Nippon Telegraph and Telephone Corporation
Q4 2020 Earnings Call Transcript

Published: 14 May 2021

[Operator:]

We will now start the briefing session of NTT's Financial Results of Fiscal Year 2020. Thank you very much for participating today despite your busy schedules. I am Fujiki from the IR Office and will be serving as today's facilitator and is very nice to meet all of you today. I will like to introduce today's attending members. First of all from NTT we have Mr. Sawada, Representative Member of the Board, President; Mr. Shimada, Representative Member of the Board, Senior Executive Vice President; Mr. Nakayama, Executive Officers, Senior Vice President, Head of Finance and Accounting; Mr. Taniyama, Executive Officer, Senior Vice President, Head of Corporate Strategy Planning; and from NTT DoCoMo we have Mr. Hiroi, Representative Member of the Board of Directors, Senior Executive Vice President.

[Jun Sawada:]

Thank you very much, my name is Sawada, the President and CEO. Thank you for joining us at this presentation despite you're busy into schedule. Before we start with the financial results, I'd like to express my heartfelt sympathy to those who have been affected by this spread of COVID-19. And so, here I am, I would like to talk about our response to the recent occurrence if I may. Regarding the recent occurrence in which members of management dined with Ministry Officials, Mr. Sawada apologize for causing great inconvenience and concern to our customers or shareholders and all related parties. Allow me to share with you the current status. On March 9, NTT established a special investigations committee including external experts to clarify facts. And this is being conducted by this committee. The recent occurrence was a result of lack of awareness on the part of members of the management and NTT deeply regrets that members of management who should set an example to employees have caused such a situation. Going forward, in order to strictly prevent the reoccurrence of such an incident and to regain the trust of our customers, shareholders and all related parties, NTT will undertake a review of its internal rules and will implement thorough initiatives to prevent any reoccurrence. Further initiatives will be announced in the future after the special investigations committee presents the results of its investigation. I would now like to go on to talk about the overview of fiscal year 2020 consolidated results. So this shows you the highlights of the consolidated results. Operating revenues, operating income and profits all increased across the board. Operating revenue and profit set new record high. As for operating revenue, they was declined due to drop in DoCoMo's handset sales roughly to JPY 20 billion. And they as operating sales, there was a decline due to drop in DoCoMo's handset sales, our overseas system integration revenue from impact of COVID-19 as well as from and the impact of change in accounting at NTT Ltd.

[Operator:]

We will now be starting the Q&A session. SMBC Nikko.

[Satoru Kikuchi:]

Kikuchi-san from SMBC Nikko Securities. Thank you, Kikuchi is my name. I would like to ask two broad questions if I may. First, relates to DoCoMo. In terms of Customer Return Program, you mentioned that the impact is JPY 60 billion, is that in Mobile Communications segments service? But then you expect JPY 60 billion decline in more communication service in your guidance. So, it seems to be equal amount. Was that which you were talking about when you talked about the impact of customer return expansion? But then there are a lot of different factors in both here. Monthly support impact for example. So, JPY 60 billion in customer return program, is that due to the -- how much of that is due to impact term price reduction. Maybe can share that, I would appreciate it. And also when you go to Smart Life business, JPY 60 billion you mentioned. We start sales or profit and also how and point factor same both there and also can you talk about the current status of ahamo, for example subscriptions for example and the outlook going forward. I would appreciate all. So that's my first broad question.

[Natsuko Fujiki:]

Thank you for your question. So, with regard to your question related to DoCoMo, I will like to invite Mr. Hiroi to take the floor.

[Takashi Hiroi:]

