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Nippon Telegraph and Telephone (NYSE:NTT)

Q1 2014 Earnings Call

August 06, 2014 4:00 am ET

Executives

Jun Sawada - Chief Financial Officer, Chief Information Officer, Chief Compliance Officer, Senior Executive Vice President and Representative Director

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

Analysts

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

Hitoshi Hayakawa - Crédit Suisse AG, Research Division

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

Ikuo Matsuhashi - Goldman Sachs Group Inc., Research Division

Tetsuro Tsusaka - Morgan Stanley, Research Division

Daisuke Oshidari

Kei Takahashi - Mizuho Securities Co., Ltd., Research Division

Unknown Executive

Thank you very much for waiting, and thank you very much for coming out of your busy schedules in this hot weather today. We should now like to start the financial results presentation meeting of the first quarter for the year ending March 2015 of NTT. I'm the moderator of the meeting. Who I will note here by your [ph] office.

First of all, the introduction of the members present today. Representative director and senior Executive Vice President, Mr. Sawada.

Jun Sawada

My name is Sawada.

Unknown Executive

Member of the board, Senior Vice President of Corporate Strategic Planning Department, Mr. Tsujigami.

Hiroshi Tsujigami

My name is Tsujigami.

Unknown Executive

Senior Vice President of Finance and Accounting Department, Mr. Hiroi. [ph]

Unknown Executive

My name is Hiroi.[ph]

Unknown Executive

Nextly, please confirm that you have all the handout materials. There should be 2. One is the copy of the slides, first quarter results, financial results for the 3 months ended June 30, 2014. And the second is a thick white booklet, financial results presentation meeting material. Do you have all the materials?

Further, disclaimer information is on Page 1 of the presentation material regarding the forward-looking statements and projected figures included in today's handout materials, presentation and questions and answers. We ask you to have a read.

And today's presentation meeting is broadcast live on our IR website, and the video recording is intended for on-demand distribution from a later date. We ask for your understanding beforehand.

As for the schedule for today, first, Mr. Sawada will be making a presentation on financial results. Afterwards, we shall be receiving questions from you. Then, Mr. Sawada, please.

Jun Sawada

Thank you for your kind introductions. Sawada is my name. Thank you for joining us despite the very hot weather outside. At the general shareholders meeting on June 24, I was appointed to this current position. And I have assumed the position of the Senior Vice President, I'm the new face on the team. This will be my first presentation. I look forward to your kind support going forward.

Then without further ado, I would like to present to you the financial results for the 3 month ended June 30, 2014.

I would like to focus on several points, if I may. Let me start with this page. I think there are 4 highlights here. As you see on the very top, operating revenue increased for the fourth consecutive year. JPY 2.6 billion or JPY 3 billion, that represents increase of JPY 31.1 billion year-on-year.

Now the second bullet point relating to operating income. That was JPY 298 billion, which represents a year-on-year decline of JPY 50.9 billion. Now as far as the annual target is concerned, the progress to the annual target is already 25% after the first quarter. So therefore, one can say that the level of operating income is very much in line with our expectations.

And from the second quarter on to the second half onwards, we'll focus on cost reduction. And also, we will also make rigorous efforts to expand revenue. So as far as our initial annual target is concerned, we believe that we're in line with achieving the full year target.

The third bullet point, relating to expansion of global cloud services. Now on the third line, we show you the revenue, global revenue. As far as global revenue is concerned, this is 363 -- sorry, JPY 363.3 billion. M&A is at the back of that. For example, Dimension Data acquired a U.S. IT solutions service provider called Nexus IS. This acquisition is the draft behind the growth. And also, cross-selling has already achieved this track record of USD 50 million. And with the permission of the client concerned, we are able to disclose this to you, but the Department of Treasury of U.K. has assigned us to carry out their ICT project. So therefore, inclusive of this, the first quarter result was USD 50 million dollars. And as far as pipeline is concerned, we are able to identify several large projects. So as far as global customers are concerned, I think we are making very strong progress to date. I believe our total strength has been recognized by the client base.

And the fourth item. In the mid-term plan, enhancing global cloud services and enhancing our network services competitiveness were highlighted. And I can say that as far as network services are concerned, we have expanded our user base in a steadfast manner. As far as mobile communications is concerned, already DoCoMo has made its announcement. The number of portability performance has improved and also churn rate has declined.

And so, on a net addition basis, on a year-on-year basis, this improved by 370,000, reaching to 460,000. So therefore, there is very evident recovery churn as far as the net additions are concerned.

