Natsuko Fujiki: I'd like to start fiscal -- NTT's Fiscal Year 2019 Results Announcement. 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. First, I would like to introduce today's updating members. President and CEO member of the Board, Sawada; Senior Executive Vice President, Member of the Board, Shimada; Senior Vice President, Head of Finance and Accounting Department, Member of the Board, Hiroi; Senior Vice President, Head of Corporate Strategy Planning Member of the Board, Kitamura.

Today's briefing will be conducted through audio live streamlining in order to prevent the spreading of the novel coronavirus. The material that we use for the explanation, please refer to the presentation material that is posted on our company's IR website. On the first page of the presentation material, the items to be noted is listed, so we kindly ask you to read through them. Regarding today's schedule, first of all, from President and CEO, Sawada, there will be an explanation of the outline of the results, followed by questions from the floor. Mr.

Sawada, please.

Jun Sawada: Thank you for your kind introduction. My name is Sawada. Thank you for joining us despite your busy schedule. Before I share with you the financial results, I must offer my sincere sympathies to those who were inflicted by COVID-19 and also whose lives were affected by the spread of this infection.

Just so -- some with the NTT Group, many employees were inflicted. I hope that we'll be able to see early recovery as soon as possible. And it is our earnest wish that COVID-19 epidemic will be contained as soon as possible around the world. Then, without further ado, based on the presentation materials, I would like to start my explanation. Let me start with Page 4.

Let me start with Page 4. This shows you the fiscal year 2019 consolidated results highlights. As for operating revenue, it increased. Operating income declined. Profit increased.

And against the guidance, we have all achieved the guidance. In particularly, when it comes to operating revenue, we have recorded an increase in 3 years in a row, and we've reached record level as far as operating revenue is concerned. As for operating income, it fell due to a drop in DOCOMO's mobile communication service revenue and also increased costs from reorganization of our global business. As far as profit is concerned, well, there was operating -- there was drop in operating income. Profit increased year-on-year from profit from valuation-related integration of ENNET as a subsidiary firm.

So it is linked. But we were still able to record increase in our profit. As for EPS, we had share repurchase. So it increased JPY 11 year-on-year. As for overseas sales, it increased 2.9%.

We had JPY 77 billion impact from foreign exchange. It's dollar-based, so that -- so it's not affected. But as far as revenue is concerned, it's very robust and very strong as far as income is concerned. At NTT DATA, in Brazil, because of the change in external environment, we had a review of the business in Brazil. And also in order to minimize future costs, we've had impairment loss.

And also, we have seen some delay in the shift to more high-value and profitable service. So as a result, we had seen a decline of roughly JPY 16.5 billion on this front. Now as far as the impact of COVID-19 in fiscal year 2019 is concerned, already in North America and in Asia, new orders for system integration has dropped. So there has been already a slight impact in terms of profit. But on the other hand, there's also positive element, such as decline in our marketing costs domestically.

So overall impact on a consolidated basis is quite slight. That is the current situation. So please turn to Page 5, the following page, please. On the top, you will find the contributing factors by segment for operating revenue. At first glance, data communication business and other businesses have recorded increase in their operating revenues.

As for other businesses, they represent integration of ENNET as a subsidiary firm and also data is because of very strong order taking. On the bottom, you find operating income. With regard to Mobile Communications segment, because of the new rate plans, there was the impact from that. And also, handset sales, also declined. So it recorded a drop on a year-on-year basis.

As for regional communication business, 2 years ago, back in fiscal year 2018, we had loss from copper wire, but that is no longer the case. So therefore, operating income increased year-on-year in this segment. As for long distance and international communication business segment, as for domestic NTT Communications business, it's very strong. But on the overseas side, we have seen increase in costs related to global business reorganization, so that's a negative. But on a year-on-year basis, we have seen an increase of JPY 3.4 billion increase year-on-year in this segment.

Turning to data communications segment. I believe that NTT DATA had already announced their financial results. So revenue is very strong. Their business size is expanding. But then there is now cost related to restructuring of business in EMEA and Latin America and also a review of business operations in Brazil.

So as a result, in this segment, we have seen a drop in operating income on a year-on-year basis. Let's now turn to Page 6. This reflects the forecast summary of fiscal year 2020 as well as shareholder return. As for fiscal year 2020, which will end March 2021, we are likely to see some impact in relation to new system integration orders, primarily outside Japan. And also, we see various types of services, including handset sales will also be affected by the impact of COVID-19.

At the end of May, if the -- there's a possibility that the declaration of state of emergency could be lifted. There is that possibility at the end of May. But still, we cannot predict the potential arrival of the second wave. So how long this -- will this current situation last? This will affect the level of services -- service. This will affect our level of revenue.

So therefore, we have to base ourselves on those premise. And we really cannot reasonably estimate the amount of the impact of COVID-19, so therefore, we decided to postpone making financial forecast for fiscal year 2020 at this time. When it becomes possible to reasonably estimate the amount of the impact, then we would like to promptly announce the financial forecast. As for dividend, in response to COVID-19, we have provided free-of-charge services to various customers. We have also extended the payment due date.

