NTT, Inc. (9432) Earnings Call Transcript & Summary

Thank you very much for attending today despite your busy schedule. Now we would like to start the briefing on the financial results for the fiscal year ended March 31, 2024 and financial forecast for the fiscal year ending March 31, 2025. I am Hanaki from the IR office and will be serving as the facilitator today. First, I would like to introduce today's attendees. Mr. Shimada, Member of the Board, President, CEO; Mr. Hiroi, Representative Member of the Board, Senior Executive Vice President; Mr. Nakamura, Executive Officer, Head of Finance and Accounting; Mr. Hattori, Executive Officer, Head of Corporate Strategy and Planning; are present here today. 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 material, please refer to presentation materials posted on our company IR website. On the first page, it shows the points to be noted so please go through it as well. President and CEO, Shimada, will explain the outline of the financial results followed by a Q&A from the floor. Mr. Shimada, please.

Thank you for joining us today. We appreciate your attendance. Allow me to present to you the financial results for fiscal year 2023 and also financial forecast for fiscal year 2024 at this time. Please turn to Page 4 of the material. Operating revenue, operating profit and profit; all increased year-over-year. Operating revenue, operating profit and profit; all reached record high levels. As for operating revenue, revenue from all business unit dropped by JPY 36 billion driven by increase in revenue in Integrated ICT business and Global Solutions business, operating revenue increased by JPY 238.4 billion and reached JPY 13,374.6 billion at the end of the day. Now of the increase in revenue, impact from foreign currency accounted for roughly JPY 200 billion. As for operating income, there was negative impact from cost related to disaster recovery and security. But cost reduction and streamlining of noncore assets helped to achieve increase of roughly JPY 93.9 billion in operating profit and the total was JPY 1,922.9 billion. Profit decreased JPY 66.4 billion year-on-year due to increase in operating profit and reached JPY 1,279.5 billion. As for EBITDA, increased by JPY 127.9 billion year-on-year driven by increase in operating profit and reached JPY 3,418.1 billion. As for EPS, we achieved the target which was the financial target of the previous mid-term plan which ended in fiscal 2023. So we achieved EPS of JPY 14.8 at the end of the day. Please turn to the following page, Page 5, please. This talks about contributing factors by segment. Let's start from Integrated ICT business. Supported by increase in integrated solutions in enterprise business as well as asset impact driven by reorganization and growth in smart life business focusing on [indiscernible] payment, both revenue and operating profit increased in this market segment. As for Regional Communications segment, there was negative impact from costs related to disaster recovery and security; but cost reduction and streamlining of noncore assets helped to achieve increase in both operating revenue and operating income. Turning to Global Solutions business segment. Operating revenue and operating profit increased driven by increased revenue in public sector, finance and enterprise business in Japan. This increased operating profit based on increased revenue. Also revenue dropped. Turning to Others segment. Revenue dropped due to drop in revenue from Urban Solutions business and energy because they contained the procurement due to skyrocketing cost of power. But operating profit also declined because of the impact of increase of procurement costs compared to the previous year. So that is the situation presented in the Others segment. Allow me to elaborate a little bit. In fiscal 2022, profit from sales of electricity expanded due to jump in the market price. But in fiscal year 2023, the market price dropped causing loss in sales, which led to operating loss on year-on-year basis. Please turn to Page 7, please. This shows you fiscal year 2024 results forecast. It's anticipated operating revenue will increase year-over-year while operating profit and profit will decrease year-over-year. Well, there is JPY 130 billion negative impact from currency. We are aiming for record operating revenue based on increased revenue in Global Solutions business. The guidance for operating profit and EBITDA is negative year-on-year. But if we exclude the onetime factor from the previous year such as the streamlining of noncore assets, there we were actually in the positive territory as far as operating profit is concerned. We believe that fiscal 2024 will be a year to evolve various measures toward medium-term plan goals. In fiscal 2027, we'll expand the base profit and actively implement various measures to increase operating profit over the medium term. Please turn to the final page. This shows you the forecast by segment. Starting with Integrated ICT segment. We expect increase in both operating revenue and operating profit through increase in enterprise business based on expansion of integrated solutions business. As we reach the Communications segment, we expect both operating revenue and operating profit will decline because of the reaction toward the noncore asset streamlining in the previous year as well as increased disaster recovery cost and the continued drop in voice service and ICP revenue and packet communication revenue. But the selection of business and cost reduction based on improved efficiency, we're aiming to achieve inflection points so that we can indeed achieve growth in revenue and operating profit in the fiscal year 2027. So that is what we are aiming to achieve. As for Global Solutions business segment, there's going to be increase in both revenue and operating profit through growth in revenue driven by robust digitalization demand. As for the Others segment, Urban Solutions revenue increased driven by expanded sales of residential homes. But as a result of the reaction to the residential