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Executives

Koji Ito – General Manager, Investor Relations

Satoshi Miura – President and Representative Director

Analysts

Hitoshi Hayakawa – Credit Suisse

Takahashi – Mizuho Securities

Tsusaka – Morgan Stanley

Daisaku Masuno – Nomura Securities

Shinji Moriyuki – SMBC Nikko Securities

Ikuo Matsuhashi – Goldman Sachs

Nippon Telegraph & Telephone Corp. (NTT) F2Q 2012 Earnings Call November 9, 2011 5:00 AM ET

Koji Ito

Thank you very much for waiting, ladies and gentlemen. First of all, thank you for taking your time to attend this meeting, Analyst Meeting to report NTT’s Financial Results of the six months ended September 30, 2011. I shall be serving as the moderator. My name is Ito from IR office.

First, I would like to introduce to you the attendees of this evening. Representative Director, President and CEO, Miura; Representative Director, Senior Executive Vice President, Unoura; Director and Senior Vice President, Director of Corporate Strategy and Planning Department, Watanabe; Director and Senior Vice President, Director of Finance and Accounting Departments, Kobayashi.

Next, I want you to confirm whether you have the following two materials in the package. One, a slide presentation copy Financial Results for the Six months ended September 30, 2011. And white thick booklet supplementary data. Have you got them?

Now regarding forward-looking statements and projected figures contained in the materials are referred to during the presentation and Q&A session, please notice that there is a written disclaimer information at back of the top page of your slide materials. Please take a look at it. And today’s presentation will be broadcast live at the company’s IR website. And furthermore, a recorded video will be delivered on demand at a later date and I would like to have your understanding about this arrangement.

And we are planning to spend about an one hour and a half for this meeting or 90 minutes. First, CEO Mr. Miura will give you an outline of the accounts, followed by Q&A session.

Satoshi Miura

Good afternoon, ladies and gentlemen, thank you very much for joining us, despite your very busy and demanding schedule. Within I would like to start with this presentation of the financial results for the six months ended September 30, 2011.

Let me start with page two, it’s entitled with highlights. As far as operating revenue is concerned we experienced increased in operating revenue for two consecutive years. And we are able to recover up to 5 trillion yen. As for operating income it was 685.5 billion yen and this – I will talk about this later on but this represents a decline on a year-on-year basis.

However, this is due to temporary factor and such as the impact of the relative program expenses at DOCOMO. And also due to the impact from the earthquake. So primarily I would like to say of the operating income is in line with our initial expectation. So we are showing very robust growth. So bearing that in mind and again I will elaborate later, but we have decided to revise our initial forecast for operating income upwards to 1.25 trillion yen.

As for mobile in DOCOMO is already provided there explanation, this is also smartphones in the first half increased rather this sales of smartphone either the first half was 3.63 million, which represent increased of 44% on a year-on-year. So the annual target was revised upwards to 8.5 million units and Packet ARPU was also increased by 150 yen on a year-on-year basis. So the annual target for Packet ARPU has been also revised upwards to 2,700 yen.

As far Global Business revenue, in tripled compare to the second quarter fiscal year 2010 and reached $5.4 billion. So we had hope to achieve $8 billion at the end of this fiscal and we also have hope to achieve $10 billion of global business revenue in March 2013. However we believe that will be able to achieve $10 billion of global business revenue at the end of this fiscal year, which means that we are able to achieve this target one year ahead of our original target.

Let me now turn to return to our shareholders in July we carried share buyback of 58 million for 20 billion yen. And furthermore a resolution was adopted by the board today for cancellation of 125 million shares of treasury stock and for a buyback of up to an additional 44 million shares. Now through the share buyback carried out at this fiscal year and due to the increase in our operating income. We believe about that EPS for the current fiscal year will increased 10.5% year-on-year and will reached 425.48 yen.

Let me now turn to three. This provides have the highlights of the consolidated result. Operating revenue was 5 trillion, 154.6 billion yen, which represents an increase of 125.5 billion yen on our year-on-year basis. Well voice service revenue declined we had expanded consolidation for Dimension Data and Keane. And also as I mentioned earlier we had increased sales of smartphones and also increased in ARPU. And also we saw increase in fixed line IP service revenue inclusive of FLET'S Hikari subscriber base. So that is – so these are the factors behind us result. As for operating income and to the communication and NTT Data experienced increase in their profit, however at DOCOMO and NTT East and NTT West there was a declining profit. So, operating income is excepted decline 41.5 billion yen on a year-on-year basis.

As far as the first half is concerned as I mentioned earlier. In the previous fiscal year there was decline or they was actually decline in DOCOMO loyalty program expenses in the previous. And I managed 55 yen in the previous year. And also there was the impact of the earthquake in March. So as a result, in the first half there is decline in the profit. However in the first quarter and also the second quarter we saw continued expansion of sales of smartphones and also these contribution from company Dimension Data. So we see very strong trend for us the profit is concerned. And also as I talk about earlier we believe that we can expect 10 billion yen increasing profit at the end of this fiscal year.

