Nippon Telegraph and Telephone Corp

TSE:9432

Earnings Call Analysis

NTT Reports Mixed Q1 Results and Share Buyback

NTT's first quarter saw a new high in operating revenues, increasing by JPY 42.2 billion, primarily driven by the integrated ICT business segment. Despite this, operating profit declined by JPY 28.7 billion due to upfront costs for operational efficiency and increasing electricity costs. However, total profit rose by JPY 7.2 billion, offset by proceeds from sales of shares. EBITDA fell by JPY 18.9 billion due to the decline in operating profit. The Enterprise business improved its operating profit through increased revenue and better cost efficiency. Both revenue and profit are on track with the company's expectations and are aiming for growth in the full year. The Global Solutions business segment experienced profit decline because of increased integration costs. The company is proactively creating new value with the establishment of NTT Innovative Devices Corporation and other ventures. Additionally, NTT plans to buy back shares worth up to JPY 200 billion to enhance shareholder returns. The results are partially compared to last year's first quarter, which had special factors that boosted revenue.

Record Operating Revenues Amidst Operating Profit Challenges

Investors might be buoyed by the news that the company achieved record operating revenues, which increased by JPY 42.2 billion year-on-year, reaching JPY 111.1 billion. This surge was primarily fueled by the integrated ICT business segment and the Gold Mobile Business Solution segment, with currency exchange impacts contributing roughly JPY 40 billion. However, the operating profit tells a different story, having decreased by JPY 28.7 billion from the previous year due to upfront costs for operational efficiency, facility replacements, and regionally increased security and electricity costs.

Commitment to Shareholder Returns and Capital Efficiency

The company is aligning its priorities with shareholders' interests, focusing on capital efficiency and enhancing returns. This is underscored by the recent decision, as reported at the Board of Directors meeting, to initiate share buybacks, demonstrating a tangible commitment to rewarding investors and improving shareholder value.

Innovation Through New Ventures

As part of its strategy to drive new value, the company has been proactive in establishing new businesses. This signifies an aggressive push towards diversification and innovation, which could be critical in driving long-term growth in new markets and sectors.

Managing Elevated Costs and Inflationary Pressures

The company is facing increased electricity costs, which are 10% higher than the previous year. While experiencing some inflation-related costs across the board, these have not significantly impacted the numbers, suggesting effective management of inflationary pressures in the market.

Cost Reduction as a Steady Progress Initiative

The focus on cost reduction is unwavering, with the company making steady progress on this front. The reductions are part of a broader medium-term management strategy that includes improving efficiencies and managing advanced expenses. Further initiatives planned for the second half of the year are expected to bolster these efforts, providing a positive outlook for operational cost improvements and ultimately, profitability.

Earnings Call Transcript 2024-Q1

[Takuro Hanaki, Head of IR]

Thank you very much for attending today’s despite your busy schedules. From here, we would like to start the briefing session of NTT’s FY 2023 first quarter financial results. I’ll be facilitating today’s meeting my name is Hanaki from the IR Office. First, I’d like to introduce the attending members on stage. Representative member of the Board, Senior Executive VP, Hiroi; Executive Officer, Head of Finance & Accounting, Nakayama; Executive Officer, Head of Corporate Strategy & Hattori.

Today’s briefing is stream lined on audio. We are planning to stream line it on our website at rated date, so we seek you understanding beforehand. As for today’s explanation materials please refer to presentation materials posted on our IR website. There is a points to be noted on the first page, so please read through it as well. Today, Senior Executive VP, Hiroi will explain the outline of the financial results first and open the floor for your questions afterwards.

Mr. Hiroi, please go ahead.

[Takashi Hiroi, Representative Member of the Board & SEVP]

Thank you very much. My name is Hiroi from NTT. Thank you for joining us despite your busy schedule. We appreciate your attendance. I would now like to present the financial results for the three months ended June 2023.

Please turn to Slide number 4. This talks about the status of consolidated results for the first quarter. Operating revenues increased, operating profit decreased, and profit increased. That is the balance of presentation. Operating revenue and profit reached new record high levels as the first quarter. Operating revenue increased JPY42.2 billion year-on-year and reached JPY111.1 billion (ph) due to increased revenue in integrated ICT business segment as well as Gold Mobile Business Solution segment.