sales in the previous year, operating revenue will increase, but operating profit will decline in this segment. Let's turn to Page 9, please. Here we talk about current profit levels and initiatives to reach medium-term targets. We actively streamline noncore assets to achieve the previous medium-term targets for which fiscal 2023 was the final year and we achieved significant profit increase. So in the case of 2023, we were able to achieve the EPS target as well. Although profits are expected to temporarily decline in fiscal year 2024, we're actively work on expanding growth areas and implement cost structure reforms in order to achieve the new medium-term targets for fiscal year 2027. To be more specific, we will actively maximize return from investment in growth areas. Also work to strengthen domestic and international enterprise business leveraging synergy from integration of NTT DOCOMO and NTT Data. We also expect cost structure reforms to take place. And we're aiming to increase EBITDA by 20% to fiscal year 2027 compared to fiscal year 2022. So that is the growth in EBITDA that we are aiming to achieve. Please turn to the following page. I'd like to add 1 comment on the financial results. As you can see, our balance sheet is expanding, but most of the expansion is in line with the expansion of our finance and data center business, which are characterized as growth areas in our medium-term management strategy. As these businesses have distinct business and financial features compared to the telecommunication business, which is the main pillar of our existing business, we decided to disclose separately so that this may help our stakeholders in assessing the enterprise value as well as the creditworthiness of our company. As with the data center business; assets, liabilities as well as EBITDA, operating revenue and operating profit will be disclosed in the supplementary data for the annual results starting from fiscal year 2023. As with the finance business, we are reflecting the balance sheet for Monex and ORIX credit, which are newly consolidated companies, starting from fiscal year 2023. But as full year results will be incorporated in the consolidated results starting from all fiscal year 2024, what we're doing is we're planning to expand disclosure by the end of fiscal year 2024 as far as this segment is presented. Please turn to Page 11, here we talk about shareholder return. At the Board today, we resolved to increase the year-end dividend per share to JPY 2.6, which represents an increase of JPY 0.1 over the forecast at the beginning of FY 2023 and annual dividends per share are forecasted to be JPY 5.2, which is an increase of JPY 0.1 from fiscal 2023. So this is the result at the Board. So dividends are expected to increase for the 14th consecutive year as a result of this effort. Let me now turn to topics. Page 13, I will briefly go over them. First of all, I would like to explain about establishing NTT DOCOMO Global. In the DOCOMO Group, a new company will be established in July to manage and promote global business centrally and flexibly across various businesses. Within the group companies; NTT Digital, OREX SAI and some overseas group companies will be transferred and start the expansion of application services such as Web3 and support Open RAN implementation for telecoms globally. Through this, we aim to bring about richer lives and societies for customers around the world. Next page, please. Next I will explain about NTT Precision Medicine establishment. Precision Medicine is a medical concept to provide optimal disease prevention and medical care that is personalized for each individual. Realizing Precision Medicine requires integrated collection analysis and utilization of medical health care data such as clinical trial data or medical examination data that is linked to an individual. Towards this realization, we will integrate assets and resources that are held by each of the companies within NTT Group establish NTT Precision Medicine, which will conduct from data generation to utilization of data in a one-stop manner and make strenuous efforts in this business by partnering with all the stakeholders. Next Page 15, please. Next I will explain about newly appointing CCXO and CAIO. In order to strengthen CX, we will newly appoint Chief Customer Experience Officer at major NTT Group companies. In addition, customer engagement indicators will be reflected in executive performance based compensation. Furthermore, in order to promote AI first, we will newly appoint 2 Chief AI officers, CAIOs. Next is regarding towards achieving net 0 in 2040. Fiscal year 2023 actual results for Scope 1 and Scope 2 was 2.42 million tons and steadily progressing in the reduction faster than planned. In addition, as an interim target towards achieving net 0 in fiscal year 2040, we are aiming for 17 million tons or 40% reduction of Scope 1, 2 and 3 in total to be achieved in fiscal year 2030. Next page, please. I will explain about initiatives to roll out overseas business for IOWN. We hosted the Upgrade 2024 conference in San Francisco towards the implementation of IOWN and other technologies globally. We proposed R&D results and product developments including distributed DC, utilizing all Photonics network and tsuzumi; and this was reported widely through domestic and international media and had many participations from overseas as well. Next I will explain the status of the number of shareholders. We report the number of shareholders as of end of March. As you see on the right side of the chart, it shows the number of shareholders as at end of March. Historically, the number of shareholders was trending in a slight increase. However, after the announcement of a stock split, there is a continuous increase and it has doubled. The proportion of shareholder in their 40s or younger has increased approximately 4x and the age composition has become more diverse. Next page, please. As for the medium-term management strategy, the progress since this February is as shown here. This concludes my explanation.