Now let me now turn to page four. This relates to the forecast for this fiscal year NTT East and West, NTT communication, bearing in mind the prevailing situation, has decided to revise downwards their full year forecasts. However, we see increased system integration related revenue due to increased revenue at Dimension Data, and also NTT DOCOMO has already experienced increase of smartphones and they made upper revision of 10 billion yen. So we net this out as far as operating revenue is concerned, we have not changed our full-year forecast. As far operating income is concerned as was announced earlier, NTT DOCOMO has made a revision of 20 billion and also NTT communications 8 billion yen on a non-consolidated basis. They made an upward revision in their profit.

So bearing that in line we had already expected in our initial forecast is that towards 1.3 trillion yen target for the next fiscal year. In start at the various operating companies to increased their profitability for this fiscal year. So bearing that in mind we has already set the full year target of 1.24 trillion yen for operating income for this fiscal year at the beginning of this year.

So in totality you might say that 10 billion yen increase in a forecast is small, but then you must bear in mind that compared initial forecast. We had already factored increase of profitability for each of Group companies already, but we have decided to further revisit the numbers. And due to the impact of the earthquake in NTT East, although we cannot fully analyze the impact of the earthquake we have decided to revise or revisit rather the various Group companies performance. And at end of the day, we decided to make an upper revision of operating income by 10 billion for the full year. As far as NTT Holding Company is concerned, we will continue to instruct the Group companies to work towards further increasing their profitability. So the full-year forecast which have been reversed upwards to 1.25 trillion yen we hope we can further increase at the end of the day. But in any event we anticipate some 3 billion yen impact from the earthquake which I will elaborate later on. So if we could exclude the impact from the earthquake in reality would have achieved the operating income of 1.28 trillion yen. So that being the case we believe the target of 1.3 trillion yen for the next fiscal year is now much clear in our site.

Let me now turn to page five, this talks about the impact, where the effect of the earthquake. They have been some fluctuations within the company, for example, NTT Communications and NTT Facilities, for example, we saw effect from the earthquake. That in totally in the first half of the year the impact will be 20 billion in terms of profit and loss and 8 billion yen in terms of capital investment. On a full year basis this is very much in line with our initial forecast. So at the end of the day for the full year basis the impact will be 3 billion yen loss for profit and loss and 3 billion yen impact in terms of in the capital investment.

So that full-year forecast remains unchanged. But aside from this direct effect or impact, as this announce for NTT DOCOMO. They are going to be introducing large zone schemes for their base stations. They're also going to be introducing longer battery hour facilities. And so they're going to make up and further create a disaster resilience network and NTT East there will also be undertaking various preparedness measures. So they will also making efforts to introduce duplicate or multiple routes, so that will also entail some investment.

Turning now to page six, this talks about the number of subscriber for fixed broadband services. In the first half the open connections increased by 70,000 on a year-on-year basis but the open connections increased 50,000. So the net addition reached 900,000 which is 80,000 less compared against the previous year. Now at the beginning of the fiscal year we had already factored in the impact from the earthquake. At the same time KDDI for example has launched fiber on a nationwide basis. And also we see harsher competition with cable television.

So these are factors behind these numbers. So as far as we are concerned in the second half further make efforts to market FLET's Hikari. FLET's Hikari LIGHT this was introduced of NTT East in June although there were delays in the affected areas already we have reached 10,000 subscribers and the net addition account for 50,000. So 60,000 are actually a people who migrated from different plans.

Move further expand our marketing efforts. Now as far as NTT West is concerned, from January 2012 they will also introduce FLET's Hikari LIGHT plan although the substance of the plan is slightly different from NTT East. But in any event NTT West will also introducing FLET’s Hikari LIGHT plan. And also we will migrate ASDL users in offices to fiber as well. And as was already announced by NTT East and NTT East and West are also making efforts in totality to further absorb if you will, corporate structure demand. So both NTT East and West will make various efforts to further expand sales for example, 7I Company. In their convenient stores, they will be introducing WiFi in all shops and also other convenient stores with regard to other convenient stores. We are having discussions. Aside from that, a combination of FLET'S Hikari and WiFi, this package and inclusive of mobile we are trying to expand these set of fiber in different market segments. But in any event, we are making efforts to achieve profitability in fiber and our target for achieving profitable fiber business at the end of this fiscal year is accepted to be achieved.

Turning now to page seven. Now this relates to the number of subscribers for mobile broadband service. 3G, FOMA+Xi, LTE, it will include the definition of mobile broadband service and this attrition would be as follows: the net addition increased 21% and reached 180,000 subscribers for FOMA+Xi net addition was 1.48 million. In the second half, again as was already announced, we will be introducing new smartphone models. We will also be introducing tablet for LTE or under +Xi brand.

And they will become available starting from the end of November. And so and also not just new handsets and devices, but in the case of LTE under the Xi brand, a year billing plan was announced. If you pay a certain amount, certain voice flat rate plan was also incorporated. So we'll continue to make up for further expand new billing plans going forward.

