NTT Data Group Corp

DUS:NT5

Earnings Call Transcript 2023-Q4

[Yo Honma]

Good afternoon, ladies and gentlemen. I am Honma of NTT Data. Thank you very much for participating in the earnings results briefing session today despite your busy schedule. Here is today's agenda. Let me firstly explain the results of the fiscal year ended March 2023.

Please turn to page 3. This shows the overview of the actual. Since the first quarter, NTT Limited has been consolidated. This impact plus further yen depreciation, along with all segments enjoying larger business scale pushed up for our performance in sales and profit. Details can be found on the next page and onwards. As for net income, financial and tax costs increased. However, incremental operating income and other factors led to an increase dividend against the initial forecast, is planned to be ¥1 up to be ¥22.

Please turn to page 4. New orders received. On the premise that the order calculation is different, NTT Limited consolidation impact is not reflected here. The Public & Social Infrastructure segment experienced declined due to the absence of the previous year's major projects. However, project wins in Japan and abroad, as well as FX impact led to an uplift of ¥324.8 billion.

Please move to page 5. This shows net sales. Net sales in all segments continued to be upbeat with larger sales of businesses. NTT Limited consolidation impact was around ¥580 billion FX impacts, circa ¥160 billion. However, even without those factors, around ¥200 billion incremental sales were recorded.

Please turn to page 6. Next, operating income. It grew by ¥46.5 billion, mainly helped by sales growth. But the Public & Social Infrastructure segment due to losses from unprofitable projects, it remained on par with the previous fiscal year. The overseas followed the same trend in sales, thanks to the limited consolidation and FX impact. It enjoyed an incremental profit of around ¥50 billion. The other segment result was mainly attributed to the cost increase from the company-wide strategic investment, which has been factored in our initial forecast. You can find a breakdown by segment in the overseas business on the next page.

Please move to page 8. This shows major achievements and challenges for the fiscal year ended March 2023. Overseas business combination with NTT Limited, further accelerated the global business and financial and nonfinancially. Our recognition has been improved. On the other hand, we feel free challenges such as losses reported from unprofitable projects, financial soundness and investment profitability.

Please turn to page 9. Let me next cover the gross combination status of overseas business.

Please turn to page 10. Here is the overall time line to shift to the holding company structure. Step 1 took place last October when we combined businesses with NTT Limited and as an overseas business company, NTT DATA Inc. was established.

As a step 2 to shift to the holding company structure in July, the company names of the holding company and the domestic business company were decided, NTT Data Group and NTT Data, respectively. Preparation is underway step-by-step.

Since before the business merger, NTT Data and NTT Limited, respectively, have been transforming businesses, making solid profitable growth. And in the fiscal year ended March 2023, the first adjusted EBITDA rate of 8% was achieved. Going forward, we will fully drive sales collaboration and reorganizing overseas business to achieve the 2025 mid-term plan objective of the overseas EBITDA rate of 10%.

Since last October, when NTT Data Inc. was established, collaboration, including Limited has been pushed forward as one NTT Data. We have been working on enhancing regional sales our capabilities to create new business opportunities and delivering greater value of service offering to create profitability. As a result, sales pipeline and customer expectations are growing.

In order to further synergize, a new operating model from 2024 has been developed, mainly comprising the regional and global units. For the regional unit, in each of EMEAL, APAC and the North America, in those three areas, NTT Data's operating companies and NTT Limited overseas business will be combined, so that through a single contact point unified offerings can be provided to further deepen regional customer engagement.

At the same time, as for the global unit, in data centers, network and others provided by NTT Limited. And those will be offered as global common services through global technology services. Also, SAP is being provided by NTT Data Business Solutions. And through which we will further enhance value of service offerings by leveraging economies of scale in collaboration with the regional units. In addition, the corporate function, including NTT Data Inc. will strive for overall optimization and for promoting growth strategy of the global level services and delivery and partnership strategy.

Next, let me explain the progress status of the mid-term management plan. Please turn to page 15. During the global first stage started from fiscal year 2005, we achieved a greater global coverage, followed by the second stage from fiscal year of 2016, where we established a global brand. The previous and the current mid-term plan started from fiscal year 2019 and fiscal year 2022, respectively, are positioned as a global search space and we will continue to drive initiatives to become a company trusted by clients globally. These are KPIs set under the current mid-term plan.

