Nippon Telegraph and Telephone Corporation (NTTYY) Management on Q1 2023 Results - Earnings Call Transcript

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Nippon Telegraph and Telephone Corporation (OTCPK:NTTYY) Q1 2023 Earnings Conference Call August 8, 2022 3:00 AM ET

Company Participants

Takuro Hanaki - Investor Relations

Takashi Hiroi - Senior Executive Vice President

Kazuhiko Nakayama - Executive Officer, Head of Finance and Accounting

Takashi Taniyama - Executive Officer, Head of Corporate Strategy Planning

Conference Call Participants

Satoru Kikuchi - SMBC Nikko Securities

Daisaku Masuno - Nomura Securities

Jun Tanabe - UBS Investment Bank

Yoshio Ando - Daiwa Securities

Chikai Tanaka - Goldman Sachs

Mitsunobu Tsuruo - Citigroup

Takuro Hanaki

We will now start the briefing of NTT financial results for the 3 months ended June 30th, 2022. Thank you very much for attending despite your busy schedules today. My name is Hanaki from the IR office, and I will be serving as the facilitator from this time.

First, I like to introduce today's attendees. Mr. Hiroi, representative member of the Board, Senior Executive Vice President; Mr. Nakayama, Executive Officer, Head of Finance and Accounting, Mr. Taniyama, Executive Officer, Head of Corporate Strategy Planning.

Today's briefing is streamed live online. We are also planning to stream the video on our website at a later date. We seek your understanding beforehand. And for today's explanation material, please refer to the presentation materials posted on our company website. On the first page are the materials, points to be considered as stated. So we kindly ask you to please go through it. After this, Mr. Hiroi, Senior Executive VP, will give you the overview of the financial results and followed by receiving your questions. Mr. Hiroi, please go ahead.

Takashi Hiroi

Thank you for the introduction. My name is Hiroi with NTT Holding Company. I have come back from NTT DOCOMO. I look forward to your kind support at NTT Holding Company going forward. So, let me just start by talking about the status of the results for the first quarter of this fiscal year.

We saw operating income -- profit increasing year-on-year -- sorry, operating revenue and profit. This reached record high level at the first quarter.

So let me start with the operating revenue. This increased ¥176.3 billion year-on-year, and the drivers were primarily, increased revenue at NTT Data and NTT Limited. Now, the impact of foreign exchange was for ¥[57 billion] in the positive territory. As for operating income, this also increased like the case of operating revenue. This is also due to the increased revenue in NTT DATA and NTT Limited. So these are the drivers of growth. So operating income went up by ¥17.1 billion year-on-year.

Let me now talk about the profit. On top of the increase in operating income, we were able to record tax deferred assets. So as a result, profit increased ¥28.6 billion in the year-on-year. So, the increase was somewhat large. As for overseas operating income margin, this improved due to increased operating income at NTT Data and also cost reduction at NTT Limited. So this improved by 2.1 percentage points to 6.1%.

So, please go onto the following page. I would like to talk about the contributing factors by segment. Let me start with the integrated ICT business segment. As far as the operating revenue is concerned, enterprise business and Smart Life business recorded increase in revenue year-on-year. But there is price reduction in the consumer business, so the segment as a whole recorded a decline in the operating revenue. But having said that, this drop was offset by cost reduction. So therefore, if we’re able to deliver increase in operating income –

Turning now to Regional Communication Business segment. Here, there was decline in fixed line voice revenue, and this trend has not changed over time. However, in the previous year, we were able to record gain from sale of real estate, but we do not have – we did not have such benefit this fiscal year. So, compared with the change in operating revenue, the change in operating profit seems somewhat large. But on a full year basis, they expect to increase both operating revenue and operating income to increase revenue from system integration and other growth service. And on top of that, we expect rigorous cost reduction to be realized. So, as a result, with full year, we expect increase in both operating revenue and operating income.

