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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Let me introduce today's presenters. Senior Executive Vice President and Representative Director, Toshi Fujiwara; Executive Vice President, Head of Corporate Headquarters, Yutaka Sazaki; Senior Vice President, Head of Finance Department and Corporate Headquarters, Kazuo Kakeya. I am your facilitator [indiscernible] of Public Communication Department. And today's presentation consists of 2 materials, Financial Results Summary and the Company Presentation, which are available for download on our official website under Investors Section. Mr. Fujiwara will present the financial results for the third quarters of the year ending March 2023. Over to you, Mr. Fujiwara.
This is Fujiwara, Representative Director and SVP. Thank you for joining this earnings results briefing session today despite your busy schedules. Let me explain the results of the third quarter of the fiscal year ending March 2023. Please turn to Page 1. Here is today's agenda.
I firstly explain the Q3 results and the forecast, then the recent updates on overseas business combination. And also NTT Limited's results have started to be consolidated since third quarter, which we will cover at the end using appendix. Please turn to Page 3.
Let me outline the third quarter results. Since the overseas businesses were combined in October 2022, we have started to include results of NTT Limited since the third quarter, resulting in growth both in net sales and operating income while incremental financial expenses and tax-related costs reduced profit.
Net sales enjoyed gain from limited consolidation. In addition, all segments continuously increased scales and benefited from the FX impact posting sales growth. As for operating income, the company-wide strategic investments increased, and we posted losses from unprofitable projects in the second quarter.
However, the limited consolidation gain in greater sales grew profit. New orders received. Since NTT Limited uses a different method in calculating orders, numbers shown here are for reference. Orders without the limited consolidation impact remains unchanged from the first half. Year-on-year decline was recorded due to the absence of mega deals posted in the previous fiscal year. However, overseas project wins and FX impact boosted the increase further. Let me go through by segment using Slide 4 and onwards. Please turn to Page 4.
New orders received. Public & Social Infrastructure: Due to the absence of large projects in the previous fiscal year for the central government, orders went down. Likewise, the Financial segment reduced orders due to the absence of large deals recorded last fiscal [ year ]. Orders received at the Overseas segment does not incorporate the impact of consolidation of NTT Limited. Please turn to Page 5.
Net sales. All segments continue to increase slightly
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their scale and proceeding incremental sales. At Public & Social Infrastructure, services scaled both for telecom and utility and
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central government grew, leading
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to an increase and it posted a surplus. Overseas segment posted a sharp increase of around JPY 500 billion, which consists of around JPY 300 billion from the Limited consolidation, around JPY 120 billion from the FX gain. Even without those, sales in fact, increased helped by its larger scale of services in Europe. Please turn to Page 6. Next, operating income.
Public & Social Infrastructure. Sales growth boosted operating income. However, red projects recorded in the second quarter reduced the profit. Other segment [indiscernible] reduced following the first [indiscernible] year's profit as we continue to make company-wide strategic investments, which have been factored in our initial forecast. Overseas segment includes the 3 months results of NTT Limited for period from October to December. Net sales was JPY 302.4 billion with JPY 16.1 billion in EBITDA, and both amounts contributed to year-on-year uplift. The effect of NTT Limited consolidation shall be touched upon later in detail. Now let's move on to Page 12.
Next, let me revisit the full year forecast. Please turn to Page 13. This shows the forecast announced on May 12, 2022, which includes NTT Limited. As for the forecast compared to the one announced at the beginning of the fiscal year, there is no change. In terms of net sales, up to third quarter, all segments increased their sales and enjoyed FX gain and are performing well. For operating income, we continue to spend on strategic investments. However, we will continue to increase profit by driving growth in order to deliver the full year forecast. Please turn to Page 14.
This shows the full year forecast by segment. Overseas segment sales, EBITDA and operating income have been updated to include NTT Limited. As per the Japan segment, the update on the Overseas business combination, see Page 16, please.
This is the overall schedule to transition to a holding company structure. In October 2022, NTT Limited business was combined. And as an overseas business company, NTT DATA Inc. was founded. And in November, NTT DATA Japan preparation company was set up, and we are taking solid steps to be ready to shift to a holding company structure, which is scheduled to take effect in July 2023.