Now all this increase, currency or foreign exchange accounted for roughly JPY40 billion of this increase. As for operating profit, this decreased by JPY28.7 billion year-on-year, down to JPY474.7 billion due to increased upfront costs related to operational efficiency and replacement of facilities as well as for security in regional communication business segment as well as increasing electricity cost.

Although, we do not ordinarily disclose the first quarter plans per se, both revenue and profit are progressing in line with our expectations and our forecast. And we're working to achieve the consolidated guidance aiming at increased profit as the full year -- on a full year basis. As for profit, profit increased JPY7.2 billion year-on-year and reached JPY175.8 billion as decline in operating profit and increased interest expenses was covered by proceeds from sales of shares. EBITDA decreased JPY18.9 billion year-on-year, reaching JPY838.5 billion due to a decline in operating profit.

Let me now turn to Slide number 5, where we talk about the contributing factors by segment. Let me start with the integrated ICT business segment. In this segment, revenue increased year-on-year due to Enterprise and Smart Life business increase. Well, operating profit declined in part due to accelerated growth investment in Smart Life business. Operating profit in Enterprise business grew from increased revenue as well as improved cost efficiency in the consumer communication business segment.

As for regional communication business segment, both first quarter operating revenue and operating profit declined due to drop in fixed line voice service revenue as well as demand for working from home having run its course. There was also impact from increase in upfront costs for operational efficiency improvement and reinforced security as well as increased electricity costs. Having said that, both operating revenue and operating profit are progressing in line with our plans, and we are going to work towards achieving our full year plan.

Let me now turn to Global Solutions business segment. Revenue grew year-on-year from growth in domestic business, such as Public and Enterprise segment, as well as impact of currency. This applies properly to the overseas business. Well, increased revenue led to increased profit. Operating profit declined year-on-year due to increase in integration-related costs in our global business as well as increase in investment for growth.

Well, increase in integrated related costs, will continue beyond the second quarter. We will work to achieve the annual plan to cost reduction based on structural transformation, and we believe that we are in line with our plan. As for the Other segment, operating revenue and operating profit declined year-on-year due to drop in revenue from electricity business at a net.

Let me now turn to three major topics in relation to the first quarter. Please turn to Slide number 7. This relates to the establishment of new companies for the creation of new value. have identified three companies that have been established anew. First, is we established NTT Innovative Devices Corporation, which will develop, manufacture and sell photonics electronics convergence devices. We also established the second company called NTT Green and Food, Inc., which will produce in sale seafood farm by land-based agriculture systems. Also thirdly, we have integrated NTT business associates and NTT Learning Systems to operate as a strategic company in the human capital field, and they have integrated in NTT XE Partner. Through this business, we will deliver creation of new value.

Next, is Slide 8. This is regarding shareholder return and regarding share buybacks. Continuously, in order to improve capital efficiency and enhance shareholder returns is the objective. And we have resolved in today's Board of Directors meeting to buy back shares in an aggregated amount up to JPY200 billion. For us, as conventionally communicating to you, enhancing the shareholder returns is something that we would like to continuously conduct.

And within the new medium-term management strategy regarding the EPS, we have clearly stated that we are steadily going to increase that repeatedly. Therefore, in order to realize such things, we would like to surely implement the shareholder return that we are sharing with you today.

Page 9 is regarding the record of share buybacks up to now. So please refer it for your reference purpose. Conduct India share buyback and by increasing operating profit we will be increasing the EPS surely, which is leading to the increase of the share price is how we think about this.

And on Page 10, this is a situation regarding the number of shareholders. So I would like you to refer this as your reference as well. FY 2023, end of June, a number of shareholders are shown in comparison with the end of March. We have announced the stock split. And due to that, we are seeing 18% of increase of shareholders who show the interest to our shares after the announcement of the stock split. And after the stock split has become effective, what was the status of that? We will not know about it till September. And once we know the status, we would like to share that thoroughly with you.

Page 11 is showing the progress under the medium-term management strategy. We have compiled the initiatives. So we would like to refer to -- refer to this later.

That is all from my side. Thank you.

[Operator]

We would now like to go on to the Q&A session. [Operator Instructions] So let us now go on to the Q&A session. We'd like to take a question from the first person, Nomura Securities, Mr. Masuno, if you'd like to go ahead with the question. Mr. Masuno of Nomura Securities, please.