Thank you. We'd like to proceed to the Q&A session. As far as questions are concerned, we will take questions from those who are on site as well as people who are connected remotely. Those who have registered beforehand and are connected to the web conference system, these are the people that we will take questions from. For those of you who are on site if you have any questions, please raise your hand and wait for the microphone to be brought over to you. For those who are connected through the net, please use the raise hand button on the web conference system. For you to cancel your question, please push the raise hand button once again. Also when we designate the questioner, we'll call upon your name and affiliation. So we ask you to mute your microphone, please mute your microphone. When you completed your question, please make sure that the mic on your side will be muted until we complete the response. Let's take questions for those of you on the floor. So please raise your hand if you have any questions. We'd like to go to the gentleman in the front row, please.

I'm SMBC Nikko Securities, Kikuchi. I have 2 questions or actually maybe 3 questions. The first question is about the streamlining of your noncore assets. You've done a great job over the past 3 months. You've done a great deal. How much sales we're able to earn and what about the profits from that? You did this over 3 months, maybe you were able to totally complete the streamlining of your assets. On Page 9, I think there was indication that there's still noncore assets that need to be streamlined. Do you have more noncore assets that are ready to be sold? So can you talk about the further streamlining of noncore assets? I'm sure that you'll proceed with the streamlining of noncore assets, but what about streamlining of your core assets going forward? A few years ago you sold off your base station assets to JTower, DOCOMO did, and yesterday NTT Data, they presented the financial results and they mentioned that data center REIT would proceed. So can you talk about the possibility of further streamlining of your core assets going forward? What about taking your core assets off the balance sheet? What type of rate do you envision? If you could cite some concrete cases, I would appreciate that. That's my first question.

All right. I like to respond to your question first with regard to the streamlining of the noncore assets. Well, in principle, this applies to NTT, to us, this also applies to NTT DOCOMO and Communications as well. They are part of integrated part of NTT group and they have decided to improve efficiency of their assets. So that is where the streamlining of noncore assets really began. In-house throughout NTT Group, then those assets have been transferred to NTT Urban. So the assets that we're talking about this time, these are not assets that would be worthy of [indiscernible] operators. So that is why we are selling all those assets to third parties outside Japan. So it's not that the remaining on balance sheet. In fiscal year 2023 inclusive of book value, we had roughly JPY 200 billion streamlining of assets. Now of that amount, I would say maybe JPY 100 billion of the JPY 200 billion would be -- the proceeds would actually be profit. I think that's a rough picture. Now naturally when we sell off these assets, we have to of course make sure that we retire the property on the assets. We need to take out the property on the assets. So in fiscal year 2023, we did a lot of the streamlining in a single year. That's because we made first the corporation in the preceding couple of years. Now are we done with the streamlining of these noncore assets. That is not the case. There are still some assets that remain. If there are unrecorded assets that emerge, then we'll be happy to streamline those assets at the time. For fiscal year 2024, there's a certain number of activities will remain moving down on the scale as fiscal 2023, but some level of streamlining of assets will continue in fiscal 2024. Now the wireless relay stations there have been a long-standing challenge for the company. But with the change in the technologies, these are assets that are no longer required. So I think we need to take planned approach and make sure that we take them off the assets category. But you could have really -- but selling of relay stations in the mountainous areas are not going to be attractive so we need to combine that with attractive real estate. I think we need to creative ideas in reference of those unattractive assets. You hear about the securitization of other assets. Yesterday, NTT Data presented the financial results and they mentioned that they will pursue REIT of data centers by fiscal year 2025. What about fiscal year 2023? Part of the data centers were actually sold off as a matter of fact. So combining the finance of third parties and expanding data center, that is the policy which we have mentioned that we want to pursue since the past. But the interest rates in U.S. has gone up. So it's really difficult for [indiscernible] together because of the increase in interest rate. So that percentage has come down. So in the initial investment, we were investing a lot of money. So as far as fiscal year 2025 is concerned, we focus on the possibility of REIT. I don't think it will be on a very large scale. The thing is by pursuing REIT, we're making amount of assets will be interested for the assessment of the clients. So that's how we want to start this program. So we pursue a massive scale, then this is going to have a downward effect on our profit. So we need to be very careful as we carry out this program. What about the securitization of assets and antennas and base stations. That is something we are consistently pursuing going forward. We will probably continue to pursue sales completed all the intended asset sales in our program.

