Nippon Telegraph and Telephone Corp

TSE:9432

Earnings Call Transcript 2022-Q3

[Natsuko Fujiki, executive]

We will now start the briefing of NTT's financial results for fiscal year 2021 3rd quarter. Thank you for attending. Thank you very much for participating in today's session despite your busy schedules. I am Fujiki from the IR office and will be the facilitator today. I would like to introduce today's attending members. Mr. Shimada, Representative Member of the Board, Senior Executive Vice President; Mr. Nakayama, Executive Officer, Senior VP, Head of Finance and Accounting; Mr. Taniyama, Executive Officer, Senior VP, Head of Corporate Strategy Planning.

Today's briefing session is streamed live. This will also be streamed on our company's website on a later date. Furthermore, NTT DOCOMO will be holding their financial results briefing session after this session. So please attend this also. Today's presentation materials are posted on our company's IR website under the title Presentation Materials. On the first page of the presentation material, points to be considered are stated, so we kindly ask you to please go read through them. After this, Mr. Shimada will explain the outline of the financial results followed by opening the floor for your questions. Mr. Shimada, please.

[Akira Shimada, executive]

Thank you very much. My name is Shimada, the Senior Executive Vice President. Thank you for joining us at this session despite your busy schedule. We appreciate your attention. And I'd like to start with the financial results for the third quarter of fiscal year 2021. I share with you the status of the consolidated results for the third quarter. Please turn to Page 4 of the material. .

This shows you the consolidated results for the third quarter. We saw year-on-year operating revenue and operating income increase. Operating revenue, operating income, profit all reached record high levels. As for operating revenue, due to increase of revenue at NTT DATA, this increased JPY 185.2 billion year-on-year, up to JPY 8,923.2 billion. Of this, foreign exchange or currency had a positive impact of roughly JPY 94 billion.

Due to the increased revenue at operating companies, including NTT DATA as well as cost reduction efforts, operating income increased JPY 37.3 billion year-on-year, up to JPY 1,539.7 billion. Profit increased JPY 199.2 billion year-on-year, up to JPY 1,030.3 billion due to profit related to minority shareholders as a result of making DOCOMO a wholly-owned subsidiary firm. Overseas operating income margin improved due to the increase of NTT DATA's revenue as well as structural transformation efforts. As for details, you're probably familiar with the materials.

So I'd like to -- Page 9, and share with you with the financial results forecast for fiscal year 2021. As I explained, operating revenue, operating income, profit, EPS and overseas operating income margin forecast have all been revised upwards, reflecting strong business results. Operating revenue has been revised upwards by JPY 180 billion, reflecting the announcement of upward revision for NTT DATA, which reflect the robust demand for digital services. Operating income was revised upwards by JPY 15 million, reflecting the increase in operating revenue. .

In terms of specific companies, aside from upward revision at NTT DATA, we made downward revision for NTT Ltd., which I will explain in the following page on Page 10 and onwards. Profit will be revised upwards by JPY 15 billion due to improved financial profit as a result of decrease in interest payment as well as reduced tax burden. EPS was reversed upwards by JPY 4, reflecting the increase in profit. Overseas operating income margin was revised upwards by 0.1, reflecting the upward revision at NTT DATA. We believe that the medium-term financial target of 7% in fiscal year 2023 is now within the range and within our sight.

Please turn to Page 13. As for shareholder returns, as for dividends, it was approved in today's Board of Directors meeting to increase the year-end dividend by JPY 5 over the forecast at the beginning of fiscal year 2021 to JPY 60. Annual dividend per share is JPY 115, an increase of JPY 10 over the previous fiscal year. This is a response in lieu of expected increase in income due to steady progress of this fiscal year's performance against the annual results forecast. As for share buybacks, we have completed the buyback of JPY 250 billion as authorized at the Board of Directors meeting last August. That is all from my side. Thank you very much.

[Natsuko Fujiki, executive]

Thank you. We'd like to take your questions now. As we have already informed you in advance, we will accept questions to those of you who have registered in advance and who are connected to the phone conference system at this moment. The operator will now explain how we'll take questions for the Q&A session.

