Nippon Telegraph and Telephone Corp

TSE:9432

Q1-2026 Earnings Call

[Makiko Sekine, executive]

We will now begin the briefing session of NTT's FY '25 first quarter results. Thank you very much for gathering in spite of your busy schedule. I am Sekine, Head of Public Relations, serving as the facilitator. First of all, let me introduce today's 3 speakers. Akira Shimada, Representative Member of the Board, President and CEO; Toshihiko Nakamura, Senior Vice President, Head of Finance and Accounting; and Akitoshi Hattori, Senior Vice President, Head of Corporate Strategy Planning.

Today's presentation materials was made available on NTT web page at 2:00 p.m. today. Now we would like to begin. President, Shimada, over to you.

[Akira Shimada, executive]

Within the 36.6 degrees Celsius, thank you very much for gathering here today. I'm Shimada, the CEO. I'd like to explain about the financial results for the FY 2025 first quarter. The consolidated financial results for the first quarter was operating revenues increased and operating profit and profit decreased against the previous year. Operating revenues for the first quarter reached new record high levels. Though there was an approximately JPY 50 billion decline from foreign exchange rate impact due to the revenue increase from the enterprise business expansion at each group company. The operating revenue was JPY 3,262 billion, up by JPY 22 billion year-on-year. As for profit, though NTT East and West increased its profit, at DOCOMO, in addition to the decline in mobile communication services revenues due to the rollout of initiatives such as strengthening customer base and improvement of mobile network quality, EBITDA was JPY 801.4 billion, down by JPY 13.9 billion year-on-year.

Operating profit was JPY 405.2 billion, down by JPY 30.6 billion year-on-year. Both revenue and profit are largely progressing as expected. Well, the foreign exchange rate, is slightly going to the negative side for us. However, by continuing to surely reduce the cost and expanding the enterprise businesses and others, we will work towards achieving the NTT consolidated plan. As for the profit was JPY 259.7 billion, down by JPY 14.4 billion year-on-year due to the decline in operating profit.

As for the revenue and profit by segment. For integrated ICT business segment, though the mobile communication service revenues decreased, revenue increased year-on-year due to growth of Smart Life business led by finance business and organic growth of the enterprise businesses. In addition to the increase in profit of the enterprise business and implementing various measures to improve the income and expenditure, profit declined year-on-year due to implementing measures to strengthen customer base and improve the network quality. As a result of initiatives to strengthen our customer base, MNP was positive in the first quarter cumulatively. Towards achieving the annual plan, we will strengthen our competitiveness through continuing to strengthen our customer base and improve network quality, as well as surely conducting cost reduction and expanding our growth of businesses such as Smart Life business and Enterprise businesses.

For the Global Solutions business segment, although there was an increase in revenue due to capturing the digital transformation demand in Japan, there was a negative foreign exchange impact of approximately JPY 50 billion. Therefore, both revenue and profit are at the same level as the previous year. Regional Communications business segment resulted in an increase in both revenue and profit year-on-year due to the increase of revenue of both enterprise and optical fiber businesses, though the legacy business revenue is declined. Furthermore, the net additions in fiber optics services has increased year-on-year due to a 10 gigabyte plans and strengthening sales and providing service to the entire apartment building in the apartment market. For the others, like Real Estate and Energy business due to the expansion of data center and engineering at Urban Solutions, both revenues and profit increased year-on-year.

Next, I would like to talk about 5 topics. Starting with the upgrade of purely Japanese-made LLM tsuzumi. tsuzumi was developed by NTT from scratch as purely Japanese-made LLM. And the second generation, tsuzumi 2, will be launched in October this year. We have significantly evolved the understanding of complex text and meaning, which is necessary for interpreting internal documents and manuals as was requested by enterprise customers. For example, accuracy in responding to inquiries on accounting manuals improved by 4x compared to the previous model and equal or better in the benchmark comparison with other models. The excellent cost performance as a single GPU model remains unchanged in tsuzumi 2, allowing for on-premise environment, safely supporting highly confidential data as a purely Japanese-made model. I hope that you will look forward to the upgraded to tsuzumi 2.