All right. Allow me to also add some comments. Mr. Shimada talked about the scale of operations for this fiscal year. As we sold off noncore assets, there are 2 types of such SSLs. First is the one being pursued by NTT East be pursued by NTT Urban. NTT Urban, they pursued noncore asset streamlining. These assets were sold and we were able to gain proceeds for NTT Urban. Sometimes they also handle core assets as well as they're in real estate, but they begin to sell off assets when the profitability is not that high. So that is being done. In the context of the management decision on the Board of NTT Urban that going forward what about the possibility of REIT. Mr. Shimada has already responded to this question. If we sell off our core assets, then this is going to have a downward effect on our profit. So it's important that we scrutinize the content of the sales. Once we have certain scale and once we're able to actually go beyond the capacity of our balance sheet, then we can strategically sell off some of the good assets because [indiscernible] we wanted to maximize the return. That is the process that we need to implement. So I think the alternate finance type of principle will apply in a decision making system. Now the technology may be evolving and copper will have to be migrated. So former core assets can translate into noncore assets. For those assets, we'll continue to actively pursue sales of those assets.

My second question is this. So I have 3 questions, let me turn to my second question. On Page 10, you talk about balance sheet. You mentioned that the data center business is expanding and you want to offer straightforward disclosure. We appreciate your efforts to provide very clear disclosure. Now the asset side, the EBITDA from the asset side and operating profit, we need more information. We need interest related cost as well in relation to the liabilities column as well because for shareholders, we need pretax type of financials. We were reaching more straightforward differention about liabilities as well. And also with regard to assets in 20 years' time, I think you'll be able to have a good view of potential profits down the line. So right now you're sharing the EBITDA level, maybe you can also share with us your ideas about potential pretax profit. If you could present that information as well, we would appreciate that. That will give us a great sense of comfort because then we will be able to do calculation for DPS and DCF. So if you could please provide information on pretax profit and also if you can talk about some of the future potential profits that may emerge from your current assets? This is my second request. So let me turn to my third point. The second point was not a question, but a request. This time you didn't announce any share buyback. Last year in the first quarter, you made an announcement about the share buyback. I'm sure that you're not going to do anything about the share buyback. But on the other hand, the dividend growth is actually quite small this time. So first of all, have there been any change in shareholder return policy? That's my third question. With regard to my request on the second point, if you can comment on my second point, I appreciate your response to my third question.

All right. Let me start with your second point. This touches upon our corporate strategy planning purposes. Now my colleagues on this side of our table are probably concerned. But right now I'm not too overly concerned about the financial burden at this moment. Why I'm not concerned because we have about 20% -- data center business is growing at a CAGR of exceeding 20%. And of the Top 3 companies, we are actually the new entrant and we are the ones who are making the newest investment among the Top 3 players, which means that our return will be coming out later stage compared to our competition. We have a situation for the growth or this business is very strong growth. It's important that we provide a very strong position in the marketplace as a result. Right now we are in the midst of intense competition over our footprint in the marketplace. So it's important that we continue to be a main player in the global data center business. We need to establish ourselves as 1 very strong global player in this data center business. Now of course financial expenses are more visible right now. That is true. I think for some time interest rates is high, but we can expect further downward trend in interest rate going forward. As you mentioned, I think we'll be able to generate return over the long term. That is also very visible. So hopefully, we'll be able to give -- we have to make strategic consideration based on these various elements and to what extent can we disclose these factors. That's something that we want to consider. Now turning to the other point about the shareholder return. Our policy about shareholder return has not changed at all fundamentally. We had 1 for 25 split in the share so JPY 1 might sound somewhat questionable for you. But still we achieved this target in the midterm plan so at the end of the period, we also increased our dividend. And of course in line with our business growth, it's important that we want to -- that we'll be able to surpass the increased dividend. As far as the EPS is concerned, it's no longer the part of the indicator in the new medium-term plan. As I mentioned earlier, we want to make sure that there's steadfast growth in EPS as well under the new plan. So that means we are very mindful about the requirement for the shareholder return.