[Operator]

[Operator Instructions] We'd like to go into Daiwa Securities, Mr. Ando.

[Yoshio Ando, analyst]

This is Ando. Can you hear me? .

[Natsuko Fujiki, executive]

Yes, we hear you, Mr. Ando.

[Yoshio Ando, analyst]

I would like to ask the questions. My first question is about NTT Ltd. In the supplementary material Page 7, the supplementary data, I see some numbers with regard to NTT Ltd. Still the other services shows strong progress, it seems. But when it comes to equipment sales, it seems to be struggling and NTT DATA is showing strong performance. So how do you see the situation?

So based on each service lineup, how do you see the situation for each service line up? I would like to ask for your explanation? And also -- this time around, you're talking about structural transformation, even -- you talked about reinforcement of structural transformation. So what impact will -- what about the forecast for the upward -- for the upside impact on profit for the next fiscal year?

[Akira Shimada, executive]

This is Shimada here. I'll respond to your question. So first, with regard to the situation pertaining to each service line, as you pointed out, Mr. Ando, in your question, as for value-added services, we -- the situation is very strong. For example, with regard to data center, the JPY 32 billion increase we see that represents 35% increase of managed services as regards to JPY 27 billion, that represents 26% increase. As for network-related services and also for cloud-related services and cloud-related services, yes, we're still circling. As we for value-added services, overall, we see an increase of 80% overall for value-added services category.

Now on the other hand, when it comes to telecommunications equipment sales and maintenance, well, here, because of the impact of COVID-19 and because of the charts of semiconductor, we see stress on the supply chain. So that being the case, in particular, when it comes to Australia and also India, and the APAC area, overall, we see very strong impact as a result of these factors. So that may be case, the 11% decline or JPY 58 billion in absolute terms. So without COVID-19, of course, the equipment sales and maintenance business would have done better, I'm sure.

We could have taken time and made efforts to shift to value-added services if we had the luxury of time. But because of the prevailing situation, we [ failed ] to accelerate streamlining efforts as a result. So that's the basis of our decision this time around. Also on top of that, with regard to overhead, we need to improve efficiency of the overhead. We want to promote that. So that relates -- so that turns to additional JPY 50 billion of transformation cost increase. That's the main [ reason ] of this cost increase.

Also in other parts, the question to cloud and also recognization of securities are included. So overall, although we were anticipating structural transformation cost of JPY 28 billion initially, but we added JPY 15 billion on top of that, which means that we will consider by JPY 43 billion overall for structural transformation cost. As of course, based on the recent [ ForEx ], it will be JPY 47 billion based on the recent foreign exchange currency. So this is the level of reorganization cost increase, which we will spent to improve our efficiency.

Now we're expanding costs for the structural transformation. And from the next fiscal year onwards, what impact will this have on profit -- we anticipate that this will be able to improve profit by JPY 26 billion as a result of spreading this level of transformation costs. With regard to structural transformation overall, please -- as you see in the supplementary data at NTT Ltd. If -- we've decreased personnel by 1,850 people. And also, we are employing new people for value-added services. So overall, right now, we've been able to implement personnel reduction by 2,000 overall. So to the extent possible by the year-end, although we will not increase despite double fold, but we are hoping that by the year-end, we'll be able to realize streamlining and cut -- and streamlining the rationalization to the extent possible.

With regard to unprofitable services, we want to withdraw from unprofitable services. We're considering withdrawing from unprofitable services. But for the time being as far as NTT Ltd. is concerned, for fiscal year '23 onwards, we're aiming for a 7% operating income margin in fiscal year 2023. So to make -- to achieve this in a certain way, we need to respond to the changes in the marketplace in fiscal year 2022. So we're aiming for 2023 target and working towards that. That is all. Thank you very much.

[Yoshio Ando, analyst]

My second question relates to Page 7, NTT Communications Group. When we take a look at this data on Page 7, we see a slight decrease in operating profit. As for operating revenue on a quarterly basis, when we take a look at the quarterly basis numbers, there seems to be up and down from on a quarterly basis. So that is the situation. If we take a look at the substance, we find that we are not yet seeing a clear upward trend as far as operating revenue for NTT Communications Group is concerned. So can you explain to us how you see the situation at NTT Communications Group?

