Nippon Telegraph and Telephone Corporation (OTCPK:NTTYY) Q3 2022 Earnings Conference Call February 9, 2023 1:00 AM ET
Company Participants
Takuro Hanaki – Head of IR
Takashi Hiroi – Senior Executive Vice President
Kazuhiko Nakayama – Head of Finance and Accounting
Takashi Taniyama – Head of Corporate Strategy Planning
Conference Call Participants
Satoru Kikuchi – SMBC Nikko Securities
Daisaku Masuno – Nomura Securities
Hideaki Tanaka – Mitsubishi UFJ Morgan Stanley
Chikai Tanaka – Goldman Sachs Securities
Yoshio Ando – Daiwa Securities
Yoshiyuki Kinoshita – BofA Securities
Takuro Hanaki
Thank you very much for participating, despite your busy schedules today. From now we would like to start the briefing on NTT’s Fiscal Year 2022 Third Quarter Financial Results. My name is Hanaki from the IR office. I will be the facilitator today.
First of all I would like to introduce today’s attending members. Representative Member of the Board, Senior Executive VP, Hiroi; Executive Officer Head of Finance and Accounting, Nakayama; Executive Officer, Head of Corporate Strategy and Planning Taniyama.
Today’s briefing audio is streamed live. We are planning to stream this on our website at a later date so we seek your understanding beforehand. As for today’s materials please refer to presentation materials on our IR website. On the first page points to be noted are listed so we kindly ask you to go through them. Without further ado, Senior Executive Vice President, Hiroi will explain the outline and the financial results followed by taking questions from the floor. Mr. Hiroi, please go ahead.
Takashi Hiroi
Thank you very much. This is Hiroi speaking. I would like to share with you the financial results for the nine months ended December 31, 2022. So please turn to Page 4 of your slide presentation material. This shows you the status of the consolidated results. Operating revenue increased year-on-year operating income decreased and profit increased year-on-year. So this is the same trend following from the second quarter. As for operating revenue and profit this reached new record high level as the third quarter results.
Operating revenue increased by JPY 649.4 billion year-on-year up to JPY 9572.6 billion due to increase in revenue in the Global Solutions Business segment. Now of this increase, impact from foreign exchange currency was roughly JPY 220 billion. While increase in operating revenue boosted our operating income, they could not cover the increase in electricity cost, especially in the Regional Communications sector. The operating income declined. The decline was JPY 18.8 billion year-on-year and the number was JPY 1520.8 billion.
Now towards meeting the annual target, we are already promoting various measures to reduce costs to cover the increase in electricity costs which is the main factor. So through these measures we intend to achieve the annual plan.
Turning now to bottom line the profit. This went up JPY 2.2 billion year-on-year. As we have been explaining since the first quarter there was a decline in the non-recurring factors such as corporate tax burden. So therefore profit went up JPY 2.2 billion year-on-year and reached JPY 1032.5 billion.
As for overseas operating income margin in line with the increase in profit we also had cost reduction related to structural transformation. So this increased 1.0 point and reached 6.4% overall.
Let me now turn to contributing factors by segment. Let me start with the integrated ICT Business segment. Now there was negative impact from price reduction in consumer communication and the reduction in mobile communication service revenue continues. However, this will come from an increase in enterprise business and Smart Life business. We also had cost reduction efforts. So both operating revenue and operating income increased in the integrated ICT business segment.
As for Regional Communication business segment, as I have already explained earlier, there is the impact from increase in electricity costs. And also with regard to fiber service, remote work an online class related demand as well has run its course. And also we had – we did not have the one-off positive factor or non-recurring factors such as Olympics and the Paralympic games last year. So therefore both operating revenue and operating income declined in this sector.
At the risk of repeating myself in the case of Regional Communication business segment on top of – we see some very challenging impact from the electricity cost increase. However, toward the year-end and we will work to reduce cost. And also we see expanding revenue from system integration and growth business. So as we move toward the year-end, we hope to expand revenue from these segments. So we want to reach the annual guidance which is increasing both revenue and income. That is what we hope to achieve.
