NTT DATA Group Corporation (NTDTY) Earnings Call Transcript & Summary

Ladies and gentlemen, my name is Honma, Representative Director. Firstly, thank you very much for your participation for this briefing session despite your busy schedule. As we still live with COVID-19, please allow us to hold this session online. For today's session, this is the agenda for today's explanation. Firstly, let me show the highlight of the financial results for the fiscal year ended March 2021. Last fiscal year, we were hit by COVID-19, and the customers curved IT spend or suspended or reduced projects. However, we appropriately conducted business operations. And compared to our guidance released last August, the negative impact was smaller than expected and results remained solid. As for new orders received, because of the year-on-year decline due to large deals in the previous fiscal year, we had a decline. However, larger sales in domestic business in net sales, we had larger businesses, and we resulted in 32 consecutive year revenue growth. For operating income, structural transformation was conducted, and we controlled unprofitable projects, and we had an increase in profits. Now let me explain year-on-year variance by segment. First, new orders received. In the public and social infrastructure, in the fiscal year '19, we had larger deals so there was year-on-year decline. But because of the projects from the central government, we were on par with fiscal year '19. In the Financial segment, there was a substantial increase because of project wins from financial institutions. Enterprise & Solutions. Even though there was an impact of COVID-19, which was relatively high, we won retail and services-related projects, and the result was on par with fiscal year '19. Businesses outside Japan was strongly hit by COVID-19. In North America, there were large deals in the previous fiscal year so there was a year-on-year decline. On top of that, because of COVID-19, there was a substantial decline. As for EMEA and Latin America, there was a large deal in Spain in the fourth quarter of fiscal year '19 so there was a year-on-year decline, and also there was the COVID-19 impact. Next, let me talk about the situation with net sales. Public & Social Infrastructure segment. For central government and the telecom sector, we have increased sales. The Financial segment, from a wide variety of financial institutions, we were able to increase sales. Enterprise & Solutions segment, especially in the manufacturing sector, there was a COVID-19 impact leading to reduction or suspension of projects, and there was a decline up to the third quarter. However, because of the larger sales in the retail and services sector, for the full year, we landed on par with the fiscal year '19. North America. COVID-19 and FX impacted net sales. However, acquisition-related business increase led to the same level as fiscal year '19. EMEA and Latin America. Italy performed solidly. However, COVID-19 drive reduction and suspension projects leading to the same level as the previous fiscal year. Finally, let me talk about the situation with operating income. Public & Social Infrastructure segment. Revenue growth plus control of unprofitable projects led to substantial increase. Next, the Financial segment. Control of red projects led to incremental profit. Enterprise & Solutions segment. Since third quarter, the negative gap has been reduced. But because of the COVID-19, SG&A ratio has been deteriorated leading to a decline. North America. In order to prepare for future, structural transformation was conducted so such costs and COVID-19 impact led to a substantial decline. EMEA and Latin America. There was a decline because of COVID-19. However, there was an effect of the structural transformation conducted in the prior year and the cost was reduced leading to incremental profit. Next slide and onwards explain details by segment. Therefore, that's the highlight of the financial results for fiscal year ended March 2021. Please jump to Page 12. The final year of the current midterm plan is the fiscal year ending March 2022 so let me explain the forecast for that fiscal year. First, business environment. Due to COVID-19, business environment is dramatically changing. Last fiscal year, even under a harsh environment due to COVID-19, we have been able to successfully demonstrate resilience. For this fiscal year, too, we do expect continued uncertainties. However, as we finish the current midterm plan, we are striving for carrying out strategies that we have been working on. Next, this is a forecast for the fiscal year ending March 2022. This fiscal year is expected to see the negative impact of COVID-19. But under the new business environment, we are going to work on profitable growth. And this shows the comparison between the current midterm plan and forecast: consolidated net sales, JPY 2.36 trillion; consolidated operating margin, 7.6%; EBITA percentage overseas, 6%; and we are aiming to achieve over 80 companies of customer base. Next, detail of the forecast. First, new orders received. In the Financial segment, there were fewer large deals in the financial segment so that we are expecting a slight decline. As for net sales, outside Japan, business restructuring is expected to reduce net sales. However, larger