[Akira Shimada, executive]

Thank you, Shimada here. Let me respond to your question. So we go to operating revenue. Yes, this is a decline of JPY 12.4 billion in this category. But you remember that last year in the first quarter of fiscal year 2020, because of COVID-19, conference-related revenue spiked on a separate basis. So there is -- so I think this is a reaction of that. As for operating profit or profit there is a decline by [indiscernible], down to JPY 150 billion. So conference-related revenue is on a downward trend.

And also, we are building our new data centers, and as a result, depreciation and amortization cost is increasing because of the build of new data centers. And also we -- solution-related offerings, we see some delay in the offering of solution services. We're receiving orders, but we're not able to execute them. So therefore, we are not able to reflect that revenue. So we see that [ reflecting ] both operating revenue and operating income. As for the fourth quarter, we'll be able to start offering of new data centers for large customers so that we have a positive impact.

And also smart healthcare and smart city-related project, it will now -- is now in the pipeline. So therefore, we anticipate revenues from those projects as well. And also with regard to network security and operations, we are going to offer them in an integrated manner. We want to expand solutions bridging all these factors. We believe that we'll be able to improve revenue from network related result. So we believe that we can achieve the year -- the annual target. Thank you.

That is all from my side.

[Operator]

The next question will be from SMBC Nikko Securities. Mr. Kikuchi. .

[Satoru Kikuchi, analyst]

This is Kikuchi speaking, I have 2 questions. I'll ask about DOCOMO later on. So I would like to ask about NTT Ltd. and dividends. Regarding NTT Ltd., due to the lack of semiconductors was included in your explanation, so they're handling network equipment. So I thought there was quite an impact on them or as of the end of March, maybe the impact may expand more is what I think. So numerically, what is the impact? And what are you planning to do moving forward, is what I would like to know in my first question?

[Akira Shimada, executive]

This is Shimada speaking. As for NTT Ltd., the impact of lack of shortage of semiconductors, the equipment delivery is being delivered, and that is one of the causes of the impact, because if we cannot install, we cannot receive the revenue for maintenance work either. So in that sense, in addition to that, in the Asian area, actually the sales people, due to the lockdown, they cannot conduct their activity, so there are impacts from COVID. So with the overseas business on the revenue basis, about JPY 20 billion is the COVID impact.

As for the shortage of semiconductors, the impact from that, we need to examine it from various angles still. However, as of the third quarter, about a JPY 30 billion impact is what we think has occurred. Of course, we will continue to keep a close eye on the situation. .

[Satoru Kikuchi, analyst]

By the way, the impact of COVID pandemic, for example, in the other businesses, it seems that it's starting to calm down compared to last year. NTT DATA as such, also NTT Communications domestic business also. However, the COVID impact to NTT Ltd. business, the reason why it is larger is there's an NTT Ltd. unique reason? Is it because an equipment sales model? Does it have a larger impact? How do you look at this?

[Akira Shimada, executive]

This is Shimada speaking. Well, regarding the domestic business, we have consulted with our customers and use alternative products. So we have responded quite in a flexible manner so that we will not be that behind the actual delivery date towards our customers. However, in the global supply chain, that type of flexible response is difficult to do. Therefore -- and also the procurement source is specified. And if that specified supply source is impacted, then the impact that we will incur becomes larger. This is the same for NTT DATA also, but NTT Communications and NTT DATA domestic business, the equipment that we originally wanted to deliver our customers, we have sourced that from an alternative source vendor, and that's difficult to do in the overseas business.

[Satoru Kikuchi, analyst]

Okay. Understood. Regarding my second question, this time, you have increased the dividend, and I think that has a good impression and I hope that is reflected on the share price. However, on the other hand, the phenomenon that's happening right now, and I do not know if there's an exact link, but NTT DATA revised upward. And because the profit was revised upward, the dividend increased. But NTT Data actually maintained their dividend. The 25% payout ratio according to the original plan, after the revision upward, it was at 20.5%. And it's maintained at a quite a low level, I should say, it's deteriorated or declined.