And we've taken various measures as well as customer return programs. We have to bear in mind basic policy of steady dividend increase in our efforts to take into consideration various stakeholders. A correction. Amidst the COVID-19, we had to make sure that we are mindful of various stakeholders. So therefore, bearing in mind the basic policy steady dividend increase in our medium-term strategy, we decided to increase our dividend by JPY 10 -- by JPY 5 per share from prior year to JPY 100 per share.

So this represents increasing dividend for 10 periods in a row. As far as the business plan is concerned, that is the current situation. Let me briefly cover some of the topics. We have prepared some materials that covers the relevant topics. So let's go on to Page 8.

On Page 8 and Page 9, we listed the primary initiatives in response to COVID-19. If I may summarize it. Communications service, we are ensuring the stable services, and we're doing that. And we have started measures to support customers. And starting this month, the special fix, the benefit payment, which is given out by the local governments, we are providing RPA automated solution free of charge.

And we have received a request that 18 local governments would like to -- 128 local governments would like to use it. And we have some educational supporting measures. And towards the students, subscribers under the age -- 25 and under the age of 25, we have implemented the measures to provide the data communications service -- certain services free of charge. And the school's online maintaining fee, we have implemented measures to provide that free to a certain time period. And Page 10 please.

The 2 previous 2 pages with corona, and Page 10 is after corona. The first is to respond to ongoing maintenance of social distancing and initiatives for establishment of a remote society. We'd like to provide various support. We have support online administrative procedures and protect that through security solutions. The second is the digital transformation, especially in the agriculture, construction and manufacturing industries.

Probably, they will require remotization. Therefore, we would like to focus on this and also contribute to supporting the lack of manpower. And we believe that there is going to be an environment that is going to increase the rise of bloc economies, and value chain is going to become more important. And with Mitsubishi Corporation, we are working on these changes to support the reshoring of industries and accelerate the 5G supply chain. And we would like to be able to use the renewable energies on our own.

On Page 11 is showing the overview of medium-term management strategy initiative. I would like to skip the detailed explanation of each one of them, but I would like to point out 2. And on the next page, I would like to point out one. Total of 3 points, I would like to highlight. First is the B2B2X project.

They were on third train projects when the medium strategy has started. And now that is 66. And our target is to achieve 100 by fiscal year 2021. And it is steadily progressing. And the second point is listed on the very bottom, which is the ratio of outside independent members of the Board.

We would like to increase it to 50%. By implementing the executive officers system, we would like to vitalize the Board of Directors meeting, and we wanted to have an efficient number of Board members. Next is regarding the environment and energy vision. There are 4 points that are listed here. The target is zero environmental impact.

Promotion of renewable energy. Currently, we're using 4.5%. But 10 years from now, we would like to increase a portion of our renewable energy usage to 30% or higher by 2030. Currently, we would like to have 30% of all the energy we use as renewable energy. And also the Science Based Targets and The Task Force on Climate-related Financial Disclosures, we would like to support it.

And also, we will be considering issuing the green bonds. The way of thinking is that ICT, which is our core business, we believe that this can reduce the social-environmental impact. With the COVID-19 pandemic, we are actually in the midst of the actual social experiment. But we would like to have these new measures to accelerate. And we would like to digitalize as much as possible and also a plastic and also reduce promotion of thermal insulation power generation glass using photovoltaic technologies.

This is a venture technology. And the major third point is we will be establishing an environmental-related laboratories, which was announced today. This will be done in July. Photosynthesis or lightning of various things will be researched there. But it says here, ITER, which is international fusion energy organization, 25 countries are in the member.

And by 2025, they will be using the first plasma. So the experimental chamber management, maintenance control by using the IOWN technology. We have entered the comprehensive alliance agreement. And for ITER, it is the first time that they entered such an agreement with a private company. So we are the first private Japanese company to have such an agreement.

So together with the establishment of infrastructure, we will be working towards the zero environmental impact. Lastly, we'd like to explain the numbers of the progress on medium-term financial targets. This is difficult to read, but it is actually in line with what we have expected. That is all for my explanation. Thank you.

Operator: [Operator Instructions] First, Mr. Masuno from Nomura Securities.

Daisaku Masuno: Masuno from Nomura Securities, can you hear me?

Jun Sawada: Yes, we hear you.

Daisaku Masuno: My first question is about the fiscal year 2020, the plan already at DOCOMO NTT DATA. With regard to the business plan, they have not been able to determine that for this fiscal year.

So I understand that it's a situation for the group as a whole. But then as far as dividend is concerned, at DOCOMO DATA, their dividend remains flat. NTT Holding Company, I thought you would also have your dividend at flat. But then you announced an increase in dividend. So that's very positive for us.

But within the NTT Group, NTT Holding Company was able to demonstrate increase in dividend, but then that was not the case for DOCOMO and NTT DATA. So what is the reason behind the difference between the positions taken with regards to dividend policy among the group companies? Is it due to the divested outlook of each of the operations? Can you talk about the reason for the difference?

Jun Sawada: Thank you for your question. In principle, NTT Holding Company is not a business operating company. We emphasize on net profit as a result. As for the other 2 companies, their operating income was in the negative territory on a year-on-year basis as they completed the previous fiscal year.

