMO at the end of the year. So as the NTT Holding Company, how do you assess the share buyback program and NTT DOCOMO?

Hiroo Unoura

Well how do I see it? That’s a very difficult question to respond to how we assess DOCOMO’s share buyback. I suppose you’re asking whether or not the NTT Holding Company intends to response to NTT DOCOMO’s share repurchase program. We have not yet made any decisions at this juncture. As far as I’m concerned I have had various interviews with DOCOMO to-date. What DOCOMO should be doing is to enhance this network competiveness and we hope that DOCOMO will be even more forthcoming and proactive in terms of enhancing their overall competiveness and one possible solution aside from the iPhone launch last year was probably the new pricing, billing scheme that was announced by DOCOMO back in April 10th. I’m not sure whether or not this is the right wording but the mid-term strategy the first stage of network competition enhancement should be carried out but also cost reduction should be pursued.

So the second stage is the new pricing regime offer by DOCOMO that’s the second stage and the third stage is the collaboration model that was announced. So therefore we have to bear in mind the competitiveness of NTT Group as a whole and then address this matter. And I’m sure that DOCOMO will be taking actions on its part and as part of that DOCOMO announced its share buyback. So, DOCOMO is contemplating the following step. And I believe this represents or this is an illustration of the conference that they can indeed go on to the next stage, so I’ve a very positive assessment of the share buyback program announced and as far as what NTT Holding Company is going to do, we want to give full thought to how we can respond to NTT DOCOMO’s share buyback.

Now as far as DOCOMO’s growth and progress is concerned it's not so much DOCOMO’s. In terms of DOCOMO with an NTT Group, DOCOMO is recycling profit to NTT Group as a whole.

Kei Takahashi – Mizuho Securities

May I take it that that position has been strengthened?

Hiroo Unoura

Well I’ve already presented and shared with my position at this juncture as to what we’re going to be doing going forward. This is something that will be decided by DOCOMO on their own volition and if need be I will be more than happy to have discussions with DOCOMO on this matter.

Tetsuro Tsusaka – Morgan Stanley

Tsusaka of Morgan Stanley. Thank you. I have to clarify pluses and minuses in my mind about the collaboration, it's not yet clear to me. First of all, the FLET'S fiber service, the marketing to fully push to the forward FLET. Where did FLET’s disappear when you promote Hikari collaboration? And this behind the scenes partner role, in other words becoming a wholesaler, will this result in the shrinking of the FLET’s marketing? Is this the way to understanding? And then in relation for users the pricing has to be proactive otherwise the users will not be using the wholesale service and if the price is attractive for the partner and if the price is attractive for company with many users like telecom carriers then wholesale pricing is lower which means less revenue for NTT in the long term but if the cost saving is greater than the revenue reduction because of the streamlining in marketing and sales expenses this will result in the end stable profit for NTT East and West. Is this already a firm design is this design already made? Is this understanding correct?

Hiroo Unoura

I think I’m bogged down in the depth more and more. The aim that I mention is we want to broaden the market. Surely several years ago there was a talk about broadband acceleration but when compared to these days when the main broadband was fixed, it is no longer the case. We have more mobile and there are also Wi-Fi. In what ways can services to users be provided if the market has already evolved? I think this direction is for sure. In this backdrop if our company just built and fixed lines or on the certain business like only in Wi-Fi or only in mobile then this will cause a lot of inconveniences to various people.

This is how we see, but nevertheless if we start this as a structural issue and start a big debate it will take years. We cannot complete by 2020, we want to do many more things and realize many more things by 2020. We do not to take this long time consuming approach. Not only FMC but we want to use Wi-Fi and Bluetooth and even more convenient communications environment and we want to provide a very convenient communications environment. This is at the basis and we want to make the communications environment available and used by various industries and various people.

FLET’s does not necessarily have to come to the forefront. Rather, FLET’s should not come to the forefront as long as NTT East and West is providing it is due to the regulations in NTT East and West difficult to move ahead and should we continue to provide various inconveniences to the various users. This has been my starting point, this is where my question started from and we want rather to be a behind the scenes player. We want to be a value adding partner and I think with this kind of positioning I think we can be a more effective value adding partner. I hope this answers your questions.