On the other hand, your company has the dividend income from NTT DATA, They are virtual. So well, NTT itself [ nonconsolidated ] is going to pay it. And the income from NTT DATA is not increasing, but you're increasing your dividend. I wonder if that's going to be -- that's aligned? And also what is the -- so how does it circulate, the money circulate? It seems that they have a different or unique cash management, by increasing the dividend, what kind of impact will it have on the cash management is my second question given the situation?

[Akira Shimada, executive]

This is Shimada speaking. Thank you very much for your concern. First of all, regarding NTT DATA, whether they will increase their dividend or not, that's a decision left up to NTT DATA. So I'd like to leave that up to them. Having said that, this fiscal year, as for the overall holdings company, we wholly-owned NTT DOCOMO, and to that, we experienced a cash increase. And this year, at the time -- due to the timing of wholly owning NTT DOCOMO, we did not receive the dividend from them. But next fiscal year, it has already decided that we will be receiving the full dividend from them. Therefore, cash flow-wise, basically, our understanding is that there are no problems.

[Satoru Kikuchi, analyst]

Okay, I see. So the increase of the dividend this time and the NTT DATA's upward revisions and your company's consolidated upward revision, are they linked or not? So you're saying they're not linked?

[Akira Shimada, executive]

Basically, NTT Holdings' company's policy is that, within the medium-term plan's original policy, we will have a continuous increase in dividend. And that basic policy is incorporated in this medium-term plan. Therefore, as much as possible, based on the situation of cash flow, if it is possible to increase the dividend, we would like to continue that. And that is the way of thinking of the management. Therefore, this time, that thought has been reflected in the dividend.

[Satoru Kikuchi, analyst]

Okay. Understood. If I start this discussion here, it may be longer and it may be complicated, but within NTT Group, NTT DATA puts priority on investment. Therefore, the dividend or the shareholder returns is kept at a lower level compared to their peers in the industry in Japan. And your company gives that mission to NTT DATA within the group. However, you as a holdings company is increasing their dividend. Is that the issue of the parent company and the subsidiary company both being listed? How the cash is handled or the profit, is that allocated? It seems that it is not aligned appropriately. But do you have the same understanding as myself?

[Akira Shimada, executive]

Well, NTT DATA is a listed company. Therefore, NTT DATA's dividend policy or capital policy, including share buyback, they should think about what they want to do on their own. However, as a shareholder of them, conveying our thoughts to them, we do such a thing. However, at this point, requesting NTT DATA to increase the dividend, we have not done that.

[Operator]

Next question from Mitsubishi UFJ, Morgan Stanley Securities, Mr. Tanaka.

[Unknown Analyst]

Tanaka here, can you hear my voice?

[Natsuko Fujiki, executive]

Yes, we hear you, Tanaka-san. Please go ahead.

[Unknown Analyst]

I would like to ask the questions one at a time then. My first question goes back to Mr. Ando's earlier question. So it's a confirmation of what Mr. Ando asked. At NTT Ltd. for this fiscal year, you were anticipating JPY 28 billion total transformation cost, but this reflecting foreign exchange could jump up to JPY 47 billion. That is what you mentioned. Now for next -- what about next fiscal year onwards? How do you see the situation for the next fiscal year onwards? You talked about impact of JPY 27 billion per annum. Can we scrutinize this?

So JPY 47 billion will be spent this fiscal year, this is the [ best ] level structural transmission cost. To what extent we'll be able to reduce the transformation costs for next fiscal year onwards? And at the same time, what will be the effect of this expenditure? How much impact you see for the next fiscal year? And what about the year after that? Can you give us those numbers, please? I would appreciate it.

[Akira Shimada, executive]

Thank you, Tanaka-san, for your question. Shimada here. So let me start, JPY 47 billion in structural transformation costs. This is a temporary cost. So if we spend -- if let's say that for next fiscal year, let us assume that we withdraw from unprofitable markets and also we suspend unprofitable services. If we don't have to spend cost for that, then we'll be able to recover this amount fully. Now the JPY 26 billion impact I talked about earlier, so the separate - so we had a separate measure for this fiscal year. And this is the level of cost which we will no longer have to spend from next year onwards. So that's what we're talking about JPY 26 billion is the cost, we won't have to spend any more from next fiscal year. So JPY 47 billion plus JPY 26 billion, so that's the added positive impact we anticipate.