Next, listing of NTT DC REIT on Singapore Exchange. NTT DC REIT, a real estate investment trust managed by NTT DC REIT manager, a consolidated subsidiary of NTT Data Group was listed on the Singapore Exchange on July 14 this year. Through the transfer of 6 data center assets to the REIT, we aim to accelerate the recovery cycle of DC investments generate investment funds and maintain financial soundness while further growing the data center business and maximizing corporate value.

Next, on Expo 2025 Osaka Kansai's IOWN use cases. On NTT Pavilion Day, May 24 and 25, NTT performed the Cho Kabuki powered by IOWN. Hanakurabe Senbonzakura Expo 2025 version as a real-time joint performance, using IOWN APN and 2-way transmission between Japan and Taiwan. Also the computers in the NTT Pavilion utilizes IOWN 2.0, consuming 1/8 of the power of conventional computers. In FY '26, we aim to offer a commercial version with twice the communication capacity of the Expo version.

Next, on the announcement of our policy for the future of fixed telephone service. Given the aging and decline in cost efficiency of NTT East and West, copper-based telecommunication facilities in the future. NTT East and West plan to gradually transition to fiber optic and wireless-based fixed-line services by 2035, ensuring the continuity of fixed line telephone services. To avoid causing inconvenience to existing customers, we will provide sufficient notice and transition periods before switching to alternative services. NTT East and West will announce basic policies and related information around late September. Progress under the medium-term management strategy beyond May is shown here.

That concludes my explanation. Thank you very much.

[Makiko Sekine, executive]

From now, we would like to take the questions from the reporters. First of all, we'll take questions from those who are in this venue. [Operator Instructions] We'd like to take the questions now.

[Unknown Analyst]

My name is [ Chayama ] from Toyo Keizai. I have 2 questions. The first question is related to the integrated ICT business segment. From June, you started the new rate plan and the first quarter, you said the MNP turned positive. With the new rate plan, I would like to know the impact of it. And also with SBI Sumishin Net Bank, I believe that it is going to become DOCOMO subsidiary company. And what is the impact to the performance of the -- of this acquisition to the ICT integrated -- and integrated the ICT business?

[Akira Shimada, executive]

First of all, related to the new rate plan, actually, yesterday from DOCOMO. This announcement that the basketball program will be added to the service. And at that time, we did announce the numbers as well. And from June, the new DOCOMO MAX has been launched. And we have had 700 million subscribers use this service. So on average, it's about 350,000 a month. On the annual basis, it's 3 million is the year plan. So I believe that we have started in a good way. And also, in addition to that, in addition to the contents and MLB content, we would like the service to be accepted and used by -- excuse me, NBA, not MLB -- [indiscernible] more subscribers.

And also regarding the Sumishin SBI Net Bank, the process has not completed yet. So I believe it will be around October. And if we can consolidate it by then from that we will be able to consolidate it. And so they are growing business, so it will be more than last year, but more than half -- around half will be included in this year's performance.

[Unknown Analyst]

The next is related to the photonics electronics conversion devices. For the commercialization next year, I think you are working on some various use cases, but specific demands and what is the direction regarding this moving forward? If you have visibility on that, I would like to know the current situation of it. And also, within the area of this photonics and electronics convergence technology, NVIDIA is also in developing their products there. So can you actually share the strength of your device?

[Akira Shimada, executive]

At the Expo in Osaka, we have the optical switch that is used there, and that speed is about 51 terabytes. And the commercialization product that will be launched next year is about double the speed, meaning exceeding 100 terabytes. And currently, I cannot name the specifics, but currently, we are having this product being evaluated by the customer. And as for our partners, we are starting to organize them. And so October 6, well, the naming is not decided, but it's an IR from the IR perspective and the PR perspective, we are planning to hold an explanatory session. And at that time, together with us, the optical switch using the photonics and electronics convergence technology, we're hoping that the partners or the customers that will be selling it can join us at that session.

But we have reached that phase now, whether I should say within this fiscal year, first of all, Well, if the customers allow us to disclose their names, we will be able to share with what kind of customers that we are doing the business, and we'll be able to reach that stage.

[Unknown Analyst]

So looking at the industry trend, what is the strength that your company has?