As for regional communication, NTT West continues its momentum in terms of fiber subscription from the second half of the previous year. So new open connections are -- continue to expand. And also, churn rate has come down. This applies to NTT East as well. And so for example, their services to promote usage has had effect. These are 2, some new programs. And as a result, we're able to put a hold to the increase in churns, and the net add has reached 170,000, which represents an increase of 80,000 year-on-year. So therefore, we believe that this will contribute towards achieving our annual target. So that is the most recent number as far as the first quarter is concerned.

Now as far as cost reduction is concerned, the annual target is JPY 190 billion. The full year target for cost reduction is JPY 190 billion. After the first quarter, we are able to add up JPY 45 billion. So therefore, cost reduction also has made very strong progress in terms of the full year plan.

Next page. Shows you some of the highlights which I've already covered. So these are some of the numerical chart, if you will.

Now as far as the percentage of progress compared to forecast is concerned, as for operating income and also net income, you will find that, on average, they respectively have achieved 25% against the full year forecast. And so, therefore, as far as progress is concerned, I believe they are very much in line with our initial forecast.

Now also, as far as net income is concerned, net operating income has declined by 50 points and JPY 1 billion. However, net income has declined by JPY 17.8 billion. However, this is effect of the taxes. For example, reconstruction tax being dropped, so that's the impact.

Next, let me talk about the contributing factors by segment. Now toward the left. Well actually maybe you should see the chart on the bottom. So let me start with the regional communication business segment. There is the expanded impact from discounts provided for FLET'S Hikari fiber program. However, we were able to cost control. So therefore, income is very much comparable to the previous year. Toward the second half, well, the pace of growth of the impact of the discount will actually decrease for NTT East toward the second half. As for NTT West, the open connection continued to show very strong performance. So therefore we believe that we can expect an increase in revenues for NTT West. So therefore, as far as NTT East and West is concerned, we believe that we'll be able to secure the annual target as far as operating income is concerned.

Now as for the long distance and international communication business, this declined by JPY 7.9 billion, primarily in the domestic business, NTT Communications and Dimension Data. Their global business actually shows some very steadfast progress.

But as for the domestic business of NTT Communication, in particular, data network communications -- the data communication network. For example, they are now trying to integrate with -- they're trying to integrate with the Arcstar network. And so therefore, that migration cost is actually involved. Over the medium term, of course, this effective integration will be felt. However, I believe these interim factors, integration with the Arcstar Universal One and IP-VPN service building, is causing temporary cost. Then once this temporary cost effect evaporates, and of course, the migration-related costs will actually be improved. So therefore, from the cost standpoint, there will be improvement. And as of August 1, NTT Communications has actually revised its marketing and sales network -- segment -- structure, rather. And so therefore, I believe in terms of marketing, there will be a plus going forward. So therefore we believe that the user outlook and forecast can be maintained.

Now as far as overseas is concerned, we realized cost control.

We think we shall be able to achieve the annual target if we also include receipts. And then on Dimension Data, in the international communications business, Dimension Data is included. And on local currency basis, Dimension Data saw 26% sales growth.

Profit-wise, because there have been upfront investments for cloud and IT outsourcing, we will be able to secure the same level of profit as last year. This is how we expect things to go. Furthermore, third column, mobile communications business and then data communication business, their respective companies have already announced their results. And therefore, you must know. But I would like to just briefly touch on the key points on mobile communications, with the greater impact from the monthly support discount. Although we did expect, yes, there was the JPY 38 billion decrease in profits. But like I mentioned earlier, the improvement of MNP and improvement in the churn rate, we are making a start to the year as we anticipated. This is how we view.

Continuously, we are making efforts to review our sales method, taking into consideration the new pricing plan offerings. And we will be reducing cost control -- costs and we will aim for packet revenue increase, which will offer the result in achieving profits that we target. And for data communications segment, there are some still unprofitable projects remaining. But currently, we are seeing strong orders and we aim to achieve this year's goal. And so far we have been able to achieve the profit the same level as last year. This was a rush to explain about the group performance. But overall, we think we have been able to make a start that we anticipated for the overall management of the group. Into the second quarter and into the second half of the year we will continue to make efforts so that we will achieve our goal.

And today, NTT DoCoMo made an announcement about the tender offer for repurchase of its shares. NTT DoCoMo has announced its TOB. We, as a holding company, for the future flexible capital policy from this perspective, NTT DoCoMo's ordinary shares that the holding company owns, that is 176,991,100 shares, equivalent to JPY 300 billion, we made a resolution to respond to this TOB, which was the resolution in our today's Board meeting. And we have made this announcement to the press already.

And the financial impact on this is, for the holding company, only nonconsolidated basis will mean a profit increase. But this is an intergroup capital policy, therefore, on a consolidated basis, the impact is negligent. This is all for the presentation part. Thank you.