sales in Japan, we are aiming to achieve 33 consecutive year revenue growth. For operating income towards the next midterm plan, we are going to accelerate investment. And in the last fiscal year, we conducted structural transformation, and we expect benefit and also the cost will be reduced. So substantial increase is expected to reach JPY 180 billion. Also, we are to improve profitability, and we are aiming to achieve 7.6% of operating margin. Because of such substantial increase for net income, for the first time, we are expecting to cross the JPY 100 billion mark. Finally, annual dividend per share. Because of such an increase, consolidated cash flow is expected to grow. Therefore, our forecast is JPY 19, JPY 1 up per share. Now let me explain the variance by segment. First, new orders received. As I explained earlier, in the Financial segment, there were large deals so we expect year-on-year decline. So we are expecting reduction of JPY 100 billion year-over-year. But for other 4 segments, thanks to renewal projects and also the new deals, we are expecting to have incremental new orders received. Next, net sales. In North America, in order to promote a shift to profitable business domains, we have a plan for divestment so we do expect some temporary decline. However, for other 4 segments, we are expecting increase in net sales. Finally, operating income forecast. Towards the next midterm management plan, we are going to accelerate investment while increasing profits in Japan, and we are aiming to achieve substantial increase overseas. In North America, we conducted structural transformation in the last fiscal year. So we are to improve profitability and we will reduce costs, and we are expecting to achieve a large increase. And we are aiming to achieve 7% in EBITA margin. In EMEA and Latin America, under the next midterm plan, we are planning to achieve 7% EBITA margin, and we are going to execute investment for EMEA group integration, including brand unification. There are also some downside factors. However, we have reviewed underperforming businesses in the previous fiscal year. So -- and also, we will not expect such temporary costs. Therefore, we are expecting large increase in profits. Next, let me talk about the progress against the midterm plan. Please jump to Page 25. Under the current midterm management plan, in order to achieve the Global 3rd Stage, we have been working on initiatives towards profitable growth at a global scale, and this shows a big picture of the current midterm plan. Under this plan, in order to provide greater value or maximize value for clients as courage to change initiatives, we intensively conducted these 4 strategies. Strategy 1, building our strengths and improving the way of competing against the peer. First, accelerating global marketing, developing digital offerings and building more COEs. With these 3 pillars, we have accelerated global collaborations. This shows one example of Global One Team. For European telecom sector, we worked with NTT DOCOMO and we won multiple 5G-related projects. The second initiative example, Digital Strategy Office, or DSO, was newly created and we developed global offerings. So far, 15 projects have reached a stage to provide services contributing to business expansion in each region. Third, building more COEs or Center of Excellence. We have accumulated cutting-edge technologies and rolled them out. This shows an example of Agile and DevOps. We continue to nurture our subject matter experts contributing to project wins in Japan and abroad. Next, Strategy 2, delivering greater value for clients based on regional needs. First, this is an example from the Public & Social Infrastructure segment. As Grid Skyway, we work with TEPCO Group and set up new business using drones. This is an example in the Financial segment. For financial institutions and enterprises, in addition to banking services, we have been providing services to support management. This is another example in the Enterprise & Solutions segment. For Kirin factories, we have been providing analytics services using IoT technologies. Another example in North America. For a large environmental services company, we have been providing analytics services using Snowflake. Another one from EMEA and Latin America. For a giant oil company, everis solutions for gas station have been provided. Next, Strategy 3, unleashing our employees' potential that maximizes organizational strengths. We developed people programs and changed systems and also, we reformed the work style and also reinforced governance. And this is an example of work style reform using digital. This enables a sharing of insights and know-how at a global scale by introducing cutting-edge mechanisms, and we have been leveraging these for proposal activities and know-how rollout. The fourth strategy is reinforcing group collaboration with NTT Group. In each region or in advance areas, we have been leveraging economies of scale to promote collaborations. We worked with Mitsubishi Group Corporation for their food subsidiaries by providing demand prediction. By using this mechanism, we have been working on this food distribution, DX, used by retailers, wholesalers and manufacturers. This is another example with Toyota. In connected car, we have been conducting joint