[Akira Shimada, executive]

Well, for example, in spring, NVIDIA, as all of you know, with the CPO method, they have announced using a CPO method. But to begin with, NTT wanted to bring the optical signals very close to the chip as much as possible. That was the concept that we have launched because that will reduce the power consumption. But more than that, the issue recently is that the heat cannot be fully treated. And we are hearing those voices more from the users. So bringing the optical signals close as much as possible to the chip and we'll be able to reduce the heat emission. And without using electricity, we'll be able to release the heat. So this type of concept is starting to come about in the society that probably that's better, which means that the direction that we have selected has been correct and has been evaluated as that's the correct direction.

And the -- but having said that, there's a technology that only NVIDIA -- NTT has. So we would like to emphasize on that point. And together with our partners, we would like to continue to work with our partners to commercialize it. Thank you very much.

[Makiko Sekine, executive]

Next question.

[Unknown Analyst]

[indiscernible]. I'd like to ask about the metal or the copper lines for the fixed telecommunication. And so we'll have the geographical information when you make the announcement in September regarding the transition period. And I'd like to also ask about why this is necessary to transition away from the copper-based fixed line telephone?

[Akira Shimada, executive]

Well, first of all, the copper fixed line telephone is the basic infrastructure that has been built. And in Kyushu and other areas where we have major natural disasters, we have tried to be very creative in maintaining that service. Of course, typhoon and various flooding would have an impact on the copper or fixed lines. And at this time, laying the new copper or fixed line telephone is not efficient, and we would like to avoid that if possible. So from that perspective, 2035 is probably the limit for the use of the current copper fixed line telephone infrastructure. So by then, we would like to have the transition to the new service to other customers. And so as early as possible, we would like to first communicate this to the customers with the NTT law amendment.

And in September announcement, we will not be having such geographical information and such details, but we would like to provide an explanation of the reason behind the transition. And first of all, in urban areas, the fiber fixed lines have already been laid out to a large extent. And so if we can start with certain urban areas with abundant fiber infrastructure, that may be best. But I'm sure that there are various feedback and comments that we receive. So we will study that and consider the appropriate transition plan.

[Makiko Sekine, executive]

Next question, please.

[Unknown Analyst]

This is again from Nikkei BP. As asked in the previous question regarding the copper line, with the amendment of NTT law, the final provision obligation has been applied. So if there are other companies that can offer that service, NTT does not have the obligation. So do you have that reflected in your plan?

[Akira Shimada, executive]

Well, basically, the customers that we are providing the service are the ones that we are asking them to transfer over. So these customers, if they voluntarily would like to select the mobile company's service, I mean, they will be able to do that. And this needs to be further discussed. However, for example, NTT East and West from the mobile operators, regarding a particular area, if they are contracted or receiving the wholesale service, there may be such cases. So from the customer's perspective, as much as possible, the contact point being, for example, NTT East and West will give them a peace of mind, and we hear those voices. So we would like to come up with a system like that. For those who already have the optical fiber cable, that's fine from the broadband perspective, they can use that. So they will have various choices. So at the timing around September, I'm hoping that I will be able to elaborate more.

[Makiko Sekine, executive]

Next question, please.

[Unknown Analyst]

I'm [indiscernible] free writer. So this is mostly about DOCOMO. Regarding integrated ICT. So there was a decline in revenue. I'd like to ask the reason why this happened?

[Akira Shimada, executive]

The main reason, as mentioned, is the customer base enhancement. The marketing cost has been increased. And last year, we have increased, but that was mostly in the second half of the year. So on a year-on-year basis, compared to the previous year, there was an increase in the customer base strengthening cost. And also, we are enhancing the service base requiring a new base station. We've increased by about 20%, and that is additional cost that is put on the integrated ICT. And for the enterprise and the Smart Life, there has been a positive increase in revenue, but they were not enough to make up for the decline in revenue because of that.

[Unknown Analyst]

What about ARPU and the telecom service itself?

[Akira Shimada, executive]

So MNP, you said was positive. So that is going well. In terms of the first quarter ARPU, it's same as the previous year. So we need to continue to look ahead, but we believe that this has bottomed out.