Unknown Executive

Thank you very much. We'd like to take your questions now. When you ask questions, a microphone will be brought to you. May we ask you to kindly state your name and affiliation, please. If you have any questions, please raise your hand. Please use the microphone, thank you.

Question-and-Answer Session

Unknown Executive

We'll start with the gentleman in the first row wearing the blue shirt.

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

Masuno from Nomura Securities. I have 2 questions. My first question relates to what you just mentioned, which relates to NTT DoCoMo's share repurchase program and the TOB, or the public offering. As far as the financial impact is concerned, I think if the sales is going to be on an unconsolidated basis, then how much after-tax impact will there be for the holding company?

Unknown Executive

On a nonconsolidated basis, a surplus -- capital surplus will benefit. So therefore, maybe it's a bit premature.

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

But for the next fiscal year, maybe NTT Holding Company can actually use this financial focus to realize your own share repurchase. So will that be the case? If so, who would you consider -- so when you consider that, how much after-tax benefit will there be for NTT Holding Company if you do respond to DoCoMo's share repurchase program? So although we're talking about odd -- on nonconsolidated basis can it have an impact on NTT DoCoMo's share repurchase program on your financial position program?

Unknown Executive

Well, as we're going to be pursuing a tender offer for -- it will be a tender offer. We have a share of more than 25%. We're a dominant shareholder. And of course, between DoCoMo and NTT Holding Company, we are -- have a parent-subsidiary relationship, which means that deemed taxation will take place. Now finally -- a correction, ultimately, until we get to September, this will not finalize. However, if the amount of share purchases is going to be JPY 20 billion or thereabouts, then I would imagine that a comparable number will be reflected as a profit at that juncture. Now, naturally, this can actually serve as the financial resources for NTT Company and the Holding Company going forward. Of course, shareholder return must be considered to take into consideration the prevalent situation at that time. But we hope that this will actually contribute toward shareholder return.

Unknown Analyst

You talked about deemed dividend taxation. You mentioned that even after this taxation, 70% to 80% of the amount will remain as a profit. I think it's about 70% to 80%. And also, share repurchase will depend on the profitability situation. But unless you have surplus, you cannot offer the share repurchase program. But may I take it that you do have a basic here [ph] at your own share repurchase.

Unknown Executive

I cannot say anything clear at this juncture. But I think what you have in my mind is very close to the actual situation.

Unknown Analyst

Thank you. My second question is about the wholesale for FTTH yesterday at MIC's intermediate report, which was provided by [indiscernible] as your counsel. It is likely that they will eventually approve FTTH wholesale model. But then, as far as the profitability impact is concerned, there will be various impacts. If this could -- I suppose this should serve to reduce your costs. This should have a positive impact. Is that not the case? Of course, I know that the amount -- the final scale is not yet determined. But for example, migrating existing customer base and also reducing marketing expenses, discounts offered for construction, less churns and also exploring new demands, I think those factors will come into play as far as the impact of the fiber wholesale model is concerned. But I think -- which of these factors will have the most significant impact? And also, what is the directionality of each of these drivers? So what impact will fiber wholesale model will have on your profitability going forward? That's my second question.

Unknown Executive

If I am to talk in generalities, first, this is something that is discussed at NTT's [indiscernible] at this juncture. Now, since me and Mr. Unoura talked about, more than 100 companies make inquiries about this program, and more than 100 companies have come forth to serve as potential partners. So therefore, this discussion on the fiber wholesale has actually begun. So unless we see how this progresses, we are not able to give you great details. But maybe there is one slide that I'm able to share with you. This is perhaps already familiar to you. But toward the second quarter, we are considering identifying several frameworks. And in that regard, there's four elements. For example, the substance -- the unit, the substance and the area based on which these services will be delivered. These details will have to be identified. In other words, of course, we have to have a lot of discussions with the partner, but we have to identify the substance and the form and the area coverage of the services to be delivered.

Unknown Analyst

And the second element that you pointed out, what impact will there be on profitability and also in terms of cost?

Unknown Executive

The second element -- the scope of the business, the scope of the coverage, this will probably have the greatest impact as far as costs and revenues are concerned. And also, as far as potential partners are concerned, some of them may actually have the ability to collect their bills, they may be able to perform their own customer interface. But then there's some partners who may actually want to entrust NTT to carry out bill collection and customer interface. So if the latter is the case, then there will be some entrustment involved. But entrustment will also have a significant impact on the profitability and expenses. So bullet #1, this will have significant impact. But the second bullet point, unless the scope of the services are identified, it's very difficult to identify the potential impact on our business plan. Now the third bullet point, what will be the operational flow of this fiber collaboration model? This, we'll have to identify as well. Because depending on the operational focus, this also have impact on the cost. And the fourth bullet point, this is something which we need to consider. But for example, are we going to charge for the construction cost? If that is the case, then what will be the breakdown and the sharing of the construction costs? So depending on this particular -- on cost sharing, again, this also have impact on our profitability as well as on expenses. Now all of these items will be eventually be covered by the MDA. But as far as the framework of covering these 4 elements are concerned, we hope that the framework can be disclosed toward the second quarter. So I'm afraid I'm unable to offer a straightforward response to your question at this juncture.