As for Global Solutions Business segment, at NTT Data, we enjoyed an increased revenue from robust digitalization demand. And so, at NTT Limited, we were able to increase revenue from value added services. And also, we were able to realize cost reduction from structural transformation at NTT Limited. So therefore, this segment recorded for the increase in both operating revenue and operating income. As for the others, this includes real estate and energy and others. This increase –therefore, the increased revenue because operating income from the increase in agency business – energy was realized, and also there’s increase in revenue from electricity charges, reflecting the rising fuel price. But that hasn’t had too much impact in terms of the operating income. So that is the highlight of the financial results.

So overall, we were able to incorporate DX demand both in and outside Japan, and we have a strong portfolio that can accommodate the increase in DX demand, both in and out of Japan. And also, we were able to pursue progress in structural transformation. We were able to reinforce our portfolio and also generate increase in profit. So that is the assessment of the overall financial results for the first quarter of this year.

Let me now turn to some topics, if I may. Please go on to Page 7, promotion of Medical and Healthcare business. Here, we have entered a capital and business partnership with a company called Genesis Healthcare Company, a pioneer in genetic testing, research and data analysis, and we have acquired 19.3% of this company. We have a company called NTT Life Science, and we were involved in genetic database creation, analysis, and so genetic testing as well. So, we have been involved in this business, but on top of that, we now have the alliance with Genesis Healthcare Company. So, we can add the genetic database from Genesis Healthcare who will be able to improve the quality of our service in this area. So, we can provide this to pharmaceutical companies as well as to medical institutions. So, data analysis and – we’ll be able to receive data analysis, and also increase revenue from the pharmaceutical companies and medical institutions as a result.

And next page, please, is regarding the decentralization of the organization. And regarding this, from the resilience perspective, the holding company’s assumption, we have been working on decentralizing it, and we have been reviewing this up to now. And now in Takasaki City and in Kyoto, we will be establishing the decentralized offices, and we will start the trial from October this year.

And next is Page 10. This is regarding the field testing for the mass and stable transportation of hydrogen. When hydrogen is transported, NTT – the civil work – engineering works, can it be used, was reviewed. And anode energy – based on NEDO’s Research [Gaia] study request, together with National Institute Advanced Industrial Science and Technology and Toyota [indiscernible], we will be conducting this field testing. So, the hydrogen power generation, which we are considering right now, by having such a system realize, we will be able to have flexibility in that area. So, we would like to participate in this field testing.

Next is Page 11, new solutions development with SAP. At NTT DATA jointly with SAP, they have developed a new cargo shipment message. It will be tracked through IoT sensors to facilitate the insurance procedures. In a more easy way to explain, when cargo is transported, there are cargoes that are fragile, for example, wine or medical – pharmaceutical products. Wine is a – very vulnerable to vibration, and for pharmaceutical products, they’re vulnerable to temperature. So, within the cargo, we have placed the IoT sensors, and through that, the temperature, the shock or the vibration will be able to be sensed. And within that, when the cargo is damaged at some point – at what point do they become damaged, is it at loading the truck or unloading or was it in the ship or vessel – now we’ll be able to identify within the supply chain process, who is going to be responsible for the damage, and loss will become more clarified. And so, by establishing such a system, the compensation for damage procedures for insurance can be simplified. It’s like the drive recording system on the vehicle, and using such a system will lead to an improvement, and have better efficiency in the logistics and also insurance procedures business.

And lastly, overview of medium-term management strategy initiatives. If you can read through them, that will be appreciated. I would like to skip the detailed explanation. That is all from me. Thank you.

Takuro Hanaki

We will now take your questions. As we have already informed you beforehand, we’ll be receiving questions from those of you who have registered beforehand in advance and we’re already connected to the phone conference system. The operator will now explain how we’re going to take questions for the Q&A session.

Question-and-Answer Session

Operator

[Operator Instructions] So from SMBC Nikko Securities, Kikuchi-san.