Yes. Thank you, very much. I will like to respond to your question, if I may. With regard to Mr. Kikuchi's question. You're talking about one. In the guidance for 2021, well look I mean, the decline in Mobile Communications service revenue for 2021. If I talk about the major trend here, it's as follows. It's their Mobile Communication service revenue is expected to decline by this much. But the ARPU that we disclosed, if you take a look at the ARPU, for fiscal 2021 is JPY 30. So in terms of the user base, actually the level of decline is not that much among our customer base. So the major contributing factors are different, this is in relation to revenue. Decline of revenue in relation to MVNO, also voice and also connection, interconnection charges will be reduced. And that will have an impact on the revenue. So that's one effect. Also, what about the impact in relation to ahamo if I were to respond to your question on this point. As far as ahamo is concerned, right now the subscription is more than JPY 1 million. And 1 million persons -- correction -- 1 million persons. And the impact of Ahamo is this. In fiscal year 2021, the level of this the impact, there is impact on decline in ARPU. But then why are we promoting Ahamo. We want to expand the customer base and we want to realize revenue base or with the medium term. That is the intention behind the Ahamo program. So that being the case, it's true that Ahamo's subscription for Ahamo who are where we take away customers from competition, is still limited. But still there is the impact of taking away customers from others. So, and so mobile number portability for the month of April is now in the positive territory in terms of the user base. It's not that customers are shifting from Gigaho to Ahamo. Not all customers are grading down from Gigaho to Ahamo. We help them. So, we build the customer, there is the potential for upselling among the customers because we're promoting something within the 20 gigabyte and all's in terms of port out. With Ahamo, people would be incentivized to remain. So, the port out risk can be reduced. So, as the result, the user base is now improving as a result of all these efforts and also young customers are now beginning to join DoCoMo. People in their 20s, 30s, and even 40s are now a kind of an 80% of Ahamo's user base. So, that being the case, it could be said that in terms of improving the quality of the user base although it might be slight or the medium term we build at Ahamo, will have a very positive effect down the road. Also, with regard to Smart Life, the increase of revenue for Smart Life. For fiscal 2021 Smart Life will account for a large book of the increase in operating revenue. And there was -- significant factor is in the financial sector; d CARD and d PAYMENT, and d POINTs. So, if in it, finance and payment will be the major driver for increase in operating revenue towards Smart Life business. As for us the competence are concerned, d POINT -- it's expanding the user base. So, data analysis is now progressing. So, by using this data analysis, we can offer marketing solutions and that will translate into increase in revenue. And also d POINTs can be leveraged for offering solutions. So, therefore we'll be able to further upsell d POINT sales. So, that's another factor contained in our guidance. So, that being the case, overall d POINT membership will be expanded. Up until now d CARD and d PAYMENT was the only factor but now we're able to incorporate to data usage. And we can churn trust like this into business model and then we have a plan for actually generate without ending here. So, there's also quality improvement here. So, our intentions are now beginning to be realized. Thank you.

[Satoru Kikuchi:]

Thank you, for that response. If I could ask a follow-up question, earlier you mentioned that JPY 60 billion was for Customer Return Program, is there impact, is the price reduction impact is JPY 60 billion here, is that what you're saying?

[Takashi Hiroi:]

Well, I'm going to put it, mobile -- its ecofriendly. So, the overall decline in Mobile Communications service revenue. So, impact so revenue from ARPU and at the end on related customer base. Customer return embraces all those factors that I just mentioned, as seemed. Maybe difficult for you to compare with your competition but in the case of software for example yesterday they announced their financial results. There was an impact of JPY 30 billion in terms of declining their revenue. That's what they mentioned. It seems close. It seems close to that number.

[Satoru Kikuchi:]

Maybe, I don’t know if we have the common definitions for very difficult to compare apple-to-apple but the impact of price reduction, can you specify the amount of impact from price reduction per se? Would that be very difficult?

[Takashi Hiroi:]

Well, as for specific numbers, I'm afraid we'll not be able to comment. But we're disclosing our ARPU, so hopefully you will use those numbers as a point of reference for your calculation.

[Satoru Kikuchi:]

Okay, thank you very much. My next question is this. This is in relation to the strategy for the NTT group as a home. This time around, you mentioned that you have to wait for the results of the study. The study group. But I believe, well yes I can understand but you have to wait for the results of the city group in relation to the combination of NTT to come communications Comware and DoCoMo. But what the relation to other companies. For example, MIC Minister or you we showed the business plan to the ministry in the beginning of March. And I believe this roughly is the same with the previous year. But the term Comware procurement appeared for the first time in the business operation plan submitted to the Ministry across the board. So, get the sense that you're very earnest about delivering this. So, can you talk about the major selling points for your group, aside for and to the communications, DoCoMo and Comware, maybe it's in real-estate maybe its energy, maybe it's overseas. And NTT did a presentation yesterday. So, this was a company -- that never had -- NTT really explained corporation from with other go-to companies for the first time ever. So, maybe there's a there is a sign of new movement. Can you talk about something that has taken place so in the group right now?