We have been working on these five strategies to achieve our goals. By implementing them thoroughly, we will continuously endeavor to provide greater value for clients. With Strategy 1, through cross-segment collaboration in Japan and by working with NTT Limited, we are working on creating new services. Key examples include the one between the public and financial segments. KOKOPASS cashless payment of national treasury and the one using NTT Limited private 5G capabilities, Factory DX for BMW. One of NTT Limited's main businesses is data centers. Its market share is the largest in the world, and it mainly serves so-called hyperscalers or cloud operators.

This data center business is positioned as a key pillar for the mid to long-term business foundation and with proactive investment, we aim to expand the foundation forge partnership with hyperscalers and offer services for enterprises.

Next, Strategy 2. Based on the foresight or for the ideal state-oriented consulting, together with clients, we have been working on co-creating new value. One example is the health care co-creation loves setup based on the foresight in the health care and insurance sectors. And we are currently working with clients and partners who could create opportunities, as one of our distinctive consulting services, which covers venture end from management technology, we are going to build integrated consulting brand and services.

Strategy 3 evolving to an asset-based business model. Asset knowledge is generated through business, which we will elevate as an asset to be widely use to evolve to knowledge-intensive business model. As an example, shows here, assets included best practices, shall be provided as a service to provide added value services in high quality and at a high speed.

In creating assets, Strategy 4 plays an important part. As described here, based on the maturity of technology, we acquire accumulate technologies and verify practical application of such technologies in business as well as develop talent. As part of this effort, last August in six countries, we founded innovation centers activities in Compass strategy development of mid to long-term technologies co-creation with clients and POCs through which we globally validate business application at the global level.

Finally, Strategy 5, with a key phrase be the best place to work. We will continue to make our workplace more attractive. So far, we have adopted Job-Type employment system and other programs, while significantly strengthening the mid-carrier recruitment. These efforts paved the way. And across 15 countries and 3 regions, including Japan, we won recognition as a top employer 2023. We will keep on transforming ourselves so that we will recognize as a more attractive company from internal and external perspective.

Next, sustainability-oriented management. The current midterm plan as a slogan and realizing a sustainable future under which we have been promoting business and corporate activities to address societal issues and contribute to the global environment in collaboration with clients.

Through our corporate activities of IT, we have built a structure at a global level to achieve our objectives under carbon-neutral vision and country -- country collaboration is underway to promote various initiatives. Through business activities by IT with sustainability offerings for clients, we have been increasing value to help clients promote sustainable management while creating more business opportunities at the same time.

Through our activities of IT, we have been working on making our dealer centers and software greener ahead of the industry. Our proactive participation in international initiatives and progressive corporate activities have been highly recognized by external parties. In our activities by IT, as one example of sustainable offering, we've started to offer C-Turtle, a platform to visualize greenhouse gas emissions, enabling clients to regionalize emissions throughout their overall supply chain. Through these offerings, we will continue to help clients and society to become more sustainable.

Next, let me explain investment and financial strategies. Please move to Page 28. As with the previous midterm plan, we will continue to strategically invest to strengthen focus technologies and industries and promote M&A to acquire digital capabilities. In addition, for the data center business that we acquired through the business merger with Limited, we will continue aggressive investment to seize vibrant market demand.

With strategic investment as per the previous fiscal year, we will continue the JPY 32 billion level spend this fiscal year as described here. For M&A, in the three-year period of the previous mid-term plan, we spent around JPY 150 billion. Under the current plan during the last fiscal year, around JPY 80 billion was spent and the same level of investment is planned for this and coming fiscal years. By spending proactively, we strive for acquiring more digital capabilities.

The data center business is observing robust demand mainly with hyperscalers and great growth is expected. Last fiscal year, around JPY 280 billion was spent and in fiscal year 2023, around JPY 350 billion is planned, while working on initiatives to gain return on investment in a shorter period with higher profitability, we will proactively make investments

This slide shows three types of investments and the correlations in terms of profit contribution using gradation colors. M&As and data center business require integration, construction and other upfront investments, and it requires a certain time to gain return. But it will contribute to enhancing our mid- to long-term competitive advantages.