Tetsuro Tsusaka – Morgan Stanley

And then my second point and share buyback amount, your response was not to ask any further but if I calculate NTT DOCOMO we do not expect to rapidly improve profitability going into March 2016 and NTT East and West whether the new business model will affect positive or negative we don’t know yet. The net income we cannot be that optimistic I think. This time for example if we see flat income with this year and if there is going to be only ¥250 billion share buyback this year, next fiscal year we will have to be ¥800 billion share buyback to reach the goal. And Mr. Unoura you said 60% or more growth in EPS but with exact 60% you need as much as ¥800 billion share buyback next fiscal year and if there is not going to be any additional share buyback this fiscal year the operation is going to be very tough. What is your thinking? How should we understand? And I think 60% or more growth is at commitment target, how should we understand?

Hiroo Unoura

I asked not to ask any further about share buybacks and still you asked which means you’re demanding more answers. Government sales, yes we will buy back from the government. We will respond as quickly as possible. And of course we need to coordinate with the government in various ways but once we finish buying back from the government then at that point we will also know at what purchase price we bought back from the government and then after that stage we will be able to explain to you in a separate occasion. Can I finish at this stage? I should not be able to talk about things six months later, you will be depriving me of my pleasure after six months later. I hope that you will forgive me with this.

Yoshiyuki Kinoshita – Merrill Lynch

Kinoshita from Merrill Lynch. I’ve two questions, this relates to the previous question, my first question relates to the previous question. There are some uncertainties about the profit, of course it all depends on the model and also the new billing scheme or the pricing to be offered by DOCOMO. So in terms of the profit for the coming year, what sort of level do you have in mind? What’s the level of profit do you have in mind for the next fiscal year in terms of operating income?

Hiroo Unoura

You’re talking about next fiscal year? You’re not talking about this fiscal year, next fiscal year right?

Yoshiyuki Kinoshita – Merrill Lynch

Yes.

Hiroo Unoura

It seems that you all are very inpatient. For this fiscal year to be quite candid with you there are some uncertainties about the profit but we want to be able to secure certain level of profit and I believe that is indeed my responsibility. That’s what I’ve been talking about. For this fiscal year of course we anticipate that this is going to be the most difficult time. As far as next fiscal year is concerned we hope that we will be able to move toward a more positive trend. But beyond that it's very difficult for me to talk about the future and I would hope that you will understand my position.

Yoshiyuki Kinoshita – Merrill Lynch

My next question, with regard to NTT East and West. You talked about, is there going to focus solely on offering wholesale to partners? Do you’ve any thoughts of separating the value-added part and the team from NTT East and West? Do you have any mind to set two different service layers for NTT East and West?

Hiroo Unoura

I think this is a mixed question if you will. So the marketing team at NTT East and West, you’re suggesting that going forward they should be focused more on alliance type of business and I think that is indeed the case. Now the subsidiary firm, it's not so much subsidiary firms of NTT East and West but within the group as a whole they will probably be existing companies will be involved in this collaboration model but it could be net new subsidiaries will emerge within the group. So there is a possibility that people maybe shifting towards those new companies. So as far as this new business collaboration model is concerned as I mentioned at the onset this is going to involve a major transformation of the operation at NTT East and West, so that being the case with regard to cost and also as far as the operational cost of NTT East and West is concerned, this will also be reviewed in conjunction. So it's a process that may take a couple of years but there could be a possible shift of personnel from NTT East and West in this context and there could be changes in the operation to be pursued but NTT East and West in conjunction with that.

Ikuo Matsuhashi – Goldman Sachs

Goldman Sachs, Matsuhashi. I’ve two questions, first is, on cost reductions. Today according to NTT’s presentation that you mentioned today, the cost reduction target will be even more challenging and you will be reducing costs this year like you did last year. On the other hand DOCOMO side personally I felt they are toning down their cost reductions because they say they have achieved cost reduction ahead of the schedule and therefore cost reduction contribution will become less this year compared to last year. This was their explanation. Now your cost reduction target, do you think is appropriate target or you intend to go further deeper in areas that have not been touched in the past? And you will be able to build up more and I’m sorry that -- that I’m asking NTT DOCOMO’s cost cutting but if you can explain to me about DOCOMO’s cost reductions I will appreciate it.

