Earnings Transcript for 9432.T - Q2 Fiscal Year 2025

Takuro Hanaki: We will now start the briefing session on Fiscal Year 2024 Second Quarter Financial Results of NTT. I am Hanaki from the IR office and will serve as the facilitator today. First, I will introduce today's attendees. Shimada, Representative Member of the Board President and CEO; Hiroi, Representative Member of the Board, Senior Executive Vice President; Nakamura, Executive Officer, Head of Finance and Accounting; Hattori, Executive Officer, Head of Corporate Strategy and Planning. Today's briefing session is streamed live. We are planning to stream it on our website at a later date so we seek your understanding beforehand. As for today's explanation materials, please refer to presentation materials posted on our company IR website. The first page shows the points to be noted, so please go through it as well. Now President and CEO, Shimada will explain the outline of the financial results, followed by Q&A from you. Mr. Shimada, please go ahead.

Akira Shimada: Thank you. I like to present to you the second quarter results for fiscal year 2024. Thank you so much for joining us today. We appreciate your attendance. Please turn to Page 4 of your material. First, operating revenue increased, operating profit decreased then profit also decreased but EBITDA increased year-on-year. Operating revenue reached new record high level as of second quarter. Also second quarter operating profit is now in positive territory on a stand alone basis. As for operating revenue, this increased ¥226.1 billion and reached ¥6490.6 billion. Of this increase, positive impact of the currency was roughly ¥100 billion. As for operating profit, well NTT DATA's Group profit increased and Smart Life business expanded. Fixed-line communication service revenue continued to decline in DOCOMO-implemented measures to reinforce for the customer base. So operating profit decreased ¥30.7 billion, down to ¥920.3 billion year-on-year. But the projection for the second quarter on a standalone basis was not indicated. But based on the internal plan, the performance actually exceeded our internal plan for the second quarter. Also as a result of marketing reinforcement net addition for fiber service increased year-on-year in the first half and there are now signs of improvement in the mobile number portability performance. We will continue to reinforce customer base and improve network quality and accelerate cost efficiency improvement and expansion of the Enterprise business to deliver the consolidated profit plan. Now due to the decline in operating profit and reaction to the proceeds from sales of stock in the previous year. Profit decreased ¥116.1 billion, down to ¥554.8 billion. As our cash generating ability improved due to increase in revenue from growth areas such as data center, EBITDA increased ¥12 billion year-on-year and went up to ¥1685.6 billion. Please turn to Page 5. This shows you contributing factors for segment starting with ICT, integrated ICT business segment. Although mobile communication service revenue decline, growth in finance and payment in Smart Life business enable the increase in operating profit revenue year-on-year. Also while Smart Life business profit increased, the segment operating profit decreased due to customer base and reinforcement measures. As I mentioned earlier, we will implement customer base reinforcement measures, network quality improvement and we'll further improve cost efficiency in order to deliver the annual plan. Turning now to Regional Communication business segment. Operating revenue and profit both declined due to a drop in network revenue and increase in disaster recovery expense. As for fiber, this is now a positive territory because of marketing reinforcement of 10 giga plan as well as the success of bulk Internet agreement. Both operating revenue profit are in line with expectations and we will continue to pursue business selection and focus and actively undertake fundamental review of our cost structure such as transformation of our operations. As for Global Solutions business segment, operating revenue increased year-on-year from increase in public finance and enterprise sector in Japan, as well as the favorable impact from foreign exchange. Operating profit increased, driven by increase in product in Japan as well as the increase in overseas data center profit and drop in structural transformation cost. In other segment, operating revenue and profit both increased year-on-year due to increase in data center, Internet revenue at NTT Urban Solutions. Next, I'd like to cover the topics if I may. Let me first start with the initiatives with Toyota Motor Corporation in the mobility field, which we announced at the joint press conference in recent. Let me talk about this particular initiative with Toyota Motor Company. Next initiatives to promote autonomous driving services. In November 2023, NTT acquired an investment in a company called May Mobility in the United States. Also in August 2024, NTT West decided to invest in company called Navya Mobility to promote the social implementation of autonomous driving services. We're implementing initiatives in various locations, in order to achieve safer and more secure autonomous driving services including Japan's first regular operation of autonomous vehicles on arterial roadways racing Iwate Prefecture. We'd like to share the video of the initiative in the -- basically look at this video. [Video Presentation]

