Nippon Telegraph and Telephone Corporation (OTCPK:NTTYY) Q2 2022 Results Conference Call November 8, 2022 2:00 AM ET
Company Participants
Takuro Hanaki – Head of IR
Akira Shimada – President and CEO
Hiroi – Senior Executive Vice President
Nakayama – Head of Finance and Accounting
Taniyama – Head of Corporate Strategy Planning
Conference Call Participants
Daisaku Masuno – Nomura Securities
Satoru Kikuchi – SMBC Nikko Securities
Mitsunobu Tsuruo – Citigroup
Hideaki Tanaka – Mitsubishi UFJ Morgan Stanley Securities
Yusuke Okumura – Okasan Securities
Yoshiyuki Kinoshita – BofA Securities
Yusuke Hori – Mizuho Securities
Yoshio Ando – Daiwa Securities
Takuro Hanaki
Thank you very much for gathering today despite your busy schedules. From now we would like to start NTT’s briefing session on the Fiscal Year 2022 Second Quarter Financial Results. My name is Hanaki from the IR office, I will be serving as the facilitator today.
At the start, I would like to introduce the attending members on stage. Representative Member of the Board, President and CEO, Shimada; Representative Member of the Board, Senior Executive Vice President, Hiroi; Executive Officer, Head of Finance and Accounting, Nakayama; Executive Officer, Head of Corporate Strategy Planning, Taniyama. 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. Regarding today’s explanation of materials, please refer to presentation materials posted on our IR website. On the first page, points to be noted are listed so please go through it as well. From the President and CEO, Shimada, will explain the outline of the financial results followed by Q&A from the floor.
President Shimada, please go ahead.
Akira Shimada
Good afternoon. Thank you for joining us at the financial results for the second quarter. So we start with Page 4 of the material, please. Operating revenue increased, operating income decreased and profit increased year-on-year. Operating revenue and profit reached new record high level as the second quarter. Now operating revenue increased JPY398.5 billion year-on-year up to JPY6,286.2 billion due to increased revenue at NTT DATA and NTT Limited. Now of this increase, foreign currency accounted for JPY135 billion. As for operating income although there was positive impact of increased revenue, this was not enough to cover increase in electricity cost. So operating income decreased JPY12.7 billion down to JPY996.5 billion. Now from the first half we have taken cost reduction measures to cover rising electricity cost and we intend to realize the benefits of these measures during the second half of this year. So we want to achieve our annual guidance through these methods. As for profit, it increased JPY20.8 billion year-on-year up to JPY696.6 billion due to one-off positive impact related to corporate tax. As for overseas operating income margin, it increased by 1.1 point up to 5.8% due to increased profit driven by increased operating revenue at NTT DATA and NTT Limited as well as cost reduction through structural reform at NTT Limited. So that is the situation.
Let me now turn to contributing factors by segment. Starting with the Integrated ICT segment. Well, there was negative impact from price reduction in the consumer segment. It was offset by increased revenue at Enterprise and Smart Life businesses. So both operating revenue and operating income increased in this segment. As for Regional Communication business segment, both operating revenue and operating income decreased because one-off positive factor from the previous year no longer applies and also because of the unexpectedly high increase in electricity cost. We will accelerate our cost efficiency program and increase revenue from system integration and growth business so that we can achieve our annual guidance of increase in both operating revenue and operating income. As for Global Solutions business segment, in the case of NTT DATA while operating revenue continues to grow from robust demand for digitalization due to increase in investment for growth and also in part from unprofitable project in Japan, operating revenue increased and operating income decreased. As for NTT Limited, both operating revenue and operating income increased due to increased revenue from value-added services as well as cost reduction through structural reform. This again as a whole recorded increase in both operating revenue and operating income year-on-year. As for others, real estate and energy, operating revenue increased due to increased electricity business at NTT and also increased revenue from electricity business reflect the rising commodity prices.