[Takashi Hiroi:]

Well, thank you. Toward the end of your question, you talked about NTT DATA. Well, it's not just global but it could be said that collaboration with other group companies are now really progressing for NTT DATA, not just in global, by any other areas. In terms of the global business, specific projects are ongoing especially in North America as well as in Europe. So, in various areas, we're beginning to see progress in since such collaboration among NTT in other group companies. So, maybe Mr. Honma was being very proactive in his presentation yesterday. Now, let me talk about the group's overseas business first. System integration is doing very well right now. And also, on top of it if we can offer digital solutions capability such as consulting, while this is a hope that NTT DATA will deliver that. And as for NTT Ltd., they should further expand their added value services. That will be the basic policy on the sales side. So, increasing added value and improving margins; that is the structure we want to aim for. Also, structural reform. Structural reform will continue for both NTT Ltd. and NTT DATA, they will continue on with their efforts in this area. And hopefully the group as a whole will be able to improve their cost efficiency further. We want to deepen such efforts, favorably move with the wonderful go-point. And the second point, yes this relates to -- the domestic operator same of in NTT DoCoMo Communications and Comware. Yes, many study groups are meeting -- study groups are taking place. So, we cannot change the structure per se. but already discussions about extra partnership and marketing, there is no constraints there. So, already that is ongoing among these relevant companies. So, that be in the case, facility effect has not been incorporated in our guidance for 2021. So, in actuality, if alliance between DoCoMo communications and Comware were to improve that further, synergy effects could be added as an upside. Turning to power, and electricity. This discussion about carbon neutral and this is really progressing and advancing. This last year we provided vision about the environment. I think one major point to would be how we review the vision for environment that we announced last year. The fourth point, which of course be the following. Because of the issue involving dining with Ministry Officials, we want to change the model of management. And one way to do this would be to promote our own digital transformation, NICT. So, it's important that we accelerate digital transformation ever more than ever. We need to further enhance this. And at the end of the day we need to promote a remote world as well as remote work style. And create a corporate style that is suited to that. When we talked about and the JPY 40 billion in cost reduction, this could be achieved three years ahead of schedule, as I mentioned earlier. We want to further realize a cost reduction, so that we could make our management or lean in and I hope we will be able to create a model where we will be able to expand ourselves as a result of such a model. I'm afraid we do not have the data, so we cannot share with you the data for each of these different segments. So, I'll be want to refrain from talking about specific numbers, if I may.

[Satoru Kikuchi:]

Okay, thank you very much. That is all from my side.

[Operator:]

Mr. Takashi, thank you very much. We will like to take the next question now. Next question from Nomura Securities, Mr. Masuno, please go ahead.

[Daisaku Masuno:]

This is Masuno from Nomura Securities. Can you hear my voice?

[Natsuko Fujiki:]

Yes, we can hear you clearly.

[Daisaku Masuno:]

Hello, Fujiki.

[Natsuko Fujiki:]

Hello. Yes sir, we can hear you.

[Daisaku Masuno:]

Oh, sorry about that. I have two questions. The first question is synergy between DoCoMo and holdings. There is two perspectives from the organization and the business. For this summer, there'll be a consolidating with communications or from next to spring, it will be one organization. You have just mentioned that you don’t have anything to comment at this point. I just wanted to confirm is that is the current situation. And regarding the synergy, to be I mean the network of that more on integration was going to require some time. And because the organization is not clearly stated yet. The DSO's marketing part we don’t know. So, I thought that this status quo here there is not that much synergy but you have if there is some synergy, that is going to show up. I just wanted to confirm that point first.

[Jun Sawada:]

Well, first-of-all regarding the organization side, originally next spring we have a target of what are we going to do about the organization. And of course we have to step up things. However the start of such effort, after the results of the committee so review. So, at this point I will not be able to provide you with a solid schedule in this process. And the second point regarding synergy. As you have mentioned, regarding integration of the backbone or the alliance between business and marketing efforts. The organization capability will be more enhanced. But without the organization part, we have already started the collaboration and alliance and the efforts and well apart from if we can call this a synergy but the fact from that is incorporated in the plans.