Akira Shimada: The operation will start today and next March 17, until the next year's on March 17, so we would like to do this testing operation. Next, I would like to explain about achieving the world's first international IOWN APN connection. Adding to existing IOWN APN connections between data centers within Japan and overseas in August 2024, we achieved the world's first international connection connecting Japan and Taiwan across the distance of approximately 3,000 kilometers. By connecting a long distance with low latency and no jitter communication, will enable us to provide international data backup and replication services in the future. Next, I would like to explain about the land-based aquaculture initiatives. NTT Green & Food plans to begin operating one of the largest land-based shrimp aquaculture facilities in Japan and Iwate City, Shizuoka Prefecture in this December. Together with the production volume of KAIKO YUKINOYA G.K, which became a subsidiary in August we plan to become the largest land-based shrimp aquaculture producer in Japan. Various initiatives are ongoing in each group company. Therefore, as NTT Group, we will continue to solve challenges faced by the fisheries industry, improve added values and contribute to industrial development and regional revitalization. Green & Food after the flounder aquaculture, this is going to be their second initiative. Next as for the progress under the medium-term management strategy since this August, is as shown here. Next, is regarding dividend. It has been increasing continuously as shown. However, given the amendment to the NTT Act, this April, we will move the interim dividend payment date to an early update. We plan the payment to start to be at November 29. And last year, it was December 18, so it has been moved up quite a bit. Next, is regarding the share buybacks. Within up to JPY 200 billion amount that was resolved, we have conducted share buyback of JPY 88.3 billion as end of October, and the progress rate is approximately 40% and progressing as planned. Lastly, I would like to explain the state of shareholder count. This has been explained in our last financial results announcements. However since then, there was a further increase. And as of the end of September, the number of shareholders has grown by 2.7 times compared to prior to the stock split to JPY 2.44 million setting a new record high. As shown on the right-hand pie chart, the diversification of age composition is also progressing, which means that various generations of age are holding our shares. This concludes my explanation.

A - Takuro Hanaki: Thank you, Mr. Shimada. We'd now like to go on to the Q&A session. we’ll take questions from those first -- we’ll take questions from those of you onsite first. And then go on to take questions from those of you who are already connected online. we’ll take questions from those of you are already connected to the conference system. For those who want to ask questions on site please wait for the – Please raise your hand if you wish to ask question for those of you who are connected online please use the raise hand button function on the web conference system, if you wish to ask questions . If you wish to cancel your question, please press the raise-hand button once again. When we designate to you, please state your name and affiliation. We ask you to switch off your mute. Please unlock the mute function and ask your question. Please make sure that you remain unmuted until the response from our side is over. So we’ll now take questions from those number who are here on site. Is this -- take the first question from Daisaku onsite

Q – Daisaku Masuno: Thank you, Masuno from Nomura Securities. I'd like to ask two questions. First is, about the general situation. I think you've seen very good profit for this particular quarter, and the stock prices are now increasing. Can you share with us your valuation for the overall performance? You mentioned that the performance actually exceeded your internal plan. But compared with my own calculation, I think Global did very well. Regional Communication also did very well based on -- in comparison with my performance. I was very conservative about the real estate and so your performance you did very well. Now, so integrated ICT was somewhat lower than my own expectations. So that's my personal interpretation of your performance. So can you give us your comment evaluation for your overall performance? What type of progress did you envisage for each business segment? I will appreciate your response.