But at the same time, though, we have the equipment change in the market environment. In response to any changes in the market environment, we'll have to respond at that juncture. So it's not a straightforward calculation. We can't see this as a straightforward return. That is what we think.

[Unknown Analyst]

Okay. Understand. So I guess -- so JPY 26 billion impact can be expected. And the JPY 47 billion this part, I'm sure that you are going to be considering withdrawal from these unprofitable markets and countries. So the JPY 47 billion, so much -- some costs will have the expense. We can't expect JPY 47 billion to have a full positive impact?

[Akira Shimada, executive]

Yes, that is the case. That is the right assumption.

[Unknown Analyst]

Okay. I understand. My second question is this, you made a revision. But what about the Regional Communications segment, you are not revising your forecast for Regional Communication Services. Going to the simple calculation for the fourth quarter, Regional Communication is going to fall into a negative [ territory ] in the fourth quarter based on your assumption, I guess. Was it to cumbersome for you to make a revision? Are you [ comfortable ] to be spending this level of cost for the fourth quarter in the Regional Communication segment? That's my second question.

[Akira Shimada, executive]

Thank you, Shimada here. Well, as for the fourth quarter -- well, in the second quarter, we reduced the wholesale price for Hikari. So that impact will be felt. And also systems integration related revenues, in the second half of 2020, we had done the work and online demand. That special factor will no longer be applicable for this fiscal year. As for NTT East, this is related -- remote work-related business, they had additional cost for this segment. And also they no longer have the sales proceeds from real estate. So when we take these factors into consideration, we decided not to revise our full year forecast at this juncture. But having said that -- so they can achieve the plan, it's important that these operating companies make the effort. That is our recognition.

[Unknown Analyst]

Okay. If I could ask about NTT East and the Zero Trust related cost. Does NTT West -- how much sales force did you have? How much sales force did you have in NTT West last fiscal year?

[Toru Takama, executive]

I am Taniyama, I am with the Corporate Strategy and Planning. With regard to the sales proceeds and costs, we are not disclosing that number. But it's less than JPY 10 billion, that is the level that we're talking about. And also with regard to NTT West real estate property proceeds, it's roughly around JPY 5 billion, thereabouts.

Thank you.

[Unknown Analyst]

So this Zero Trust.

[Takashi Taniyama, executive]

If we're talking about Zero Trust, it would be, let me see, yes, slightly above JPY 5 billion.

[Unknown Analyst]

Okay. So altogether, it will be less than JPY 10 billion, altogether.

[Operator]

Next question will be BofA Securities. Mr. Kinoshita.

[Yoshiyuki Kinoshita, analyst]

This is Kinoshita. Can you hear me?

[Natsuko Fujiki, executive]

Yes, we can hear you.

[Yoshiyuki Kinoshita, analyst]

I have 2 questions also. It seems that the question concentrates on NTT Ltd., very sorry about that. However, this fiscal year, the effect of the structural reforms, that is added. What kind of a positive effect has come out from the reforms is what I would like to know? That is my first question. The accelerated positive effect, is that going to come out earlier than planned? Or within the conventional initiatives that you have implemented, is there something that came out with more positive effect? If so, please explain?

[Unknown Executive]

Are you talking about the effect coming out from the additional costs that we have spent or overall? .

[Yoshiyuki Kinoshita, analyst]

There's a JPY 3 billion of structural reform it seems that it has a positive impact than the beginning of the fiscal year. So can you please explain the reason behind that?

[Unknown Executive]

Simply speaking, it's the reduction of personnel costs. Meaning that due to streamlining the business, we no longer have to pay the personnel cost.

[Yoshiyuki Kinoshita, analyst]

You're saying that earlier timing, you were able to let go of a certain number of people, so they came out this way.

[Unknown Executive]

We started around December and that positive effect is starting to show.

[Yoshiyuki Kinoshita, analyst]

So earlier than what you have originally planned, then the personnel costs went down by JPY 3 billion then earlier than what you have planned?