[Daisaku Masuno:]

Okay, thank you very much.

[Jun Sawada:]

And also regarding the individual companies refer DoCoMo and NTT Communications, I have a question. First of all, regarding NTT DoCoMo, the Mobile Communications revenue, you had a decline. Well actually in March term on 2021, DoCoMo aside from ARPU that of due to MVNO, there will be a decrease in over the near of JPY 60 billion JPY 70 billion and the voice or time of that was the difference. So, it's onto fiscal year 2021 or the data connection is the timing was delayed to 2021 March. But originally in the first half, this is something that you've already expected. But if we exclude that, the ARPU were about JPY 30, it seems that it was very good landing. From there last fiscal year and this fiscal year the MVNO if impact decline in revenue, maybe it's just the timing difference but if you add the two last two years what is the actual situation. Let me confirm. Well, first of all, as you have pointed out, there is a difference in the timing but as Mr. Hiroi mentioned previously, the impact of positive impact of Ahamo is as showing. Other people who left us stopped leaving us. And also the net additions and situations, we have experienced an increase. So, the base part is starting to be pushed up. Therefore, there is a difference a timing difference at the voice on wholesale but the ARPU of JPY 30, I myself think that it is a good situation and we are seeing a good impact is my understanding. Mr. Hiroi, do you have additional questions? Well, I think that JPY 30 is a very good number too. Regarding the MVNO if I may add, as Mr. Masuno you pointed out, at the end at our fiscal year the voice wholesale from the plan perspective we were looking at various things honestly speaking. And that the timing obviously refer to fiscal year 2021. But the actual money amount as of end of March it was decided. So, regarding the money amount itself is slightly different. However as the overall structure it is as you have pointed out Mr. Masuno. So, if that is so, there's an MVNO area, there is a timing difference. So, let's put that aside for a second. But in fact are there impact of lowering the rates. But before lowering the rates, the ARPU the last the second half it was increasing and this fiscal year was going to go up but due to the decrease in the rates, it is declining. So, the majority is to the impact of declining rates. But the positive impact of other than decreasing the rates with other initiatives such as cost reduction and others that is being observed. But the decline in revenue acquiring new subscribers and improving efficiency you're able to observe that. Is that correct? There was a question before that, there is an impact of the declining revenue but you will be able to cover this with the of acquiring new subscribers. Yes. We understand in that way. The environment that DoCoMo is placed on, it is moving towards a good direction and also the Smart Life business is following a positive trend. So, if we have the enterprise related business with the collaboration, so with NTT communications it will be another good edition, is how we look at it.

[Daisaku Masuno:]

Thank you, very much. And lastly, NTT Communications, the Japan business, domestic business, that recently the enterprise network structures, enhancement, digitalization, remote from home, cloud, the datacenter, due to all these aspects there is a very strong demand that is continuing. So, the operating income increased. How much going to continue. If we look at that for NTT Communications, the domestic are business, I just think that maybe they can increase your operating income and think on a bit more. But how do you look at this?

[Akira Shimada:]

Well, honestly speaking, last era the same timing as now of last year or two years ago, NTT limit its structural reform, limited with establishing 2019 and we thought that the Japan domestic business will face a tough situation. However, due to COVID-19, they were able to provide various solutions and for us too starting April we have started a dual trust remote system was introduced and holding company are actually implemented that and this is from NTT Communications. So, it is a very comfortable and very well-suited to working-from-home or remote working. And toward the tradition, that really matters a lot of NTT Communications is providing our solutions. So, if the digitalization's becomes stronger and stronger, and then the market for NTT Communications is going to further expand and that is becoming a favorable wind.

[Daisaku Masuno:]

So, the plan is much of a 2022 of our profit. Now the plans seems that it is a flat. So, it's difficult to see the sense of increase, so what do you think about that?

[Jun Sawada:]

Well, basically the remaining telephone system areas that decline, occurs every year, so we need to fulfill that part. So, the end of result we cannot help it to look flat, however the telephone system or the legacy part is going to start to settle down. So, in that sense if they have the appropriate solutions to be provided, then they will probably be able to get towards the structure that it will continue to increase the profit.