[Unknown Analyst]

And my second question, In terms of the CapEx investment, Opensignal report, 5G SA report was issued recently. And NTT DOCOMO was partially excluded from the survey. So regarding 5G SA, what is the schedule for the planning and the CapEx for that?

[Akira Shimada, executive]

Well, DOCOMO being excluded in part of that survey. The reason is that because there are many areas where we have both 4G and 5G. And that was probably the reason why DOCOMO was excluded from the survey. SoftBank and KDDI, the sample number is quite different. So it's very difficult to compare apple-to-apple. Going forward, within SA, 5G's metal run would be the main service. So SA, first, of course, the target will be the enterprise customers. So in terms of providing a concrete service to enterprise customers, that will be the first priority in this area. .

[Makiko Sekine, executive]

We'd like to take the next question.

[Unknown Analyst]

[ Morioka ] from Nikkei Cross-Tech. And I have a question regarding NTT Data Group. Regarding the hiring plan. domestically for a long time, there was a -- there's a shortage of IT talent. But in U.S. or global, the AI talent layoff is accelerating. So as planned, are you going to continue the hiring to increase the headcount? Are you going to suppress the headcount? Are you going to revisit your strategy? I would like to know the current situation.

[Akira Shimada, executive]

Well, through the reporting in the media due to the penetration of AI, especially in the North American region, there's been a reduction in headcount in the industry is what I have in mind that is the image roughly. But also, we need to look at the market situation as well. If the market situation becomes better, for example, they are things that can be covered and the efficiency can be improved through AI. However, the consulting to implement AI, those type of talent will be required.

So in a temporary perspective, saying that because the AI is going to be implemented, the requirement for head count is going to go down. Instead of thinking that way, in order to implement AI, we need the talent that can do that, and we need to recruit more. And this fiscal year, AI-related orders around JPY 150 billion worth is what we're going to achieve in 2027, it's probably going to increase up to JPY 500 billion level related to AI. So in that sense, engineering people or the consulting people for the AI implementation, we probably -- I think we need to increase it regardless of within Japan over -- now both for Japan and overseas.

And for the contact centers, and these type of businesses where AI can fully be implemented. Probably AI will be able to respond to the calls so there is a possibility that those areas will have a decline in talent. But in North America, their backyard is in India. But having said that, if the business grows and expands, then it will require more talent to be hired. So it's not necessary the fact that the hiring or recruitment will decline. Sorry, this was my personal perspective. So if the business expands, then the contact center side, there are areas that you will not decrease or decrease. So there will be a balance. Well, the contact center is where we'll see a decline. So depending on the area and industry will differ.

[Unknown Analyst]

One more question. The Trump administration's impact, this is for NTT Data Group due to the entity -- due to the Trump administration, the public sector orders are declining. But is there an impact from the Trump administration? .

[Akira Shimada, executive]

Well, regarding tariffs for us and also for NTT Data Group, we are not in the exporting business. So I believe that it's not going to directly impact us. However, due to the impact of the tariffs, the various manufacturing companies being impacted. And if the economic situation will be impacted negatively. Then the IT demand will be negatively impacted as well. So we need to be sensitive to the economic situation trend, and we are keeping a close eye on it.

In fact, the German automobile market, we do have quite a large customer base there, and they are being impacted. And that is due to not only tariffs but overall economic recession in Germany. Therefore, we are more concerned than the market -- of the market situation.

[Makiko Sekine, executive]

We will take one more question from the floor and then take questions online.

[Unknown Analyst]

[ Ishikawa ] I'm freelance writer. The other day, KDDI's au Jibun Bank and SBI Securities announced partnership. So what is your take on that? And Monex and SBI Securities being treated equally, it was also mentioned. So can you also talk about that?

[Akira Shimada, executive]

Of course, SBI Holdings is our partner. We have capital partnership. So I cannot say that this has no impact, but regarding the SBI Securities, we have no capital relationship. But with the relationship with the SBI Group, we would like to enhance that further. And regarding Monex and SBI Securities, we would like to continue to have equal treatment. But SBI forming partnerships with other players, that is all up to SBI and that is not something that we should comment on. .