Takashi Hiroi: Yes. Thank you for the question. Let me respond to your question one by one. With regard to integrated ICT business, which relates to DOCOMO's performance. This was mentioned during the press conference earlier. But I think for this fiscal year, it's important that we focus on reinforcing the customer base at DOCOMO. And also we need to improve the communication network quality at all costs. We need to really focus on these two issues. So that is what I have instructed to our staff at our people at DOCOMO as well. So in reality, if you want to reinforce our customer base this will entail some costs. And so if we want to improve network quality then this does require a certain amount of investment and cost. And, of course, the support that we achieved the annual target plan. But what is more important is that we address these two issues that I mentioned earlier. We really need to focus on addressing these two very important issues and challenges. So for Mr. Maeda, I asked that you need to achieve the plan, but at the same time also adjust the two issues at the same time. I realize that this is a very tall order. It's very difficult for me to come rather than say that we can forget the performance just as much as possible because as far as the, sorry. Now I'm sure DOCOMO will talk about the integrated ICT business later on during their meeting. But as a result of these efforts, we're beginning to see outcome and we have seen positive turnout, positive turn rather in the mobile network profitability program, and also migration from all plans is also very well. Already we were at 60% for eximo, but we've already exceeded 60% in terms of the customer selection rate of eximo of 60%. In the case of irumo, we have found that people have not chosen irumo compared with initial expectation, so overall beginning to see flat ARPU as a result of these factors. Let me turn to the Regional Communication in particular with regard to NTT East and West. With regard to NTT East and West, net additions for fiber is now beginning to recover. We have launched across-service as one reason, and also the bulk arrangement, bulk Internet arrangement for condominiums and multi-family dwellings have really produced some results. Originally at the market, I think there is still growth in the market. So our market share has declined despite the expansion of the marketplace. So we need to revisit that. We need to rewind our performance and a company that is going to reinforce our efforts will be able to enjoy stronger sales and that turned out to be right. Also we want to reinforce our enterprise related services as well as a result. The connectivity data centers are now increasing in terms of the demand. So I think revenue and sales will continue to expand. Of course communication, I think we'll be able to work hard, so they will be able to capture increase in revenue as far as cost is concern this is in line with initial expectation. Overall performance is exceeding initial expectations. As a result with regard to data, I believe yesterday there was a press conference by NTT DATA, their performance was very strong and now they're going to exceed the full year plan. So I hope that they will continue to work as hard during the second half as well. That is my expectation for NTT DATA Group. As for the other segment. Again data center sees very strong demand. Still for NTT Group as a whole, we are now beginning to build out data centers for other forecasts outside our group and the NTT facilities profit has really picked up as a result of increased orders from nonentity group companies for data center build up. So in the other segment, I think this is the most encouraging growth factor for us. So that's my comment on the overall performance of the company. Again, we have more or less exceeded our internal expectations for the year. So I think we did very well as the second quarter performance. Thank you. That's all.

Daisaku Masuno: I just wanted to confirm. So other than integrated ICT business segment, they are exceeding the plan. And DOCOMO right now is enhancing their marketing activities and the competition is becoming severe. But for the other segments, they are outperforming. So with overall it's going to be okay. Well, please ask President and CEO, Mr. Maeda. I want them to generate the profit. The second question is Japan domestic CapEx or the overseas data center was explained. And at the press conference today, you were talk -- there were questions regarding the domestic Japan data centers. Looking at the future AI demand, or the investments towards the generative AI NTT, are you going towards the direction of increasing CapEx? According to the media, it seems that you are going to work on the large-scale data center.

Takashi Hiroi: Well, basically in Japan we will be looking at how the demand will trend. For example, it's like the computation platform something that's public. We have no intention of developing such a thing. It's more by each industry. And the other day, we announced the collaboration project with Toyota, like that we'd like to create a platform that has a certain demand. So the same way of thinking applies to the data center as well. So there's the needs and demand. And as I said at the press conference in the control [ph] region of Japan or in the suburbs of that area, constructing a data center is probably highly efficient and will match the needs of the hyperscalers is what we think. So around there securing the power and if we can find appropriate land for the ones that we are sure that customers will be there we will be making investments. And basically for the global side in advance there's not much that we're making investments in. Basically it's where we see the demand and we can secure the customers are the data centers that we are making investments. So in that sense, it's not a business deployment that we're making a lot of advanced investments. Thank you very much.

Takuro Hanaki: Thank you. Next question, please.