[Daisaku Masuno:]

And this is my last question. Once they said -- and increase profit in the new area. So, that'll be March of 2022 or the mid-term March 2024. So, around next/next fiscal year, you will, we will be able to see a clear picture of that more, including the platform type of business?

[Jun Sawada:]

Yes. So, we are preceding quite a bit with the preparation. So, whether that's going to be 2022, 2023, I feel that NTT Communications have a has a bit more longer perspective but as a direction, that is correct.

[Daisaku Masuno:]

Thank you very much, that is all.

[Natsuko Fujiki:]

Thank you, very much, sir.

[Operator:]

Thank you very much, Mr. Masuno. We'll go on to the next question now. Next question is from Daiwa Securities, Mr. Ando. Mr. Ando, the floor is yours.

[Yoshio Ando:]

Thank you, this is Ando, can you hear me?

[Natsuko Fujiki:]

Yes, we hear you, sir.

[Yoshio Ando:]

Thank you. I would like to ask two questions, if I may. It's somewhat it's to elaborate on those previous questions. Mr. Hiroi talked there was JPY 60 billion. That was impact from cost reduction, NTT current revenue, I would like to confirm that. So, cost reduction for consumers and also cost reduction for MVNO. Is this the amount that combines both two factors, I would like to confirm that. And also in principle, what -- how can you put it?

[Jun Sawada:]

So, moving factors, moving variables are there. For example, let me explain what I mean. For example, the percentage of change in Ahamo plan What? I can to put it. But with factors moving variables are there. For example, let me explain what I mean. For example, the percentage of changing in Ahamo plan assumption as to how much people will change to a Ahamo. Can you please elaborate so that we can have a clear image? That's my first question. Thank you.

[Takashi Hiroi:]

Yes, thank you. I would like to respond to your question. This is Hiroi Mr. Ando you want to confirm the first point. So press reduction for users and use added press reduction for the MVNOs ? Yes, the number that I mentioned earlier is a combination of both two factors. Now you address the so called moving factor or moving variable. I don't quite understand they just a very question. If I may, you asking very difficult point. But as I’ve mentioned, since the beginning to the extent possible, we want to improve the structure of our user base. So the pricing strategy and the sales strategy that we have in place is really to expand our user base. So therefore, we want to get into the positive territory for MNP. We also want to expand our headset sales and expand our user base. And so we want to retain high ARPU customers as much as possible. That is what we're aiming for. So in terms of change in the plan among the existing customers, we want to make sure that they plan up that they enjoy a higher pricing range. So that is the objective behind our exercise. I hope that answers your question Ando.

[Yoshio Ando:]

Well, if I may, sorry, if I could good follow up. I would like to ask additional question, if I may. So the percentage of change in the plans, it seems probably larger than your initial expectation that was covered in some of the newspaper articles. Going forward, the percentage of such transition would change then the percentage of customers that have joined from non-DOCOMO competition could actually contribute to the profitability of Ahamo. Is that the scenario you have in mind? If you could give us some pointers or some clues as to where you're headed? How you see the situation?

[Takashi Hiroi:]

Well, let me see. We took a look, it's only been very, it's only been a very short period since this Ahamo was launched. The percentage of conquest from non-DOCOMO customers is not hasn't really changed significant just because of a Ahamo. So we have set up the profit plan based on the prevailing situation as our assumption. Now naturally, we want to acquire non-DOCOMO customers as much as possible based on the Ahamo, the larger the better. And also the competition has been, has concluded their promotional campaigns at the month of April. So we're going to see some effects of various factors. Hopefully, this will translate into positive effect. But we want to continue on with such marketing efforts naturally going forward. But we'll make a decision, we're beginning to see some signs. But that's the extent that I'm able to share at this juncture. Well, in terms of the overall balance, I believe new subscriptions, so they contribute to the ARPU and also conquest from non-DOCOMO customers, and also upselling customers. And we also have customers that will be downgrading their plan. Although we've not made this up. And but it's a combination of all these factors I would imagine. Yes, that is the case. But right now we're at a very good place, right. Yes, the situation we see right now is very much in line with our initial expectation. So as you mentioned, Mr. Ando so the proportion if we are able to acquire larger customers out of from outside from outside DOCOMO the percentage would improve then that was improved but that is the current mixture that we have.