Meanwhile, as we establish NTT DATA Inc., we have been promoting initiatives to nurture business projects by combining strength of NTT Limited and to design optimal operating models. Please take a look at Page 17.
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collaborated with NTT Limited and
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SAP transformation project from major electronics [ manufacturer ] and provides Microsoft Azure infrastructures for SAP and network to connect the environment.
In addition to the track record in the SAP application space, increased unified understanding among clients and in the sector across the world by undertaking business projects to build an even greater trusted brand so that we can enhance market competitiveness and corporate value. Please Turn to Page 18.
This shows initiatives at NTT Limited. In order to shift to high value-added services, mainly around managed IT services, NTT Limited is implementing initiatives to drive sales and reform its structure. For high value-added services to grow top line, it aims to enhance sales with advanced expertise by assigning right resources, rescaling and hiring talent from the market. As an effort to promote focused proposals for targeted clients, it develops and executes account planning, which includes proposals of high value-added products and services for each targeted client.
As the data center investment, it continues to make aggressive investments to capture a vibrant demand from hyperscalers. It also works on structural reforms to establish more efficient business foundation as initiative to exit from unprofitable services and shift to cloud. It is undertaking a shift away from underperforming services and reorganizing a security business. It also pushes forward deliveries through outsourcing and streamlining overhead operations to optimize resources. Let me finish my part and hand over to Kakeya, Head of Finance Department.
I am Kakeya, Head of Finance Department. Let me cover additional information of the impact of NTT Limited consolidation. Please turn to Page 20. This shows the FX impact.
The third quarter experienced a yen depreciation greater than our full year guidance and [ JPY 16 ] forecast in a case when the Japanese currencies yen were weaker against U.S. dollar. In fact, JPY 10 billion gain in net sales. Please turn to Page 21.
This shows details of consolidated net sales. Up to the end of the first half, our presentation deck did not include impact of NTT Limited in our appendix [indiscernible] out of the year-on-year net sales uplift of 30%, around half of it comes from NTT Limited consolidation.
In the third quarter, NTT Limited net sales and operating income landed at JPY 302.4 billion and JPY 12.8 billion, respectively. Next, the profit decline in the quarter mainly stems from increased financial expenses and tax associated costs. Financial income and cost/share of profit loss of entities for using equity method increased given the nature of NTT Limited data center business, where a large capital investment is required upfront, raising the interest-bearing liabilities, while the interest cost also rose in response to the recent interest rate hike.
Income taxes and others also increased mainly due to a tax cost increase as a result of limited consolidation. And a certain part of profit loss is recognized on the side of noncontrolling shareholder. Please turn to Page 22.
This shows the breakdown of net sales to clients outside the company. Overseas segment reflected NTT Limited consolidation impact, both in actuals and forecasts for the third quarter and onwards. The line at the bottom called net sales by product and services has newly incorporated 2 items in addition to the existing 5 items based on the business operated by [indiscernible]. Assets increased by around JPY 2.8 trillion, principally due to around JPY 860 billion uplift in current assets, plus noncurrent asset increase by around JPY 1.9 trillion, driven by property, plant and equipment and PPA and intangible assets.
Liabilities, on the other hand, was pushed up by an increase of interest-bearing liabilities amounting to JPY 1.1 trillion, resulting in around JPY 1.8 trillion increase year-on-year. That's all from my side. Thank you.
Thank you very much, Mr. Kakeya. Let us move on to Q&A session, and please remain seated during this session. First, we will invite questions from the participants in the venue and then take questions from online participants in the second half. And be sure to speak through the microphone.
First, those of you in the venue, raise your hand if you have any questions. Go ahead, please.
This is Yamagata from [ Net Kruska ]. And this question directed to Fujiwara-san. And this might not be directly related. But recently, the rising prices is really happening in Japan as well, and then the raising salary and wages. What do you -- what's your view on that? Can you talk a little bit about your intention? That's all.