Let me now turn to some of the topics on hand, I would like to introduce 5. Please turn to Page 7, increase in starting salaries for new graduates. I would like to explain this matter. In order to hire more highly skilled talent, NTT Group major domestic companies are increasing the standard starting salary from April fiscal 2023. Also we’ll begin offering higher salaries based on higher levels of expertise at the time of hiring. Page 8 talks about the new — the review of salary system for regular employees. This will take place from next April. So we won’t have a salary system with promotions based on expertise. Page 9, next I will explain about establishing a new company in the field of human capital. We will establish NTT HumanEX Corp. in December 2022. We will establish a new company that uses human capital data analysis to provide comprehensive support from consulting to system integration. Based on NTT Group’s knowledge of pioneering human capital reforms, we will leverage NTT Group’s personnel data infrastructure and AI analysis to support company work style reforms, environment building and improvement of engagement for career development of employees. Next page, please. Next I will explain about development of technology that enables high-speed wireless underwater communications. As the technology that will enable stable high-speed underwater acoustic communications, we developed 2 technologies: spatial temporal equalization technology and environmental noise immunity improvement technology. We have established a technology that suppresses the impact of delayed waves caused by sea surface reduction and noise from marine biologies in a shallow water area that is about 30 meters deep and successfully conducted a transmission test with transmission speed of 1 megabits per second, which is over 10x of conventional speed underwater over 300 meters of distance.
We apply this technology to realize the wirelessly controlled underwater drones. Moving forward, we will proceed in-field demonstration for practical usage and aim for being used in infrastructure inspection of port facilities and fishery industry field for marine environmental survey for aqua farming.
Page 11, please. As for the overview of medium-term management strategy initiatives is as shown here. However, I will explain 3 main initiatives. With the objective to further promote NTT Group’s XR business, NTT DOCOMO has started the business of the new company NTT QONOQ from October. As announced last May based on our business integration plan of NTT DATA and NTT Limited, NTT DATA Inc. — no it’s not last year, it is this year. Based on our business integration plan of NTT DATA and NTT Limited, NTT DATA Inc. was established as overseas business company under NTT DATA in October. In NTT East and West to further increase Hikari demand, they are planning to lower wholesale price for wholesale Hikari service during fiscal year 2023.
And please refer to Page 12. In order to improve capital efficiency and enhance shareholder returns, we have resolved in today’s Board of Directors meeting to buy back our shares of maximum total amount of JPY150 billion. That is all from my side.
Question-and-Answer Session
A – Takuro Hanaki
Thank you very much, Mr. Shimada. We’d now like to go on to the Q&A session. We will first take questions from the members who are here on site. We’ll also be taking questions from people who are connected to us on a remote basis. We’ll be able to take questions from people who are connected to the phone system who have registered beforehand. So we would like to start with the members who are present on site. Please wait for the microphone to be brought over to you. So please raise your hand if you have any questions. Please state your name and affiliation and go on to your question. So let us start from the gentleman in the first row.
Daisaku Masuno
Masuno from Nomura Securities. I would like to ask about the second quarter results. Just the three months for the second quarter, you can focus on three month. Can you give us some response for each of these business segments for these three months for the second quarter? Let’s start with the Global Solutions. NTT DATA has already made announcement about the results and on a quarterly basis NTT DATA, we knew that there was with regard to revenues as opposed to NTT Limited when we take a look at this number compared to the second quarter of the previous year, their margin seems to be coming down, profit seems to be coming down maybe it’s because the profit was so high in the previous year. How do you see the outlook for the second half? How do you see the outlook for the Global Solutions in the second half? How do you intend to improve and expand your profit for the Global Solutions business segment for the second half? And then I wanted to ask about Regional Communications after you respond to my question about Global Solutions.