Hiroo Unoura

I already mentioned that DOCOMO has not assumed this collaboration model in their business plan yet. As far as I have listened to DOCOMO’s business plan -- whilst I was listening to DOCOMO’s plan in my mind I had this Hikari collaboration model and DOCOMO’s new pricing model plus this Hikari collaboration model how will they be incorporated and introduced, this is a new challenge. This will have to be done from now. And DOCOMO, in their presentation I think I said to you that in the first half they will announce their midterm plan or their vision.

In this discussion what will happen about this fiscal year’s plan, I want to discuss with DOCOMO at the end of the first half. What will be the impact of this new collaboration model and DOCOMO’s new pricing? I want to further deepen, and what will happen and what should be the way of group’s total marketing cost? This is also a big thing in my head.

How will we will streamline is a big theme. DOCOMO’s new pricing plan and this time fiber access collaboration model if we consider that two I think the way we will market should be changing significantly and we should.

Under the conventional marketing model, due to our consideration to the partners who have done business with are conventional model we have not been able to say that much aloud but we want to keep good consideration.

Ikuo Matsuhashi – Goldman Sachs

And DOCOMO will start soon their new pricing model, but following this fiber access collaboration model announcement, will they now be postponing the new pricing plan?

Hiroo Unoura

June, as scheduled DOCOMO will be implementing their new pricing plan. Maybe there can be additional plan to be announced this is how I understand.

Unidentified Analyst

JPMorgan, Yoshida [ph] is my name. I would like to ask you questions inclusive of confirmation of our cost reduction. Originally do you had envisioned more ¥100 billion cost reduction and then this was expanded to ¥500 billion at the time of the first half financial results and now it's up to ¥600 billion. So how much further cost reduction can you really realize, what’s the room for cost reduction? Maybe it could be said that or you’re very, very loose when it comes to your cost structure. So what is the level of cost reduction that is truly possible?

Hiroo Unoura

I will take your questions one by one then. As far as cost reduction is concerned it's very difficult to cover all aspects of cost reduction but we’re reducing our programming cost and if I could go further we’re referring to the global procurement price followed by the Dimension Data in our cost reduction efforts. So therefore more than what we initially expected from that the cost reduction efforts have provided positive results. Now ¥280 billion for NTT DOCOMO, I believe this is a number which DOCOMO has already announced but at this moment East and West and DOCOMO if we -- it has already identified ¥160 billion cost reduction possibilities on top of the previous assumptions ¥40 billion and is a matter of how much challenge they could tackle further beyond the ¥560 billion identified and that’s what we’re expecting. I hope I have responded to your question.

Unidentified Analyst

And I suppose six month later we will have even higher numbers then?

Hiroo Unoura

To be very candid I think the type of cost reductions we had been able to realize in the past cannot or we cannot be overly optimistic going forward. Efforts are being made. When it comes to marketing cost there is a limit as to how much cost reduction can realize in your marketing cost because of competition however with the new pricing regime by DOCOMO and also this new collaboration concept this will help us to expand the level of the control over the marketing expense. So therefore there are some areas where we could not explore but now with this new business model we’re able to explore the possibilities of cost reduction, you cited loose cost-structure. I can only say that that is not the case, we do not have a loose cost structure.

Unidentified Analyst

The second question is a related question, NTT East and West and NTT Communications. NTT East and West increase in operating income was realized through a cost reduction but NTT Communications has consistently had a trend of decline in operating revenue and operating income. So certainly with NTT East and West for this fiscal year it seems that they are envisaging in the business plan, a fairly substantial operating income. Is this a feasible business plan or budget or is this something that was set by NTT Holding Company as a challenge to be pursued by NTT East? So what is the nature of the target or the forecast and also the trend for decline in operating revenue and operating income in NTT Communications, at what juncture do you intend to take measures because if this trend were to continue there could be further slide in the operating income and operating revenue. So how do you intend to tackle NTT Communications?

Hiroo Unoura

As far as NTT Communications is concerned without a doubt domestically a downward trend cannot be stopped but however outside Japan their revenues are expanding. So I do not have the numbers on hand I hope I will be able to get back to you later on but outside Japan if we include overseas on consolidated basis, NTT Communications Group is about to shift toward a upward trend in their operating revenue because on a consolidated basis NTT Communications already enjoys the upward trend in the operating revenue.