[Daisaku Masuno, Nomura Securities]

Thank you very much. I would like to ask two questions. I would ask about the operating profit for the first quarter. It seems a bit low. But based on your presentation, you were mentioning that your operating profit performance is in line with the expectation. Kenteki (ph) segments also regional global business. These segments are seeing decline in operating profit. I want to confirm. This is only because of the anticipatory investment and also because of the continued trend in downward trend in revenue. And also about it, you have seen a decline in the sales of electricity business? You mentioned that this is in line with the forecast, is the performance of on profit in line with the expectation? That's the point I wish to confirm.

[Takashi Hiroi, Representative Member of the Board & SEVP]

Yes. Thank you for your question. Let me respond to your first question. What about the new business as well as Regional Communication Segment? As far as the segments are concerned, in the case of flat, the net adds for the short services has been somewhat slow. That is very clear on a year-on-year basis. But I think as far as this period is concerned, a slightly higher targets. But yes, I think we have already been prepared for the fact that the revenue will be somewhat softer. That being the case, it is important that we rigorously control the cost for this fiscal year. So it's important that we reduce cost as we head towards the end of the year so that we'll be able to secure operating profit. So in that regard, I believe the performance is very much in line with our full year expectation.

From third quarter and the fourth quarter onwards, we would like to see increase in cost reduction. As far as the global business is concerned, there have been some integration costs in relation to our global business. At the same time though, the structural transformation costs will be spent to a certain degree. But I believe such costs will be coming down eventually. And towards the second half, we would like to see the impact -- positive impact from the integration process. And also in the first quarter of the previous year, there were some special factors that really boosted our revenue. So that was the situation in the first quarter of the previous year. Second, the performance in terms of revenue is very much in line with our expectations.

Now as far as Anode is concerned, our energy business, as you are aware, last year we have seen a significant increase in operating revenue and operating profit, especially in the fourth quarter of the previous year. that I believe you have observed a pattern in the previous year. Mr. Masuno, as you pointed out, in the fourth quarter, we did procure electricity, and they were sold off in the marketplace. But this fiscal year, we are not anticipating a similar pattern in our electricity business. So as far as our annual plan is concerned, we're prepared for the eventual fall in the fourth quarter. But I think the performance in the first quarter as far as the energy business is concerned, it's very much in line with the expectation.

[Daisaku Masuno, Nomura Securities]

Okay. I want to go on to the second question. I believe you are getting cash to acquire Green Power. And also, yesterday, IIJ performance was announced you have sold off this disclosure of the sales of entity owned IIJ. So can we talk about Green Power and IIJ. Can you talk about your purpose with regard to your involvement in IIJ. And also in Green Power, that's my second question.

[Takashi Hiroi, Representative Member of the Board & SEVP]

Yes. Thank you for your question. With regard to JPI, our investment, we are aiming for carbon neutrality by 2040. We have said that medium-term target for carbon neutrality. So that being the case, it is important that we work towards this, and we have made a great step forward in terms of achieving this carbon neutrality. We're talking about onshore wind power. This is renewable energy, and we believe that this will really entail -- this will actually acquire -- help us to acquire offshore wind power generation capacity in a significant manner.

So I believe that this represents very strong progress in terms of achieving neutral coverage by 2040. When it comes to renewable energy procurement and also through IOWN we try to reduce our product consumption. We have these two pillars in mind. And based on these stabilities, we plan to achieve carbon neutrality. With regard to procurement of renewable energy, I believe that such a certain degree we've been able to achieve what we wanted as far as procurement is concerned. So I think that we have been very meaningful acquisition in relation to Green Power investment.

Now some people talk about the expensive pricing. We are aware of the critical comments about the price that was involved in green investment. As far as we are concerned, the when it comes to offshore wind power. This is done in the context of FIT or Flex FIT. And well, FIT scheme is in place, we believe that this is going to be very profitable for us. So in terms of procuring renewables and in terms of securing profitability, I believe that we have made a very good investment in relation to the Green Power Investment Corporation.

Let me now turn to your second question with regard to IIJ. As far as IIJ is concerned in the beginning of 2000. IIJ's infrastructure company faced difficulties. And we invested in IIJ to save this business at that time. Now at that time, they are Internet-related technology and in terms to the business, they had a very strong know-how when it comes to network and when it comes to Internet rather. And we wanted to leverage their expertise so that we could also expand our own business in the oncoming Internet era.