Satoru Kikuchi

Kikuchi here. I would like to ask about DOCOMO later on. If I could ask a question about NTT Limited at this juncture with regard to top line, and also, I would also like to ask about the profit. So let's start with the top line related question. On a consolidated basis, you mentioned the ¥57 million was the impact from foreign exchange on a consolidated basis. NTT Data had ¥30 billion, I believe. So I think foreign exchange had the impact of maybe a 10% impact on your overall operating profit. So having considered all that, we look at our operating revenue December and the data center business in factory and foreign exchange.

I think data center business really enjoyed the growth. So first of the factors behind the growth -- the positive growth in data center business -- and can you talk about the outlook for the data center business with regard to high added value services? I think there's a drop in the network. In the first quarter, network was in the negative territory. So it seems to be a very large drop in the network business. What are some of the elements behind this drop? And as with regard to equipment sales, if you exclude the impact of foreign exchange, I think it's probably a slight increase. There's the semiconductor shortage and also the impact of the lockdown. So how do you see the trend of this business in the second quarter onwards? I would like to ask your assessment about the top line going forward. That is my question.

Takashi Hiroi

So let me respond. I would like to respond to your question, if I may. As was commented by yourself, Mr. Kikuchi-san, you said NTT Limited in the first quarter, the revenue structure is exactly as you have assessed. So I think you have the right assessment of the revenue at NTT Limited. With regard to value-added services at NTT Limited, as you pointed out, there is the impact of foreign exchange -- of currency. But data center really drove this business, and this led to increase in operating revenue. So that was the largest contributing factor to the increase in operating revenue.

And with regard to the data center business, we have been investing in this area for many years, and now the data center business has begun its operations. We made appropriate preparations and we were able to accommodate a very robust demand for DX. So I think data center business has really begun its operations in full. With regard to equipment sales, as you pointed out in your question, the growth is somewhat lackluster, and that is true. Now we're talking about physical hardware sales. So, we have to consider the impact of the semiconductor shortage. With regard to receiving orders, in the fourth quarter and the first quarter, we've been able to have very strong order taking, but the reality is that, in terms of the actual shipment, because of the shortage of semiconductors, we're not able to deliver. So that -- so the contribution to sales has become somewhat weaker from this segment. That is the reality as we head towards the second half of the year. And also toward the end of the full year, we have to see how much equipment there could be for the semiconductor business at that time. It's important that we not be -- we deliver the orders we received and make sure this can translate into contribution for sales. So it's important that we go ahead with such initiatives.

Satoru Kikuchi

If I could turn to my second question. With regard to operating income, roughly ¥6 billion is the number. But on the other hand, profit itself is ¥8 billion. So these are the numbers that we see. So, I have 2 questions about this, if I may. For this fiscal year, ¥30 billion is considered the sort of transformation. In the second half, this is going to have a positive impact, right? But for the first quarter, how much impact did you see from structural transformation? And if you subtract that, the operating margin and profitability has really begun to improve. Is that the case? Is my assessment correct? And also if I may add. What are some of the reasons why the net profit is so high? If you could explain the drivers? Let me now talk about the structure behind our profit. I would like to talk about that, if I may. With regard to operating margin and net profit, what is the difference between the 2?

Unidentified Company Representative

Well, for one thing, I mentioned this is the first part of your question. The tax deferred assets were reflected. So that impact is there. And also, partly, we had gains from sales of shares in some of the subsidiary firms. So that has also had an impact. Now turning to NTT Limited. Since last year, we've been improving the operating profit at NTT Limited. So we invested in [Varian]. We had a tax credit. So therefore -- so we're not able to recall that -- collect that, which means that we're able to record larger tax deferred assets as a result of being able to collect some of the investment into Varian in the past.

There's one other factor with regard to cost for structural transformation. As far as this matter is concerned, on a full year basis, we anticipate ¥38 billion roughly. That is the amount we expect on a full year basis. As far as we are concerned, this is in line with our expectation. The progress there is in line with our initial projection. So it's important that we fully go ahead with these initiatives, and we have to be in time. It's important we carry structural transformation on a full year basis. And from 2019, structural transformation will be completed for this fiscal year. We have to be able to complete this structural transformation and be able to drive profitability as a result of the structural transformation by the end of this fiscal.