Now page eight. Let me turn to ARPU for fixed broadband services, FLET's Hikari. At NTT East, due to the earthquake ARPU declined by 10 yen down to 5890 yen, however NTT West, due to our increasing additional and optional services, ARPU increased by 50 yen and reached 5940 yen. Inclusive of new additional services, ARPU has also been expanded due to various sales of set services and packet services.

Turning now to page nine, and this talks about ARPU for mobile broadband services. Packet ARPU compared against the first quarter increased by 70 yen, aggregate ARPU inclusive of voice also increased compared against the first quarter. On a full year basis, aggregate ARPU will not increase compared against the previous year. However, if decline trend were to continue then by the next fiscal year, we anticipate that the aggregate ARPU will turn to the positive. So we want to make efforts towards that.

Page 10, this relates to video services, services for fixed broadband, includes FLET’s TV and Hikari TV. The subscriber base at the end of September are indicated here on the page, we see a very strong growth. At the end of September, the combined subscriber base for East services reached 2.43 million subscribes. Now as for mobile broadband, BeeTV subscribers also increased, up until now they were not available for smartphone users and there was actually some lackluster growth. But starting from this fiscal year, we began to see a very robust growth in the subscriber base for BeeTV and the subscriber base reached 1.84 million at the end of September for BeeTV. BeeTV going forward inclusive of d Market and NOTTV, we intend to further expand new video broadband services. We'll make further efforts to expand our broadband services.

Page 11, I will be very brief from now on. This is the information by segment, regional communications business, down 55.7 billion operating income was also down by 32.6 yen billion. Long distance and international communication business regarding this segment sounds to acquisition Dimension Data increased their operation revenue as 210.3 billion, and operating income were also increased 18.3 billion year-on-year. Mobile communications business as I said, the operating revenues declined 25.2 billion yen and the, and the data commutation business, the operating revenues increased 35.6 billion yen and operating income increased by 8.3 billion yen.

Next NTT East, their second quarter results, operating revenues were down 35.1 billion yen year-on-year due to the negative offset on revenues of the earthquake and blunting revenues increased from IP services. Now IP service revenues increased to 5.6 billion yen, but it could not offset the 3.7 billion decrease of voice revenues.

Now going forward, the decline of monthly fee revenues are due to the negative impact of the earthquake still exists of about 3 billion yen. In the case of Hanshin earthquake, the fixed telephone subscription instantly, immediately recovered, but with this temporary recreation facilities, residence, do not so easily subscribe to the fixed telephone services, because of this, we show the suffering from the declining monthly fee revenues. So that's why our operating income will remain at 70 billion as same as the initial process. The NTT East follows the similar trend.

In the first half of the operating revenues, was down 9.9 billion yen year-on-year. The full year fiscal ‘11 estimate just like the East, we haven’t changed from the initial focus.

Page 14, IP related revenues and voice transmission services revenues of both East and West are shown in this graph. For the first time in the second quarter, IP related revenues exceeded voice revenues for NTT East. And NTT West will follow suit very soon that is our projection at the moment.

Page 15, communications, the financial results of the second quarter. Operating revenues are continued to follow the downward trend and was down from 6.4 billion yen year-on-year, but we show the making (inaudible) as to cut cost combined with the lower mobile access charges, operating income increased to 12.1 billion yen year-on-year.

Now the fiscal ‘11 estimate, we have made upward revision by 8 billion yen to 95 billion yen in operating income.

Page 16, 17, NTT Data DOCOMO, I will skip the detailed explanation about these companies. Page 18, consolidated operating income and the – on the other hand, there are the total of – operating income of total five major subsidiaries, there is some difference, but this is mainly because of 42.7 billion yen of operating income of subsidiaries other than five major ones and you see the consolidated accounting shows decrease reflects realization of unrealized gain from sale of property. It existed in that last fiscal year, but we don't have such gain this year.

Next capital investment, 1.3 trillion yen and the turnaround of the fiber business and 10 billion yen, profitability for the global business as described in the mid-term business strategy. We are quite confident to achieve all these goals, but only difficulty we might face is this capital investment.

In the second quarter, just ended the consolidated CapEx. We made almost the same as the previous year or more precisely down 10.8 billion yen at 828.2 billion yen year-on-year. But as I said earlier, DOCOMO’s front-loaded investment in creating tougher networks as well as the enhancement of systems including the customer systems are to be distributed nationwide. So because of these investments by DOCOMO, about 20 billion yen increase is projected and our target is 1.970 trillion, but in the coming fiscal year, this is just one-off time expenditure. So they will not be repeated. So we shall be continuing efforts to contain the investments, capital investment and at the same time, we would like to reach the target of CapEx to sales ratio we have.

Now the cash flows, free cash flow shows a negative number, but it would have been in the positive 300 billion range without effect of DOCOMO’s fund operations. And cash – in July, we exercised our share buyback amounting to 220 billion yen in July. As a result, cash flows from financing activities posted significant increase year-on-year in cash outline.

Page 21, now one target of our mid-term business strategy, the transformation of business structure as the target for this fiscal year, IP and solution related business will account for 68%. This was the actual result of the first half and our target for three years is almost 70%. So we are right on track. So this concludes my presentation. Thank you.