So therefore, they cannot even come up with estimates for the coming year. So it was very difficult for them to commit to an increase in dividend. But then unlike business operating companies, NTT Holding Company was in a position to return profit to the customers. So that is the difference, I believe.

Daisaku Masuno: I see.

So my next question. So impact of COVID-19. Outside Japan, there has been some significant impact. But then on the domestic front, the sales costing decreased. So therefore, it is likely that the impact will be slight in the Japanese domestic market.

So against the backdrop, with regard to the medium-term management strategy, you have set the EPS target. So based on the actual track record and based on the annual growth, you're talking about 9% growth. That would be the plan. But as things are the way they are right now, what additional metrics do you think it would be necessary to achieve your medium-term target? Do you see such a need to take additional measures at this juncture?

Jun Sawada: Well, first of all, with regard to fiscal year 2020 business plan is concerned, we did gather the information and had discussions, but then they -- we were not very clear-cut when it comes to the prediction and estimate. Yesterday, NTT DATA, Mr.

Honma talked about this. But as for as NTT DATA is concerned, JPY 500 billion of variables still remained. As for NTT Ltd., but it's half the scale compared to NTT DATA. So we'll be talking about JPY 200 billion to JPY 300 billion in variables. So in terms of the system integration, at maximum, JPY 700 billion could be the potential impact.

Although depending on auto, it does depend on the pipeline. But then in the recent, the various countries are now beginning to reopen their economy after the period of lockdown and so forth. So yes, there are concerns about the second wave and the potential third wave. But the customers are now tracking TD solutions for digital transformation and to promote remote work and so forth. Then if that is the case, then in a positive fashion, we should -- we can explore possible pipeline and projects.

So that's the first point. And secondly, at NTT Holding Company, back in April, has also instructed the diverse cost for fiscal year 2020 should be contained. Investments and cost to be contained for fiscal year 2020. That notification was for NTT Holding Company to the business operating companies. So towards June, we have provided instructions for the operating companies to contain their costs.

And thirdly, capital investment. As a natural progression, we're likely to be slow. That is indeed the case. And also for those areas where we have seen drop in revenue, we also have to consider containing the level of CapEx. So when we announced our projection for fiscal year 2020, we want to make sure that we can take efforts to improve our profit.

That is our thinking at this juncture.

Operator: Next will be Merrill Lynch Japan Securities, Mr. Kinoshita.

Yoshiyuki Kinoshita: This is Kinoshita. Can you hear me?

Jun Sawada: Yes.

Thank you very much.

Yoshiyuki Kinoshita: I also have 2 questions. First, for the COVID-19 pandemic, the recent situation, you showed it on Page 8, for the fixed communication service, the night time peak. Well, during the daytime, it's maybe reached from the beginning. It's not used that much.

But the nighttime peak was at 10% and daytime was 50% to 60% increase. And under this situation, you may be enhancing the facility and network. But due to that, what is going to happen to the CapEx? And also, what you have mentioned before, depending on the revenue that you are going to control the CapEx. So through that control, is that enhancement of -- for the enhancement, is that going to be insufficient is my first question.

Jun Sawada: Yes.

Well, basically, as I have explained, the Internet traffic, backbone or the network, the way we think about those is we are conscious of the past, and we set the night time at the peak. So towards the regular traffic, we do have quite a high level of capacity. And because of this situation, there's not many major events so there's no burst that is occurring. So even during the daytime, there's no impact. And -- but on the other hand, if there's an increase at the nighttime, then we will face trouble.

But right now, it's only 10% increase. We are thinking about JPY 1 billion of investment increase for the enhancement. But if this continues and depending on the region or the location, if there's differences or variances, we may have to increase the level by a notch. But from an overall perspective, it is within the amount that we can control.

Yoshiyuki Kinoshita: You said JPY 1 billion investment.

What are you going to invest towards?

Jun Sawada: The connection point, VPN devices that will connect with each customer. Mass server equipment. It will require those types of devices and equipment.

Yoshiyuki Kinoshita: Oh, okay. And if you increase it by JPY 1 billion, you'll be able to cover the whole situation?

Jun Sawada: Yes, looking at the current situation.

Yoshiyuki Kinoshita: Okay, understood.

Jun Sawada: But what we're concerned is that the second wave and the third wave comes, and if there is a major spread as such, then we will have to respond. That area is going to be larger.

Yoshiyuki Kinoshita: Another point is that the -- within the lines with Toyota, this time, you will be cost holding the shares with each other. And depending on the way of thinking, it seems that what you're doing is going against the trend.

But what is the meaning of this cross-shareholding? By holding each other's shares, what kind of benefit return do both companies have from each other?

Jun Sawada: Well, as you say, the cross-shareholding has become such a way. But basically, the project that we are trying to do together is not just at the Higashi Fuji project but it is something for the global arena. Together with Toyota and NTT, we'll provide smart city or provide support for creating smart cities, and we'd like to make that into business. So it's for a long term, and also, the scope of it is very large, too. So in way, it is to show commitment to each other.

And another point is that Toyota themselves actually take that pattern for alliance. In a way, they invest in KDDI. And with Softbank, they have a joint venture. So within that situation, we are showing each other that we're both a more strategic partner than others -- to each other. So through this, it's not that we are going to put a stop on the liquidity of the shares or try to cover each other on the liquidity of each other's shares.