Kazuki Tokunaga: Thank you. Tokunaga from Daiwa Securities. I'd like to ask two questions if I may. First is with regard to NTT DOCOMO. They did quite well in terms of subscriber acquisition. And I think you have been successful in trying to capture as many subscriptions as possible. As for NTT Holding Companies is concerned what are going to give a passing grade to DOCOMO's performance. At what point are you going to allow DOCOMO to decelerate in their efforts to acquire customers. Can you give us some indicators? Not sure you can talk about the ending of these efforts, but the investors are concerned as to whether or this effort will continue to -- can be sustained.

Takashi Hiroi: Okay. Thank you for the question. We will continue as long as there's a party that will do the business. We find that -- I think we want to continue with this matter until we reach a point where we can do no more. Again, it depends on the other parties. It could be one year, who knows it could be six months. We have to be mindful that there are other players that are involved. Now the mobile number profitability itself will continue for some time. If we find that we're able -- I think we need to work with this measure until we're able to see some sort of outcome maintaining this market share of 35% is absolutely essential.

Kazuki Tokunaga: Okay. Let me ask a follow-up question. To support such efforts I think Retail Communications data segment needs to generate profits in order to cover such costs, right? Is NTT Holding company prepared to take those measures?

Takashi Hiroi: Again, we're doing business as the NTT Group. That is the reason why group structures is implemented. Now the customer base for DOCOMO needs to be sustained. Why do we need to sustain customer base at DOCOMO? Because we need to further evolve Smart Life business down the road. And the customer base is essential if we want to further evolve our Smart Life business because we are able to deliver new services because we have sufficient customer base to begin with. So if the customer base is eroding [ph] we cannot be successful. So it's important that we secure sufficient customer base in order to allow for further expansion growth.

Kazuki Tokunaga: Thank you for that. My second question is about the universal services. I think you held a meeting to explain the situation. You mentioned that this will have impact on cost efficiencies. So I think long-term -- over the long-term this could be quite good. Now you talked about NTT East and West at NTT IR Day. Will this be an upside to the revenue going forward? Or are you going to use the -- are you going to use the cost save to invest in other sectors of your business?

Takashi Hiroi: Well we talk about NTT East and West at the NTT IR Day the other day we talked about the other scenario to recover the situation. But that recovery scenario does not include scenarios pertaining to fixed line business. So the upside to the change in universal service it has not been factored in the numbers for NTT East and West. Nothing has been decided at the time. So we have not factored any such upside in the projection for NTT East and West when we took the floor at the NTT IR Day.

Kazuki Tokunaga: Okay. Thank you. We are looking forward to the performance. Thank you very much . That is all for me.

Takuro Hanaki: Thank you very much. I would like to take the next question. So on that side the very front row please.

Satoru Kikuchi: SMBC Nikko Securities. I am Kikuchi. Thank you very much for today. I have two questions. The first question is a slightly conceptual question maybe. The second quarter you have increased the profit due to the global business profit increase, but the global business is listed. And so it's probably the minimum level of increase. And for retained earnings because they are a listed company, you cannot bring it over here. So, as NTT itself, are they experiencing increase in profit? I don't think it's increasing. It's actually declining, meaning that you are part of the pie. So thinking about that, on the other hand, this year DOCOMO and NTT East and West had a decline in profit. And if your policy is to make this year the bottom and starting on next fiscal year it's going to turn around and grow. But having said, that how much of a growth of profit can you do? I can only see that a little bit will suffice. And a little while ago, NTT, the dynamic group organizational reforms or through that I thought that it's going to change. But the day before the working report for DOCOMO for the fair competition, something that is objected to have an impact on the fair competition is only subjected to that. So -- but if it remains like this the NTT's growth, even though it is the bottom this year, where is it going to go to? It seems that the situation is at a point that with each company's effort, it's not going to be enough. The management efforts or the structural reform breakthrough type of measures that needs to generate the growth is what I think. Because looking at the global solutions, you're not gaining a lot. So maybe you need to further work on the cost reduction or maybe something drastic like a disruptive resolvement. I just wonder, if we think five years from now, there's a difficulty for us to have expectations. So I wonder what the situation is.