So in terms of R&D and in terms of business, we are putting conduct a great deal of benefits as a result of this investment in IIJ. Now IIJ main business was system integration. So therefore, the used Flex network for that business. And also as well as access, they also use DOCOMO assets. And so with regard to expansion of MVNO business, they're free to the services to DOCOMO. So that being the case, I really provided first on business advantages for NTT. That is our recognition. And at the same time, though, when you consider the current competitive landscape that has really changed a great deal.

So as a result, even with the capital relationship, I think we are not in a situation where we can both enjoy increasing business even without capital relationship. So that indicates, with regard to capital, amount of stake in IIJ. We still maintain strong business relationship. So that indicates we sold off -- reduced the investment in IIJ.

[Daisaku Masuno, Nomura Securities]

One more point. So now the your stake in IIJ will be on par with KDDI. Are you going to continue to maintain this investment going forward?

[Takashi Hiroi, Representative Member of the Board & SEVP]

Thank you for the question. As far as this particular transaction is concerned, there are three aspects to this current transaction. First, we have sold off on a bilateral basis. And also, we also repurchase some shares. And so we also saw lost some shares in the marketplace. So it's a three-pronged approach. I believe we have a lot of commitment. So for an being, we’ll continue to hang on to liquidity stake in IIJ at this level.

[Daisaku Masuno, Nomura Securities]

Okay. Thank you very much. That’s all for my question. Thank you.

[Operator]

Thank you very much. We'd like to take the next question. Daiwa Securities, Mr. Ando, please go ahead. Mr. Ando, I think you're on mute. Can you hear me? Yes. Now we can hear you. Thank you.

[Yoshio Ando, Daiwa Securities]

Apologies for that. I have two questions. The first question, the government is planning to sell your shares regarding the idea of 2020 of Mr. Amadi (ph). Mr. Shimada, is welcoming -- made a welcoming comment is my understanding. If that is so every year, what is sold, let's say, that your company through share buyback, we'll absorb that. And if such a scenario does exist, the current share buyback, well, what you have announced today that pace.

If I look at that, I think it will be -- you'll be full. And buyback from the open market will seem to become extremely difficult, is what I have calculated. So how should we think about this? I'm sorry that this is a base of hypothesis. But can you please share your thoughts or way of thinking? And if you are going to conduct a share buyback from the open market, what kind of initiatives are you considering? If possible, can you share your thoughts on that as well?

[Takashi Hiroi, Representative Member of the Board & SEVP]

Thank you very much for your question. Our President and CEO, Shimada regarding the content from Mr. Amadi -- commented on it. And today, I did show you the past track record of the share buyback. And if you do look at it, you will know that, let's say, if the government will sell at that pace. We do have the cash flow capacity to fully absorb that is probably something that you will be able to understand by looking at that material. So if you look at that slide material. You'll see that further more it is possible to add slightly more, meaning the capacity of buying from the open market, et cetera. However, if it is necessary to buy back from the open market. whether we're going to have more leverage on or not, there are various ways of looking at this.

However, at this point, whether selling it or not or how it will be sold is something that is going to be discussed moving forward. From now, Therefore, given that as the premise of weather, we're going to buy from the open market or not and comment on that. At this point, I would like to refrain from commenting. However, having said that, as Mr. Shimada mentioned. I would like to do it in a way, as much as possible that it will not be a disadvantage to the shareholder and also think of various things in the best way for the open market as well, therefore, we would like you to understand at this point. That's all.

[Yoshio Ando, Daiwa Securities]

Thank you very much for answering a difficult question. The second question is regarding this first quarter results. This first quarter results as Masa mentioned, it seems that you have ended up slightly lower than the consensus. And the reason is probably because of NTT East and West, they were set at a lower assumption than what the investors were accepting -- expecting.

So my question is the decline of the profit for NTT East and West, maybe that is due to the increase in cost. Is that -- does that have a strong onetime aspect, therefore, in the second quarter or the second half? It will not be as high as we saw in the first quarter or are you going to respond to the situation through cost reduction, further cost reduction initiatives? Can you elaborate on that, please?

[Takashi Hiroi, Representative Member of the Board & SEVP]

Well, as you have said yourself, there are multiple aspects to this. Depending on the item of the expense, there are some that will be coming out more in the second half. And from that perspective, the cost restructuring effects are more towards the second half, as you pointed out. And this revenue trend is as what we have expected. So towards the second half, changing the structure of the cost is this something that we're going to think -- we're thinking from the start of the fiscal year, and we are working on it.