Akira Shimada
Let me start with NTT Limited. This time around we have already plans for the second half. Yes, we are still slightly behind the outlook for the second half and the major driver for this is as follows. We call this the system integration related services. The sales of system integrated services has been affected by the semiconductor shortage. The pipeline is building up. The pipeline has been expanding. Toward the end of the year JPY27 billion hasn’t built up at the end of September and I think the scale will be roughly JPY170 billion at this moment. So that being the case, revenues have been affected. So that means that the profit in relation to this revenue has not been achieved. So that is why the profit for the second quarter has not reached our plan. Now aside from that, in the case of value-added services, we’ve already disclosed the numbers that we have seen the growth in data center business, sales has been increasing by 160%. So we see very robust growth in data center business. And although we have not disclosed the following number, in comparison with the full year pipeline — roughly 90% of the full year pipeline has now been translated into revenues for data center business. So from the third quarter onwards, maybe we need to increase the investment in the data center business because we’ll not be able to accommodate the customer demand. That is the situation pertaining to our data center business right now. So I think we need to be mindful of several issues. First is the handset sales, equipment sales; we have not been able to progress as much as we had anticipated. So that is the issue on hand.
Daisaku Masuno
Could I turn to Regional Communication business segment for just third three month alone, the profit seems to be coming down. This is probably affected by the electricity I would imagine. You mentioned that toward the second half, you want to introduce efficiency program and will be able to absorb and make recovery in the profit. May I take it that is the correct assumption?
Akira Shimada
The situation varies between NTT East and NTT West. In the case of NTT East as far as profit is concerned, last year we had the Olympics and the Paralympic games. So there was a temporary impact that accounted for roughly JPY15 billion in terms of revenue. So revenue has been affected by that. So this is a downward trend in the revenue and also because of the rise in electricity prices, operating income has also fallen as a result of these factors. Now on the other hand turning to NTT West, the cost efficiency program is more skewed toward the second half. So therefore, in the case of — because of the rising electricity prices, we have to consider that. Also last year although different — we also had a different transitional factor, temporary one-off impact for NTT West. Because of COVID-19, our call center business was affected so that factor no longer applies this year. So that is a negative impact on operating income and also electricity increase has not been covered by cost efficiency program. But then as far as the second half program is concerned, we have a plan. If we are able to meet the plan for cost efficiency second half, we believe that we’ll be able to meet the annual guidance of increase in both operating income and operating revenue.
Takuro Hanaki
So the gentleman in the second row.
Satoru Kikuchi
SMBC Nikko Securities, my name is Kikuchi. I have two main questions. The first is regarding NTT Limited. It’s kind of the continuance of Mr. Masuno’s question just asked. Structural reforms this term you have planned JPY38 billion. First quarter was JPY4 billion. Therefore, the second quarter, how much have you spent and for the second half, how much more are you planning to spend? Originally you had planned for JPY38 billion. But looking at the progress of the first quarter, it seems that it is a bit behind. In the second quarter, is it behind too? Do you really need to spend all of it or do you need to add more to it is what I would like to know? That’s the first question. And also regarding the data center, probably it has increased in revenue therefore it has increased in profit as well. And you are making investments in advance quite a bit and you were explaining I think the cost at the front is probably heavy. So is that also increasing as well?
Akira Shimada
Regarding the structural reforms, at the first half actually we have not done even half yet. Probably around 40% is correct to understand. Therefore, in the latter half there will be about 60% of the structural reform expenses that is going to be recorded. As I have been saying before, unprofitable countries or unprofitable services we would like to withdraw from those. And also currently we are using outsourcing in the delivery area or the overhead areas. Therefore, those operations are working on improving the efficiency. Therefore, the headcount optimization is going to incur cost in the second half. And throughout the year the low profitability services, especially the cloud services, we are reducing it so it is showing on an equal basis. But the two points that I’ve mentioned right now is going to be more loaded at the latter half of the year. And also regarding the data center, thanks to everybody’s efforts, the sales is steadily increasing.
And as mentioned before in terms of the orders received, originally we have received already 90% of the orders that we have expected at the beginning and we also have plenty of pipeline as well. Therefore in that sense capital investment, we’ll probably have to spend more in the second half and also for next fiscal year. It seems that they’re not feeling the impact of a recession yet and even in Europe as well they are not feeling the impact of recession yet. Therefore, in a little bit more continuous manner, we need to make investment is what we are thinking. So in that sense, making investments on our own right now is going to surely link to the later return. And actually we have many hyperscaler contracts so the contract period is quite short. Therefore, we are having an increase in the contracts that have a low risk. Therefore, even though we make our own investments, we would like to further expand the business.