Turning now to Global Solutions business segment. As far as the segment is concerned, we see increase — we see increased revenue from strong demand for digital services. So in and out of Japan, we see increased revenue from digital services. Also, turning to NTT Limited, they have expanded their high-value services and also global business — global operating companies have worked to realize social transformation through cost reduction. So both operating revenue and operating income increased in the segment year-on-year.
As for the other segment, we have seen increase in electricity addition business at ENNET. And also, as we have been explaining, we see increase in revenue from electricity fees, reflecting the rise in commodity price. So we’re able to pass on the cost to our customers and energy [ph] revenue in this segment is increasing. So, in this segment we see increase in both operating revenue and operating income.
Let me now turn to some of the topics on hand. Please turn to page seven of your material. Let me start with the initiatives to resolve food and environmental issues. As far as our efforts in this area is concerned, we will form a planning company in furtherance of establishing a green food business with a company called Regional Fish Institute Limited. And we intend to do this in March. Well, what type of business will this be involved in?
Please take a look at the chart and the diagram. There are two parts to this. So we have the land-based agriculture. So, we will be for the land-based agriculture system and also will be — also harvesting algae on land as well. And Regional Fish Institute is a company with genome editing in relation to land-based agriculture system. They’re able to accelerate the growth of the fish. They’re able to increase the flesh meat of the fish.
Now on our side, we have taken a relationship of genome editing of algae, the technology to accelerate the growth and the harvesting of algae. So we’ll be able to cultivate and accelerate the cultivation of algae, which means that, the base absorbed CO2 can expand. They have the ability to fix it CO2 that they absorb. So by accelerating cultivation we’ll be able to use algae as the feed for fish. And by using this land-based agriculture system, it means that, we’ll be able to further expand the size of the land-based agriculture system.
So that is a system which we hope to establish down the line. So as the first step towards this end, we will be establishing a greenfield business with Regional Fish Institute and we’re going to set up a planning company. And we plan to establish a joint venture between the planning company and Regional Fish Institute in the first half of fiscal 2023. This will be the company that will actually be involved in this business on the ground. So that is how we would like to start the business. So through these initiatives, we have to resolve various social issues, reduction of governmental environment impact, [Indiscernible] fishing industry and so forth. And through this, we hope we will be able to respond to future risks that we see around the world. So, that is what we would like to contribute towards down the line.
Next, on page eight, initiatives in the Space Business. For this initiative with us and Space Compass have established a company to promote the space business. And in order to — for the early realization of a global rollout of this, we have concluded a partnership agreement with Skyloom Global Corporation. What this means originally is that, as you can see on this diagram, the so-called — the LEO, the low earth orbit satellite. This is something that a satellite use for earth observation. And from here to the surface of earth, they will transmit data, but it’s only during the limited time length and only limited data capacity.
But for us, this GEO, the GEO stationary orbit satellite by using that, we will provide the optical data relay service. So through this GEO to the surface of earth, we will provide a high-speed transmission data service. And it will become possible with a large data capacity as well. So together with this Skyloom Global Corporation, we will work together with Skyloom.
We will launch three geostationary orbit satellites. And to begin with at the end of fiscal year 2022, we will start this business and we will launch one GEO over Asia and gradually expand the business globally.
And next on page 9. This is the status for remote working. Last July, we have introduced the work system with working remotely as a standard and it’s about six months. I have pass since then and I would like to report the status. The employees eligible for the system, we started at 30,000 and currently it’s 40,000. So we have expanded the eligible employees by 10,000. And by using this working system, how many employees are posted away from their family were reduced was about 400.
In actual numbers, the employees posted away from their families was reduced by 900 and there were 500 employees who have newly started being post away from their family. So — as a total overall, 400 employees were reduced for being posted away from their families.
And the next page, this time we have conducted a survey for working remotely of our employees. And the results are shown on page 10. Having this system with working remotely as standard, we were able to improve the flexibility of working and the productivity is also improving. So we would like to expand the scope of the eligible employees and promote this initiative.