Operator: Next from Daiwa Securities, Mr. Ando.

Yoshio Ando: Can you hear my voice?

Jun Sawada: Yes, we hear you.

Yoshio Ando: I would like to ask 2 questions as well. My first question, it's on Page 4.

You explained Page 4, and you talked about the overseas operating income margin. You explained that -- well, there was a review of business environment in Brazil. You talked about impairment loss and also did they shift to high-value services? So impairment loss and did any shift to high-value services, can you be more concrete? What specifically are you talking about? I would appreciate your comments on that point. And also next, with regard to NTT Ltd., I believe you're trying to pursue transformation streamlining as well as integration. But in the past 3 months, what has been the update of those efforts? And also inclusive of the impact of COVID-19, what about the outlook for cost? I think you'll be able to control the cost to a certain degree.

What changes are you noting in the recent -- on this front? I would appreciate your explanation on those points.

Jun Sawada: Thank you for your question, Dan. So I talked about the change in the external environment for Brazil. That was already probably addressed by NTT DATA as well. But this relates to so-called simulator.

We procured equipments, and they were held as assets. But then the law in Brazil changed, and that device could no longer be used. So we have to take that off this inventory. So as a result, around JPY 5 billion had to be incurred to review the business. So there was a JPY 5 billion loss.

And also, I talked about minimizing future costs. NTT Security is a wholesale company, but already the goodwill has been depreciated at NTT Security. The thing is though, the sales is not all that robust at this moment. So we want to reduce the assets. That was the instruction put forward by our accountant.

So JPY 4 billion shrinking of our assets and that took place. So in terms of a shift to high value-added services and high profit -- more profit of the business, I talked about the delay in the shift. In terms of NTT Ltd. and the business environment, North America and Africa, they are not all that positive at this moment. As for North America, already in North America, just selling Cisco-type of systems per se is no longer all that profitable.

So it's important that we migrate to managed services and security services, which can be even more profitable. The thing is, though, we are not yet there. We're not there yet. So that's what I describe a so-called delay in the shift to those services. The impact is roughly JPY 3 billion.

And also, we have JPY 3 billion negative impact from currency, foreign exchange. So roughly JPY 16 billion is the negative impact in terms of the global business. So JPY 5 billion, JPY 4 billion, JPY 3 billion in foreign exchange, if you add that all together, that's the situation.
As for NTT Ltd., you'd asked about the integration at NTT Ltd. In principle, well, there are many different elements.

But we are trying to introduce IT within 2 years, and that's on track as far as this particular item is concerned. But because of the impact of COVID-19, there has been some delay, especially when in terms of changing the signage. For example, the regional companies, they have to change their name to NTT. And since there are several hundred such companies, roughly -- maybe a dozen, so close to 20 such companies, they're changing the title or the name of the company has been deferred. And the regulators in those places are not yet all that active.

So that is the reason for the delay in the change in the name and the title of the company. Now as for the cost, this was covered in the first question. This profit is going down. We are accelerating our streamlining efforts. So there is an incurred cost to pursue and accelerate streamlining.

So that has been the positive. Now in fiscal year 2020, which will end March 2021, JPY 20 billion decline in both facilities and human personnel are expected. So therefore, we aren't controlling the relevant expenses.

Yoshio Ando: Let me go on to my second question. Again, I apologize for asking a COVID-19-related question.

NTT East, West and NTT Communications, what has been the impact of COVID-19 in those 3 companies? Aside from traffic, what has been the impact of COVID-19 for those 3 aforementioned group companies? I appreciate your explanation. DATA, DOCOMO, they've already explained the impact of COVID-19 on their experience, on their performance. So NTT East, West and NTT Communications laso has suspend the net effect of COVID-19 for those 3 companies.

Jun Sawada: I thank you for that question. Let me respond.

As for NTT East, West and NTT Communications, data traffic and phone traffic, it hasn't been that affected because of the fact that most of the systems involve flat rate charges. But when it comes to networks, in April, it is there was a pickup in the demand for fiber. But up until March, we really did not note much change. So we haven't really seen much movements there. The expectation is that maybe due to telework and working from home, hopefully, the demand for fiber could increase.

In -- April indicated a slight increase, but it's not exponential growth at this juncture. But the issue is system integration. NTT East, West, NTT Telecommunications, they have system integration business, so new orders for system integration. We don't see a very active pipeline at this juncture. That is one source of concern.

And also, when we look ahead, various companies are now trying to reduce their costs, and also, they're trying to reduce their budget and thus pursuing streamlining. So communication services provided by NTT East, West and Communications, it could be that those companies would be coming to those companies to reduce the cost. That's a possibility. And -- but we're not yet able to estimate the potentiality of the scenario at this juncture.

Operator: Next will be Citigroup Security, Mr.

Tsuruo.

Mitsunobu Tsuruo: This is Tsuruo from Citigroup Securities. My first question is additional question related to Mr. Ando's question. First question, the overseas ICT business environment, when we think about that Ltd.

and also that DATA, the structural reform, what is the possibility of doing that? Meaning that in Japan, teleworking is not progressing that much. So this COVID-19 to the ICT business, maybe we don't have to be that pessimistic. But for the overseas or international business -- it's not that the ICT business was not behind. So it seems that the BOP type of business will decline, so I'm concerned. And this may be part of the forecast of this fiscal year.