[Yoshio Ando:]

Okay, thank you. And let's ask the second question. It's about your overseas business. Margin will be jumping from 3% to 6%. That is your guidance. So can you elaborate on what factors will contribute in the improvement of the operating margin for a resist? In the past you have talked about increasing the percentage of value added services as part of your overseas portfolio. Is that the case? Or is it cost reduction? Is it impact on cost reduction? If you could give us a breakdown. I'm sure that there are several factors involved. So if you could please show concrete numbers if at all possible. Thank you.

[Takashi Hiroi:]

Okay, thank you for your question. I think it's probably 30 billion for NTT Ltd, and NTT Data respectively. So the total JPY 60 billion 70% is cost reduction. So structural reform and cost reduction NTT Data was behind in the past, but they've already completed their structural reforming data in North America and they will do so in Europe entities will continue on with their efforts. So that effect is included in these numbers. So 70% from cost reduction efforts. So the remaining 30% NTT Limited will be transitioning to high added value service. The target was 37%. We want to improve this to 39%. That's we want to improve this by increasing the percentage of added value services this will have an impact on increasing revenue as for NTT DATA increasing their digital offering needs to be done. That will improve their operating profit because of increased sales. So that is the macro picture that we have envisioned. Okay, thank you very much for that.

[Operator:]

Hi Ando those I missed out. Mr. Ando, thank you very much. We like to take the next question. Next BofA Mr. Kinoshita please go ahead. BofA Securities, Mr. Kinoshita can you hear me?

[Yoshiyuki Kinoshita:]

I have two questions also. First question is something related to the questions that have been concentrated to just question is the way of thinking of ARPU of NTT DOCOMO. The discount applied amount, I think is heading towards a declining direction and the last fiscal year also by that largely declining, it is actually supporting the ARPU recovering but this fiscal year is mobile ARPU when you were doing the calculation this discount applied scope, last fiscal year was JPY 460 and the image is that it's going to go down to around JPY 300 yen. Is that the correct understanding that I'm having? I just wanted to confirm that first.

[Jun Sawada:]

Mr. Kinoshita that's quite of a deep dived question. And tomorrow, I think you can have those questions with a DOCOMO tomorrow. Mr. Hiroi would you like to answer that now?

[Takashi Hiroi:]

No, I can answer that tomorrow. No problem with me. I just want to talk to you about the outline of this as you Mr. Kinoshita pointed out the monthly support discount, the impact amount is probably what you're talking about, of course, fiscal year 2021 there is still the impact remaining and towards fiscal year 2022 it is going to start to decline significantly. And compared to fiscal year 2020 as you have pointed out, there is a declining amount. So the details I would like to explain tomorrow.

[Yoshiyuki Kinoshita:]

Okay, understood. Thank you very much. So tomorrow, I look forward to speaking to you. And my second question is related to the dividend this time when you were thinking about the dividend amount based on what thinking did you increase it by JPY 5 and last fiscal year as a result there was a JPY 10 year increase in total. So you are continuing to increase the dividend and this time EPS going to increase by 18% and the dividend increases JPY 5. How are you thinking about this? And in the interim point of the fiscal year, is there a possibility that you will be reviewing the dividend payment and increase it by one notch?

[Takashi Hiroi:]

Well, as you have mentioned in 2020, the third quarter in February when we had the financial results at that time. We did approve and resolve the increase in dividend and that is because the 2020, fiscal year 2020 results was good. That was the background and this time for fiscal year 2021 forecast from the revenue to the profit in that three accounting items we were able to, we can expect a record high number. So at this point as the dividend forecast we wanted to increase the amount. However, as we execute our plans and if the business situation goes quite a positive in the midterm of increase of a dividend we would like to consider that.

[Yoshiyuki Kinoshita:]

So, just want to confirm that if you can see that you will be able to achieve the plan you can consider increasing the dividend or are you saying that unless you will have in profit, that is the one step higher than what your plan you cannot increase the dividend?