Akira Shimada: First of all, related to NTT law, our first thing is that the NTT East and West, the regulation on their business scope is going to be deregulated and that's going to be a major impact. Up until now, we had to make the company a subsidiary company which means that the corporate functions and the sales force line we had to have a duplication of each function. And moving forward, the corporate side, the headquarters can take care of that. So, to deploy new businesses, this is going to work in favor for us. And within the group reorganization, the regulations to reset actually for NTT East and West under the NTT law, they were already imposed by strict regulations. Therefore, I don't think that it is going to be more than what it is right now. And as for NTT DOCOMO, probably, I don't think that there is much that is going to impact them either. So it is a strengthening the regulation. However, in fact in reality, it's not something that we feel additional large burden imposed on us. So, the regulation regarding the business scope. Other than the broadcast relating type of business, we were able to do any business. And regarding by sorting out the universal service that has a major positive impact. And so for the global side of the business, there are various issues that exist. So as a major shareholder, maybe request for a larger dividend payout. I believe that there are various methods that we can use. So we'd like to think about that. And regarding the new businesses, right now, we are planting the seeds. So within the group, we are taking on various challenges. And by reorganizing all that and then starting to consolidate those temps and growing it to a large scale is what is important. So we would like to work on that as well.

Satoru Kikuchi: Thank you, very much. My second question is regarding IOWN 2.0 in 2025 is coming right there. And before you said -- before I thought that with this IOWN 2.0, there's computing there. So, it will -- the company will change a lot is what I thought. But 2025 is next year. And IOWN, are you seeing some elements that IOWN is going to contribute to your company's performance? And several years ago, there is expectation that you'll take part of becoming a technology leader in the global arena and we have that expectations till now. However, what's the progress? Or are there any numerical targets? We would like to hear of them, so IOWN 2.0 targets or goals, is what I would like to know.

Takuro Hanaki: I would like to quote the numbers. However, but we have not reached that level, honestly speaking. Regarding IOWN 2.0 something that we can show physically as a product. We are thinking of within the communication service have the photoelectric conversion device product at the Expo. And also there are things that are embedded in the server. There's a possibility that we'll be able to showcase that as well. However, in reality, when we can launch that as a project will be a year from then. So next year we will actually see the product. Until now, it was just a concept. But we will see the actual physical product. And what we are assuming right now is that compared to the conventional devices. As I mentioned from before, the energy consumption or power exemption will be one-tenth. So once they can see that, there will be customers that would want to use it. And right now the hyperscaler type of customers, are involved from the designing stage of the server. So having the photonics-electronics convergence device in there is something that we are starting discussions, but I cannot name the company specifically. But as a service we do have visibility that that is going to be launched. So showing the actual physical product and seeing the actual equipment or machine it will have a large impact to society. So we'd like you to wait until then. And if that -- when that day comes, then of course, we will have solid response from the customers. And at that time, we'll be able to project numbers as well. So just wait for a little bit longer please.

Satoru Kikuchi: Thank you very much. That's all.

Takuro Hanaki: Thank you. Now we'd like to go on to other questions. Next question please, Tsusaka from Morgan Stanley.

Tetsuro Tsusaka: Now NTT shareholders and NTT investors for these two groups the current general portfolio will be perceived as this. When we take a look at the general portfolio it's now very difficult for investors and shareholders to understand why it is that they need to hang on to this investment in NTT to begin with, because with this financial representation NTT DATA is the driver of the performance and profit. Next year, if we put -- if we place the moving parts I think, NTT DATA will probably make even greater contribution to the increase in operating profit. That is the general consensus I believe. So NTT DATA is a listed company in its own right. So that being the case. Excluding NTT DATA for example Regional Communication, structurally Regional Communication is not facing very easy situation. Those are clear in your presentation at NTT the other day. You also have NTT-DOCOMO. Now DOCOMO doesn't have edge in all aspects of their competition. And also because of the fixation of market share profit cannot be expected to increase. So that's the outlook for DOCOMO. So for the two-year outlook for DOCOMO, I think that's how we should assess the possibility of performance at DOCOMO. So if you're going to investment in NTT maybe you need to return 100% of the cash you absorbed from your group companies. Because unless you do that unless you take the bold initiative there's no reason for shareholders that you need to continue to hang on to their investment. That's one of the reasons why you're underperforming compared to your competition in the telecom market. And what are the options available? Maybe one thing one possible option is that you make a change a shift to total return to shareholders or you invest only internally with the NTT Group. So that's one other option available to you I believe. Consumer business is only that profitable. It's quite clear. So structurally fixed-line communication is faced with a difficult environment. So maybe it's not for you to make a very bold initiative. You're not coming at a time when you need to take bold actions and decisions, any response to my comment. Thank you.