[Makiko Sekine, executive]

Next, for those of you participating online. I would like to take your questions. [Operator Instructions]

Nikkan Jidosha Shimbun, Yamamoto-san.

[Unknown Analyst]

I have 2 questions. The first is related to Rapidus. The other day, Rapidus announced their prototype. How are you looking at their progress? And including the next round, what is your stance relating to the investment?

[Akira Shimada, executive]

First of all, Rapidus came up with the prototype product. And our Chairman, Sawada went to their opening ceremony. And truly, it was a very modern -- maybe the word modern is old, but it was a full automated manufacturing plant. I heard that he's seen it. So in that sense, there are the cutting-edge semiconductor factory being constructed is a very good thing. And as for the investment at the very initial stage, we did invest for about JPY 1 billion. And as before, the photonics electronics convergence device have that included in the benefiting process. We do have that type of expectations. So we will respond in an appropriate manner in terms of the equity investments. .

[Unknown Analyst]

One more point is the Move (sic) [ Woven ] City of Toyota is going to have the public opening at the end of the month. And the collaboration with Toyota that you have announced the other day. If there are any updates that you can share with in Woven?

[Akira Shimada, executive]

Well, Woven is purely Toyota's project. And we are receiving some jobs. But I would like to refrain from the comment on Woven City. And also with Toyota, together creating a safe society, including the autonomous driving. Regarding that concept, we have been deepening our discussions. Therefore, in that sense, we are having discussions that have progressed quite a bit. That is the comment that I would like to leave you with.

[Makiko Sekine, executive]

Next, question from online participants. There are no further questions from online participants. So if there are any questions from the floor, we still have a few minutes.

[Unknown Analyst]

[ Sekiguchi from Kita Watch ]. My first question, regarding the Q1 results, DOCOMO's business. Competitors have announced new rate plans like KDDI. And also Rakuten have also announced their new rate plan next. And SoftBank has not changed their rate plan. So what is DOCOMO's impact with regards to competitors' rate plan? And how do you analyze that impact first quarter to second quarter?

[Akira Shimada, executive]

Well, competitors' rate plan having an impact on NTT DOCOMO, I think it's premature to make such an assessment at this time. So from June 1 DOCOMO MAX was introduced and zone and international roaming and other value-added service are providing -- are provided in a more comprehensive manner with an extensive menu.

And the numbers that we have seen actually exceed our initial expectations. So I believe that customers are giving us high marks for this plan. Each player is considering their own plans. DOCOMO is always talked about us raising our tariffs, but actually, we have maintained the existing plan with no price change. But we are just attaching the pricing to the value. It's not the price hike. It is simply introducing a rate plan that matches the value that is being provided.

And to further add contents to the plan to seek further satisfaction of our customers. So this is the backdrop of the new rate plan. So going forward, we will continue to provide services that have big value to the customers.

[Unknown Analyst]

And the second question is regarding network quality of DOCOMO. And you talked about the cost side of the network quality improvements, but how do you see the actual improvement?

[Akira Shimada, executive]

This may be a bit qualitative. Last year, we planned for new base stations and all the base stations have been constructed exceeding the initial plan. And this year, we have decided to further increase the number of base stations. And we're also accelerating the schedule compared to previous year.

Last year, a lot of the work was concentrated in the fourth quarter because of the preparations that needed to be made. But for this fiscal year, from Q1, we have accelerated our progress. And this year as well, we are still a bit biased in terms of the second half, and we're trying to make adjustments so that more work, more of the construction work can be done in the first half. Of course, this needs to be coordinated with the different companies that provide the construction service. So we would like to increase new base stations in advance of the initial schedule. And tuning, et cetera, has already been more or less completed last year. Of course, in areas like Shibuya where we have constantly new buildings or the demolition of buildings. We need to continuously work, but otherwise, tuning related adjustment has already been completed.

[Makiko Sekine, executive]

I'd like to take the next question in the back with the short sleeve shirt.

[Unknown Analyst]

This is Takatsuki from Nikkei. Two questions. First, the other day, there was the council held at MIC and the KDDI au and the -- the other competitive carrier showed a large concern regarding the integration of NTT East and West. And I was in NTT data. And so I'd like to know how what claim will you be making against that?