And lastly on page 11, we are showing the progress of the medium-term management strategy initiatives and showing the third quarter of progress. So we would like you to go through them. That is all for my briefing. Thank you.
Question-and-Answer Session
A – Takuro Hanaki
Thank you very much. That was Mr. Shimada [ph], the Senior Executive Vice President. We would now like to go into the Q&A session. With regard to questions we’re able to take questions from those of you who are taking part online and who have registered beforehand and for connected to the phone conference right now. [Operator Instructions] So we’d now like to take your questions.
We have a question from SMBC Nikko Securities, Mr. Kikuchi, the floor is yours.
Satoru Kikuchi
Thank you very much. Kikuchi is my name. Thank you for taking my question. There was a Q&A during the press conference and you talked about this earlier as well. But let me — the impact of the — impact from the rise in electricity prices. That’s what I would like to confirm. This trend continues for the second quarter into the third quarter that you gave us, cost is increasing and you’re not able to absorb the overall increase in costs. So at NTT East based on the supplementary data, if we take a look at supplementary data JPY6.9 billion increase in costs and JPY12.1 billion increase NTT West.
So in the Regional Communications segment close to JPY20.4 billion increase is seen. So what is the impact from the electricity fees? I think you mentioned the number of JPY50 billion in the press conference. Can you talk about the impact of the rise in electricity price?
And also can you give us a breakdown of increase in cost for those service related to increasing electricity price? Also you mentioned that this — that could expand in the fourth quarter and the same trend could continue into the following year. Can you give us some numbers to indicate the potential increase in electricity cost? That’s my first question.
Takashi Hiroi
Yes, thank you for the question. With regard to the impact of rising electricity price. Overall — as in the number of electricity fees [ph] is JPY45 billion overall. At DOCOMO and NTT West base — they account for the bulk of this increase. It’s very difficult to be specific as far as numbers are concerned, but I think the impact is roughly similar across these companies. I think that is the rough understanding that you should have in addition to the impact.
Satoru Kikuchi
And also with regard to quarter-to-quarter electricity rise impact?
Takashi Hiroi
Well, for the second quarter and the third quarter, the impact of electricity price has been significant in both the second quarter and third quarter. And I would imagine that the similar trend will probably continue into the fourth quarter as well. That is our outlook. But having said this though, there is the issue of the government assistance and support. In the fourth quarter this can the introduction of the government support and government assistance. So the impact — there’s going to be the impact of reducing the burden on our company. And I believe that this is — it’s a very complicated system. When I answer about the specifics of the systems scheme. But I believe the government assistance will probably have a positive impact to mitigating the impact from the rising electricity prices. Thank you. That is my response.
Satoru Kikuchi
Thank you for your response. Then I could go on to my second question. As we think about this next year will be the value for the media term management strategy. I’m sure that we cannot get these final numbers at this juncture. But I just want to hear your thinking on this matter. I think around — in the previous year and at the beginning of this fiscal year compared with your prediction for — at the beginning of this fiscal year and in the previous year the deposit is negative. Now of course the trend electricity price is a downside factor. Also in the case of different segments, urban solutions for example, their progress in profit growth is not very strong.
So the impact of the electricity price and also increase in energy cost that has been a factor on urban solutions. But then on the other hand in the global business, I think the problem is primarily exceeding your expectation perhaps. So the — so next fiscal year will be the final year for mid-year plan. So what is on the potential upsides and downsides at the back on the final year all you made your management strategy plan? That is my second question. Thank you.
Takashi Hiroi
Thank you very much for the question. This is a very difficult question you have raised. I think you wanted to hear our outlook for the next fiscal year. It’s very difficult to talk specifically about the coming next fiscal year. But maybe we can share with you what we see as the trend for this fiscal year. Well, first of all, when we take the consolidated portfolio DOCOMO is a very major part of the portfolio. So what about DOCOMO, what is the assessment because of mobile communications service revenue? Actually DOCOMO will explain in their meeting later on. But I think we see an improved trend for the improved ARPU this has been continuing from the second quarter and this trend continues. So in terms of the revenue structure, I think the improved ARPU will — this continues into next year. I think this will help to stabilize the revenue structure for DOCOMO.