Therefore, the third quarter and also in the fourth quarter as the cost is reduced. And the profit will be secured as the plan. Therefore, if you look at each quarter and if you compare the profit by each quarter compared to the previous year. For NTT East and West, there is more profit weighted on the fourth quarter. That is a fact. That is all. Thank you.

[Operator]

Thank you very much. We'd like to go on to the next question, SMBC Nikko Securities, Mr. Kikuchi, the floor is yours. Mr. Kikuchi of SMBC Nikko Securities. Please go ahead.

[Satoru Kikuchi, SMBC Nikko Securities]

Thank you. A question about your performance, especially about profit and pretax profit. The sales of IIJ shares. The proceeds from the sales of IIJ shares, is that factored in your performance? And so when we look at the financial expense, we heard the representative in the data performance yesterday. I understand the interest expenses increased by JPY10 billion. So that's probably one factor. Do you believe that this is sustainable?

NTT data this time around EPS, net profit was negatively affected due to the reorganization of global business that took place in the previous year. So I think NTT shareholders are very upset with NTT Holding company. Do you feel it's a responsibility to the performance in NTT Data? Now there could also be a potential outside risk. But I [indiscernible] NTT Finance to offer some help to NTT Data. I will ask about your financial expense. That's my first question.

[Takashi Hiroi, Representative Member of the Board & SEVP]

You mentioned that -- please don't say that you cannot forgive or accept NTT company. We'll do our best. With regards to financial expense, as you pointed out, yes, there was the proceeds from the sales of our IIJ shares, and that is factored in. So that has had a positive impact. That is true. That's the biggest factor. That is true.

As with regard to the second point, about the interest payment. As you pointed out, as far as the interest payment is concerned, yes, it is increasing. So this is exactly as explained by data, financial presentation yesterday. I did listen to their presentation yesterday. You ask -- I think you want ask [indiscernible] to take some measures to support NTT Data. As far as we are concerned to the extent possible, we want to respond to be able to minimize the payment. Yes, they were also a slow start this fiscal year.

And then Mr. Kikuchi, you really dislike us. But I'm want assure to you that I would like to take required measures to accommodate the situation. And as you pointed out, well, in your question, for example, with the possibility of the care trade. We look at some measures so that we'll be able to save dollar principle. Naturally, we will have to take various measures to support the situation. Now as far as the theory is concerned, the risk retained to foreign exchange transition will be generated.

But in reality, though when it comes to the loss from currency translation it will come out in the actual financial payment. So we'll be -- I believe that will be -- if the site will be able to manage the loss from the currency translation can be managed internally, then I believe we will be able to manage this situation. So that being the case, we want to make sure that we are practical terms, we will be able to increase our cash flow. So we will have to work on that. We intend to do that.

Now having said all this, With regard to the new one in transactions, yes, we will be able to accommodate this. With regard to dollar-based funding and also for currency funding, if we can wind it over a cost, then I think that can be done. But for those costly ones, I think we had to intention maturity. And then and refinance. So we need to be mindful of various considerations. As far as we're concerned, the direction that we are very profitable in preferable terms and take a corporate measures. So I would appreciate your understanding on our position.

[Satoru Kikuchi, SMBC Nikko Securities]

I really appreciate your response. Let me go on to my second question about the share buyback. This is related to Mr. Ando's question as well. So for this fiscal year. Well, last year, the government did not reflect this in their budget. So can I take it that you're going to be purchasing shares of the JPY200 billion in the marketplace and not from the government. If have a better claim. Certainly, the government decides to sell off government-owned entity shares during fiscal year, will you consider the possibility of responding to the share buyback? So in any way, the JPY200 billion share buyback that you announced this time around, this is going to take us primarily from the market? The open market?

[Takashi Hiroi, Representative Member of the Board & SEVP]

Yes. Yes, JPY30 billion for this fiscal year, we intend to get the -- intend to do this to the general market. And for anything beyond that, If anything should emerge, what gives considerations when these issues arise as they come. Thank you very much.