Satoru Kikuchi
And regarding the structural reform, I don’t know if you should discuss detailed numbers. However, you said you have progressed about 40%. So in the second quarter it was about ten several billion of structural reform that you have done. So if you add that back, last year’s second quarter structural reform was around JPY3 billion. Therefore, limited profit excluding structural reform and added back, you say in profit terms that it is improving. Is that correct to think that way or is the data center driving the numbers?
Akira Shimada
Well, last year’s structural reform expenses was about JPY44 billion. What we’ve done in the first half is only one fourth of that and the second half was three fourth of it. So this year compared to last year, in the first half we have spent more. Therefore, that amount is absorbed and reflected in the current profit situation. The profit is behind the plan and the reason of that is about the equipment sales business is not doing well, but the others are in line with the plan.
Satoru Kikuchi
So in the second half for NTT Limited, right now it’s a part of NTT DATA Inc. so you may not be able to extract the second half numbers. So first half JPY10 billion, second half JPY25 billion was the operating income plan after you subtract the structural reforms. That is not going to change.
Akira Shimada
No, it will not change. Well, not changed. But whatever was behind in the first half, they will catch up in the second half — need to catch up in the second half.
Satoru Kikuchi
Regarding my second question. Towards the next fiscal year, what is going to be the cost increase, the factors or the factors to reduce revenue. You have mentioned that you are looking — reviewing the salary amounts and also the expenses amount. You were saying that the new graduates, but I believe that overall the younger generation employees will be impacted by that. I don’t know to what age range it is going to impact. But overall group-wise, I think you don’t include the overseas employees, but you do have quite a number of employees in the younger generation group. So it seems that it is going to be quite of an expense. So is that going to become a factor that is going to reduce the profitability? And for NTT East and West the wholesale price, you said that you will be reducing that and that is directly going to be a reduction in profit factor. So for next fiscal year, how much should we expect for the standard starting salary increase?
Akira Shimada
We said young people, but the background is the second year or third year employee. So the cost increase factors is only — it’s not that large. It’s quite small and it probably will not reach even JPY1 billion. Therefore, I don’t think you need to be that concerned about that point. And also what was your question — the wholesale price reduction. Regarding the wholesale price reduction, it’s not clear yet at what timing that we will be doing that because NTT East and West haven’t decided yet. But depending on the timing, the degree of impact will change. This time conventionally if we do this, it will be the fifth time next fiscal year. We have done this already 4 times in the past. Therefore, basically it will be probably the same level of price reduction.
Satoru Kikuchi
The net adds are not that bad recently therefore for the FTTH so I believe that it’s not going to be that much of a reduction.
Akira Shimada
Well, lowering the wholesale price and have the collaborating partners to promote the sales more is what our intention is.
Takuro Hanaki
Any other question? We’ll go to the person in the third row in the back section.
Mitsunobu Tsuruo
Tsuruo from Citigroup Securities. My first question is this. JPY50 billion share buyback. Appreciate the announcement of the share buyback program. The [adjustable] income is roughly JPY300 billion, out of that JPY50 billion will be allocated for share buyback. Can you elaborate on how you reach this amount? So this year exceeds JPY500 billion and I think the actual track record will probably exceed JPY500 billion. Are you going to increase — are you going to use the remaining capital for dividend? Can you talk about the plans for next fiscal year as well to the extent possible?
Akira Shimada
Well, thank you for the question. In the past couple of years — among the past couple of years, this fiscal year I believe represents the year in which we’ll be carrying out the largest share buyback to-date. So that being the case, the shareholder return ratio will be 77% I believe. But having said that, we want to — we don’t want to increase the return ratio in such an extreme fashion. We want to pursue a more stable increase in shareholder return. So that being the case, we felt that this was the appropriate level for us. To be quite candid, I believe the current level is quite appropriate. As far as our thoughts about possible increase in dividend, I think we need to monitor the progress of our business performance overall and also we need to see — monitor the progress in operating income and based on that, we will make our decision. In any event under the current medium-term management strategy, we are going to be seeking increasing dividend as our basic policy. So that policy remains unchanged. That is my response.