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

I see. So this is a new initiative. I suppose you're embarking on this new initiative because this will have positive impact on your profitability. Is that the case? Could I confirm that?

Unknown Executive

In principle, that is the case. But then, we have to offer these programs fairly to -- of our large number of customers, this may involve some competition. So as far as NTT's [indiscernible] is concerned, this may be positive. But then in actuality, be it NTT Communications or DoCoMo, be it NTT DATA, maybe some group companies, these are -- they also need to offer good services. So overall, there is a negative impact. So there is that risk as well. We need to consider that.

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

So as far as NTT [indiscernible] is concerned, this will have a positive impact. May I confirm that?

Unknown Executive

Yes. Well, I hope that is the case. But then, again, this will depend on the pricing regime for the wholesale model. So it's very difficult to say at this juncture.

Unknown Executive

Thank you very much. Any other questions? Any further questions? The second line over there? The front row person.

Hitoshi Hayakawa - Crédit Suisse AG, Research Division

Hayakawa of Crédit Suisse. NTT East and West operating profit include real estate profit starting from this time, I think. In this sense, comparing with last year may not be proper. But as of the state of the first quarter, the plan is, I think, JPY 20 billion included in the plan. But what was the amount? This is my first question. And then secondly, fiber subscription, every year and often, we get disappointed in fiber subscription acquisitions. And fiber subscription acquisitions seems to be good in this quarter. What did you do? What worked well to acquire more subscriptions? Please explain to us.

Unknown Executive

First question. So far, it used to be included in nonoperating profits. But on quarterly basis, about JPY 10 billion nonoperating revenue, or sales, and profit-wise, about JPY 5 billion is the actual picture. But I think this is not disclosed. Allow me to further add, sales-wise, NTT East and West both have about the same level, which means both together is double the scale. All right?

Unknown Executive

Footnote #3. If you look at this material, footnote 3 includes the information, both.

Hitoshi Hayakawa - Crédit Suisse AG, Research Division

Shall I wait? Or is it all right? I've read it already myself.

Unknown Executive

Does this solve your first question?

Hitoshi Hayakawa - Crédit Suisse AG, Research Division

Yes.

Unknown Executive

Now the second question, with fiber good acquisition of subscribers, number-wise, NTT West was more vibrant. Starting from last year, this has been the trend. We have been promoting continuous uses by providing discount for longer subscriptions, or longer usage. In this sense, we are seeing less churns. This is working to add up net adds, and resulting in good results. This is the structure.

Hitoshi Hayakawa - Crédit Suisse AG, Research Division

What about NTT East?

Unknown Executive

Actually, the same. By providing discounts. Although the churn in itself is not this good but it's still improving. Now correction, East improving more, improving in churn rate more. And West, sales volume is increasing. In this sense, both in NTT East and West, new services and new discount services have been working. This was one key point.

Unknown Executive

Next question, please? We'll go to the gentleman in the second row from the front.

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

Ando from Daiwa Securities. Two questions. My first question, in regards to your global business, I think you talked about restructuring of your global business quite recently. But can you talk about the current stage of your global business? And also, what challenges do you see ahead for your global business? And also, what will transpire going forward? I would like to confirm your thoughts about your global business, so that's my first question. And my second question, you talked about the rigorous cost control and cost reduction toward the second half of the year. But in actuality, what items will contribute most toward cost reduction, which will allow you to improve your profitability toward the second half? I'd appreciate your thoughts on this as well.