[Akira Shimada, executive]

First of all, NTT received the interview the hearing process, and we have answered to the questions quite a bit. First of all, from the anti-monopoly law perspective, already more than the majority of our shares has been held. So even though it is a whole -- going to become a wholly owned subsidiary. It is not going to impact the competition or the antimonopoly law. When the company was spun out. So we did come out with the exclusion clause, the dominance of the market.

And after that, the law has been developed, so the fair competition, if we compare -- with other competition, regulations and laws that will suffice. And also, NTT Data itself solutions business market share at this point is around 11%. Therefore, they are not in the position of the market dominance. So we believe that there's not much of an issue there as well.

So regarding NTT East and West, at least with the fair competition conditions, there are some actions that are prohibited because of that. Once we comply with that, there's no special preference or anything that will occur. So we believe that there are not that many discussion points regarding this. That is all.

[Unknown Analyst]

The other question is related to what you have explained, the tsuzumi 2. Due to the improvement of the performance, the Japanese made the small LLM, the lighter LLM due to the launch of tsuzumi 2, how much of the allocation can be expanded? And also till now what was a proof of concept. And with this, that commercialization can be accelerated? Can you share -- elaborate more on your expectation? The parameter size, the first tsuzumi was 7B, and this time, it's going to increase to 30B.

[Akira Shimada, executive]

So first of all, the performance has improved due to the increase of parameter size. And of course, it's not that the larger, the better. The cost competitiveness or the price competitiveness, that is what we have been pursuing. So as a little bit written here, GPU, the more you increase the GPU, of course, we'll be able to increase the number of parameters but with just 1 GPU, if we bring up out a certain level of performance, we'll be able to suppress the cost. So in order to improve the competitiveness we would like to improve the performance, but not increase the price that much. And this enable us to do so.

Regarding the application area, it's not going to be that different than the conventional to tsuzumi. We only have this launched with Japanese, and we are having a study for about 16 languages, but it's only a Japanese that we can fully commercialize. Therefore, in that sense, how the rack will be combined, that's matching the Japanese companies. Well, implementing AI or LLM for companies. It needs to be combined together with consulting because with just the data held by the customer, whether they will be able to reach the correct answer or not.

That type of a detailed response needs to be conducted to have a sufficient level of implementation. That is why to -- our customers, we may say that it's better to implement tsuzumi, it may be better than that for that particular customer, different servicers, LLM is better. So we have changed it. And last year, domestically and internationally, we have actually delivered to 800 customers. So implementing the AI that is suiting the customer will bring about the full benefit of AI. Of course, we want to put tsuzumi at the forefront. However, there are customers out there that it's better that it is not tsuzumi. So we would like to respond to those in a flexible manner.

[Makiko Sekine, executive]

Next question will be the last question.

[Unknown Analyst]

[ Hokkaido Shimbun Takahashi ] is my name. I'd like to ask about Rapidus, regarding the back-end process, going back to IOWN strategy and Rapidus, how is that impacting this? And in '26, the commercial version will be launched. So is that the right timing? Or I'd like to ask about your strategy around this?

[Akira Shimada, executive]

Two nano chip is what we want to launch going forward. But I'm not able to provide a clear answer about the actual product yet. It's more about the future as new devices are launched going forward, it is likely that there will be a demand for this. On the other hand, for the supply chain, the big challenge going forward is the heat, how to lower the heat.

The biggest challenge for data center is how to control the heat that is being emitted. And so water cooling is being done for the frame or the actual device being in the cool liquid to lower the heat. That is the -- what is being done in data centers. And of course, you need a lot of air conditioning to cool the room as well. So how to suppress heat is really the challenge that is being faced. So in the back-end process having an optical circuit to reduce the overall electricity consumption and to reduce the heat. If that becomes a reality, then data centers heat issue that is really a big headache can be resolved. So the semiconductor of Rapidus' value also increase as a result of that, and we can contribute in that area. So that is an area that we'd like to provide support.

[Makiko Sekine, executive]

Then thank you very much. So this concludes the NTT's press briefing. Thank you very much for attending today. Thank you, everyone.

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