Mitsunobu Tsuruo
So I will not ask about share back in the next fiscal year then. Then let me go on to my second question, it’s about the pace and the speed of your cost reduction efforts. In this quarter JPY875 billion so improvement of roughly JPY5 billion compared to the previous year. But compared to the previous year, the pace of cost reduction has been slowing down. I don’t know how you’re going to make the announcement. So is there a possibility that cost reduction efforts will be delayed by pressure on prices? Can you share with us how you see the challenge? And to the extent possible since there’s a comment about electricity price, to what extent will this have impact on your overall performance for the group? I would appreciate your comment.
Akira Shimada
Well, thank you for the question. As you point out, the pace of cost reduction is not slowing down. We would like to continue to follow and carry out cost reduction efforts. But then there’s the impact of increase in electricity prices. For example in the case of NTT East and West, they need to absorb such cost increase and also need to make further cost reduction efforts to absorb such cost increase. So this goes to what I mentioned earlier. As far as the measures are concerned, I think the measures will be more loaded or skewed towards the second half of the year. So we hope we’ll be able to cover the increase in such — we hope that we’re able to cover the increase and we would like to really make an effort for cost reduction in the second half in order to absorb those costs.
Takuro Hanaki
The center second row from the front, please.
Hideaki Tanaka
Mitsubishi UFJ Morgan Stanley Securities, my name is Tanaka. I have three questions. The first is related to NTT Limited. The structural reform expenses was already mentioned. The effect of the structural reform in the first quarter was about JPY7 billion and that impact or effect in the first half in total, how much was it? And the equipment procurement, industry-wise it seems that the situation is easing a bit is what I feel. However, once again I would like to ask you about your outlook. I believe you have your pipeline, but do you think the situation is going to be resolved within the fiscal year?
Akira Shimada
Regarding the structural reform on an annual basis, about JPY9 billion is what we are expecting for this year. And from next year onwards for the full year, we are expecting about JPY12 billion of structural reform positive impact to the profit line.
Hideaki Tanaka
The first half, how much?
Unidentified Company Representative
What Shimada explained is that this fiscal year structural reforms and there was an effect of last fiscal year, the first quarter it was JPY7 billion and the second quarter accumulated basis it was JPY14 billion. That is a total of last fiscal year and this fiscal year and total is JPY14 billion. And on an annual basis, it’s going to be around JPY20 billion.
Hideaki Tanaka
So if first half is JPY14 billion and annual basis is JPY20 billion so the second half it seems that the pace is going to slow down.
Akira Shimada
Well, what we’ve conducted last year from the third quarter, it’s going to be the same amount. So against the previous year, the effect is not going to show that much. So what we are conducting a structural reform right now, we will be seeing that effect in the second half. So on an annual basis, it’s JPY20 billion and next fiscal year simply thinking it’s additional JPY12 billion.
Hideaki Tanaka
Next fiscal year JPY12 billion plus additional.
Unidentified Company Representative
And in fact the semiconductor supply situation, the equipment procurement or equipment sales will be impacted by that. The semiconductor industry is a situation looking at the second half — second quarter as explained to you — it is starting to go up meaning that how much of products can be manufactured at the vendor side for NTT Limited, Cisco’s supply, how much will that recover? It’s all dependent on that. At least the current situation has not recovered to the level that we want it to. But we are hoping that the second half will start to improve even more. At this point it is not clear whether we will be able to respond to all of the pipelines that are accumulated.
Hideaki Tanaka
Well, NTT Limited is the distributor from the Dimension Data days?
Akira Shimada
Well, in that sense, it is a company that’s buying the most so I cannot share you with the content, but we are already seeing the supply that matches that position.
Hideaki Tanaka
The second question regarding the human capital, this company HumanEX. This is a consulting and system solutions is what you have mentioned. But for the talent of this company, is it going to come from NTT DATA and other group companies? And are you going to pursue the businesses in AI or are you going to use the research institutions or are you going to bring in other talent?