In order to maintain and enhance sustainable competitive edge, we will continue to appropriately manage investment portfolio.

To do with challenges, financial soundness and profitability with profitable growth, we are aiming to increase EBITDA, whereas, using the third-party capital in the data center business, we will shorten time to recover investment. Therefore, with fiscal year 2023 at the bottom, we will work on improving investment profitability and financial soundness.

Next, let me explain forecast, our fiscal year ending March 2024. Please move to page 35. Fiscal year ended March 2023, consolidated only six months results of NTT Limited. However, from this fiscal year and onwards, the full year results will be consolidated. Also, please be advised that the forecasted new orders received will continue to exclude NTT Limited figures. The exchange rate is estimated at JPY130 and JPY141 respectively, against the dollar and the euro.

Page 36, please. Based on the time as mentioned earlier, this shows our forecast for this fiscal year. The NTT Limited consolidation impact is reflected on a full year basis, therefore, we expect to see an uplift in sales, profit and costs. If we strip out the limited consolidation impact, net sales held mainly by Japan's business project wins such as digital projects. Net sales are expected to grow.

As for the operating income, although integration costs due to the overseas business combination will increase business growth in Japan and abroad and disappearance of losses from unprofitable projects in the Public & Social Infrastructure segment, we expect to see the growth.

As for net income, due to the withdrawal from the overseas underperforming businesses, expenses are expected to increase along with the incremental capital investment and financial expenses we expect to see a profit decline. New orders received does not include NTT Limited figures. Given the strong order climate in Japan and abroad, such as related to needs, we expect to see an increase. As for dividend, based on the strong performance month, it shall be up by JPY1 against the fiscal year ended March 2023 to pay out JPY23.

Please move to Page 37. This shows forecast by segment. Sales and operating income will be impacted by the NTT Limited consolidation for full year coupled with solid business scale growth across all segments, we expect to grow both sales and profit. New orders received has factored in a decline due to major project wins in the Enterprise segment in the previous fiscal year. However, the favorable order climate in Japan and overseas, we expect to see an increase. The next page shows forecast by segmenting the overseas business for your reference in the same format as actuals.

This concludes my presentation, and let me pass over to Kakeya, Head of Finance, to cover details of consolidated results, using the appendixes. Thank you for listening.

[Kazuo Kakeya, Head of Finance]

I am Kakeya, Head of Finance. Let me add some information to the consolidated results. Please turn to page 40. Here is details consolidated results. Let me cover the items below the operating income.

Net income for the fiscal year ended March 2023, despite increased financial income and cost share of profit loss of entities for using equity method and income taxes and others is landed at ¥7 billion surplus helped by greater operating income, as we informed in the third quarter.

The increase of financial income and cost share of profit loss of entities for using equity method came from more interest payment, due to incremental interest bearing debt from the limited consolidation.

Higher income taxes were driven by higher tax cost, due to the higher pre-tax net income and partial profit loss of NTT Data Inc. recorded in the non-controlling shareholders profit and loss.

As for net income for this fiscal year, as explained by Honma, there's an increased cost from overseas on the performing businesses and higher capital investment and financial costs. Therefore, we are expecting a decline of ¥6 billion.

Please turn to page 41. This shows breakdown of sales from clients outside the group. The Enterprise segment implemented organizational changes on April 1st, 2023. Therefore, starting from this fiscal year, we are going to report on the three areas.

Manufacturing and services, retail and consumer packaged goods and consulting payments, the overseas segment actuals consolidated NTT Limited results from the third quarter, while the forecast has reflected the full year consolidation.

Please turn to page 44. This table shows the balance sheet comparison against the previous fiscal year-end results highlighting major items. The NTT Limited consolidation impact increased the total assets by circa ¥3.1 trillion, mainly driven by a ¥1 trillion increase in current assets.

In non-current assets, property, plant and equipment, goodwill and PPA increase leading to an uplift of circa ¥2.1 trillion. On the other hand, liability is up by ¥2 trillion due to ¥1.2 trillion increase of interest-bearing liabilities.

That's all from my side. Thank you.