Question-and-Answer Session

Koji Ito

Thank you very much. We would now like to take your questions. (Operator Instructions) Thank you. We'll start from the gentlemen in the front row.

Hitoshi Hayakawa – Credit Suisse

Thank you, Hayakawa with Credit Suisse. Thank you very much for the explanation. With regard to the revised forecast for the full year, if you’re talking about revisions, then this probably have to embrace and until certain kind of message. So what's the significant of your revision in your forecast? I'm not very clear about the message behind your revision in particular, when it comes to NTT East and West. While on a consolidated basis, 10 billion yen forecast sort of revision, let's put that aside. But if you take a look at the details of revenues for NTT East and West, there's actually downward revision. Isn't it? But as far as profit is concerned, it remains flat. Now turning to NTT Communications topline has declined, but our income or profit has increased. So there has been a mixture among different operating companies. So, can we focus on the various slight adjustment in NTT East and West. What’s the message behind the revision in the forecast for NTT East and West this concerns me. As was mentioned by Mr. Watanabe after the first quarter financial results, I believe NTT East and West, you mentioned that – the proper message that you sent out was actually to be a minimum, but then after the second quarter, what you mentioned as the minimum line that you build for NTT East and West is likely to remain the way it is at the end of the full year. So what’s the message behind the revision in your numbers for NTT East and West, what’s the message behind this very slight adjustment for NTT East and West’s forecast.

Satoshi Miura

Well with regard to revenue in the case of NTT East as I mentioned earlier there is the impact from the Earthquake and that still has – there is still that impact and so there was certain elements which we did not projecting at the beginning of the year.

Turning to NTT West, the gap between voice service revenue and IP service revenue, the gap between the two did not shrink as much as we had initially expected of course inclusive of the (inaudible) study or fiber services there are certain reasons why. So as far as the revenue is concerned, while we made some slight adjustment, we felt that we need to reflect certain elements of the prevailing situation, so that is why we decided to revise downwards their outlook for the revenue.

However although I was not present at the first quarter financial results presentation there were comments from our company that this is simply the minimum line if you will the minimum threshold that we had in mind.

It’s true that in terms of the top line this situation remains tough however as far as the income or profit is concerned despite the very difficult environment, we want to secure certain level of profits. So therefore we will fully exercise cost control.

So inclusive of that message if you will, we are – we indicated our results of maintaining if you will, our profit targets of course this will depend on our marketing efforts going forward but as much as possible we want to seek increase in profit and that basic position remains unchanged. So I do hope that you will take it that this shows our results.

Hitoshi Hayakawa – Credit Suisse

What about the full year?

Satoshi Miura

70 billion yen and let’s see yeah 70 billion yen and 55 billion yen for NTT East and West for the full year.

Hitoshi Hayakawa – Credit Suisse

So if you say that this is the minimum and you’re expecting some upside on top of these numbers? But it seems that that results has weakened, is that the case, or is it still unchanged?

Satoshi Miura

Well after the first quarter well let me put it this way. Comparing us what we had anticipated in the beginning of the year and in the first quarter the situation seems to be somewhat more difficult than we had anticipated.

However as I mentioned earlier, the profit target that we have indicated, we want to secure that and we’re showing our results achieved our profit. So I hope that you will take in that light.

Next question please. The person in the second row please.

Takahashi – Mizuho Securities

Takahashi from Mizuho Securities. I have two questions. First one consolidated results the forecast, the revised forecast honestly speaking I'm talking about DOCOMO well the competition is changing very rapidly. So as DOCOMO you they have just made upward revision but as a result considering your mid business plans and numbers DOCOMO’s profitability going forward will be exposed to the unstable factors or not such as the price competition so forth.

There was some slight upward revision but let suppose DOCOMO decides to lower the data rate and if that is exposed to severe competition, how are you going to respond to such change if it happened vis-à-vis your consolidated targets, full year targets and question number two relates to the fixed services ARPU seems to be declining, so the acquisition number is almost inline but regarding ARPU FTTH ARPU for the next fiscal year, what is your prediction the sub lines of both East and West for this year FTTH profitability will be turned around but in the coming fiscal year FTTH profitability, positive profitability can it support and lift up the operating income of the both companies?

Toshio Kobayashi

Let me respond to your questions, first DOCOMO at this point in time, we are not so worried about other performance DOCOMO’s plan, my understanding is achievable now point number two fixed line services in relation to the ARPU of East, West they next fiscal years our top line forecast order profitability forecast, I think it is premature for us to answer such questions but basically the full year forecast was not revised as Mr. Miura said of course we should be making the further effort to achieve the upside and we have communication about that with DOCOMO and so both companies yes do expect that they are willing to achieve that reach target, additional question.

Takahashi – Mizuho Securities

Second quarter Dimension Data's performance revenues or sales and income I have those numbers, second quarter Dimension Data in terms of sales and revenues 230 billion yen, income 8 billion yen, these are the numbers. Our comment from the moderator in the white book page 30, page 30 please at the bottom line shows the numbers of Dimension Data the cumulative number for the six months.