Akira Shimada
This NTT HumanEX Corp basically is going to be comprised by HR talent and combined with the consulting business associates and NTT learning challenge. The HR of the group or salary or benefit is done within the group by these companies that the talent will be coming from. So the HR consulting talent, we are depending on the NTT business associates. So we will be rolling out the talent from there into this company. So the system composition of Zero Trust in that part, we will be utilizing the NTT communications capabilities as well. So at the front line, NTT HumanEX people will be working and behind the scenes various resources within the group will be leveraged. And of course the sales channel, we would like to leverage the group’s sales channel as well.
Hideaki Tanaka
My last and third question is on Page 11 regarding the medium-term management strategy where it says promotion of the IOWN development rollout plan so the digital coherent signal processing circuit and optical device as mentioned here. Will the sales be recorded? What’s the timing that it is going to positively impact the P&L? I would like to have more of an elaboration on this?
Akira Shimada
Well, regarding this area, at the end of this fiscal year, the 400 gigabits packaged product is what we expect to be able to launch as a product at the end of the fiscal year. So being provided as a full-scale product will be from next fiscal year onwards. From 2025, we would like to have a 500 gigabits product — excuse me, 800 gigabits. It’s for a specific purpose so it’s not something that we are going to see a sudden increase in the demand. So the IOWN — for the photonic photoelectronic converted product AP and the timing to supply APN, then the volume of that will increase. So we would like to have more expectations from that timing onwards. And for the other detailed information, in next week’s R&D forum we will be able to give you more detailed explanations.
Takuro Hanaki
We would now like to take questions from members who are coming to us through online.
Operator
[Operator Instructions] Okumura-san from Okasan Securities.
Yusuke Okumura
Okumura from Okasan Securities. I just have one question, it’s about NTT Limited operating income. In the second quarter I think there was a drop of JPY5 billion on a year-on-year basis if you compare it with the previous year. Now you mentioned that the cost of structural transformation had a negative impact of JPY8 billion. But on the other hand, there is also the benefit of structural reform and the amount is equivalent. So what are the — so the factors if you exclude structural reform, the revenue will be JPY4 billion. So we cannot visualize the positive contribution from increased value-added services at NTT Limited. Can you talk about the positive impact of increase of value-added services on operating income?
Unidentified Company Representative
Well, the plan was to — we were behind by roughly JPY3.6 billion because the plan was JPY10 billion so that is the amount that we are behind. So in principle, as I mentioned earlier, we need to focus on equipment sales. The revenue from equipment sales are not progressing against the plan. So that accounted for 50% of the impact. So data center business was a positive contribution so that was able to offset the negative factors. So that is the equation here.
Yusuke Okumura
So value added services are making a positive contribution to operating income. But in the case of others, the other part is declining. So overall the operating income is in the negative territory. Yes, that is how you should understand.
Operator
Next BofA Securities, Kinoshita-san.
Yoshiyuki Kinoshita
This is Kinoshita, BofA Securities. Regarding the cost increase part, if possible I would like to know in numbers. Electricity cost in your presentation materials on Page 18, it says the increase in electricity expenses. It says JPY318 billion overall on the group. On the group basis, what percentage is from electricity increase on an annual basis? How much of a [comparison] impact is that going to have? In numerical terms, I would like to know if possible.
Akira Shimada
The electricity price hike first half is JPY30 billion impact. So about 40% increase occurred in the price. And probably second half is going to be at the same level. Therefore, on an annual basis in total it’s about JPY60 billion of cost increase is how you can understand it.
Yoshiyuki Kinoshita
And including that — regarding the plan at the beginning of fiscal year, well at that time from last year, the electricity price has been increasing. But this impact has it been incorporated to a certain extent or regarding the electricity price, you were not paying that much of attention or within — if it settles within the JPY60 billion range the way you think right now it can be absorbed. However, moving forward, if the electricity price goes even further up, is it going to be enough by implementing measures at that point?