On top of that in the case of enterprise business at DOCOMO, we have of course converged and integrated enterprise business for NTT communications in DOCOMO and that effects of the integration is now beginning to translate into concrete results. So that being the case I believe that we are on track with what we expected which means that the business structure at DOCOMO Group has really improved as a result of this integration. And we see very positive progress in this area.
And turning to a global business NTT Limited and NTT DATA. Again here with regard to digital demand, digital transformation or DX is very strong. This applies to the domestic business for the NTT DATA as well. And so the strength demand with DX is translating into concrete orders and this is turning into revenue. Of course, there are of course ups and downs from different factors. But in terms of totality, we see this very positive trend. So as far as we’re concerned, we believe that we’ve been able to see progress in the transformation of the business structure. And I believe we are on track as far as the progress we envision as far as midterm management strategy is concerned.
Now on the other hand, in terms of the macro economy, there are uncertainties as for the macro economy is concerned. For example, the rise in electricity price is one reason — one factor out of that. And also we see the rising trend in the interest rates — in the interest rate hikes.
Turning to the United States, the [indiscernible] is continuing to tighten their interest rate policy. And so they cautioned us to potential recession as a result of this policy. So we turn to the next fiscal year compared with what we had envisioned earlier as we regarded our center base.
With regards to electricity price this has had impact on our domestic business for DOCOMO as well as for NTT East and West. For DOCOMO they just embarked down, as electricity business of their own so that has had a very negative impact on the business, which they just started. So there are positive sides, which we envisage, but also a negative effect. This was more than what we had expected.
So turning to next fiscal year, I think, there’s going to be a mixture of both optimism and pessimism. It’s going to be a mixed bag if you will. So I hope you understand our position. Thank you.
Satoru Kikuchi
Thank you very much. Very clear. Thank you for the results.
Takuro Hanaki
Mr. Kikuchi, thank you very much. We would like to take the next question from Nomura Securities, Mr. Masuno. Please go ahead.
Daisaku Masuno
I have two questions. The first is regarding the segment breakout of the Global Solutions segment and three months year-on-year, it’s a JPY 12.9 billion increase. But just looking at limited three months, it’s JPY 7.1 billion increase in profit. So the remaining is about JPY 6 billion. And that is DATA and others. I think that is the breakdown of that number. Is that breakdown correct? And limited did the structure reform and the data center business has increased. So those were the drivers for the Global Solutions.
And for the others, overall, JPY 5.4 billion increase in profit is what I think, but Urban Solutions is JPY 6.2 billion operating income decline has occurred. So other is JPY 11.6 billion increase in profit. Probably the wholesale market is selling electricity again has contributed is what I think. So that means that for NTT East and West the negative impact due to electricity cost probably half plus of that is recovered through a node business seems to be the situation. So I just wanted to confirm the actual results of these. Thank you.
Takashi Taniyama
This is Taniyama from Corporate Strategy Planning. I would like to answer that question. First of all, for the Global segment for NTT Limited just the single third quarter has a profit JPY 12.8 billion for first quarter, second quarter. First quarter is 6.2, and the second quarter is JPY 100 million. So in the three quarters — and the third quarter is JPY 12.8 billion, and so the total is the number shown here. So deducting that remains is the DATA’s numbers.
That is the degree of the increase of profit for three months. So compared these three months and the previous three months with the over Global Solution the JPY 12.9 billion but just looking at just limited is JPY 7.1 billion. So at DATA and others is JPY 5.8 billion. So limited is JPY 7.1 billion is good and the increase JPY 7.1 billion. Out of that the structural reform factor positive factor and data center business increase.
Daisaku Masuno
So how much of that occurred? Can it be accumulated number or three months, three months please accumulated?
Takashi Taniyama
Okay. Three — just looking at the single third quarter, the structure reformed positive impact for Limited, it’s JPY 5.3 billion — well, it’s JPY 5 billion. That’s year-on-year. It’s about JPY 5 billion. And structural reform is the opposite gone down by JPY 2 billion. So plus and minus of that is a JPY 7 billion profit was generated.