Turning to NTT East and West, what you’ve seen is a forecast on a non-consolidated basis which is very little removed from the business plan submitted to the MIC. But as far as the breakdown of the operating profit is concerned that the lease of real estate which was currently the non-operating item is now part of the operating income. So if you include that part NTT East and West is based on the current capacity at NTT East and West. This is not unfeasible number. It is an achievable number but what I’m saying is that even beyond that point toward the second half NTT East and West make efforts.

Unidentified Analyst

Third question, I would like to turn to the thinking behind the Hikari collaboration model concept. There are various process for example without involving change in the telecommunication business law, if I submitted this model. But at the end of the day if the direction over the midterm to long term if this model were to be successful and as was pointed out by Mr. Tsusaka in his question over NTT FLET'S, at the end of the day, in the future like in the case of BTO permit, NTT East and West inclusive of FLET’s will actually exit, well not so much exit from the retail sector but overtime, stage by stage NTT East and West is going to transform its business model. So you want to -- actually you’ve drawn the trigger with this new collaboration model or is it the case that you will continue on with your existing path? So what is your thinking? We would like to know what your thinking is.

Hiroo Unoura

Well NTT East and West isn't just dedicated to fiber to the home service. That’s one point that I would like to clarify but as far as the services are concerned in-line with the environment there might be a need to review the situation as far as the fiber to the home is concerned as I’ve already mentioned we’re shifting to a model where FTTH is no longer at the forefront or at the center, then what about other products? Well that’s a separate matter. We would like to give thought to the other products separately but as far as fiber to the home service is concerned as you mentioned we’re going to be shifting to the role of a supporting cast when it comes to fiber to the home service.

Unidentified Analyst

Well the legacy fixed line, do you want the people to consider possible changes to the telecommunication business law? In other words, are you -- so not so much based on external factors are you on a proactive basis shifting the direction? Is that a possibility? Is that what you have in mind?

Hiroo Unoura

Well fiber to home service is something that we changed on our volition. But there is a legal question, but FTTH is not part of the basic services provided by NTT East and West but when it comes to fixed line subscriber service this is not something that could be changed only our part. What type of position we provide is very important. So, with regard to the FTTH model we are shifting our business model and as a next step we would like to consider what to do above the existing legacy services. But that’s a question to be addressed going forward and then we hope that we will be able to share with our thoughts on this matter and at appropriate timing.

Hideaki Tanaka – Mitsubishi UFJ Morgan Stanley

Mitsubishi UFJ Morgan Stanley, my name is Tanaka. Just one question this Hikari collaboration model, why not prior internal communication with DOCOMO beforehand? Why did you not announce after internal coordination with DOCOMO? What was the circumstances leading to this announcement?

Hiroo Unoura

NTT East and West as I mentioned do not wish to have DOCOMO as their only partner. East and West wishes to have broad range of partners so that ultimately they will have stable business. And then what I was And then what I was conscious was if we have discussions with DOCOMO and have preceding discussions with DOCOMO ahead of time, then I don’t want to go back to 45 years ago discussions or 10 years ago situation. Now that things are open I want to have their active discussions also with DOCOMO and other group companies and elsewhere too.

Unidentified Analyst

(Indiscernible). Just one question if I may, it's about the Hikari collaboration model, hearing your explanation about this model, it seems that it's a question whether or not you’re actually getting into the enabler service. Are you seeking profitability from such model? So can you talk about that? I suppose it's a matter of what type of discussion we have with the potential partners? And if there is any possibility at this juncture it will involve not just NTT East and West maybe it's a subsidiary firm or group companies, other group companies but through that we hope to pursue that possibility. So you’re saying that companies like (indiscernible) Comware, their external sales could potentially expand as a result of this new business model?

Hiroo Unoura

Well the group as a whole, how will they address this new model? We have not yet finalized that at this juncture. So we will start this with NTT East and West and they will have to discuss how to pursue this model with various partners. I’m sure various scenarios will emerge and based on that -- the various other group companies can consider how they can be involved in this new business model and if need be together with members of the other industries we could create a joint initiative.

Operator

Anyone else with questions? I don’t see any further questions. So with this we should like to close today’s presentation meeting. Thank you very much for your attendance. Thank you very much.

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Source: Nippon Telegraph & Telephone's (NTT) CEO Hiroo Unoura On Q4 2013 Results - Earnings Call Transcript

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