research such as big data analytics. In fiscal year 2020, in the mobility services arena, we signed a business alliance with TOYOTA Connected. Furthermore, we have been -- as one NTT Group, we have been aggressively working on smart city concept. Under the midterm plan for ESG-oriented management, we set up a goal to contribute to achievement of SDGs. In fiscal year '19, we have identified 12 key ESG issues, and we have been working on initiatives to contribute to societies through businesses as well as corporate activities. This shows initiatives and contributions through businesses, not only in Japan but also in North America and Europe. We have worked on various initiatives for social contribution. Going forward, we are going to work on green. In last fiscal year, Climate Change Action Promotion Committee was set up. Continuously, we will push forward initiatives to reduce carbon dioxide. Last year, we launched TradeWaltz. By leveraging blockchain technologies, we have digitized trade data across industry so that it can reduce paper and also improve operation efficiency. This contributes to carbon dioxide reduction. Next, let me talk about our responses to key issues. First, let me talk about our accomplishment of unprofitable projects and preventive measures. We have reinforced this initiative since 2019. And in fiscal year 2020, we successfully reduced unprofitable projects significantly. Next, improvement of profitability abroad. In North America, because of the COVID-19, since last fiscal year, the structural transformation was conducted ahead of the plan. Shifting to digital-oriented business domains. Continuously, we are to increase digital and the consulting businesses. And also, we will promote initiatives to enhance digital talent and transformation to business domains so that we can achieve 7% EBITA percentage in this fiscal year. Next, EMEA and Latin America. Thanks to our accomplishment of structural transformation, we were able to win digital deals. And also, we reviewed our talent portfolio and underperforming businesses, and we were able to identify a pathway for improvement of profitability. For future, we are going to work on global brand unification and also integrated operation of multiple operating companies. Let me compare against the current midterm plan goals. In Japan, the performance has been trending solidly while abroad, it is hit by COVID-19. Therefore, we are continuously working on reform for recovery and growth. Consolidated net sales of JPY 2.5 billion (sic) [ JPY 2.5 trillion ] is expected to be achieved in the fiscal year ending March 2024. In Japan, we are going to increase growth investments and will sustain profitable growth. And in overseas, we are going to accelerate structural transformation so that we can further improve profitability. As for EBITA percentage, 7 percentage goals, North America is expected to hit it in fiscal year ending March 2022. And EMEA is expecting to achieve in the fiscal year ending March 2024. Finally, let me talk about the directions for the next midterm plan. This shows the business environment surrounding NTT DATA. COVID-19 is accelerating DX and also we are seeing the global trend of decarbonization. Towards Global 3rd Stage, we are going to capture these changes, and we believe that we need to upgrade the current midterm plan to the next level. In the digital arena, we are going to realize DX for the whole society by cross-sector collaborations. And in the green area, we are going to implement Green Innovation based on IT and co-creation of value model. And this shows the vision of what we want to be as NTT DATA. By leveraging strengths of technologies and long-term relationship, we are aiming to realize new society with digital and green. And this shows some specific vision of new society using digital that we are envisaging. Administrative services will be sophisticated. Therefore, we are striving to realize connected one-stop society, where all the administrative and other services and procedures can be complete. As for achieving carbon neutrality as one NTT DATA, we are to leverage eye on digital twin computing technologies. We have started PoCs to shape the future town. Under the next midterm plan, as you can see here, we are going to focus on 3 dimensions of Japan, abroad and global strategies, and we are going to reinforce stronger collaborations. Going forward, towards the Global 3rd Stage with IT and the power of digital, we are going to -- we are aiming to contribute to shaping new society so that we can be recognized as a truly trusted global company. Before conclusion, let me mention about the media coverage in relation to the company in March. And I know that this has caused concerns and inconvenience that occur to you, and let me take this opportunity to extend my deepest apologies. On this matter, on the 9th of March, we have involved external experts and set up a Special Investigation Committee, and this committee is currently conducting the investigation to reveal the facts and correlations. As for the future steps, once the findings become available, we are going to share those publicly. Next slide and onwards explain key topics in numerical data so please allow me to skip those details. This concludes my presentation. Thank you very much for your attention.