At the bottom of page 30 the communication 2299 and 84 for operating income. Full year profit is said to be 15 billion yen, after consolidation what will this figure look like would it be smaller, as far as second quarter is concerned please look at the foot note of the same page consolidated which is 8.4 billion yen, this is a number created by Dimension Data base and the IFRS and when it is translated to US GAAP the depreciation is conducted so 3.3 billion yen will be the number for the second quarter. So slight increase from the first quarter am I correct to say that?

Satoshi Miura

Yes. The sales quarter was 1 billion yen plus something.

Takahashi – Mizuho Securities

Thank you.

Satoshi Miura

Next question please. I will go to the gentlemen in the third row.

Tsusaka – Morgan Stanley

Thank you, Tsusaka from Morgan Stanley. Thank you very much. With regard to fixed line service or the top line and direct line service it seems that there continues to be downward strength in the top line or fixed line services actually you’re securing profit as a result of cost cutting measures and our thoughts here for cost control but at the medium terms if NTT East and West would achieve a margin of let’s say 5% let’s assume hypothetically that NTT East and West would achieve in the margin of 5%. Even if that were to be achieved over the medium term the offsetting profit will only be 150 billion yen maybe and in three to four years time if this is to be achieved then on a full year basis on annual basis the plus on a consolidated basis will only be 10 billion yen.

In other words when you’re talking about (inaudible) for the consolidated basis contribution from NTT East and West were very small even with an operating margin of 5% at NTT East and West. So that’s the case when you take a look at the consolidated picture for NTT Group who will be the growth driver for the group, do you still anticipate that it’s NTT East and West or will it be NTT DOCOMO which group company will be the driver or is it the global business maybe two in maybe two years time do you believe that some components of global business will be the growth driver or maybe in five years time. You will only anticipate a slight increase in profit because you anticipate the next five years will be simply be the period where you are going to plant the seeds for future growth. I'm sure you will announce your medium term plan sometime down the road but at this juncture how should ourselves try to understand to the growth driver for NTT Group going forward. That is my first question. Thank you.

Satoshi Miura

Thank you. With regard to fixed line services, you are pointing out that maybe we should not expect too much from fixed line services. So suppose which you are asking is what should be done in that regard is truth that at this moment, NTT East and West, or the fixed line services not yet achieved an operating margin of 5% to date. So for the time bring I suppose 5% should be the target we aspire to achieve going forward.

So if the consolidated operating profit is (inaudible) then fixed line services is not going to represent a dynamic growth against the picture that is true. Right now including smartphones and tablets we are seeing very exclusive growth in sales and I will say in terms of services we are seeing very robust growth.

So mobile business is going to be a very major element. But if we look further ahead but will be the picture inclusive for WiFi and for – and for fixed mobile convergence but let’s take WiFi, I think we are not beginning to see first convergence between fixed and mobile right now. So I think this is where we cannot anticipate further upside in terms of both revenue and profit. So convergence of fixed and mobile that is one area and also as was announced by NTT DOCOMO in their financial results presentation. It is a plus to ICT naturally but in terms of convergence with other sectors, it’s going to further progress. So if that been the case we believe that we are likely to see new convergence which transcends the convergence we see today.

So this is what we expect. Also we are – we have acquired companies such as Dimension Data and Keane up until now. And, going forward, I believe that we will be able to offer a fully seamless services globally, cloud services, which connect Japan and outside Japan in a very seamless fashion and we have three strong expectations towards growth in that area. So as far as more corporate numbers are concerned we need to further revisit and consider but our expectation is growth in this new business domains if I may, if I may add an additional questions. So you talked about the potential growth drivers? No the investor community and the analyst community, we take a look at the financial indicators should we observe the operating income or should we focus on EPS you are talking about growth of 10% on a year-on-year basis they are various elements. No you are focusing on EPS the earnings per share is used of the growth in EPS is probably higher than and let’s say growth in let’s say operating income. Will, that be the case.

Satoshi Miura

Well, let me put it this way. Mr. Tsusaka, in your question you made a comment. As far I'm concerned, I believe that fixed-line services will continue to be a stable revenue generator. I believe that this will continue. So how do we challenge and tackle new growth drivers and how do we enhance the margin of these new growth businesses. I believe this will dictate our medium-term plan going forward.

Tsusaka – Morgan Stanley

Then what about the timeline and the schedule.

Satoshi Miura

Some of these new businesses will start earlier than others, some will take longer. So as far we’re concerned we need to naturally focus on the profit, but at the same time for the investor community, we also want to communicate about our earning per share, EPS. We will take responsibility and further pursue an increase in EPS. So I think that’s the message we need to communicate.

Tsusaka – Morgan Stanley

Thank you very much.

Koji Ito

Yes, next question please. The gentleman in very first row please.

Daisaku Masuno – Nomura Securities

Masuno from Nomura Securities. I have more than one questions, but the first question is; the second half, how do you view it according to your plan East and West vis-à-vis first half and vis-à-vis previous year, they have to work very hard to grow that income, and Comm in the second half versus first half and versus previous year, they are expecting to see lower income, so I think achievability is not sure with the communications. So how do you view their approach regarding second-half in terms of profitability.