Toshihiko Nakamura: Thank you for your proposal. We'll certainly take note of your comment. And we'll use it as a point of reference and consider policy options going forward.

Takuro Hanaki: Thank you very much. At this point, we would like to receive questions who are participating online. For those of you participating online and have a question through the web conference system please press the raise your hand button. No questions? Just a moment please. Citigroup Securities, Mr. Tsuruo, please unmute and ask your question. Hello. Please go ahead.

Mitsunobu Tsuruo: Important questions already came out through the Q&A session, so I'm very sorry that I'm asking detailed questions. First of all regarding the Regional Communications segment, the first half various cost reduction investments are made and it will recover in the second half is what you have mentioned. And looking at this disclosed numbers, how are these numbers changing? And how much investment are you going to make? And how much of improvement are you going to see as a result of the cost reduction in the second half. I would like to know the status of that.

Takashi Hiroi: This is Hiroi speaking. Regarding the cost reduction measures, within the Regional Communications business segment, of course, at the first half stage they started to implement the measures and they are making investments. So as effect of that it is still small, so you will see it heavily in the second half is how I would like you to understand. Yes, more specifically speaking here, the expense move this way or that way. If not, I understood the overall picture. Well, the items for the cost reductions, is within the other expenses. Well, other expenses items specifically speaking consignment fees, outsourcing fees. And we are constantly doing a lot of consolidation. So the related expenses to those are going to be reduced.

Mitsunobu Tsuruo: Okay. Understood. Thank you very much. And my second question is something that's already discussed before. In order to protect the market share of NTT DOCOMO, how much can you tolerate in terms of expense you'll spend and investment that you'll be making. Specific numbers or the way of thinking -- no, you already mentioned of the way of thinking. But if you have any specific numbers, I would like to know, especially at this point M&A what banks was mentioned but that was not realized. And the outlook may be not clear at times like this. How much of a buffer are you thinking of? Can you share your thoughts? In the first half how well was the profit? And do you have a buffer because of that, is a related question. So, if you can comment on that, that will be appreciated.

Akira Shimada: This is Shimada speaking now. Basically, spending the -- even though we spend cost, I've told NTT DOCOMO to protect their customer base. But it's not just simply spending the cost is good. Meaning that the cost efficiency improvement needs to be done elsewhere and that's the request I'm making to DOCOMO. So with that how much they can cover the cost or can they do more than what we're asking will all depend on the management of NTT DOCOMO. However, having said that they have to protect profit, so the quality improvement that they're doing right now and maintaining the customer base that you're working on right now. I don't want them to relax on what they're doing right now is the way of thinking, if you can understand our thoughts with this. The finance business expansion regarding that, I've been talking about that all this time and the President and CEO, Mr. Maeda has been speaking of that this time as well. And I believe that it is steadily moving forward. So at some appropriate timing, I believe that there will be things that we can share with you.

Mitsunobu Tsuruo: Thank you. Thank you very much. That concludes my question.

Unidentified Company Representative: If I may add, the full year plan and DOCOMO's full year plan is maintained. So, if there's a misunderstanding that the DOCOMO's profit level is going to decline, I just wanted to correct that. Reinforcing the selling and protecting the profit is something the area or something that was not able to be done right until now. But at the end, there was a decision made as Mr. Shimada shared. And so, whether the profit is going to be protected by relaxing on the marketing activities or are we going to continue strengthening the marketing activities by relaxing and protecting the profit, that's not the case either. We need to do both and have a thorough management of the business is what I would like you to understand.

Mitsunobu Tsuruo: Understood. Thank you very much.

Takuro Hanaki: That concludes this meeting at this juncture. Thank you for your joining us today. Thank you.