Satoru Kikuchi

As far as structural transformation is concerned, this ¥38 billion is the number -- this is more skewed towards the second half -- for the first half? So even if there is impact to [indiscernible], then you will be able to go ahead with this structural transformation. But if you subtract the impact of structural transformation, the operating margin will actually be 5% or 6%. Is that the case? Is that calculation correct? That means that, as a result of structural transformation, profit will improve. So we -- or is it just the case that you were able to windfall profit? And for the second quarter onwards, do you believe that this is difficult -- will be -- is very difficult? The situation will be very difficult for you for the second half? So can you talk about the outlook of transformation.

Unidentified Company Representative

It’s very difficult to decide. It’s very difficult to determine at this juncture. The structural transformation during the first quarter, how do we see that – we’ve had structural transformation in relation to personnel and also been able to migrate some of the services, or stop some of the unprofitable services. And we’ve been spending cost to rate that structural transformation. As you point out, the – we are off to a somewhat slow start, if you take a look at the general picture. So maybe that has had a positive impact on the profitability at the end of the day.

But the effect of the structural transformation – some of the results will be seen in fiscal [2021]. We will see some impact from structural transformation in the first quarter to fiscal 2022. So we just see impact on the – positive impact of the structural transformation across different years. So as we head towards the second quarter and the third quarter, we will pursue further structural transformation, and we hope that we’ll be able to deliver results and be able to meet the full year guidance. That is what we are aiming for.

Operator

Then we'd like to take the next question from Nomura Securities, Mr. Masuno.

Daisaku Masuno

I myself would like to ask a question about NTT Limited and the integrated ICT business segment, if I can ask here. Regarding NTT Limited, the data center demand --globally, I'm sure there's a difference up and down, but still, there's a continued strong demand. And are you having an outlook that the strong demand is going to continue? And also the CapEx. In the gross amount, it's about ¥200 billion level, including others, and it's a physical investment. So as a holding company, moving forward, this is an actual investment to a physical building. But moving forward, in what way are you planning to manage or control such a data center, is what I would like to know.

Unidentified Company Representative

The demand for the data centers, it is very difficult. But basically, from our perspective, we believe that the demand is continuing to be strong. However, having said that, the recently -- since the end of last year, the macroeconomic situation changes is occurring. And based on that, the investment or the data center investments on the customer side, may be impacted by the changes in the economic situation. But the degree of focus that we pay attention to, may have to be increased. But looking at the recent situation, the orders received from the customers and looking at the demand situation, it seems that this strong demand is going to continue. So we would like to surely capitalize on this strong demand.

Daisaku Masuno

And also and the ¥200 billion of investment. So as a holding company, under the new structure, what are your perspectives regarding the data center investment?

Takashi Taniyama

Regarding the data center investment for this fiscal year, we are assuming about ¥300 billion, and 60%, we will be investing. And for the third-party, capital investment is 40%. Currently, regarding the data center, we have the third global ranking market share position. So the investment compared to others is low. Therefore, this ¥300 billion investment, utilizing of [indiscernible], as Hiroi mentioned, keeping an eye on economic situation, we would like to continue investment in data centers.

Daisaku Masuno

So that type of a decision making, the holding company is getting involved within the global business environment? Is that the correct way of thinking about this?

Takashi Taniyama

Yes, that understanding is correct.

Daisaku Masuno

My second question is regarding the integrated ICT business segment. Different from the financial results from July, you'll be integrating the functions. And under that, the services or cost structure reforms are already starting, is my understanding. So, what has started? And looking at the most recent situation, what is your outlook towards the second half of the fiscal year? If you can comment, can you share your comments, please?

Unidentified Company Representative

Well, regarding the details, that will be -- can you please ask that in the DOCOMO session following this session? But as the holding company, if we may share the evaluation of the situation starting from July 1st, I think they have started in a good way. And the highest expectations towards the synergy is the strengthening of the enterprise business. And for us to -- recently for a DOCOMO and common - were -- are working together and conducting activities towards the large corporations where they are covering overlaps.