Daisaku Masuno
So for the others the three months and single month year-on-year comparison Urban Solutions is JPY6.2 billion. That the three-month year-on-year has a JPY6.2 billion decline. So at a node it will be JPY11.6 billion increase. That is selling electricity. I just wanted to confirm if that is correct?
Takashi Taniyama
That Mr. Masuno, you are correct.
Daisaku Masuno
Okay. If that is so the NTT East and West and DOCOMO’s electricity price increase seems to be the focus point. But on a consolidated basis probably half of that increase is offset is the correct understanding, or is it more that’s being offset?
A – Kazuhiko Nakayama
This is Nakayama speaking. Yes, as you have — as mentioned at the third quarter electricity price increase overall group is JPY65 billion. And Masuno-san your question is that probably half of that and it is generating a positive profit right?
Daisaku Masuno
No, but just three months. Just three months.
A – Kazuhiko Nakayama
Just a moment I don’t have the numbers for only the three months, but on a cumulative basis the trend is as I explained and as you have commented.
Daisaku Masuno
Okay. So full year in the group is minus JPY60 billion Third quarter nine months is JPY45 billion. So fourth quarter just simply calculating is about JPY15 billion. So and it — if they have about JPY10 billion of profit I’m just thinking that you were able to offset quite a bit of it.
A – Kazuhiko Nakayama
Yes. But the profit of [indiscernible]. The secured business price and at the market what the price is going to be also it depends on that also. So whether the same trend is going to continue on into the fourth quarter, we cannot simply just say that that is the content.
Daisaku Masuno
Okay. Understood. Thank you very much. Okay. I understand about that. The second question is the integrated ICT segment a very strong performance, especially, the mobile’s ARPU, the mobile communications service revenue for three months compared to a year ago. It’s only gone down by JPY2.4 billion. So I think it’s very good.
And as for consumer communications; the operating profit in three months compared to previous year is a JPY7.2 billion decline. I was wondering if the unexpected cost has increased in addition to the hike in electricity costs. What is the mobile revenue or the ARPU strongly performing? And the enterprise business is also performing well. So as explained before the enterprise business this is a synergy effect. How much is that generated? They are performing very strongly. So I just wanted to know the big background and the reason behind this?
Takashi Hiroi
Yes. Regarding the ARPU from the second quarter has been explained, the trend has not changed meaning that the medium bucket, the large bucket usage has increased. And we call that an upsell, but that has increased and that positive effect is largely contributing is what we think.
On the other hand the downside factors for example from the existing old plans transferring over to giga light in 2018, 2019 we had the price decline. And due to the impact we had a large number of subscribers moving over to a lower price plan. But the giga light customers are increasing. And this transferring over to a different plan the number of subscribers is declining. So the degree of the decline itself is becoming smaller.
And also for the enterprise business, the mobile and fixed line services can be provided as a set and that is showing a very positive impact. We are able to respond to the customers’ demand and needs and do sales activities that meet those needs. As for the synergy effect how much is the difference from before? Is that difficult to express in actual numbers of revenue is where I would like you to look at to grasp the actual situation.
Daisaku Masuno
Thank you very much. So regarding the synergy the operating profit the enterprise business is increasing strongly. So there is a positive impact of the synergy as well. Is that correct?
Takashi Hiroi
It has a good effect on the profit, yes, because the revenue is strongly performing and that is contributing to the push up in the profit side or the bottom line. Thank you.
Takuro Hanaki
Thank you, Mr. Masuno. We’ll go on to the next question from Mitsubishi UFJ Morgan Stanley. Mr. Tanaka, the floor is yours.
Hideaki Tanaka
Thank you very much. Tanaka here. Can you hear my voice?
Takuro Hanaki
Yes, we hear you.
Hideaki Tanaka
Thank you very much. Yes. I would like to ask one question if I may. It relate to NTT Limited. Earlier; you mentioned that you carried out circa transformation and the effect is now being transferred into reduced cost. Now as far as this matter is concerned, first of all, I think you mentioned JPY38 billion in the annual target. But I think the effect benefit was actually JPY4.1 billion, right?