[Operator]

Thank you very much. We would like to take the next question. Mitsubishi UFJ Morgan Stanley Securities, Mr. Tanaka. Please go ahead. Mr. Tanaka, can you please unmute and speak? Mr. Tanaka, can you please unmute once again and speak? Apologies. It seems that we cannot share your voice. So Mr. Tanaka, we would like to take your questions later on. So we seek your understanding. So I would like to move on to the next question. Citigroup Securities, Mr. Tsuruo. Please go ahead. Mr. Tsuruo, can you please unmute and speak.

[Mitsunobu Tsuruo, Citigroup]

I am. I did unmute.

[Operator]

We can hear you now.

[Mitsunobu Tsuruo, Citigroup]

This is Tsuruo from Citi. I understand I can ask up to two questions, if that is so, the first question is -- apologies that it's a very detailed question, but this is an important question. And I believe -- excuse me, all the important questions were previously asked. The electricity cost increase and the infrastructure cost increase, what was the impact of that in the first quarter because the previous fiscal year, there were a frequent explanation regarding those costs. I would like to know about it this time. And then the next question is that cost reduction, it seems that it is not progressing that much in the first quarter looking at the excel sheets. So how is this a cost reduction initiative going to increase? If you can share that with us? I would really appreciate that.

[Takashi Hiroi, Representative Member of the Board & SEVP]

Thank you very much for your question. For now, the cost increase due to the market environment or the impact from the inflation of the market up to now, what is the most prominent that we see is the electricity cost. And for now, regarding the electricity costs, when we compare it quarter by quarter, last year, it was increasing. But this year, compared to last year's track record, it is 10% higher. And the other costs or general costs. There is some inflation impact. There are on the increasing trajectory. However, it is not at a degree that it is reflecting in the numbers due to the inflation, meaning that our understanding is that it is not a large impact from the other increases. And what was your second question?

[Mitsunobu Tsuruo, Citigroup]

And the second question is regarding to excel sheet, medium-term financial target cost reduction item. So when you say XO, what do you mean?

[Takashi Hiroi, Representative Member of the Board & SEVP]

Supplementary material.

[Mitsunobu Tsuruo, Citigroup]

Sorry, it's a very detailed question. Regarding the cost reductions, for us, today, as I have been explaining, for the cost reduction itself, that we have been building up for the medium term, it is steadily progressing. And regarding this effort, you are asking why is there a lower profit. Well, in the past medium-term management strategy, the cost reduction included in that is steadily progressing. In addition to that, improving the efficiencies of various things and the advanced type of expense that is occurring in the first quarter that will further reduce our cost in the future is seen.

And in addition to that, other cost reduction initiatives will be conducted towards the second half. And as a result of these activities and initiatives, we will be able to achieve the cost reductions that we are targeting at. Of course, regarding the second quarter, third quarter, fourth quarter, we have not expressed that specific terms were not thing what will actually happen, but we believe that we will be surely able to achieve the cost reductions.

The second question is regarding the data centers. NTT data may be the main body of this. So you can answer within the scope that you understand. The data center business or balancing is discussed. What kind of -- through kind of initiatives are you thinking about this? And also last year, the Hong Kong operations data center operation, the majority will be held at NTT data. I heard that you actually transferred that asset. So can you explain about the background of this deal as well?

[Takashi Hiroi, Representative Member of the Board & SEVP]

First of all, regarding the data centers, I will answer -- like to answer from the latter questions you had. Regarding the data centers in Hong Kong. Originally we transfer all the Data Inc. temporarily. But this time, the data center responsibilities to transfer to NTT Communications. And that is why within the data centers business results, that impact of that transfer is reflected. Therefore, the revenue growth of the data center seems to be stagnant slightly because of that. However, incorporating the negative impact, it is a slightly flat in terms of the revenue. So that is the situation.

[Toshihiko Nakamura, Head of Finance & Accounting]

And also, this is the Head of Finance and Accounting, Nakamura. So if you look into the supplementary material, sorry that it is very detailed. The Global Solutions business segment is where what you have pointed out is incorporated. But at the bottom, there is a note the data center transfer impact for this quarter is JPY6.3 billion. And that -- last first quarter, it was belonging to the Global Solutions business segment. And this time, it's in the NTT Communications. So If you can explain it that way. So -- and structure to those are now -- you asked about the structure. So what was in your mind when you asked that question?

[Mitsunobu Tsuruo, Citigroup]

So the sales based on the negotiations through that, are you planning to off-balance the data center assets? Because I believe there are various ways that you can off-balance that asset. So that is why I'm asking this question.