So the cross-selling of the products that each NTT has, and also, office link or PBX, that is going to be provided in an integrated manner to the customer, is what has started also. And also for the SMEs, the degree of the advancement of the companies that differ -- so we would like to make a thorough approach by customer visit them and then cross-sell each NTT's products. And that is what they're going to do in July and August, is what we have heard. And the employees are working on it with a high level of motivation. Therefore, we would like to keep a close eye on how it goes.

Operator

Next question from UBS Securities, Tanabe-san.

Jun Tanabe

I would also like to direct the question about NTT Limited. Earlier, you mentioned that non-operating loss and tax deferred assets were reflected. If possible, can you talk about the actual numbers? And also, in terms of your full year plan, I get the sense that this is going to have a negative impact. I think that was your full year guidance. Is this in line with your projection and business plan, or was this outside your expectation? If you could share that information, I would appreciate it. And if it was within your plan, then it means that from the second quarter onwards, the negative impact is going to be very large. That will be the impact of your business plan. When you have consolidation with NTT Data, I think there will be financial liabilities. And the cost should be -- will be reduced. Does the NTT Holding Company have any plans to actually reduce the impact through consolidation with NTT Data.

Kazuhiko Nakayama

In relation to finance and accounting, let me direct response with regard to the sales. Look, we had ¥10 billion impact from the gain of sales of shares. And with regard to tax deferred assets, the impact is roughly ¥10 billion. That is the level of the impact. Now, what about the relation to the business plan? With regard to the sales and gain from the sales, we're always on lookout for such opportunities. So this is very much within the line with our business plan, and with regard to reflection of tax-deferred assets. Well, the performance in NTT America was very strong in the recent month, and that became very visible. So, that being the case, this was -- we are seeing this in the context of the overall business plan. So that is all from my response to your question. Have I fully responded to all your questions, sir?

Jun Tanabe

If I could follow up. So, from the second quarter onwards, in the context of the full year plan for the second quarter onwards, you are envisioning very strong negative impact. Is my assessment correct? Is my understanding correct? Are you looking for negative impact from the second quarter onwards?

Kazuhiko Nakayama

Well, I don't think we see potential negative in terms of the operating profit.

Jun Tanabe

Well, you have the full year plan. And in the nonoperating loss, you're anticipating negative [¥12 billion] here, right? With regard to corporate tax, I think you're envisioning negative impact of ¥23 billion. I think that was the full year plan. But if the first quarter was positive, it means that from second quarter onwards, if this is in line with business plan, you're envisioning very strong negative from the second quarter onwards in these categories. Is that the case? Is my understanding correct?

Kazuhiko Nakayama

If I may. We're in the positive territory right now. This issue that from the second quarter, we're going to be in the negative territory. And are you talking about how we see the interest-bearing debt? Is that your question?

Jun Tanabe

Yes, that is the case.

Kazuhiko Nakayama

I see. With regard to interest-bearing debt, right now, our full year guidance is roughly ¥60 billion. We're looking to reduce this by ¥60 billion on a full year basis. And we have certain assumptions behind the ¥60 billion reduction in interest-bearing debt, for example, buyback. And also we are looking for possible capital investment. If this goes as planned, that we are anticipating the results at the end of the year will be very much in line with what we expected in the beginning of the year. But the thing is with regard to the range of the interest-bearing debt is somewhat less than the previous year. So we have to take into account the capital policy of a possible investment. So there could be some fluctuations along the way as far as the full interest bearing debt is concerned on a full year basis.

Jun Tanabe

If I could turn to the second question, if I may ask. You have not clarified the time table, but with regard to the acquisition of NTT Data shares of ¥100 billion, can you talk about the timeline for acquisition of NTT Data shares to the extent possible?

Takashi Hiroi

I’m afraid, with regard to details the source timeline is concerned, we are not able to comment on this matter. I would appreciate your understanding. We’re not able to comment on the specifics on this matter.