But the possibility of structural reform, can you answer as much as you can?

Jun Sawada: Thank you very much. In DATA, DATA Japan business, recurring business is about 70%. For overseas, it's about 50% is what I hear. And basically, the orders that we have received up to this point is going to continue. That's the structure.

So with an overseas business, the question is what happens to the new orders, as I had mentioned before, including the Japan's new orders. Recently, I have not just split up DATA and explain it, but the annual sales is about JPY 500 billion, when we look at the tradition. And there's the backlog of orders for DATA. And for the first half and second half, that is going to turn into cash as we move along. So in that sense, for the DATA of such as of the changes is limited.

For the Ltd. side, about half of it is selling products. And of course, there's a lot of recurring on that side of the business too, but that sometimes will not reorder the product or they wanted to streamline the order or they will not place new orders. There's a possibility of such. So that is a bit dangerous.

But in the subsidiary company, we have a company called Arkadin, which provides a service of teleconference and web conference, and they are having a very strong performance. March, April performance compared to the previous year, they are achieving large numbers. So it's a plus and minus in factors that can offset each other for the overseas unlimited business, too. But when we look at the overall picture, of course, they're in a tougher situation than the Japan situation.

Mitsunobu Tsuruo: Okay.

Understood. That was a good reference. The second is regarding free cash flow. From 2 years ago, when you compare 2 years ago and last year and looking at the cash statement, it seems that the free cash flow has improved by large. I would like to know the background of it.

Maybe there's accounting characteristics to it, so I'd like to briefly explained. And regarding this fiscal year, I'd like to hear about your basic way of thinking or outlook as much as possible.
Takashi Hiroi;Senior VP, Head of Finance & Accounting

and Director: This is Hiroi speaking. Tsuruo-san, are you talking about -- are you looking at the consolidated cash flow material in asking your question?

Mitsunobu Tsuruo: Yes. I'm looking at the B&S balance sheet.

Takashi Hiroi;Senior VP, Head of Finance & Accounting

and Director: The free cash flow, yes, there are a lot that is improving. However, the one thing -- or the one major reason is that if you look at the DOCOMO numbers, you will understand it. The working capital inventory assets has improved by large. That's one point. And also another point is that the handset compared to the previous year is not selling large, so the receivables have been downsized.

So because of those impacts, the final free cash flow, the working capital improvement compared to last fiscal year, this fiscal year, fiscal year 2019, it's actually working an improvement of -- so if you look at the financial statement, the cash flow, there's the share buyback, a little bit of impact of buyback. And also DOCOMO's share buyback has an impact quite a bit. So we are financing that through borrowing. So the interest-bearing borrowing, on the right-hand side, you'll see it increasing.

Mitsunobu Tsuruo: So for the actuals, I understand.

So there's no special reason. Meaning, that basically, the overall cash flow has improved is my understanding.
Takashi Hiroi;Senior VP, Head of Finance & Accounting

and Director: Well, one reason is that the handset sales is not doing so well.

Mitsunobu Tsuruo: But this for this year, how should we look at it?
Takashi Hiroi;Senior VP, Head of Finance & Accounting

and Director: Well, this fiscal year, we are not announcing any forecast. So it's difficult to answer that question.

But within the just-ended fiscal year, something that I have to answer is that within the cash flow, if you look at the EBITDA numbers, it's worsening. So the other areas, other than EBITDA, the operating cash flow is improving. So the base, this is a qualitative way of explaining, but DOCOMO and also Regional Telecommunications Center are taking the lead. We would like to improve it so that they'll be able to generate a satisfactory level of cash. And because of COVID-19, we don't have a clear vision of the future that much.

But as the President CEO explained, we would like to control -- have good control, and we just have to see the impact of COVID-19. So it's very difficult for me to give you a solid answer. So can you forgive me with this?

Mitsunobu Tsuruo: And just one more thing, NTT East and West, the business plan has been submitted recently or submitted last fiscal year. So the effort is to lower it?
Takashi Hiroi;Senior VP, Head of Finance & Accounting

and Director: The business plan for approval, the CapEx level that's written in there regarding the COVID-19 impact, we are looking at in a flexible manner and respond in a flexible manner regarding that.

Operator: Next from Mitsubishi UFJ, Morgan Stanley, Mr.

Tanaka Mr. Tanaka.

Unknown Analyst: Tanaka here. Can you hear my voice?

Jun Sawada: Yes. Please go ahead with your question.

Unknown Analyst: I would like to return to the topic of NTT Ltd. once again. Right now, I'm looking at the supplementary data, Page 6. And we -- I'm looking at the group-specific summaries. So when we took a look at NTT Ltd.

group for the period just ended, I'm taking a look at the operating revenue from second quarter onwards, and on a [ year-on-year ] basis, we see a quarterly drop on a quarter-on-quarter basis. You mentioned the delay in the shift to high-value services. But in real terms, is sales at a phase where you're showing on a year-on-year basis? Is that not problematic? How do you see the quarter-on-quarter sales trend?