Thank you very much for your question. So we didn't touch upon in the presentation, but this is a question about the payroll. I just would like to talk briefly about it.
As part of NTT Group, regardless of deflation or the market situation, we have been working on improving the work conditions and especially introduced the specialty-based talent programs. And also, we have been hiring specific talent. And as for the pay raise itself, in the past 9 years, we have been doing that. And recently, 2% improvement of payroll or JPY 100,000 should be included as an uplift.
And during the spring labor negotiation, through the discussions
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I ask -- I'd like to pose the question to Fujiwara-san. So combination with the NTT Limited, I'd like you to talk about the impact. And conventionally, basically, one of the metrics that you have been using is that basically, you want to achieve a 2% share in any market that you operate in. With this combination, if there are any markets we are able to grow because of the combination?
Thank you very much for your question. As you mentioned, 2% market share is our target. [indiscernible] to have more opportunities of [ this forward ]. And NTT Limited originally covered certain countries, and this increased the number of countries that we operate. And we can jointly approve which clients in Europe as well as North America.
Therefore, in each region, for example, North America, Asia and Europe, there's an initiative for joint go-to-market. So both teams jointly visit clients to win the orders. To be more specific, in each region, each entity has existing clients, and they cross-check the client list to promote cross-sells.
For example, application layer, if it is application layer, then NTT DATA goes. And if it is infrastructure, Limited goes. And they have selected 10 companies each. And then for those targeted customers, they are discussing how they can approach those customers. By doing so, there are actual examples which I -- which is shown here. So we approach a major electronics manufacturer. So for the infrastructure layer, Limited did and the application and consulting was done by NTT DATA. So SAP and cloud, we are getting very good feedback from customers.
This is only 1 example of many, and we started to see such -- this collaboration started to yield results. And NTT Limited used to provide only infrastructure. However, they actually have the framework contracts. Under such contracts, there are various RPs. And in the past, they only covered infrastructure part. However, there are other layers, and they actually transfer those contracts to the others.
However, NTT DATA can cover those areas and can come up with proposals, so those business opportunities are coming up. Therefore, we are expecting more opportunities to come. Thank you very much.
Next question, please. Anyone in the venue, do you have any questions? Go ahead.
My name is [ Harry ]. And about the Overseas business, I'd like to ask the question. And then especially, I know that you were seeing a brisk performance in terms of new orders received. But when you look at the other markets, you started to see a recession. How do you see the outlook going forward?
[ Harry-san ], thank you very much for your question. As you said, there's energy crisis or supply chain issues or interest rate or exchange rate, various issues are tangled together and it is creating uncertainty.
And what about the IT spend? We are carefully watching the trend and including Japan, in North America or in Europe, we haven't seen the decline in trend of IT spend. And of course, in the existing area -- of course, there's pressure to reduce cost, and that is actually quite strong in Japan and overseas.
But as for the so-called digital space that can lead to new businesses, IT spend is quite aggressive. So they have to do it. Otherwise, they cannot survive in the market and especially for the digital IT services are seeing such trend, and we are seeing a very aggressive investment even during the COVID-19 and even today, where the pandemic is becoming settled.
Moving on to the next question. Any more questions from the venue? Please go ahead.
And this is [indiscernible] from [ K business ]. And about the electronic manufacturer business that you talked about, which country that company operate in? And then also in NTT Limited, excluding that, and you are getting a lot of orders and in Overseas, especially in Europe, and is there any connection. Can you talk about that?
Thank you for your questions. So regarding this electronics manufacturer, this is a multinational company. So it operates in various countries. Therefore, over multiple countries, NTT Limited can provide services and so does NTT DATA and such capabilities were highly recognized. And except for NTT Limited in North America, so new orders received is like a decent level, excluding FX impact because of the large projects in the previous fiscal year.
And also, as we mentioned last time, we are being selective in doing the projects. If it is a loss making or low profit project, then we do not prioritize those. And as for the pipeline for the new orders received, it is becoming thicker. And we hit the bottom at the fourth quarter 2021. And since then, it started to rise. And also, the sales cycle is now speeding up from taking orders to the sales recognized, especially in the digital space. And we are aiming to enhance our profitability.