Akira Shimada
Well, first of all, when we planned for this fiscal year, we expected about 20% of increase, but right now it’s 40%. So it has increased twice than what we had expected at the beginning. Therefore, let’s say the annual basis it goes up by JPY60 billion and we have expected JPY30 billion, but JPY30 billion we have not expected. So that part we need to absorb by increasing the efficiency in the cost side. Regarding the fiscal year, within the fiscal year we have a contract and of course there is the fuel price adjustment issue as well, but probably around 40% is where we will settle. However, for next fiscal year, currently we are in the process of negotiating the contracts and more than this fiscal year’s contract situation, the environment is becoming more severe. What I’m saying as severe, it’s not that the price is going to increase, but rather conventionally we’re able to have a long-term contract. But recently with the electricity companies having such a contract is becoming difficult. So regarding next fiscal year’s plan, we need to carefully pay attention to that. And against next fiscal year’s business plans, how much can be absorbed through cost reduction is something that we need to thoroughly think of. The electricity prices, well, next year or next year for about 2 years, there’s a possibility that it’s going to continue to increase so we need to be dealing with it cautiously.
Operator
Next question from Mizuho Securities, Hori-san.
Yusuke Hori
My name is Hori from Mizuho Securities. I would ask about NTT Limited. Now NTT Limited, do you have any numbers pertaining to current foreign currency impact on NTT Limited on a stand-alone basis. So the revenue for equipment sales and also increase in value-added services. I want to identify these numbers as much as possible.
Akira Shimada
Well, If you take a look at the materials that have been disclosed, there’s a supplementary data in the disclosed materials. As for the overall — so the value-added services ratio among the overall sales in the first half is about JPY232.23 billion so that represents 28.6% increase on a year-on-year basis. Now of that, data centers accounted for the largest bulk in terms of the growth, JPY124 billion. That is the number for data center. There are so JPY40.52 billion increase year-on-year. So that accounts for 67% of the increase on a year-on-year basis. Now on the other hand as far as the equipment sales are concerned, JPY320 billion is the revenue so that’s roughly JPY27 billion increase. That represents an increase of 9.3%. But in the previous year because of COVID-19 impact, the sales itself was very low. So I suppose it’s a reaction to that. So that being the case, it is not yet back to the level which we expected. That is how you should interpret the situation.
Yusuke Hori
So I’m looking at the breakdown numbers in the supplementary data, but what about NTT Limited? What is the impact of foreign currency for NTT Limited on a stand-alone basis for the first half?
Akira Shimada
Let me respond. In total, JPY62 billion is the total impact of foreign currency for NTT Limited in the first half.
Yusuke Hori
Now turning to data center. In the case of NTT East and West, I suppose they were significantly affected by electricity. In the case of NTT Limited data center, you’re signing bilateral contracts so I suppose you end up susceptible to cost pressure going forward as well. You’ll be able to pass on the cost to the customers. So may I take it that electricity will not be a negative factor pushing up costs for NTT Limited going forward?
Unidentified Company Representative
Well, as far data center is concerned, it depends on the customers. In principle, 50% of the customers are hyperscale clients so remaining 50%, we’re able to pass on the electricity price increase to the customers. So the customers will be bearing the cost for electricity. In the case of large scale enterprise customers, many of the customers were able to pass on the cost to the customers. But in terms of the contract with Asia, inclusive of electricity, we have covered that in the contract and this also applies to some contracts in Japan as well. As for those type of contracts, when the contracts are up for extension, we hope that we’ll be able to pass on the increase in electricity cost to the customers. That is our position right now. So significant portion of the increase in electricity cost, we’ll be able to pass on to the customers and that is the case for NTT Limited.
Takuro Hanaki
Once again we would like to receive questions from the floor. For those of you who have a question, please raise your hand. The third row in the center.
Yoshio Ando
My name is Ando from Daiwa Securities. I have two questions. The first is regarding the second quarters each company’s — the assessment of the profit progress from the holding company’s perspective. NTT Limited is short a little bit or East and West is impacted by the electricity price. But other than that, DOCOMO and other companies’ progress assessment is what I would like to know.