Jun Sawada: Thank you for the question. Well, on a quarterly basis, I think it's more heavily skewed towards the second half. That is because structural business -- the business structural reform cost are more expanded towards the second half.

And also we talked about the cost for streamlining. We've had to bring forward the voluntary retirement programs in certain cases. So that has also added some cost. And also, I mentioned earlier, but in the U.S. and in Africa, some -- we're seeing areas where buy sales are not expanding, so that has come -- there has some creeping effect.

So that is why it seems as though there is a drop in sales, especially towards the second half.

Unknown Analyst: You're talking about profit, but what about operating revenue? I'm talking about sales. On a quarter-on-quarter basis, it seems that the operating revenues are coming down. Does that represent the fact that sales are struggling? Is that the reason? Is that the only reason? Or do you think that this is on par for the course?
Takashi Hiroi;Senior VP, Head of Finance & Accounting

and Director: Thank you. Hiroi, for finance and accounting.

Let me respond to your question. Yes, on a quarterly basis, especially for the fourth quarter, it seems as though that operating revenue sales are decelerating. I know it looks that way. But in the case of the fourth quarter, I think we had significant impact from the stronger yen. So that effect -- that impact was there in the fourth quarter to begin with.

And also, as Mr. Sawada already explained, in places like North America and in other regions as well, system integration-related revenues were slowing down. So I think that accounts for the 50% of the impact, roughly speaking. That is how we look at this situation. So as far as the currency is concerned, emergency -- emerging economy currencies.

In the case of former, you mentioned DATA, they were very active and had sales in emerging markets. And those emerging economies' currencies, because of COVID-19, had become much weaker against the U.S. dollar. So I think that also -- that was also a significant factor when we do a quarter-on-quarter comparison.

Unknown Analyst: I see.

And also just one more point, if I could ask one more thing. In the past or even now, you're trying to pursue -- expand cloud services for NTT outside Japan. In the U.S., you have the likes of Googles and Amazons. There -- these companies are still growing. So against the backdrop, NTT Group's cloud service, can they really be on par and compete with the likes of Amazon and Google? How confident are you? If you can share with us your confidence?

Jun Sawada: Thank you for the question.

As far as the cloud is concerned, as Mr. Tanaka mentioned, well, a couple of years ago, various players who are trying to tackle the cloud service. And back then, we had the public cloud and the private cloud, and there were many, many parties that were involved. So therefore, we were emphasizing this area. But in the case of public cloud, I think we have consolidated onto Amazon, AWS and Google, I think, Microsoft Azure.

So there's a consolidation in the marketplace. So technical power, financing power and the sales power and financial strength, all of these factors came together. And in the case of the public cloud market, we see 3 major powerhouses. So we have to consider whether or not we should take on these players straight on. So rather, we should engage our customers and offer hybrid cloud, combination of public, private and on-premise clouds, depending on the request of the customers.

That's what we're selling. Now the private cloud part, we have the ECL that is being provided by NTT Communications. But sometimes customers want AWS, Azure naturally. And we make sure that we're able to accept those inquiries and their requirements. We also have software to connect them to our system.

So that being the case, we are seeing progress in our cloud business, but we have seen shift in our directionality. And of course, it's not so much that we're brushing up on cloud and try to sell our own cloud service only. Also, in relation to Microsoft, we have already begun alliance and cooperation with Microsoft. So our public cloud is now -- the public cloud is now being accessible to Azure. So we want to make sure that we're able to offer more higher value-added services.

Operator: Next will be JPMorgan Stanley, Mr. Tanabe.

Jun Tanabe: This is Tanabe from JPMorgan Stanley Securities. I have 2 questions also. Regarding share buyback, there's no announcement regarding that.

And without the forecast, maybe it might be difficult. But in the material, it says undecided yet, to be decided. So as usual, you're just saying that you're not saying that you're not going to do it. So from last year, you have been planning. And within that process, what are you thinking about the share buyback? And this COVID-19 situation, has that changed your plan for share buyback? It's what I would like to know.

And also given that the COVID-19 situation, once it becomes clear and you will be able to establish a forecast, and let's say, the performance is not doing so well, and it's going towards deterioration against the forecast, are you going to not do a share buyback? Or it does contribute to the increase of EPS? Are you still going conduct a share buyback? Can you please share your thoughts?

Jun Sawada: Thank you very much. Basically, even though with the COVID-19, the way we think has not changed. Globally, it seems that the share buyback has been actively conducted. But as I have been explaining from before, for us, our base FICA shareholder return is the continuing increase in dividend. And in order to continue that, the number of shares, we purchasing it and canceling them, that is also linked to the shareholder return.

So this share buyback and dividend is implemented as a set is how we look at it. And that way of thinking has not changed. But as you, Mr. Tanabe mentioned, at this point, our business plan itself, we need to look at it at a higher probability and in a more rational stance. So once we get a clear picture and be able to do that, then we would like to make the announcement.

So if we're asked whether we're going to conduct a share buyback this year, we will probably like to respond it as we have been doing up to this point.

Jun Tanabe: Okay. Understood. My second question is regarding the way of thinking of CapEx. Before, you were saying that for the fixed-line services within Japan, it is within the control.