[Toshihiko Nakamura, Head of Finance & Accounting]

Well, basically, at this point, we're not limiting the methods of balancing. And we would like to select the structure that is most advantageous to us. But right now, we would like to do it in the bilateral way. And of course, if there are other structures that are advantageous to us, of course, we would like to select that as well. However, at this point, in the times when the interest rate is increasing. Well, as you know, with the funds that are operating with the third-party capital, their appetites are weakening slightly. Therefore, where we will sell the assets is probably more to the operators and the financial institutions. I think as a buyer, they are more promising is what you're thinking at this point. Thank you very much.

[Mitsunobu Tsuruo, Citigroup]

Just one more follow-up question regarding your answer. So to NTT Communications, the Hong Kong data center was transferred. So what was the background of that? I do understand the money amount impact, but what was the background of that situation?

[Akitoshi Hattori]

My name is Hattori from the Head of Corporate Strategy and Planning. The background of the transfers that for the restructuring reform of NTT Limited, there were some licensing issues. So legally, from NTT Communications to NTT Limited. It was not completely transferred. That was the last year's situation. And within that environment, instead of transferring it legally and ownership NTT communications, we thought that it's better to have a different structure and transfer over there in order to continue the data center business in a better way.

So we brought under the NTT Communications, I meaning the Hong Kong data center and also the Chinese ones. So when we visited the – and after that, we reexamined the situation so that the entity – excuse me, the Hong Kong ones are moved into the ICT business segment.

[Mitsunobu Tsuruo, Citigroup]

I understood it very well. Thank you very much.

[Operator]

Thank you. Next question. Let's go back to Mr. Tanaka of Mitsubishi UFJ Morgan Stanley Securities. Mr. Tanaka, we were not able to hear your voice. Are you connected? Mr. Tanaka of Mitsubishi UFJ Morgan Stanley. We're still not able to hear your voice. You have muted your microphone, you're still not able to come through, I'm afraid. I apologies Mr. Tanaka. We not able to hear you. We'd like to go on to other person. And hopefully, our office will be able to get in touch with you and get your question. So let us go on to the next person. Mr. Okumura of Okasan Securities. Please go ahead with your question.

[Yusuke Okumura, Okasan Securities]

Okumura from Okasan Securities. Can you hear me?

[Operator]

Yes we hear you Mr. Okumura.

[Yusuke Okumura, Okasan Securities]

Thank you very much. I just have one question. It's about NTT Limited. I'll ask about the profitability, data centers and the combine sales. Based on your presentation, it seems that data center is concerned, there is an impact for the transfer of the business. So we expected more deeper decline in the operating profit in the first quarter. I think that was your projection as well. But how do you assess the first quarter results. Despite the currency. Did NTT Limited do better than you expected?

Can you talk about how you see the performance for NTT Limited in the first quarter? And also with regard to NTT limited equipment sales, I think there was an order backlog related to into semiconductors. So your plan was to see positive increase. But then in actuality, the operating profit declined despite your projection. Can you talk about the backdrop as to why the fall or decline in the operating profit?

[Takashi Hiroi, Representative Member of the Board & SEVP]

Okay. Hiroi, again, I would like to respond to your question. Let me start, with regard to the data center. As far as the data center itself is concerned our plan for this fiscal year for this period is to factor in the impact of the transfer and that the impact of the churn. So our plan factors in those elements. But the revenue for data center is very much in line with our expectation. Also if we convert to Japanese yen, the currency itself was much weaker in relation to the yen than we had initially expected. So yen-based revenue has been pushed up as a result of the currency. So that needs to be taken into account. With regard to the equipment sales revenues at NTT Limited. That was another part of your question.

[Yusuke Okumura, Okasan Securities]

Yes, was there order backlog. And will that change the situation?

[Takashi Hiroi, Representative Member of the Board & SEVP]

Yes, there is impact of the semiconductor. There's still a lingering impact in terms of the availability of the semiconductors. So the revenue as a result of shortage of semiconductors is still weak as a result of this. Now with regard to the weaker than expected operating profit. The thing is, last year, we had a very large scale contracts, but that was not the case in the first quarter this fiscal year. There are some unique factors that were unique to the previous year. So I think the one-off factor that was available in the previous year is no longer the case this fiscal year. So that's...