Akira Shimada
First of all, regarding NTT DOCOMO regarding consumer business of theirs, Well, you can ask them from now onwards. But in the second quarter there were some seasonalities is JPY4,080 in terms of ARPU and within the year it is going to hit the bottom probably. And regarding the subscribers number, MNP this year is steadily progressing. Therefore in that sense the consumer business, they have a decline in the profit, but we are seeing signs of heading towards the recovery trajectory. And for the enterprise business side, the reaction from the customers is very good. Therefore, the expectations from the customers is quite high. So towards that expectations, providing the mobile solutions surely is something that is asked for communications as well so we can have expectations towards that. And as for the Smart Life business area, thanks to the efforts in the finance side, they are experiencing an increase. And for the other businesses are also experiencing an increase. The only one that is a bit of a concern is DOCOMO Denki, DOCOMO electricity. Its electricity contracts have been all covered. But for next fiscal year onwards, I believe that there are still issues that remain. And regarding that point, I would like you to ask Mr. Ii later on. They need to once again re-examine this year’s plan and probably maintain this year’s number of customers. And as for NTT East and West, as I mentioned before, it is as explained to you. So towards the second half, we need them to work on the cost reduction.
Yoshio Ando
For the NTT East and West other than electricity, it’s on track to the plan?
Akira Shimada
Yes, we believe so.
Yoshio Ando
And also for the Global Solutions?
Akira Shimada
NTT data had some unprofitable businesses. But overall, there is a strong additional demand. Therefore, the sales is strong. So we believe that the Global Solutions business is the growing driver — growth driver. So we’re not that concerned for NTT Limited. As I have been explaining from before, the telecommunications equipment sales business is being impacted right now. However, at this timing, the margin is low. So having them improve the efficiency is something that we also can do. Therefore, it’s not necessarily all bad. Well, of course the more we sell, it’s better. But if they can sell, we can respond in a way that it doesn’t sell with different measures and initiatives. So I believe that in the environment that they will be able to pursue such initiatives as well. And as for the other businesses for NTT Anode for now, they are having — they’re managing the business at a satisfactory level. They’re increasing their sales as well from Tokyo Gas and other partners basically NTT Anode is selling on behalf of them so they are able to secure the electricity side supply. So they are steadily increasing. For real estate business, urban solutions have declined in revenue and operating income. So excluding the part that they have transferred over to Anode, then they are increasing both in the revenue and profit.
Yoshio Ando
The second question is including the electricity power and infrastructure-wise maybe not so much in Japan, but globally there is some impact. So simply speaking in terms of the price increase strategy, how much effort are you going to put into that? I’d like to know your way of thinking not just electricity, but also in the United States. My impression is the personnel expenses is in a situation that is easy to be increased. So how should we think about this price increase?
Akira Shimada
Well, regarding the devices product, the ones that are increasing, it is already set at that increased level of price. For the telecommunications equipment, the network equipment or the servers, we have quite a bit of volume that is imported so the impact from that is something that is going to come out from now onwards and we need to consider that as well. How much of a response can we make towards the inflation? Within the next year’s plan, how much can we absorb? Is this something that we need to look into? And as for the personnel expenses, the issue that Japan has is that the personnel expenses is not increasing. However, suddenly personnel expenses are going up. I don’t think such a thing is going to happen. This domestic inflation that we’re experiencing here if it reaches the level of Europe or the United States, then we probably need to increase the wages and salary accordingly. But the CPI not has increased that much. So CPI plus an increase of personnel expenses that will maintain or increase the employees’ motivation is something we have to think of, but it’s not going to be a sudden increase. Well, in the United States, the personnel expenses or electricity, various expenses are increasing. Therefore, you will have to bear the decline in profit. But if you can increase the price, it will be okay. But you already have measures ready for that direction. For the overseas businesses where we are experiencing increase in personnel expenses so basically we are going to ask the customer to pay it. We can pass on to the service price so we don’t have the amounts at the company side as we are going to absorb it.
Takuro Hanaki
Any other question? Are there any other questions? Thank you. If not, with this, we would like to conclude the presentation of the second quarter financial results for NTT. NTT DOCOMO will continue with their presentation of their financial results so please stay with us a little while longer. Thank you for your participation. Thank you very much.
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