Now, question number two, regarding the next fiscal year the fixed services trend, existing trend of growing income should be maintained, but excluding DOCOMO the 20 million yen full is expected or can we expect it to see some return total or some partial return?

And question number three is, as has been referred to FMC. In this industry, the FMC related approaches will be accelerated. That is the existing trend. But in terms of the situations at both East and West DOCOMO, cannot be bundled, and they can’t work together, so there are such restrictions against that backdrop. What kind of measures are you going to take to make a breakthrough.

And regarding light services, if you do not offer more attractive rate schemes, I don't think the light can grow in a promising manner. So I would like to ask you these three questions first.

Satoshi Miura

The first question, East, West and Comm, East and West compared with the usual second half we’ll have to make additional effort to grow their profit. The Commercial made some provision in the first half, but in the second half their income will be slightly lower than the first half. Regarding that in the case of entities in the first half year-on-year profitability declined, but in the second half of scores FTTH and other revenues will be grown with that most efforts, they will be taking every available measure and through these measures they are determined to achieve this target, but suppose if the FTTH without extremely hard effort it will be very difficult to achieve this target, but with additional cost control I think they will be making their best effort to achieve this target. Now NTT is similarly compared with the usual the second half profitability, unless it is extremely high, it will be very difficult for them to achieve that.

Second half expenses compared with usual years, the levelization is going to be progress. Foreign program expenses was incurred at the end, but it will be divided over the term and cost control of course will be strengthened. So these are the efforts that they will be taking. Now the NTT com, compared with the first half, their profitability is slightly low.

Every year, basically, NTT com they use to have more profits during the first half compared with the second half, especially on a year-on-year basis. Sorry, correction; second half seems to have a lower profitability, because the last year in the second half the access charge as a lump sum was realized. So considering such factor, if the com follow the usual trend, I think their goal is quite reasonable. (inaudible) yen the impact of earthquake regarding data protection, if I talk about the details as a result of earthquake, the stronger resilient networks are to be established, which of course boasted some capital expenditure, and of course there will be some impact. Yes, on the depreciation, yes, there are some impact, but basically 30 billion yen will not change so dramatically. So next fiscal year this ¥30 billion as the base is quite reasonable and appropriate.

FMC; by considering the existing regulations of course NTT might have faced many difficulties, yes, many people say that. Fair competition, that is the major rule imposed on us, but even within that limitation, I think we can do device many good solutions without breaking this rule. So there are many areas we can achieve this FMC even under the existing mechanism, so we would make utmost efforts to offer the best available services, and that is exactly what we are studying.

Daisaku Masuno – Nomura Securities

One additional question, if I may before I conclude, the shareholders returns on mid-term basis, dividend and share buyback, which are you going to prioritize, of course we would like to see both, but of course different people may have different views. So, what is your basic understanding?

Satoshi Miura

In our mid-term business strategy, we said that dividend will be the core policy, in terms of shareholders returns, this remains unchanged. But depending on the situations, dividend share buyback, both may occur, but the basic policy would be focused on dividend.

Koji Ito

We would like to take the next question. The gentleman in the second row please.

Shinji Moriyuki – SMBC Nikko Securities

Thank you. Moriyuki from SMBC Nikko Securities. Thank you very much for this opportunity. Many people have asked questions already and I'm trying to interpret to your responses to these questions. For the past year, fixed-line services has enjoyed a tailwind. It seems that you've had some positive trend and you have been upside, however, it seems that a wet blanket has been thrown in the second quarter, is it just simply due to the impact of the earthquake or is there a structural change. How should we interpret this negative trend in the fixed-line services. If it's structural change, then my question to terrestrial/digital broadcast, I think that had actually had an upside boost and so maybe the damage of losing that tailwind, maybe that's quite significant.

But on the other hand, the services in smartphones are so much higher than your expectation, so that’s also had an upside, so maybe you need to change your strategy. So you might say that you're planting seeds, and maybe over the next year or two, you might think that you're going to actually stabilize your efforts as far as fixed-line services are concerned. But then, in the meantime, you will actually use your cash flow to provide return to your shareholders and say that they should expect more from fixed-line services in few years time.

The advertisement fee space seems to focus on the tie up between Hikari and fiber with smartphones. So maybe this is a good juncture for you to change your strategy, maybe you're actually changing your strategy. Is my interpretation correct?

Koji Ito

Thank you. Then let me respond to your question. As far as this fiscal year is concerned, NTT East will probably feel most the impact from the earthquake. That is without a doubt. And, as you mentioned, Mr. Moriyuki, this represents a structural change, It depends on over what timeline you actually see this situation. As far as I am concerned, I do not believe that such a major dynamic structural change is taking place. NTT East and West has faced the impact of the prevailing homework, and in the previous year, there was a unique factor of [IRU] that has positive impact in the previous year. But that impact no longer is felt this fiscal year, so if that’s the case, what is the basic trend for NTT East and West?