So if we based just on the number that you mentioned earlier — on a cumulative basis, I think JPY24 billion is already done for social transformation. And the effect is now – effect remaining is a big as far as expense is concerned, are you going to spend in line with the plan?
In the first quarter, you didn’t spend that much but then less spending in the second quarter, but it went down in third quarter. Is there will be expenses increase in the fourth quarter? I would like to ask how you intend to spend in relation to cost for social transformation?
Takashi Taniyama
Thank you. Taniyama from Corporate Strategy Planning. With regards to structural transformation expenses, yes, we invested JPY38 billion for the full year and we spent already JPY23 billion until the third quarter.
As, right now we intend to use — we intend to go in line with the plan. We intend to use the expense in line with the plan. As for the specifics of the spending, well operating delivery overhead and optimization of human resources, we made progress after third quarter and we intend to continue this in the fourth quarter as well.
And also on top of that, we will continue to introduce cloud service and migration in the security business will continue. So right now, yes, we intend to spend JPY38 billion at the end of the year as in line with the plan. The effect is going to be at JPY41 billion yearly basis, yes, it will be roughly JPY20 billion. That is the increase we envisage.
Hideaki Tanaka
Thank you very much for that. If I could ask if we look at social transformation expenses, you take automization of human resources. Was it more skewed towards the second quarter? Are you really going to be spending that much money at the end of the day?
Takashi Taniyama
Well, again, we tend to go — we intend to proceed in line with the plan. So we mentioned JPY38 billion. Right now we intend to spend that money as we planned. Of course, we have to monitor the circumstances and consider whether we’re going to actually spend the full amount at the end of the day. So right now we cannot give you a clear response of this matter, but yes, we intend to spend — right now we intend to spend JPY38 billion.
Hideaki Tanaka
Thank you for the respond. Do you think that — for the next fiscal year, will the expenses coming down in the next fiscal year? Can you talk about the trend? Can talk about the trend starting for the next fiscal year as far as the spending is concerned?
Takashi Taniyama
Well, next year the social transformation needs to be pursued to certain degree but then we will be embarking on a different phase. So, NTT DATA Inc. because we will now have discussions with project integration with NTT DATA Inc, so we’ll probably be shifting to spending within the integration of NTT Data Inc.
Hideaki Tanaka
Okay. Thank you very much. That is clear. Thank you.
Takuro Hanaki
Mr. Tanaka, thank you very much. We’d like to take the next question. Goldman Sachs Securities, Mr. Tanaka, please go ahead.
Chikai Tanaka
This is Tanaka from Goldman Sachs Securities. Can you hear me?
Takuro Hanaki
Yes, we can hear you.
Chikai Tanaka
Thank you very much. I have two questions. The first is slightly related to Mr. Kikuchi’s question. And I just wanted to confirm, the electricity cost hike, what the annual impact of the ¥60 billion has that not changed? And NTT East and West are strongly impacted by that. And the progress against the plan, they’re struggling. So, the cost reduction plan in the full year, are they in line with the plan? Can I just confirm that first?
Takashi Hiroi
First of all, the ¥60 billion impact of the hike in electricity cost that outlook we believe will be, as such. So we have not changed that. Looking at the actuals, we think that it is going to be in line with that outlook.
And also regarding the NTT East and West cost reduction initiatives. They are facing quite a difficult situation, as the regional communications business. And within that situation, if you look at how the expenses and costs are being generated, it seems that NTT West has more of the difficult situation.
There’s an electricity cost hike as well as in terms of cost reduction, the expenses decline on the expense side they’re not seeing that much of a track record. So in that sense, NTT East and West are both facing difficulties. But in terms of the degree of the difficulty West is facing more of a difficulty.
Chikai Tanaka
Understood. And my second question is related to probably what was said right now, in terms of the company-wide cost reduction progress. Looking at the supplementary materials on page 2, the progress of the third quarter, for the two past quarters the cost reduction amount itself seems to not be progressing that much.