And if you look at the gross -- the margin rate, so compared to 2 years ago, we are seeing the improvement by around 1.5%. And this is one of the accomplishments that we have made in the digital space. And as a result, EBITDA is 7.2%. It includes some specific things, but it is a little over 7%.
As for the European market, new orders environment is very robust and it is growing. Therefore, both in orders and the sales, they are growing. And our European team has consulting capabilities in the upstream. So they go to that layer and then undertake digital projects, and then they diverse the projects to BPO and others. Therefore, for the European market, structural transformation are still underway to the digitization. But even including that cost, profit is going -- is rising. Thank you very much.
And a 1.5% gross profit improvement, then you are being selective in choosing the products. And then right. So the high-value digital project that are highly profitable, we are focusing on capturing those. Thank you.
Moving on to the next question. Please go ahead.
This is Yamaguchi from Nikkei. And the net profit and the financial expenses and also taxation expenses that have an impact on the profit. And then until when this will continue, into the fourth quarter or next fiscal year? Can you talk about that?
Thank you for your question. So for the net profit, the financial expenses and tax associate costs, it is not only for the single year every time it's going to hit our performance. So this -- I think it's around JPY 10 billion or JPY 12 billion for the financial expenses and JPY 5 billion for the taxation-related costs. And that hits our balance sheet, and that's going to continue.
From one perspective, and it will push down the profit for the year. However, we are growing sales so that we can push up the profit. The data center requires investment upfront. Therefore, there's a longer cycle to generate profit. So over the longer term, we would like to achieve solid growth.
So with that, I'd like to ask you related questions. So the operating income margin, so your guidance says 7.2%. And then compared to previous year, I think that this represents a decline. And are you expecting a V-shaped recovery and also 10% that you set the target at. Are you close to achieving that and when do you start to see the rebound? What's your prospect?
So are you talking about operating income?
Operating income.
So there is a drop, which is a temporary one because strategic investment increased by JPY 15 billion compared to the previous fiscal year. And also in the second quarter, the unprofitable projects for the central government had an impact. So those are the 2 key factors. It is not that the profitability is declining. And especially for the strategic investments, we will continue to do so, to drive growth for the future.
But for the red projects, we are going to prevent those projects so that we can drive profitability.
Thank you very much. Moving on to the next question. Please raise your hand if you have any question.
And this is Suzuki from [indiscernible]. So on the consolidated performance. And if you look at the SG&A within that for the labor cost is growing 30% and then other costs are also showing a 50% increase. And the depreciation of yen and then also the rising labor costs overseas. Are these creating an adverse impact to your performance?
And then also -- and there are a lot of competition for the IT resources. And if the wage increase will continue overseas and how much impact something like this will have on your performance? Can you talk a little bit about that?
Thank you very much. Yes. So there's a shortage of IT resources, and we call it talent war that is happening not only in Japan, but also in the wider global market, and we expect this trend to continue.
In the Japanese market, labor cost sharp increase is not yet happening. And earlier, the question about the pay rate was asked, but that may come out in the future. However, in the other countries, we are seeing the labor cost increase and it varies by country, but it is now up by 20%.
As a countermeasure, firstly, we want to gain understanding from clients. This is what American people -- members said. This is a great opportunity. This provides an opportunity to negotiate with clients because the market is fluid and the pay rate trend is happening. So even during the middle of the contract, it offers the opportunity to negotiate the prices. And as for the labor cost, in the past mid-carrier hiring, even though unit price is high, we did hire those people. And we do campus hiring as well.
It's like we hire new graduates, and they call it innovation center. So they train those new graduates to -- for them to learn the digital skills and expertise. So they are also nurturing those talent. So by and large, we can control the labor cost increase.
Does that answer your question? Thank you for that. Any other questions? So now I'd like to invite questions from online participants. And those of you who ask questions, please use the raise hand icon at the bottom and then waiting to be called. And when you're called, please make sure that you unmute yourself before speak. And [indiscernible]. And we will activate the audio, so please stand by. [indiscernible], please go ahead.