Satoshi Miura

As I mentioned earlier, what are the changes in the basic service ARPU? That's something we need to monitor as far as fixed-line services are concerned. So when you take a look at that, I do not believe we're seeing such an extreme change in the structure, if you will, of fixed-line services.

Shinji Moriyuki – SMBC Nikko Securities

Thank you and just as a response, on a consolidated basis a consolidated basis, you’re up – is an upside revision.

Satoshi Miura

I think you're saying that we're making upward revision on a consolidated basis, so who cares about the substance.

Shinji Moriyuki – SMBC Nikko Securities

But there is a slowdown in the fixed-line services, so I think it’s possible for you change your strategy but that’s not how we should feel?

Satoshi Miura

No, we're not there yet. Without a doubt, we see progress in IP and we see progress in cloud services. So, in that regard there is such structural change, but that's regardless of fixed or mobile. As a telecom operator, the revenue structure, naturally, will change. But, against that backdrop, we will naturally consider various possible strategies to accommodate that change.

Shinji Moriyuki – SMBC Nikko Securities

I see. If I could further follow up. What about your strategy after the migration to terrestrial digital broadcast migration? Do you believe that this represents a slowdown? Because the migration to terrestrial digital broadcast has been completed, so do you believe that that represents a certain slowdown?

Satoshi Miura

Well, first of all the impact of the migration to terrestrial digital broadcast has been completed. I think the biggest effect is due to the fact that IRU-related revenues are declining, because, in the previous year, we had a very positive upside, but this year that is not the case. But on the other hand, we talked about video services. Even after the migration to terrestrial digital broadcast Study TV inflects their video services continue to enjoy growth in their subscriber base. And also, as I mentioned earlier, WiFi gathered a great deal of attention. For example, its WiFi within your household and also WiFi in a shopping district or WiFi in public spots. For example, public awareness (inaudible) network.

Shinji Moriyuki – SMBC Nikko Securities

So it's true that there are certain changes on the fixed-line service side, but, in line with the changes in the mobile, I think usage pattern in the fixed-line services are also undergoing a transformation. So I think there's still room for fiber services to grow. I believe there's still room for growth for fiber.

Satoshi Miura

So within the context of totally converged fixed-mobile services, I think there is still room for fiber usage to grow going forward.

Koji Ito

Next question, please. Yes, that gentleman there at the very front please.

Ikuo Matsuhashi – Goldman Sachs

Ikuo Matsuhashi from Goldman Sachs. I have two questions. First one is Dimension Data inclusive overseas business will be the first topic. According to the materials I received and listening to your presentation NTT Comm’s obviously is a business that shows the decline, so that’s what I read. If that is the case, NTT production Dimension Data was acquired, but there was some negative factors. What were they? That’s my first question. The second question is, industry environment surrounding Dimension Data of course is not exempt from the worldwide economic downturn, where there any unexpected phenomena occurring that you did not expect in the first half, so we would like to share your views regarding these issues.

Satoshi Miura

NTT Comm’s obviously is business. I don’t know what number you are looking at, but in relation to that data, if there were anything, nothing. I can say that there were only positive impacts given to NTT Comm’s, obviously is business. In terms of number is reference to decline, but it is mainly because of existing obviously is substituted because of the ForEx situation so forth, but basic trend as far as we know, is that there were no negative impact through participation of Di Data, and now the – what about Di Data itself? Basically it is making organic growth. We had that video conference last week with them, considering the current economic environment. Of course, they have some concerns that it could cause some risks, but actual business performance will be grown in a very sound manner.

Ikuo Matsuhashi – Goldman Sachs

Thank you. Another point is fixed-line business. I have some confirmations to make. The impact of the earthquake, the facilities have stopped and free course were offered so these were a sort of opportunity losses. When everything comes back to normal, these negative impacts will be erased and this 18 billion yen is this number reflect that and regarding NTT East in that fiscal year, 18 billion yen added this, the numbers of this fiscal year will be made and we’ve increased our efforts of cost-cutting, you will be aiming at more than 18 billion yen growth, is that correct for me to say that? And you now said that there is still further room to grow FTTH. The increase of subscribers, is that what you mean or where you referring to the additional added value services? Or the increase of the revenues per subscription? I think that is the case. We of course including video services our low price services are appearing. So it won’t be such as an easy target to achieve. So once again, so FTTH business, the increase of revenues in order to expand this business what will be the drivers, maybe the rate mechanism aside from what the ministry would say, I think this another important issue that you will have to approach. So taking this opportunity we would like to hear from your views in depth regarding this issue.

Satoshi Miura

The fixed-line business and its impact by the earth quake. NTT East, 18 billion yen on full year basis impact is projected out of that. In the effected area of course the services were disrupted and as a result we could not collect the monthly fees, so the evacuation facilities even the residents would have to use or re-subscribe the services, but it is somehow not growing. So at this point in time, this timing will be much later than we originally expected and the remainder will add to the extraordinary loss, a special loss so this will be incurred this fiscal year so that portion will be fixed. But when the new facilities are established during some period of recovery then we will have to spend a depreciation expenses, so with the effect of new construction we may have to spend our depreciation expenses, but that is not clear at this point in time.