But at the ended term, it seems that there's about JPY 100 billion increase. And even on a consolidated basis too, there's about JPY 100 billion increase. So this fiscal year is a way of thinking -- the other businesses, if that is going to continue to increase? Or is it going to maintain as it is? Probably DOCOMO, they'll be able to control their CapEx, meaning that they won't be spending. So the -- basically, thinking is flat is what I think. So depending on the -- if the situation recovers, maybe you may want to accelerate your plans.

So including this factor, is there going to be an increase in CapEx somewhere else? Or is it going to decrease? If there are any plans, please share that with me.

Jun Sawada: Thank you very much. As I have explained to you, the network investment NTT East, West and DOCOMO's network investment, we look at it and set a target as a CapEx to sale number and controlling that number. And for this fiscal year, it's not that high, and it's almost flat. And next year, it will be under 13.5%.

That is the target. And as we have pointed out right now, whether there's others that are increasing or decreasing, the major point is real estate, including overseas. We created urban solutions. So if there's a good residence, a property or office property, we'd like them to move actively. And another major point is the data centers, depending on the demand -- well, with the COVID-19, the deals are falling behind schedule.

But for the other areas, SBC, we'd like to make it a different, a special-purpose company or off-balance the assets. I'd like to use other companies' cash too and treat these assets. So for fiscal year 2019, even development is increasing. And DOCOMO, in order to start the commercial service of 5G, they have developed base stations, large number of base stations. So they are spending a bit more.

That is the fact.

Jun Tanabe: So as the overall outlook, that's -- maybe there are some things that will fall behind due to COVID-19. But your intention is to making it flat in terms of CapEx.

Jun Sawada: Well, network investment would like to suppress it. But the total amount for DOCOMO and 5G, they're saying they will spend JPY 1 trillion in 5 years, but we would like to lower than what it is -- what they're spending currently.

But real estate and data centers, we have other large assets. And if we include that, it will go up and down. But we will rather utilize other people's capital or cash and treat these assets.

Operator: Next from SMBC Nikko Securities, Mr. Kikuchi.

Satoru Kikuchi: Kikuchi here. I would like to ask the questions as well. So my first -- the first part of my question, this might actually overlap with some of the earlier questions, please bear with me. So the impact of COVID-19, your global business, do you think that this requires further resilience-related measures? And also, have you been -- I suppose there's some potentially vulnerable areas of your business. Has that become visible as a result of COVID-19? And also if that is the case, what can NTT Holding Company do against those -- against the situation? And if possible, in the past, the management of Dimension Data -- there's some reports about the former management of Dimension Data.

If you have any thoughts about that, I would appreciate it. That's my first question.

Jun Sawada: Thank you for the question. First of all, with regard to the impact of COVID-19, is there any need to review the business operations as a result of COVID-19? It's not so much that this was triggered by the COVID-19. Originally, NTT Ltd.

has been shifting or has been aspiring to shift to a more higher value-added services. So remote and online solutions, this is very much amenable to what happen as a result of COVID-19. So that being the case, the external environment was actually improved as a result of COVID-19. As for as NTT DATA is concerned, they're trying to pursue engagement and digitalization. That has been the policy, which you have been requesting they take, and that's the policy which they're following.

So here again, digitalization of customers, this was also very much in sync what is taking place as a result of COVID-19. So it's not so much that we're changing because of COVID-19. With regard to the buyout, this is about Africa. This is not yet determined. You asked about the buyout of the -- but because of this option, we're -- various options are being considered.

In Africa, there are some difficulties on a country-by-country basis, so we need to carefully give this matter consideration.

Satoru Kikuchi: I see, so as far as Europe and U.S. are concerned? North America is concerned? You're not changing -- you're not considering any change to the U.S. teams play.

Jun Sawada: No.

I have no such intentions. In the case of Africa, the name of Dimension Data still remains in Africa. But aside from Africa, it's all been to changed to NTT Ltd. or NTT America and so forth. So the name has been changed.

So that is the situation.

Satoru Kikuchi: My second question. Today, you announced the personnel with regard to various NTT groups. And also with regard to -- I know that you are delegating many of the decisions to the operating companies. But as far as NTT Holding Company is concerned, is there an intention behind the recently announced personnel changes within the group companies? And also, I think during the March 11, there was a delay in the personnel management.

What about this time around? Did you give special considerations for the personnel management this time around? As far as personnel is concerned, is there any intention?

Jun Sawada: It's very difficult. Is there a clear intention? Very difficult to say. Mr. E, the Senior Executive Vice President has been changed, has now been shifted to Senior Executive Vice President for DOCOMO. Of course, I think we need greater coordination between Holding Company.

That indicates, Mr. E, Senior Executive Vice President, was responsible for global procurement. And he has -- he's very skillful in various discussions with outside parties. So I think he is appropriate. Now as for the rest, you're probably familiar.

But at a certain timing because of the age consideration and so forth, we might seek to bring on a younger team. So that trend was properly considered by the various group companies.

Operator: Next, UBS Securities, Mr. Takahashi.

Kei Takahashi: This is Takahashi speaking.