Unknown Executive

Yes, thank you. Your first question about our global business, so what is the current stage are we indexed at [ph]? We believe that we are in the expansionary phase. We have put the banner of global cloud services. And on a global basis, we see migration to global cloud. So we're actually challenging, if you will, the global cloud service. So that is why we're pursuing with various acquisitions and also data central switching service. The base for global cloud services are being build out. So to the contrary, what challenges you asked. The challenge is that we need to deepen the synergies of the various group companies. During the presentation today, we talked about partnerships and coordinations in terms of marketing. I think we need to deepen that coordination. And it's important that cross-selling at the group-wide basis be pursued further. I believe that is the first challenge that comes to my mind. Now secondly, in gearing on to sales and marketing, it is only natural that we pursue further cost reduction. I believe this is quite evident in NTT Communications. But leveraging the acquired assets and, actually, relocating to places like India, Malaysia and offshore allows us to reduce costs. We want to pursue this further, because this will help us improve our profitability. So I think that is our second challenge. So that's the current situation as far as our global business is concerned, and we want to further expand our business. So that's the stage we are at. Now your second question about our cost reduction toward the second half, what items will contribute most in terms of cost reduction. I believe the most fundamental part would be network related. We will announce this later, but when the medium-term management plan was announced, our cost reduction was initially set at JPY 400 billion. But then the new target has been revised to JPY 600 billion. For example, DoCoMo will be using FLET'S services offered by NTT East and West. And also, duplications will be cleared or eliminated, so that will also contribute more. Earlier, I talked about NTT Communications. In the first quarter, migration has actually incurred some cost. We will actually be migrating several duplicate networks to one single network, which will allow us to reduce our back-end costs. And NTT East is also trying to integrate multiple networks. Now, in order to integrate this network, this has incurred some investment in the previous year, as well as this year. However, eventually, this will actually translate into reduced costs. So I believe that these are some of the significant drivers. And also, in terms of procurement, this is an area where Dimension Data has significant strength. They have strength in terms of procurement. So it's important that the group companies actually leverage such available schemes so that cost reduction can be realized. So that's what we have in mind. So I think these are the more significant drivers toward cost reduction. Of course, it's important that on a day in, day out basis, we continues -- we continue with various cost reduction efforts, and we also need to review various IT costs. But I think these are the significant factors. Have we responded to your question? Next question, please?

Unknown Executive

Then the gentleman to the second line, first row.

Ikuo Matsuhashi - Goldman Sachs Group Inc., Research Division

My name is Matsuhashi, Goldman Sachs. I have 2 questions. First question is, as had been mentioned, cost reductions, my question is related to cost reductions. I think at the beginning of the year, when you explained that by building up the profits of the group companies, it will still not be enough to achieve the profit target. Therefore, there need to be further cost reductions needed to achieve the profit target. I think that was what Mr. Unoura explained. And what we heard after the first quarter results now is things are according to schedule, things are in line with expectation, and it is possible to achieve the annual target. I think that relates to the major subsidiaries, but this means still a gap versus the guidance, or the announced plan as NTT Group as a whole. The individual subsidiary's profits, how are you -- how do you think -- when do you think you can make specific -- how you can further add up profits of the subsidiaries? Maybe when you announce the second quarter results or the second half timing? I want to know further on the timing. And then talking about cost reductions, I don't think there was any comment about reviewing the service content. For example, NTT DoCoMo bills, there will be, finally, elimination of paper bills. From the time of the decision making up until that effect is achieved, I think there will be some time necessary. Something similar can be done by NTT East and West, and I think that is what the other NTT Group companies are going to, but the network costs and procurement costs, other than these costs, any efforts to further other kinds of costs? Could you further explain? Could you further reiterate? And then my second question is, if I may ask my second question now, Dimension Data. Dimension Data also has operations in Japan, although small, increasing people in Dimension Data Japan so that procurement for NTT and building networks and installations. Do you want and -- do you really want to utilize Dimension Data Japan actively for Japan. First of all, I wonder if that is a good strategy, but I wonder what is the thinking of NTT? Please explain if -- inasmuch as possible.

Unknown Executive

First question related to cost reductions, yes, not been adding up, that yes, there is cost reduction target. And then to the individual companies, we want to provide a stretch goal and work hard to achieve. And in this sense, yes, there is a gap. But when can we make this -- and identify in specific, all the companies are already working on their measures, and some recently are seeing results come out. But financial result-wise, I think second half would be the timing. In this picture, you mentioned about the bills or invoice. Yes, it does take some time. This year, cost reduction result-wise, I don't think there will be a big benefit achieved yet this year. But NTT Communications has an example, taking the lead in the past, in 2008. This resulted in some revenue increase because we charged for that, plus some cost reductions. On full year basis, this is a big contribution. In this sense, there will be big benefit in next fiscal year's result.

Unknown Executive

If I may add, the question on making bills for a charge or issuing bills for a charge, NTT East and West have already announced this measure as well. East and West Japan, July 9. East, starting from January issuance; and NTT West, starting from the December issuance. For FLET'S study or fiber users, excluding corporate users, bills will be sent for a fee. And in the case of account transfer clients, notice in advance in paper is done. We send paper in advance. But if we continue to send paper notice, we will do this for a charge we announced. And the question regarding possible review of service contents, yes, we constantly review, and we constantly review the possibility. But we need to announce properly to customers, and gain proper understanding as we go along. This is the nature. Therefore, it is difficult to mention from this stage what are the thoughts we have in mind. But once things are decided, we will announce specifically and move ahead, and we will take the necessary steps as we go along. NTT East, NTT West and DoCoMo will be going ahead. And NTT Communications, as Mr. Sawada mentioned, have already been doing this. The 4 major companies will be switching billing to internet. This will be the move. I hope this solved your first question.