If I could also add with regard to your second point about the disclosure, if I could be somewhat specific. We're now in the phase of expanding our investment in data center business so that is why there is increase in the size of our balance sheet. But this is a time consuming effort before we could recover the cost. Data center is quite a time consuming process because we need to buy land beforehand and then we gain permission from the local community, get power and they have permits. So compared to other type of assets, this data center business is more long term. So that is why liabilities of BS is high and also the high interest rate is going to be a factor. However, down the line, we'll be able to recover the cost because our customers will be increasing. Fortunately, if interest rates were to come down, that will also have a positive impact as well. So right now the impact is from these 2 factors at this moment. I think we need to be mindful of the phase of the investment required. We need to consult with NTT Data. Hopefully, we'll be able to talk about our portfolio at some time. Maybe we can provide a [indiscernible] offer. We'd like to give that matter consideration. On the shareholder return, Mr. Shimada has already explained.

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

This is Tsuruo from Citi Securities. First question is regarding cost reduction. The cost reduction plan I believe it's about JPY 10 billion less than the original plan. In this area, you have a solid execution till now. So maybe this is an unusual situation. So I want to know the background on this. And I'm sorry that various questions are mixed together. And the Regional Telecommunications, it had a dip and you're going to use cost to expand the growth businesses. So how should we look at the future and what is going to happen to the cost reduction? Regarding the future from now, maybe you don't have it now. But in the medium term, what kind of cost reductions are you thinking different from what you have been conventionally doing? I'm sorry, various questions were mixed in this.

As you have pointed out, we were slightly shy to JPY 1 trillion by about JPY 10 billion and if we kind of tried or forced ourselves, maybe we could have achieved it. However, we had the earthquake and CSI and there were security related matters. So to the very end, how much are we going to provision? We had some areas we had to have the provision the last minute. So of course if we were able to achieve it, that would have been great. But overall, our understanding is that we have achieved the target that we had. And moving forward, basically I did talk about we appointed newly 2 CAIO officer. One person will be responsible to share the AI development externally and the other person will be in charge of internal development of AI and promoting that. And the head of the development technology division also will be the co-CAIO. So where we can replace it by AI, we are going to replace it by AI as much as possible is what we're planning. So there will be the investment cost to implement AI and there will be operation costs for fine-tuning temporarily that is not going to incur. However, in the long term all those processes will be automated. Therefore, the business processes with AI, we are going to make it flow through. It's not just DOCOMO and not just for the operations side, but it will be customer contact center type of area or as the contact point from the user side, we would like to thoroughly implement what we can. Therefore, FY 2024 will incur the costs for that. So it will be the starting point for the cost to incur and this is not going to complete in a year. So we would like to continue this effort for a while. So in absolute money amount terms what this is going to be, we will not know until we actually conduct this. So I would like to refrain from answering that.

My second question is regarding ROIC. You are in the phase of investment so I do understand the situation. But the existing ROIC is declining though the profit is increasing. So for next fiscal year onwards, how should I think about the existing ROIC? Of course this is not included in the medium-term plan, but I am concerned so I'd like to know about this.

First of all, well, DOCOMO in the existing areas, how are we going to look at it is 1 key point. For the asset side of course, however, the other point is how are we going to build up profit for fiscal year 2024. In terms of customer basis, we have a 35% market share. So we need to really think of how we can retain and maintain this customer base. ARPU itself, the plan shows that it will be declining and later on you can ask President Ii from DOCOMO the same question. However, for myself, [ Idomoo ] we should have more market promotions for Idomoo and acquire customers and make that gain as the base for smart business in growth areas. So as for the profit base, we will have to and we need to conduct more marketing activities. There was a mention of a tower before and as much as possible on the asset side, we would like to downsize it. However, instead of securing profit even though we need to drop the profit level a bit, my understanding is that we need to have a solid base for future profit generation. And we are about to enter a struggling phase for DOCOMO. So the FY '24 profit maintenance, if they don't have the source at turnaround, it will be hard. So of course securing profit is important. But how can we have them maintain the current situation and how we can add more initiatives for further expansion. That is where we are right now.

Let's go to the next question.

My name is [indiscernible] from Daiwa Securities. I would like to ask 2 questions. The first question is this. The factors behind the drop in operating revenue, you cited onetime factors. Now sale of noncore assets JPY 100 billion. If you exclude that, I think it seems that there's still a operating loss. So can you talk about some of the breakdown involved in the drop in your operating profit at the end of the day? And also how the sales of noncore assets play into the vector?