Operator

Next question is from Daiwa Securities, Mr. Ando.

Yoshio Ando

I have two questions also. The first question is regarding the first quarter on a consolidated basis. Was it above your expectations? And by business segment for overseas, depending on the situation, it was the way beyond your expectations? Or were there areas that did not reach your expectations? And the Regional Communications Business was not reaching your expectations. If you can intentionally explain that the differences in new ones than what was announced?

Takashi Hiroi

That is a fairly difficult question to answer. I myself have reviewed the various numbers. But there wasn't that much of a large change. And overall, it was in line with the expectations for each business regiment is how I think. And as for DOCOMO, the revenue trend, maybe I want the enterprise business segment and Smart Life to put more effort into it, but we have a clear visibility, and they're still working on the cost reduction. That is in line with the plan -- and Regional Communications Business. As you know, there's no large changes, so there's no surprise. And for all the global businesses, as I have mentioned before, we will surely obtain the sales, and we are changing it to be a profitable organization, and that speed becoming quicker and we have a wish that we want to largely change the profitability. But as the transition point for the first quarter, I think it is in line with our expectations. Therefore, sorry, there was no big surprise for us, so to speak. So I think that's probably how you can look at this.

Yoshio Ando

My second question is regarding the power business or power -- electrical power. My understanding, your company, you are one of the largest power provider, and you are in the position of the electrical power provider. And DOCOMO has started via service providing the electricity. But looking at the recent crude oil prices or the power prices, situation, I want to understand that situation. So what I want to ask you is that, for your company, not just ENNET, but how much of the total electricity sales do you have? And how much are you procuring? And looking at the recent electricity price increase, how much of the impact will you bear? If possible, can you share rough numbers in a quantitative manner?

Takashi Hiroi

For the electrical power, structurally speaking, we have 3 types. The first is that we have the proprietary network -- to provide the proprietary network, we are using power and operating the base stations and also the network itself. And when the electricity prices go up, we cannot pass it on to the customers immediately. Therefore, such an element will impact the profit level immediately. And the other is ENNET. At the center, we have the enterprise, retail, power sales business, and that we do procure the electricity to a certain degree and provide it to the customers. And this a major financial transaction, meaning that, to a certain degree, we have the mid-term and long-term procurement secured and have a hedge over that transition. And the third is the business towards the consumers, which is like DOCOMO Denki. And this is similar to the enterprise business, meaning that we will procure to a certain degree and keep it in a way that the cost does not vary that much, and being able to provide it in a stable manner to the customers.

And the first part regarding the network, for us, an annual basis, about 20% we thought will be the electrical power increase. But recently, it's about 30% increase, and the speed of this increase is quicker than what we had expected. Therefore, that part is going to be a down pressure on the profit is what we think. And also, the latter part for the enterprise customers and also the consumer retail business part. As I have mentioned, to a certain degree, we are already hedging the procurement. Therefore, in that sense, whether that's going to become a large risk this fiscal year, that is not the case because we believe we'll be able to manage it to a certain degree. But in a medium-term perspective, we cannot infinitively continue to secure the power supply for long-term. So that risk is going to be -- may be similar to the market risk and have an impact to our business. And I think that's how I'd like you to understand it.

Yoshio Ando

So in that case, for example, your company's profit significantly being impacted will be ¥10 billion and above? That will be the minimum level of the significant so-called impact. But for this fiscal year, you still have a risk.

Takashi Hiroi

Yes. As I said before, what will probably impact the profit directly will be our own usage part. We did expect that in the plan, but the degree of the increase in the price is quicker than what we expected. So we are putting efforts in saving energy, and we need to have a more strict control so that we’ll be able to minimize the impact, and that’s how we would like to operate at the second half.

Operator

Next question is from Goldman Sachs Securities, Tanaka-san.