I have one question. Regarding the COVID-19 impact with the major operating companies, we did receive an explanation of the impact for them. But for the other businesses segment, subsidiary companies, for example, is there a company that will be impacted largely? So the companies other than the major operating companies, businesses, can you give an explanation for the others segment?

Jun Sawada: What we are most concerned and what we review all the time is urban solutions, which is real estate related. Especially making urban development, we believe that moving forward, that the real estate situation is going to change. And before that, this March till April, in Kyoto, we were scheduled to open 3 hotels.

However, due to this COVID-19 situation, we had to postpone the opening. Originally, these hotels were going to be luxurious hotels with higher room rate. Even though the size is small, but it was going to be such a hotel, meaning that this is not targeting a large audience. And from the city of Kyoto, we received a comment that if it is such a hotel, we'll definitely like you to construct such a hotel. But as you know, the hotel industry, due to this situation, they're struggling.

And also the tenants, for example, many -- there are many restaurants and they are struggling. And in addition to that, they are receiving requests to lower the rent. So with that, several billion yen will be impacted is what we think. Other than real estate business, we don't have to be that worried. Power business will not be impacted that much.

Comware, Finance -- Comware, they do a little bit of external business, but it's not going to be largely impacted. And Internet, there is some delay of the construction work, about -- it's a company of about JPY 50 billion size. So I don't think they will be impacted largely also. That's about it.

Operator: Next Morgan Stanley MUFG Securities, Mr.

Tsusaka.

Tetsuro Tsusaka: Tsusaka here. I just have one question. Well, turning to your global business. We had the medium-term management strategy, in order to achieve the targets thereof, I think you need to maybe bold the change in your strategy.

That's my question. Do you think that there's a need for bold change in your strategy? And also as a result of COVID-19, maybe you could use COVID-19 to bring up a structural change against this environment. What are your thoughts about leveraging COVID-19 to be that structural change? To be more specific, right now, you have about JPY 20 billion sales and the profit is about JPY 0.5 billion -- even less than JPY 0.5 billion at the juncture. In order to achieve the plan, going forward, you need the incremental JPY 5 billion in sales. And also, you also need to improve your profit by JPY 1 billion in order to achieve the target.

Right now, you are JPY 20 billion, very little profit. So from this point onwards, you have to achieve the financial targets in the medium-term management strategy. How do you intend to achieve JPY 5 billion sales and also JPY 1 billion increase in profit? It seems to be quite inconceivable as a scenario as far as I'm concerned. But do you intend -- do you think that -- intend to undertake bold strategy going forward?

Jun Sawada: Thank you for your question. I'm not sure whether or not this would be equivalent to a so-called bold strategy.

But high value-added service, security, data centers, they account for roughly 30% of our revenues. So by '23, we want to increase this up to 50%. So 30% margin is -- they include services with high margins, such as 15% to 20%. So how far can we include such higher profitable services? The remaining 70% to 80% of the sales don't have much margin. That's about -- I'm talking about NTT Ltd.

here. But -- so the 70% of the sales, I'm talking about, this probably is more or less to sales of physical products. So how can we shift to high-value services?
So it comes down to the issue of personnel. So of course, we have to consider the issue from the management side question as well. Now turning to NTT DATA, we have seen increase in personnel and outsourcing type of business.

In the case of [ IFRS ], the margin is going down in these services. So how do we further reinforce governance? That's what we have to consider. As for NTT DATA, Senior Executive Vice President, Mr. Nishihata, is going to return to the team. So I think that's, in a sense, very bold, something unprecedented for NTT DATA.

But the keyword is management governance and shift to higher value-added services. So does that represent a bold business model? I'm not sure whether or not that is a direct answer to your question. But that is the mentality that we have.

Tetsuro Tsusaka: I see. I know that these things are not very visible right now, and maybe it's a very strange question for me to ask.

But you're talking about lower-margin business. It seems that you're reporting more or less lower-margin business. And the business environment -- if the business environment is dampened as a result of COVID-19, then cost will come down. Sales might come down, but also cost might also come down. So maybe it doesn't have significant impact on bottom line.

Is that the way you see things? Or do you believe that since you have JPY 20 billion sales overseas, should we consider the risk that this could be a swing factor for the bottom line going forward? So how should we see the situation? Which of the scenario is more likely?

Jun Sawada: Well, as far as the operation is concerned, we're not just selling physical products. We are preferring maintenance. And we're also offering management services, although maybe not fairly advanced, but still, we're offering management services. So just because of COVID-19, it doesn't mean that what we're doing is going to be disrupted. That is not the case.

Tetsuro Tsusaka: But as you pointed out, there could be decline in revenues. At the same time, the costs could also be coming down. Is that the case?

Jun Sawada: I'm not sure whether or not we can be all that optimistic. But we have parts that are recurring. We are also selling physical products that may remain steady.

But it could be that we might not see increased in demand going forward. That might be the case. Have we -- have I responded to you question?

Tetsuro Tsusaka: You know that's fine.

Operator: [Operator Instructions] It seems that there are no other questions. So with this, we would like to conclude the fiscal year 2019 results briefing session.

Thank you very much. [Statements in English on this transcript were spoken by an interpreter present on the live call.]