[Unknown Executive]

Yes.

[Yoshiyuki Kinoshita, analyst]

So my second question is regarding -- this is all about the structural reform, too. But accelerating that, you have accumulated the cost required for that. Conventionally, what kind of structural reform plan you had, I don't know in detail. However, in order to achieve the midterm management strategy, within the outlook towards that, the structural reforms required overall cost. Did it increase this time? Or is it just front-loaded? Can you share what your thoughts about this?

[Akira Shimada, executive]

This is Shimada speaking. It's not that if we were achieving this earlier than planned, then we should spend time more on streamlining, and the existing product sales business, downsizing it. We did originally have that plan. However, as mentioned before, due to the COVID pandemic and due to the shortage of semiconductors, accelerating the process and moving that forward is one thing we are doing. But other than that, regarding the services, for example, the cloud migration and others compared to the conventional timing, we are accelerating it more.

Of course, other than this, the IT integration, system integration is done. And of course, with the streamlining, we can integrate the offices and others, and that can be accelerated also. Therefore, in that sense, within those factors, the major one is the streamlining.

[Yoshiyuki Kinoshita, analyst]

Sorry, I just want to confirm. Instead of the cost outlook, it's that you have started implementing these measures earlier than planned.

[Akira Shimada, executive]

Yes.

[Yoshiyuki Kinoshita, analyst]

So it's not that additional something has come up that you have to implement the structural reform measures.

[Akira Shimada, executive]

Correct. There's nothing new that has occurred. It's just that what we have originally thought, it is done earlier than planned and also accelerated. I would like you to understand that in that way.

[Operator]

Next question is from Citigroup Securities, Tsuruo-san.

[Mitsunobu Tsuruo, analyst]

Tsuruo from Citi Securities. I like to ask 2 questions. My first question is this, if we look at NTT DOCOMO and NTT Communications and synergy -- integration synergy in the last 3 months. Have there been any updates in the synergy from the integration of NTT DOCOMO and NTT Comware and NTT Communications?

[Akira Shimada, executive]

Thank you, Shimada here. I'm sure that DOCOMO question. I would appreciate your asking your question to DOCOMO in the following session. But as far as the integration between DOCOMO and NTT Communications is concerned, also that -- we see, for example, OCN Mobile One being offered at DOCOMO Shops, so that type of sales was launched at the DOCOMO Shop. So we see some small progress in a very steadfast manner and they're translating into results. That is our expectation going forward.

Now of course, as far as some major policies are concerned, after this summer, for example, from NTT Communications, network operation and construction team will be shifting to DOCOMO. In actuality, already they're working together on the ground and they're drawing up a plan for the future. So that being the case, in terms of efficiency as a result of integration of NTT Communications and NTT DOCOMO and also with regard to sales strategy for the sales group, what was separate in the past are now being brought together as a result of this integration. So studies being carried out as a result of -- study is being considered together as a result of this integration. This represents the update and progress in the last 3 months.

[Mitsunobu Tsuruo, analyst]

I'm looking forward to that. My second question, it might be premature, but what about the forecast for the next fiscal year onwards? I'm sure that in the full year session -- in the full year presentation you give us a number, but can you share with us to the extent possible the projections and forecast for the next fiscal year? We talked about NTT Ltd,. so what about other operating companies? So to the extent possible, can you share with us your outlook for the performance for the group next fiscal year?

[Akira Shimada, executive]

Okay. For one thing, as we talked about the impact and the effect of the integration of NTT Communications, DOCOMO and Comware, it's important that we translate them into concrete results. For example, this fiscal year, we had rate reductions through ahamo. You've seen the impact of that already. This has translated to positive impact for ARPU. And inclusive of the competition, there has some impact. So it's important that we embrace these changes. It's important that we absorb this impact through cost reduction efforts. At the same time, though, we had to be -- it's important that we prepare for such a situation. And that is going to be one of the important issues for the company in the next fiscal year onwards.