Chikai Tanaka

I'll ask about NTT Limited. Two broad questions about NTT Limited. The first question is about the demand environment. If I could talk about a different perspective, can we see across different regions? I know that you're globally active, but can you talk about region by region? Is the demand strong across the board? Or are there differences from region to region? If you could give us your assessment of the demand among the different regions. So I think you still had network equipment, but then there's the impact of shortage of semiconductors. So compared with the situation 3 months ago, do you see some of the improvement in semiconductor? Or is this -- is the environment still harsh? If you could talk about possible changes? That's my first question.

Unidentified Company Representative

First of all, let me talk about our assessment by region. Well, generally speaking, well, starting from Asia, in Asia, I think we see very positive trend generally across the board in Asia. If we talk about the macro situation, be it the United States and also in Europe, I think the situation is very strong in these regions. So having said that, how much have been able to benefit from the strong demand available in these markets? In the case of NTT Limited, as a result of integrating NTT Communications business in Asia, Asia's portfolio expanded for NTT Limited. So therefore, inclusive for the data center business, we see very robust demand in this area, in this region. In the case of the United States and Europe, well, relatively speaking, the competition is very tough. So compared to the situation Asia, the trend is somewhat weaker in the U.S. and in Europe. I think that is how you should see the situation overall.

Chikai Tanaka

What about the impact of semiconductor shortage? Has the situation changed over the same month period?

Unidentified Company Representative

Mr. Taniyama will respond to your question.

Takashi Taniyama

With regard to the semiconductor situation, if I may comment, as is mentioned by Mr. Hiroi earlier, the supply chain for semiconductor, we're trying to see -- Our expectation is that this will be improving. However, the speed of improvement in semiconductor -- supply chain for semiconductor is somewhat weaker, as was mentioned by Mr. Shimada in the press conference. We have ¥130 billion residual demand. Right now the residual demand is ¥130 billion, which means that overtake -- we see order taking improve or increase. So how do we respond to the backlog of demand? This is something that we really need to scrutinize and monitor. So the impact of semiconductor shortage is still evident in the first quarter. How this will play out in the second quarter, this is something that we want to scrutinize very carefully over time.

Chikai Tanaka

So, you're saying that the improvement is not in line with your expectation, but on the ground, it's still very difficult? You do not estimate -- you do not see significant changes in the marketplace?

Takashi Taniyama

Yes, that is the case. Compared with the fourth quarter of the previous year, this situation is not improving. That is our understanding.

Chikai Tanaka

Could I ask another question? From the second half, NTT Limited and NTT Data Overseas business will begin to integrate. So that being the case, what about the PMI, as you see? Can you talk about the priorities for PMI? How much improvement would you like to realize as a result of this integration? If you could talk about this in qualitative terms, but if you can give us an outlook for the PMI for the 2 businesses?

Unidentified Company Representative

At the press conference, I think Mr. Sawada and Mr. Honma already talked about this in previous press conferences. So we need to identify which areas we need to reinforce. I think that, at the end of this, this is what we should focus on. As far as the customers are concerned, we see -- the customers want not just an application, they want network and data center managed services. They want all these functions to be provided in an integrated fashion. So the customers' demand cover all of these areas. That is their expectation. So it's important that we'd be able to deliver those services in a one-stop fashion.

So that is what NTT Limited and NTT Data -- NTT services and other data, that their related firms are now being integrated. We want to make sure that we enhance our service capability through the integration of these different functions. As far as NTT Data is concerned, they have strength in consulting expertise. They have a strong customer base. So it's important we leverage those capacity and also be able to reinforce our platform capacity and also improve connectivity for full-stack connectivity. But I think on this front, NTT Limited can make strong contribution in this area. So if we can maximize our capability to integrate our services, then this will translate into strong PMI. This is a qualitative response. I do apologize.

Takashi Taniyama

So, if I could add. As was explained by Mr. Hiroi, yes, we want to offer full stack solution. On top of that, it’s important that we offer – carry out cross-selling investment into consulting services. We have different systems across different companies. So it’s important that we integrate this network and leverage synergy as a result of these integrations.