FTTH subscription, whether we are growing that or whether we are growing the number of value added services. The base of course is something we would like to grow continuously. But, as one measure, office ISDN are the users we would like to target at in using the FTTH, and of course, we would – at the same time, we would like to offer the corporate customers the attraction of WiFi availability, so we will be taking these measures.

The added-value services of course we will be continuing to offer them at the same time, so we shall be pursuing both measures at the same time. I think I already told you this before, both east and west of course, because of regulatory issues, they themselves cannot become active service players so, instead, the group companies. In terms of IPTV, the [Clara], the subsidiary of NTT Communications, will bear the responsibility to contribute to the revenue increase.

Koji Ito

Thank you. Next question? Yes, we’ll take the question from the gentleman in the first row.

Unidentified Analyst

Thank you. JPMorgan, (inaudible) is my name. I have two (inaudible) questions. My first question relates to EPS. You talked about wanted to further improve earnings per share, but how much growth rate do you envision. This is a question that I have been consistently asking, but I never get a straight response. And in terms of revenue, how much growth CapEx or sales ratio 15% its not clear when this will be achieved, operating income not much growth maybe and NTT’s West effects on business its not easy to grow these businesses, so it’s the same story, it’s the same response we get from you all the time. So if that’s the case, what’s the driver behind your business? At the end of the day, what’s the growth driver? If active services growth is slowing down in NTT East and West and that’s a reality, and cloud and ICT – you talk about cloud and ICT, but what would NTT's ICT and cloud into. What segment are you talking about, which business company will actually be spearheading and driving cloud business ICT and all of these elements are not very clear, maybe you’re going to say late until our medium term strategy, but we can’t wait till that. So, can you give us a medium term image? I know you talk about share buyback and cancellations and so forth, but, inclusive of all these efforts, if there is offset of profit and loss how much increase in bottom line do you – are you envisioning? Can you show us the will if you will, as the management of the company that’s my question. My second question, what’s the revenue driver going forward? To which business segment is it going to be? It could be global or it could be data, so no matter what form it is, if you can just give us a growth driver out of the current corporate structure, which operating company, which business segment will actually be driving the revenue base for your group? What is your philosophy? If you (inaudible) away from this point? Thank you.

Satoshi Miura

Well, you’re saying that we don’t give you a straightforward or clearcut response to your questions. The thing is it’s very difficult to pinpoint just one particular segment. I’d believe it’s an exercise of trying to improve each of these components and trying to achieve improved performance of the group on a consolidated basis, that’s the only way we can actually address this.

In terms of the trend, if we simply consider the extension of the current philosophy, it’s true that we cannot expect too much growth. If we simply pursue the extension of the business as usual that means that we need to carry out that transformation of our business structure and I suppose its one form of innovation. We need to, again, realize convergence among different sectors, and deliver new converged services. So, inclusive of your service being taken by NTT DOCOMO. We are planting seeds at the group as a whole. Now each individual effort might be very small maybe only in the order of tenths of millions of yen or even several hundred millions of yen, but if all of these add up and if we are able to plant seeds and if this could be expanded I think this will achieve positive results.

And furthermore, you ask which operating company, but its nothing much which operating company. We’ve been talking about convergence. If we highlight cloud services for example with in NTT Group, all group companies are actually using the term cloud. So when you talk about NTT’s cloud it’s not something that the group company’s can do on a standalone basis. Again, yes, we’ve done a similar fashion connecting both domestic NTT of foreign businesses and that’s something that a group company on a standalone basis can achieve. The group as a whole must work together to provide the most efficient and the most inexpensive network to the customers offering very robust data allowing for a global footprint. So, what we need to do is to project the strength of the group as a whole. This is not something that we are discussing internally. So, if you ask us to highlight on a specific company we can’t do that. We’re trying to offer cloud service as a whole. There is upside, I’m sure that we can grow this system, so its not one specific, I think it’s a converged picture.

Unidentified Analyst

Well, what you mentioned Mr. Miura right now in the medium term. Well, since 1999 for more than 10 years you’ve had the holding company structure, but once again, are you considering real, possible reorganization. Is that a possibility? So, this is how you mentioned, is there a possibility of reorganization.

Satoshi Miura

Yes, I think that possibility is there. I’ve consistently mentioned that we should not have a debate simply from the structural side or simply based on the organizational format. We should always begin our discussion based on services and as a result of that, there is a possibility the there could be reorganization that’s something I’ve talking to various Presidents of group company’s.

Unidentified Analyst

Have you had such discussions with the ministry.

Satoshi Miura

I know we have not yet finalized about the services, so we have not yet had discussions with the ministry in relation to organizations, but in terms of services, we have had discussions about convergence of services.

Unidentified Analyst

Then what about the growth rate for EPS, any specific number?

Satoshi Miura

I hope to explain that in the new medium-term management strategy when it comes to effect. I’m afraid I cannot give you a clearcut response.

Unidentified Analyst

Thank you. I look forward to your new medium-term management strategy.

Koji Ito

Next question please. No. So with this, I would like to conclude today’s analyst meeting. Thank you once again for your attendance.

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