And this is [indiscernible] speaking. And I hope you can hear me [indiscernible]. And this is a global related question. You have talked about the SAP project with the electronic manufacturer, and that's a great achievement. But on the other hand, well, when you look at the strength of NTT DATA, which is all about addressing the societal issues and cutting across different verticals and best industry, not just focusing on the individual clients, and that's what you have been doing in Japan. And is that something that you would like to do in the overseas market? So for example -- or you will be focusing on competing likes of the [ Accenture ]?
[indiscernible], thank you very much for your question. Where we are right now is slightly different between Japan and other countries. And in each country, the level of presence is not so high compared to our presence in the Japanese market. But in terms of facing up to societal challenges, I do see some common perspectives.
For example, the issue around carbon neutrality, for such societal issues, there's an expectation from the community, not only in Japan, we are going to work on that in a global market. So for example, visualizing CO2 emissions by providing consultations or as for the circular economy, it is not contained to Japan, but also in other countries. There are a lot of initiatives underway. Therefore -- so between Japan and Western countries teams, we are collaborating with each other.
Thank you very much. We'll be going to the next question. [indiscernible] from Nikkei. And we will activate the audio. So please stand by. Now it's ready. [indiscernible], go ahead.
And I hope you can hear me.
Yes, we can hear you clearly.
And this is [ Okamoto ] from [indiscernible]. And I have 2 questions. First, in the financial result and the [indiscernible] and then the sales and then also the operating profit and then the financial services and enterprise except for the NTT Limited, what are the drivers that you -- that stand out?
Okay. Let me explain by segment. In the Public sector, the driver was the projects for the central governments and ministries and also the telecom and utilities from the sales perspective.
And as for the Financial segment, banking-related projects drove sales. In the last fiscal year, we had multiple large deals, and those have been recognized into -- as revenues. And in the Enterprise segment, retail services in manufacturing sectors are the area we are stronger and those are driving ourselves. And as for the North America, financial services, health care, public sectors and manufacturing sectors, those are the drivers, and in Europe, including Europe and Latin America.
So in Spain, Germany, U.K. and Brazil in those countries, those countries are drivers as a region. And in terms of the industry, it is actually different by country. But the financial sector, public sector, manufacturing sector, telecom and media sector, these sectors are being the drivers so far. Did it answer to your question?
And that brings me to the second question to Kakeya-san. And the financial expenses increase that you talked about, and this is attributable to increase in debt-bearing liabilities. And is this not -- this liability is denominated in yen or U.S. dollars? Or are you thinking about making any changes in our financial policy in the future?
Okay. Let me answer to your question. So in terms of the foreign currency or the breakdown of the borrowings, so we have borrowings in foreign currency for higher percentage. Most of it is -- are in foreign currency and dollars and euro accounts for around 80%.
For the future financial policy, we will continue. So NTT DATA Limited is going to make investment in data centers in the global market. Therefore, foreign-based borrowing is the one that we have in mind. But also we are going to explore other options as well. That's all.
Thank you for the questions, and thank you very much for the online participants. And I would like to open the floor to those of you in the venue and then any additional questions from the venue. Please go ahead.
This is [indiscernible] from Nikkei. And the cost of the combination was limited. And what's the total cost that you expected? And up until December, how much of that has -- have you been posted?
Thank you very much for your question. So post merger, PMI cost, I think this is the question is about.
So JPY 11 billion has been recorded and JPY 4 billion was already spent. And joint go-to-market is one of the activities that we use that money for or the corporate function consolidation is the one that we spend. And we are planning to use that spend by the end of this fiscal year.
And as for the PMI, we are currently estimating the cost. And now every year, JPY 10 billion to JPY 20 billion are roughly estimated to shape a better business.
Thank you for that question. Any other questions? If you have any questions, please raise your hand. Thank you very much for all the questions that you had asked. So with that, we would like to conclude the press conference for the financial results for the third quarter for the year ended March 2023. Thank you for your attendance.
[Statements in English on this transcript were spoken by an interpreter present on the live call.]