So the ¥930 billion of the full year how much — from where are you looking for the fourth quarter? Is the progress itself facing a difficulty as well? Can you please explain this?
Takashi Taniyama
This is Taniyama from Corporate Strategy Planning. This ¥930 billion in annual basis, up to the third quarter is ¥880 billion. FY 2022 in a single year, we are planning to reduce ¥90 billion and the progress is ¥40 billion. As we have been explaining since before, the impact of the hiking electricity cost group-wide is ¥45 billion. So excluding that, — so at ¥45 billion, so its ¥85 billion that is the progress. It’s how we look at it. However, having said, that the hike of the electricity cost does exist.
So NTT East West and DOCOMO in order to cover that hike they have several initiatives and several additional cost reduction initiatives being worked upon in NTT East and West in order to achieve that cost — in order for them to achieve the profit target the cost reduction must be done. So they are implementing various initiatives to further reduce the cost. So towards achieving the target they will be — put their full efforts into this.
Chikai Tanaka
If that is so, up to the third quarter, the progress was not just strong. It seems that the strength has stopped from the second quarter. The impact of the electricity cost increase, due to that there was a slight of a delay. Is that understanding correct?
Takashi Taniyama
Yes.
Chikai Tanaka
Okay, understood. That is all from my side. Thank you very much.
Takuro Hanaki
Thank you, Mr. Tanaka. We’ll take questions from other people. If there are any questions, we would like to take them now. From Daiwa Securities, Mr. Ando, you have the floor. Mr. Ando, please.
Yoshio Ando
Thank you. This is Ando here. Can you hear my voice?
Takuro Hanaki
Can you speak up, a little bit please?
Yoshio Ando
Yes of course. Thank you very much.
Takuro Hanaki
Thank you.
Yoshio Ando
I’d like to ask one question about the electricity situation. Earlier you mentioned that during the fourth quarter the electricity fees could actually be supported by the government assistance.
You mentioned the possibility of government assistance relation to the electricity fee burden. If I may ask, do you think that this will be a factor in the next fiscal year as well? And do you believe — and are you going to factor that in as you plan for the next fiscal year?
Are you going to predict the performance of the outlook for NTT East and West based on the premise that the government assistance will be incorporated? I would appreciate if you also with regard to the position of the performance for NTT West — East and West for fiscal year 2023? And how you see the government assistance at that juncture? Thank you.
Takashi Hiroi
Yes. Thank you very much. With regard to the government assistance support. I think the idea is that, it will continue until September. That seems to be the makeup or the mechanism here. So — in the first half, yes, we can probably rely on this assistance.
So that is the assumption business which will be coming up with the plan for the next fiscal year. But having said that, this was then in the government budget. And also, this will depend on the — how severe the impact is on the lives of the Japanese public. So this will be the variable here.
With regard to the base electricity price for this fiscal year, yes, this been up significantly to fiscal 2022. And also, in fiscal 2023, I think, we have to be prepared for the situation that electricity prices could rise to a certain level as well. And that increase in prices is likely to be quite significant as a possibility.
So in the first half, we are likely to rely on the systems with the government. We have to see how much the — we will not be able to predict the concrete outcome — concrete impact without the assistance of the government assistance. At this juncture, we cannot give you the very detailed prediction. I hope you understand.
Yoshio Ando
Yes. Thank you for your response. Let me turn to my second question then. I think you mentioned this during the Q&A session at the press conference. Mr. Shimada mentioned the data center remains very strong business. And it was mentioned in the next fiscal year data center business growth can be expected. That is my understanding of the Q&A at the press conference.
So let me now turn to my question. With regard to technology sector, the data center, it still remains strong in the tech sector. The demand for data center remains still strong. It has not been affected too much. And despite the concerns in the stock market, I believe the strong performance in the data business continues.
So where is this gap coming from, do you think? Is there a reason for this gap between the market expectation and the actual performance of your business? If you have any interpretation of the situation, I would appreciate it. Thank you, very much.