[Yusuke Okumura, Okasan Securities]

Thank you very much for the response. Let me ask additional forecast. The operating profit margin for -- the operating profit for data center is that still in the teens has not changed?

[Takashi Hiroi, Representative Member of the Board & SEVP]

Yes. Thank you for the question. Yes, that is the basis of our plan. Yes, that is true.

[Yusuke Okumura, Okasan Securities]

Okay. Thank you very much. That’s all from my side. Thankyou.

[Operator]

Thank you very much. SP1 We are getting close to the ending time, so we would like to make next question the last question. Mitsubishi UFJ Morgan Stanley Securities, Mr. Tanaka. Please go ahead.

[Maki Tanaka, Mitsubishi UFJ Morgan Stanley Securities]

This is Tanaka from Mitsubishi UFJ Morgan Stanley Securities. Sorry that I caused you trouble several times. I have two questions. Regarding the regional communications segment, I just wanted to confirm. This time -- or you get the explanation of the reduction of profit, the procurement costs went up or the electricity cost went up. Money amount-wise, specifically, how much of an increase was there?

[Unidentified Company Representative]

This is [indiscernible] speaking. I would like to answer. For electricity costs, in NTT East and West in total is about JPY1.4 billion in the first quarter year-on-year. And for security initiatives and operation costs, we have the large-scale system update. So temporarily, the change cost for the previous system and by implementing a new system, there were initial costs as well. Therefore, that was a several billions of yen is reflected.

[Maki Tanaka, Mitsubishi UFJ Morgan Stanley Securities]

Okay. I understood there is a JPY10.8 billion increase in the regional communications business. Is that normal? Is that there is some explanation, not sure. It seems that that's a weak explanation.

[Toshihiko Nakamura, Head of Finance & Accounting]

This is Nakamura Head of Finance and Accounting. What [indiscernible] explained right now. In addition to that, we call it the idle assets such as the old employee dormitories or the buildings that we have exited. Without that is about JPY2 billion. In the last year, there was a temporary revenue that occurred in the other revenues and that asset several billion yen. So if you offset those two numbers, it does make sense now.

[Maki Tanaka, Mitsubishi UFJ Morgan Stanley Securities]

Okay. And next, for the other segment, the explanation of that, where there was a reduction in profit as you have explained, electricity sales I was not able to understand some parts of it. And last year, at fourth quarter, you were expanding, and you thought about that. And the first quarter was what you explained becoming the major reason for the reduction of the profit. Can you elaborate on that point?

[Takashi Hiroi, Representative Member of the Board & SEVP]

Well ENNET, the factor for reduction of profit. Well, maybe my previous explanation was that misleading, but as I have commented before, the impact for the first quarter, it was a limited impact. So in the full year, planned, that cost is going to decline, and we will see that a positive effect in the fourth quarter. So I spoke in a full year structure perspective. And so the net corporate customers, the profit plan from the fourth quarter of last fiscal year, it is dropping. And this time, in the first quarter, the customers' sales income is dropping. And we are seeing that on a year-on-year basis. And it is not a large amount. However, that is one of the factors of decrease in both revenue and profit. I think that's how you can understand it.

[Maki Tanaka, Mitsubishi UFJ Morgan Stanley Securities]

So if that is so...

[Takashi Hiroi, Representative Member of the Board & SEVP]

I'm sorry, can you -- Mr. Tanaka, can you repeat the words?

[Maki Tanaka, Mitsubishi UFJ Morgan Stanley Securities]

I understood about the ENNET. But the other segment in order to achieve that plan in the second half, the real estate is going to perform strongly or what is the plan for that?

[Takashi Hiroi, Representative Member of the Board & SEVP]

Regarding the real estate, as you have correctly pointed out, the applied operating profit on a year-on-year basis, what has increased. It will be more heavily -- there's a more heavier increase in the second half. So towards the second half, the real estate business increase in profit is going to become one of the major factors to achieve the profit plan for the year. Thank you very much.

[Maki Tanaka, Mitsubishi UFJ Morgan Stanley Securities]

Thank you very much.

[Operator]

Thank you. Time is up, we'd like to conclude the meeting at this juncture. We will go on to the presentation of results by NTT DOCOMO. For those of you who attend DOCO meeting, please remain connected to the system. Thank you once again for participation. If you wish to listen to DOCOMO, please stay on the connection. Thank you very much.