[Takashi Hiroi:]

While I'm talking about both. Maybe closer to the first part. Well, of course my feelings I would like to increase it. But if I give you a stately comment, maybe it will be the first statement I said that if we can clearly see that we'll be able to achieve the plan. Thank you.

[Yoshiyuki Kinoshita:]

That is all from my side.

[Jun Sawada:]

Thank you, Mr. Kinoshita.

[Operator:]

Tomorrow for 1 pm. There is going to be a session with NTT DOCOMO So we hope that you'll take part tomorrow as there. Let's go on to the next question. Next question is from Credit Suisse. Mr. Hiroyasu Eguchi, the floor is yours Credit Suisse, Hiroyasu Eguchi.

[Hiroyasu Eguchi:]

Thank you. Can you hear me?

[Jun Sawada:]

Yes, we hear you.

[Hiroyasu Eguchi:]

Thank you. I would like to ask two questions as well. The first question relates to the following. It's about the middle term management strategy and this policy. You talked about the cost reduction, in the new fiscal year on JPY 70 billion was added. So for the next period onwards I suppose that there's room to further increase your cost reduction. So can you talk about the factors why the cost reduction is being implemented in such a smooth manner? And as what about the next year onwards? Is there a room for upside for cost reduction from next fiscal year as well? Can you share with us your thoughts at this moment? That's my first question.

[Jun Sawada:]

Thank you for your question. Well, for the last couple of years, as you're aware, in our global business, we created NTT Limited, NTT DATA and other companies pursued structural reform very significantly and in their aggressive manner. We have encouraged them to do so. We talked about this earlier, but among the major subsidiary firms for the officers will be expanding the scope of performance linked performance based compensation such a band, that percentage was quite high. So performance linked compensation especially we need to make sure that the recognition EPS penetrates. So should be linked with the performance. And we just pursue digital transformation in this context. That's the basic principle. So for the medium term financial targets are quite lofty. But it's important that operating companies understand. And it's important that they pursue improved efficiency, improved productivity, as well as streamlining so as a result of those efforts, that we are seeing these numbers. So JPY 840 billion target was achieved ahead of schedule. This is due to the change in the mentality and the awareness of the group companies will begin to see some positive trends there. So these are the factors which have allowed us to achieve the cost reduction targets. It's important that we maintain this momentum at the same time we also need to pursue digitalization, digital transformation and to pursue further upside and cost reduction that is very important.

[Hiroyasu Eguchi:]

Mr. Sawada you talked about IT promotion, IT and digital transformation. Talking about improved productivity among your own staff, right. What about the KPI? Have you said anything? Are you following that? Are you monitoring that? Also how confident are you that you're able to make a major transformation rather in your own organization?

[Jun Sawada:]

Well, we are still we've just started various initiatives. So we have not yet been able to confirm the KPI in this effort. But for example, we want to change our internal system to cloud based system. This has already decided in NTT Holding Company and in the month of May and June I believe that such decisions will be made by other group operating companies which means the both domestic and outside Japan in the next two years or so I believe. Everything will transition to cloud based ERP. That is the work which is already in progress. This is already factored in our plan.

[Hiroyasu Eguchi:]

I see. So, may I say that your profits structure will be much leaner going forward?

[Jun Sawada:]

Well, I'm talking about NTT that was primarily, but we're beginning to see very senior aged employees. On the other hand, are we, do we have the capacity to hire people, there are areas where there's a shortage of people. That's a microcosm of the Japanese society. But there are areas where there's shortfall of personnel. So that's where we need to promote automated technology as well as remote work based on digital transformation. Unless we do so we cannot improve productivity and we cannot operate our business. So this I think, will be a great testament and hopefully that we will be able to promote our ideas to our customers as well.

[Hiroyasu Eguchi:]

Thank you very much. My second question. It just goes back to the carbonneutral 2030, the environment vision that you were talking about earlier, Mr. Sawada, you mentioned that you want to go beyond carbon neutral. So I suppose this isn't represent a major shift in your strategy. But you're also involved in energy business and also have the telecom infrastructure. Very few companies have bought such assets. So through Smart City, how do you intend to contribute to carbon neutral? Are you expectations about the timetable for achieving this? But what are some of the challenges ahead? And what are some of the responses you have in mind against such challenges? And if possible, can you give us some numbers that you envision in terms of the changes taking place in this segment going forward?