Ikuo Matsuhashi - Goldman Sachs Group Inc., Research Division

Yes.

Unknown Executive

And then the second question was Dimension Data Japan, how to utilize Dimension Data Japan. Yes, as you point out, within Dimension Data, Japan is a small part of Dimension Data, but still, it is a part of Dimension Data. And they have a very advantageous position for procurement. We can be advantageous in procurement. And Dimension, when selling to general enterprise, the engineering team can be enhanced. This is one way, one direction. And in utilizing the procurement capability, the Dimension Data skills and engineering part can be strengthened as a group, and I think this is one thought of our group. This is our thinking. But in the -- in that case, NTT East, West and DoCoMo and NTT Communications all have engineers for network building and building systems of customers at their backyard. What to do about all these engineers will be the next stage challenge for us to review. This is the way of our thinking.

Ikuo Matsuhashi - Goldman Sachs Group Inc., Research Division

My question was -- may not be proper. May -- so that I avoid misunderstanding, I would like to clarify. For network building -- and you have many suppliers and partners outside. And in group, you have several thousands of NTT engineers -- correction, outside you have thousands of engineer supporting NTT Group. And will you continue to utilize all these engineers? And I think the assumption is to continue to use these existing thousands of engineers outside of the NTT Group.

Unknown Executive

Basically, yes, but I think it's a matter of economics for every company. And today, we have several thousands of engineers who are active and working hard. And what will happen to these companies, maybe there can be changes. But if we can obtain a lot of customers, we may need more engineers. At this stage, we cannot yet be clear. I hope this satisfied your question. Next question, please.

Unknown Executive

We'll have to go to the gentleman in the third row, please.

Tetsuro Tsusaka - Morgan Stanley, Research Division

Tsusaka from Morgan Stanley. I would like to ask about the share repurchase. And also, I have another question about your global business. I would also like to ask about the following: NTT DoCoMo's new business and acquisition strategy from the standpoint of a major shareholder, vis-à-vis DoCoMo. First question, a share repurchase was announced by DoCoMo. You were going to respond and said the amount will be roughly JPY 200 billion. And -- so roughly JPY 200 billion level of cash will come your way toward the end of September. If that is the case then maybe NTT -- it's NTT Holding Company's turn. And of course, I'm sure that you have to have negotiations and discussions with the Minister of Finance on this matter. But as far as your wish list is concerned, at what timing would you like to realize, your share repurchase? So what would be the ideal situation as far as NTT Holding Company is concerned? If you have your way, what's the best timing for you to carry out your share repurchase? Or do you see this already on the horizon? Have you already discussions with the Minister of Finance? And do you already have a fairly clear timeline for your own share repurchase? That's my first question.

Unknown Executive

As you are aware, the Minister of Finance plan is toward the end of this fiscal year. So what will be the best timing? I suppose when the stock price, the share price is low. I suppose that will be the optimal situation. Of course, if we have the required conditions set, I suppose as soon as possible, is the right answer. But I think at this juncture, we can only say that we are on the way.

Tetsuro Tsusaka - Morgan Stanley, Research Division

So are you saying that, at this juncture, well, toward the end of -- from the end of September through end of March, you have no idea where the share repurchase might take place?

Unknown Executive

I think we're still in the midst of making coordinations.

Tetsuro Tsusaka - Morgan Stanley, Research Division

Well, as far as we're concerned, naturally, as soon as -- well, because the stock price is rising right now, we want to do this as soon as possible. That's our wish.

Unknown Executive

I think we're saying the same thing.

Tetsuro Tsusaka - Morgan Stanley, Research Division

I see. So yes, as soon as possible, so the stock price is continuously rising, that's your assumption?

Unknown Executive

Yes, that's what we believe in.

Tetsuro Tsusaka - Morgan Stanley, Research Division

My second question relates to your global business. In terms of your top line and in terms of project orders and inquiries, I think the performance has been strong to date, I understand that. But on the other hand, maybe this is a perpetual challenge, but what about the bottom line? I think bottom line is very critical. If the 20 billion global revenue that you aspire to achieve, and hopefully, 10% operating margin can actually be within your reach, then I'm sure the stock market will appreciate your company more. But at this moment, I think the stock market is still in doubt as to whether or not you can actually achieve these targets. So, that being the case, how long do we have to wait before you are able to generate profits in your global business? Can you share with us some outlook? For example, through some reengineering, is there any methodology to generate more profits? Or are you saying that until you reach $20 billion, you may need to expand your investment? You're in the expansionary phase. So until -- even though you get to $20 billion, operating income increase may not be expected and just have a lot of accounting factors. But for example, since you're reporting on a U.S. GAAP basis, I suppose if you can separate out global business category, that will be best. What are your thoughts?