Takashi Hiroi
Yes. Thank you for the question. As far this matter is concerned, it’s very difficult to respond to your question. As you know, when we have discussions with various data center businesses. And this, of course — this relates to the macroeconomic situation. But I believe the overall trend for digital transformation and DX still remains very firm and strong. And this is also applicable to the global market as well. So that is the backdrop.
So players like GAFA and the so-called hyperscalers, they still have very strong demand. And also they’re working to reduce costs on their own, in their own right. But with regard to data centers, the investment to our data center resources, they continue to expand. And it seems the demand for expanding their data center resources has not yet waned. That has not yet eroded. That is our interpretation of the demand among the hyperscalers.
Right now the interest rate is on an upward trend. So that factor needs to be considered. And we have — and their concerns about possible recession as a result of the hike in interest rate. But when we talk to different — various businesses the need for digital transformation and data centers. They still remain very strong.
Of course, if the interest rate were to hike — were to increase interest level, likely the possibility of a recession. But the basic requirements for DX will not disappear. So the speed might be moderate somewhat, should the interest rate reach such a level.
But once the interest rate stabilizes, again, the demand is not good to be translating into an upward trend. So then there might be some impact from recession, but it’s not going to have a severe dent on the demand. It’s — many people, outside the banner [ph], say that they will defer the plan. That is the only effect. So that is my interpretation of the trend.
Also, if I may add, as far as the data center is concerned, the fund and financial players are very active, because it was very profitable for them. So as far as financing is concerned, we are reliant on outside sources. And when the interest rate is rising, you have to increase the price, which means that the demand and the supply question — the demand and discipline may not be in sync.
Now, of course, we are monitoring the interest rate hike, but we are able to — we’re confident that we are able to realize the return, which exceed the increase in interest rate. Maybe that accounts for the difference in the views between the marketplace and the actual performance. Thank you, very much.
Takuro Hanaki
Mr. Ando, thank you very much. We are getting close to the ending time. So, we would like to take the next question as the last question. BofA Securities, Mr. Kinoshita. Please go ahead.
Yoshiyuki Kinoshita
This is Kinoshita speaking. Can you hear me?
Takuro Hanaki
Yes, we can hear you.
Yoshiyuki Kinoshita
I have two simple questions. The first is this fiscal year, how it will end up. Regional communication seems to be facing slight difficulties and they want to achieve the target. But from the overall perspective, the others is performing strongly. And if it goes as it does in Global Solutions, maybe they may exceed what they have been planning. So the negative factor even though the regional communications goes under these two other businesses probably can absorb that negativity. Is that way of thinking correct? And also, ICT, looking at the overall ARPU trend, I think that there may be an upside. So this — can you share your rough sense on these points?
Takuro Hanaki
Okay. Then roughly, I would like to respond as well. It’s not that we can stay back and relax. That’s not the situation. As you have pointed out, the integrated ICT and the global business, we can have a certain degree of expectations for their performance, so that they can — we will put our efforts in so that we can achieve the annual target and I’d like you to take it as the answer. So for the others, last year in the fourth quarter, they have had a decline in the operating revenue. And the same trend is going to happen this year as well, because on the annual basis, they have already achieved the profit level. For the first quarter, we don’t expect them to have a large decline.
Yoshiyuki Kinoshita
Okay. Understood. Thank you. And also, regarding this fiscal year up to the third quarter, the profit before tax and how it goes down to the profit. The full year plan, it seems that the third — fourth quarter, the profit whether the tax rate is going to go up maybe? So, there’s — in the first half, there was a reverse of the tax and there’s a little unique factor. So naturally, it is going to be this way, or are there any special factors that are going to impact the final numbers in profit?
Takuro Hanaki
Well, as you have mentioned Mr. Kinoshita, that situation does exist. And the corporate tax or the deferred tax asset in the quarter basis, it goes up and down. So, on a full year basis, the current annual outlook, I think is what you should look at.
Yoshiyuki Kinoshita
Thank you, very much.
Takuro Hanaki
Thank you, very much Mr. Kinoshita.
Takuro Hanaki
With this, we would like to conclude the briefing session of fiscal year 2022 third quarter financial results.
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