[Jun Sawada:]

Well, thank you for a question. Let's just talk about the big picture. It's we are struggling to come up with firm targets or numbers in the segment. Why? In terms of, we do not yet have a structure whereby renewables can be considered as a stable source of supply. And also in terms of power supply. Striking a balance between the supplier and the demand is very difficult to do in the current grid system. So as an independent source of power, heavy renewables and and electricity storage, that model is already there, but to locally produce and locally use energy and translate that into smart city and offer this as a solution. And also being a place to use those services ourselves that is the model which we have envisioned for right now. We cannot set numbers. We cannot set numbers for the work. One factor is of course, the accuracy. And the second is related to equipment spread of equipments that can accommodate direct current. And the third is battery storage battery, and the price performance of storage. Naturally in the case of management strategy, we want to offer accumulation based on hydrogen. And also we want to send hydrogen through our infrastructure that business model I think is also possible. So in the context of in the context of smart city there are a lot of options available for possible solutions. But in terms, we are not yet there where we can set up a business plan for the items that you're mentioning in the course of your question, Mr. Sawada, do you have any follow up response?

[Jun Sawada:]

Well, this was and storage battery storage. You talked about these items, but we're still at an R&D phase for these technologies. So what concrete products will be applied probably the most efficient product that needs to be tested in various trials. We're still going through the trials at this stage. So it will take some time before we can organize business models. Maybe this will take another couple of years before we can come up with concrete business models. Now the case of the Smart City project with regard to energy, we have some projects. We will introduce that naturally. Right now various city programs are ongoing as we speak. And those projects we will naturally introduce new energy projects. That is our understanding.

[Hiroyasu Eguchi:]

Thank you very much for your response.

[Operator:]

Thank you very much. I would like to take the next question. Okasan Securities, Mr. Okumura. Please go ahead.

[Yusuke Okumura:]

I am Okumura from Okasan Securities. Can you hear me?

[Jun Sawada:]

Yes, we can hear you. Please go ahead.

[Yusuke Okumura:]

Thank you very much. I have two questions. The first question is a qualitative question regarding NTT Limited. The high value added service. The high value added service. It seems that it is quite a sticky reoccurring business. And the business is related to that is the proceeding. But I think the situation is that you're slightly struggling acquiring new business. This high value added service business if you have a positive trend that you're seeing, for example, in the order received, etc. As you have mentioned, the high value added service meaning the high margin business data center or managed service or managed network or security type of businesses, it acquires experts and acquiring a new deal. So we were struggling. However, for example, NTT Limited , the organization that has the high value services NTT sales organization, the collaboration of these two organizations are proceeding and they are listing up the high potential customers. But though this is an orthodox type of method, they have started implementing this method and globally there are picking up the customers that they can target and the sales side is starting the contacting these customers. So fiscal year 2021 said that 30% of the profit is going to be generated from the high value added service expansion of the business and the sales activities is increasing. So we are becoming more confident to achieve that.

[Yusuke Okumura:]

Thank you very much. My second question is, maybe this is something that I should ask you tomorrow. However, it's related to DOCOMO, the mobile communications business ARPU, the last fiscal year fourth quarter ARPU before discount compared to the third quarter I think it has declined more than JPY 100. The Ahamo service has started in March. So I don't think it has impacted to the decline of the ARPU. So I wanted to know briefly, it's fine, but why the decline has occurred?

[Jun Sawada:]

Well, the detail I would like to explain it tomorrow. However, it is not the essence type of a factor. It has some seasonality factor that is impacted this. So I would like to explain this tomorrow.

[Yusuke Okumura:]

Okay, understood. Thank you very much.

[Operator:]

Mr. Okumura. Thank you very much. We were now fast approaching the time to conclude the session. Is there any other question? Any other question. If you have a question please press zero followed by one. Any other question? If not, then with this we will conclude the Q&A session. I would like to repeat myself tomorrow on May 13 from 1 PM. We will have an analyst meeting for NTT DOCOMO. Please take part in that meeting as well.

[Operator:]

That completes the presentation of fiscal 2021 financial results. Thank you for joining us. Thank you ladies and gentlemen that concludes the session. Thank you.