Unknown Executive

Yes, a very difficult question. First of all, the target of 20 billion, the fact that we have set this target means that we first want to expand our global business. I think that is our thinking. So I think the priority is on achieving expanded global business. So I think profit is a challenge which will follow the expansion of our business globally. At the same time, we have set very strict guidelines for our global business. So while we will pursue expansion, in the case of Japan, if you invest, the profitability will drop. However, outside Japan, although we may invest, we are going to maintain the profitability. So at the stage when investment begins to realize efficiencies, then I believe that we'll be able to not only maintain but, perhaps, slightly expand our profits. So in other words, after 20 -- we reach 20 billion, then it's important that we heighten the profitability target to a higher level. So I suppose it's a 2-stage rocket. So it's not that we are ignoring profitability at this juncture. We naturally want to secure the bottom line as well. So I think there are 2 aspects. And also, Mr. Tsusaka, you asked when will this take place. At this juncture, I'm afraid we're not able to give you a clear response.

Tetsuro Tsusaka - Morgan Stanley, Research Division

As for my third question, DoCoMo subscriber base is beginning to make recovery. But on the other hand, investment into the new business area, maybe this is my own view, but the investment in a new business area, it seems that they are actually investing into the so-called hardware, physical hardware. For example, Cooking Studio, a company that sells records, they're making investment into physical companies, if you will. And also, in the recent months, we hear a lot of speculation, and the rumors about the film, Cinar conflict [ph], was not realized. But investment into sports was also rumored. So I understand that you need to make investment into the so-called real physical business. However, when you consider the trend of NTT business, I think DoCoMo's investment runs contrary to this trend. So what are your thoughts about DoCoMo's acquisition strategy? I'm sure that NTT Holding Company receives reports about this. I'm sure that you may need to have prior consultations with DoCoMo about their acquisitions. But as far as DoCoMo's new business area is concerned, do you believe and -- are you comfortable, rather, in letting DoCoMo pursue their new business?

Unknown Executive

Well, in principle, I believe DoCoMo should be the one to express their own position. Now this fall NTT Holding Company has also encouraged that NTT DoCoMo come out with their new medium-term management plan. And I understand that DoCoMo is beginning to work toward preparing the -- their medium-term plan. Now the idea of smart-life, how we see DoCoMo's strategy as far as their new Smart Life business is concerned, in principle, embracing Upper Layer Services, I believe, is something that we agree with, and we certainly support that. But if it's into physical infrastructure, I think that was your -- I suppose that was your idea. I do take note of your emphasis, but they're investing into some physical infrastructure and hardware. But I think, actually, this is also -- has potential, because we're going to be able to connect that with network. So if -- from the concept of Smart Life business, I think DoCoMo is exploring various possibilities at this juncture. That is my understanding.

Unknown Executive

Any further questions? Anyone else? Then in the middle, the gentleman in the white shirt, please?

Daisuke Oshidari

JPMorgan, Oshidari. Having heard so far, I want to confirm some of the dialogue so far. NTT Communications' review of the sales organization, this part, what effect will this arise? What is the expected benefit? Will this mean additional cost reductions? What are the effects? Please confirm. And then my second question is fiber FTTH. As volumes go up and as churns improve, you need still to put in measures. With natural phenomenon, you cannot just suddenly see FTTH situation improve. My question is, what did you do? What was the measure? If NTT East and West are doing these measures, then from the second quarter onwards, what will happen, and what will be the impact on a steady collaboration fiber wholesale business?

Unknown Executive

First question, NTT Communications' sales organizational structure, rather than cost structure, cost reduction, this is to enhance the pipeline and to improve profitability. Content-wise, because I used to be in NTT Communications as Senior Executive Vice President until June, what the contents were -- was inclusive of cloud, made the total proposal to customers. And all the teams that used to make these proposals are consolidated into one. They used to be divided -- distributed into various organizations. And in overseas, they used to be presales -- there are presales team and general and common. But these teams were established by various divisions and various businesses units that had their own businesses. But we call these people to get into one team. And as we brush up the proposals, the team will make a proposal to the customers, and sales volume and the pipeline will be enhanced. This is the underlying policy. And FTTH, please, Mr. Tsujigami, comment in FTTH measure.