Operator

Next question is from Mitsunobu from Citigroup Securities.

Mitsunobu Tsuruo

I have two questions. First is regarding the progress of the cost reduction. Looking at the overall results, it's in line as planned. But as written in the material, the progress of cost reduction, the first quarter, it went down by ¥30 billion. And from the full year, it seems that it is front loaded or it's quicker than planned. And with the integration of [Comm] and DOCOMO, there will be a synergy that's generated. So through these three companies, how much is the cost reduction going to be accelerated, or maybe not? But this -- recently, this ¥30 billion of cost reduction, can you mention the main items or areas?

Takashi Taniyama

As you have mentioned Mr. Tsuruo right now, this fiscal year we have accumulated up to ¥870 billion. And annually, it's ¥930 billion. So from ¥830 billion from last fiscal year, we are ahead of plan at ¥30 billion of cost reduction. Basically, the personnel cost reduction, facility cost and sales promotion is 1:4:5 in terms of a ratio. That's how we are planning the cost reduction. And within that situation, the improving efficiency of network improvement, 3G ahead of plan, we are responding to it. And in DOCOMO we included a web and the digital channel. We have utilized it more. And for DOCOMO and Communications, operations improvement and efficiency, those are the elements that are going to be embodied for cost reduction. So annual of ¥930 cost reduction, we will thoroughly work on this moving forward.

Mitsunobu Tsuruo

And one thing I would like to confirm. In the second quarter or the third quarter, when are we starting to see the drop -- the large drop in cost reduction reflecting the cost synergies?

Unidentified Company Representative

Specifically speaking, we are implementing these initiatives. So I cannot tell you exactly at what timing you'll see it. But from the direction wise, I think there's going to be more weight of the cost reduction in the second half.

Mitsunobu Tsuruo

The second question is regarding free cash flow. I have the information from DOCOMO have free cash flow. But for your company, I don't probably. Your company overall, free cash flow situation is what I'd like to know. In DOCOMO, the net working capital is generating a lot of free cash flow. So this may involve DOCOMO's question 2, but overall, can you explain about the free cash flow situation?

Kazuhiko Nakayama

First of all, the consolidated basis, the cash flow situation today, at the beginning, as Mr. Hiroi explained to you, for the quarter financial results briefing session on Page 20, there is the consolidated cash flow numbers. And if you look at that situation page, for free cash flow as a result, is almost at the same level as the last fiscal year. And the consolidated cash flow and investments – cash flows from investment activities for the consolidated cash flow last fiscal year – compared to last fiscal year, the plus amount is about – went down for about ¥150 billion. What is at the base, which is EBITDA, is increasing about ¥20 billion. Therefore, at the base of the operating activities, there is no specific problems.

However, the decreased amount part, last fiscal year, as you’ve seen the note #2. DOCOMO decreased primary – DOCOMO they incorporate taxes in March, that was lower than expected. And also, the working capital last fiscal year – the various education-related projects occurred. And the cash in from that in the first quarter was quite of a large amount. So compared to that, the cash inflow is decreasing. Therefore, there are some specific special elements that caused this variance. And next, the cash flow from investing activities, that is a bit more simple. Compared to last fiscal year, the investments were less. And in this fiscal year, as I have mentioned before, the subsidiary company is being sold. The sales of subsidiary stock increase is about ¥10 billion, but we had about ¥40 billion. So that has the impact. So plus and minus, it’s as you see here.

Operator

Are there any other questions at this juncture?

Takashi Hiroi

If I could go back to the earlier question by Tanabe-san. This is Hiroi. It is true that right now, we are disclosing NTT Limited's performance. We are disclosing the performance of NTT Limited. It is true that net profit is supposed to be 0 for the full year. So I think we need to check on the full year guidance once again. And also in line with the disclosure rules, if we need to make adjustments based on those rules, we will want to respond in a suitable manner. Thank you. That is all.

Takuro Hanaki

Thank you very much. With this, we would like to close the fiscal year 2022 first quarter briefing of the financial results.

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