Hiroshi Tsujigami

Recently, overall net adds, compared to last year, increased 50,000. But overall level has been at a saturated level already in the past several years. And I may have mentioned this in this meeting in the past, but conventional consumer is not the only target. There cannot be a bigger market just targeting to consumers. In the past 1 to 2 years, more recently, what NTT East and West have been working on is to cultivate the enterprise or corporate customers, not large corporates, but medium- and small-sized clients. These have been the main targets. Product-wise, we have been providing menus that are more easier for corporate clients to use. And we have also been putting together support menus. And to further emphasize these businesses, we have been forming organizations and putting more sales resources into this area. But for line opening basis, corporates are not a big proportion yet, but in net adds, the mix of corporates, in the case of NTT East, is about half of the net adds is for operations and offices. Once an office operation starts using compared to consumers, churn or cancellation possibility is much lower. Therefore, we have also changed the way of selling, we have changed the product, and we have also been reviewing the target clients. And in NTT East and West, the progress of the market has been different. In East, last year, to acquire new customers, campaigns have been executed. Today, we have stopped the campaigns, and we have now been working more to contain churns, and we have been maintaining last year's level. And West, about 2 years behind, and new customer acquisition campaigns are still continuing. Last year, difficult to get new adds; but this first quarter, doubled in getting new adds. It is not that this will continue forever to expand. Like you pointed out, going forward, we will become a service wholesaler. NTT East and NTT West will not be selling as a standalone product, fiber, but fiber can be embedded into various products, various players. There will be a gradual transition. With this, we want to see another boost in the value of fiber. This is all from me. I hope this is all right. It's not that we are going to suddenly transition overnight.

Unknown Executive

Other questions? Yes, we'll go to the gentleman toward the middle of this room.

Kei Takahashi - Mizuho Securities Co., Ltd., Research Division

Takahashi from Mizuho Securities. I would like to ask about NTT Communications, one question about NTT Communications, and one question about the fiber wholesale model, so I have 2 questions overall. First, let me start with questions about NTT Communications. You mentioned that a domestic data communication network has been integrated. And you mentioned that, on a temporary basis, there is increasing cost to integrate the network. But specifically, in the first quarter, how much expense increase was there -- how much cost increase was there as a result of integration of the network? And also, for this full year outlook, what will be the impact on a full year basis? My second question relates to the fiber wholesale business model. A confirmation from the third quarter onwards, I understand that wholesale will be launched. After that, the retail business carried by NTT East and West, in what timeline will they begin to shrink their retail business? I would like to confirm that point.

Unknown Executive

Yes, first, let me begin with your second question. At this juncture, as I mentioned earlier, it's not that we're going to suddenly switch to this new model. So what will be the effect? It will depend on the number of partners. And also, it will depend on how the transactions with the partners transpire. And also, it will depend on whether or not end users will actually stick to the program or not after this switch. So it's very difficult to give you a specific timeline at this juncture. I think that's the prevailing situation. Now will every -- will there be a total switch to this new model? That's very difficult to say. I would imagine that many -- some customers will remain with the old model, even after many years. So I think it's not 0 or 100%.

Kei Takahashi - Mizuho Securities Co., Ltd., Research Division

Well, from the standpoint of your marketing activities, NTT East and West, will they continue on with their retail business? I think that's my question.

Unknown Executive

Well, as was mentioned by Mr. Tsujigami earlier, we're beginning to see greater sales vis–à–vis the corporate structure, so therefore, our partners in the corporate business are engaged in retail consumer business. So if that is the case, then I think they will continue to stick with the existing model. But on the other hand, right now, we're creating the framework for the wholesale model. It will depend on how many inquiries we receive, and how much impact there will be. After we're able to identify that, then we can begin consideration. I think -- and so that's the flow of events.

Kei Takahashi - Mizuho Securities Co., Ltd., Research Division

You're talking about the corporate sector. At the end of the day, NTT East and West, will they actually exit from the retail business after a couple of years? Is that the final picture?

Unknown Executive

If we have solid partners, I think that's the assumption behind such exit. And your second question was about NTT Communications. Shall I respond to that question, then? Well, as far as the first quarter results for NTT Communications is concerned, operating income was weaker. But then the reason behind is that the data network revenue and the active service revenue is actually 5 million less than our initial expectation. Now ordinarily, they should have been able to cover the -- they should be able to offset that with improved cost efficiency. However, they are not able to catch up with us, so I think that's the scale of the -- I think that's the scale.

Kei Takahashi - Mizuho Securities Co., Ltd., Research Division

So it's not that there is impact of temporary cost?

Unknown Executive

Well, there is such temporary cost involved, but it's true that this cost and the other costs were not able to be fully offset. That's the situation. Have we responded to your question?

Unknown Executive

Anyone else? If no further questions, with this, we would like to conclude today's presentation meeting. Thank you very much for your attendance. Thank you very much.

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Source: Nippon Telegraph And Telephone (NTT) Q1 2014 Results - Earnings Call Transcript
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