Turning to Regional Communication, we see very strong progress as a result of the streamlining efforts. So that being the case, they are launching new businesses. So it's important that these new businesses, the [indiscernible] so that they can grow further. Aside from that, at NTT Energy Power business will be integrated and also real estate business and NTT Urban Solutions. For these businesses, it's important that we encourage that fast growth in these business segments as well.

Turning to NTT Ltd,. if I were to explain a bit further about NTT Ltd., we talked about the data center business. We mentioned that the increase -- there is a 35% increase in revenue for data center business. We see very robust demand for data center outside the Japanese market. So it's important that we accelerate the growth in this area through our responses.

[Operator]

Next question will be from Goldman Sachs Securities. Mr. Tanaka.

[Chikai Tanaka, analyst]

This is Tanaka from Goldman Sachs Securities. Can you hear me?

[Natsuko Fujiki, executive]

Yes, we can hear you well.

[Chikai Tanaka, analyst]

I only have one question. The structural reform in NTT Ltd. next fiscal year, how much is going to be spent? It's probably not clear at this point. However, originally, in the midterm plan, this structural reform, by accelerating it this fiscal year, to what level have you reached in terms of progress? And how much more you need to do? Image-wise is fine. So can you please share that? To what level of the mountain have we climbed?

[Akira Shimada, executive]

To express that will be difficult. But we have climbed quite a bit is our understanding. And as I have mentioned from before, what NTT Ltd. has been covering in business. The area of that is over 80 countries globally, we have been conducting business in these number of countries. And within that, of course, there are areas that are profitable. However, business-wise, unprofitable areas that do exist, I cannot specifically name them, but they do exist. Therefore, whatever we going to do about these unprofitable businesses is an urgent issue that we need to tackle.

And at the same time, regarding the unprofitable businesses, the area in the unprofitable business needs to be considered as a set. And where we need to withdraw, we will withdraw, and the areas that we need to take an offensive stance, we will. And therefore, next fiscal year, the issue for us to tackle is to do these things. So I think next fiscal year will be the ground finale of the structural reforms.

[Operator]

Next question is from the Nomura Securities, Masuno-san.

[Daisaku Masuno, analyst]

Masuno from Nomura Securities. I have several questions. The first question is about domestic enterprise network-related business and the market environment for this business. If we take a look at the industry, there's very strong demand. We see increase in both revenue and impact -- and income. But for NTT Communications, that is not the case. I'm sure there are various factors behind this. So that is why you're integrating into NTT Communications with NTT DOCOMO because of that situation.

So after the integration of the functions for the next July onwards, what is lacking in NTT Communications? And how this will change after the integration in July 2022? How do you see the outlook? So what is missing? And how do you tend to -- how do you tend to fulfill the missing piece?

[Akira Shimada, executive]

Thank you, Shimada here. Well, turning to NTT Communications business, I think NTT Communications is at a turning point in terms of their business. That is how we take a look at it. Now the -- there used to be a smart data platform, they are working on some more data platform. So in the future, it will not be a straightforward network. They want to combine cloud and AI on top of the network and transfer that into platform and to deliver the services on top of this platform. That is what the customers are demanding already. The SDF -- we already have the smart data platform already, and we want to increase the actual use cases of the customers on top of this new platform. So it's important that we enrich the product lineup.

And the product line will be changing at this juncture. We are at that juncture, naturally. As far as legacy services are concerned, they will begin to shrink, which means that we have to add new services on top of the shrinking legacy business and trying to pave the way for growth in revenue going forward. And what is important at that time is that we utilize DOCOMO's network service, in particular 5G. The standalone service [ center ] was launched back in December. So therefore, network slicing and that type of network-related new services will be delivered.

So it's important that NTT Communications incorporate that in their sales. We believe that this will allow them to shift away from business centered around dedicated lines shifting to new mobile network-based service. So as I mentioned earlier, they'll be able to use the data-driven platform and also combine that with mobile cloud. So they are now at a transition period where the shift is taking place.

[Daisaku Masuno, analyst]

Okay. If that is the case, cloud and mobile will now be integrated. I think that's a natural outcome of this integration. So at that, these services are not in sight. So the issue is more or less -- so how you can actually reinforce your marketing and sales team in order to deliver those services. So that mechanism is going to be within sight. As a result, is that the case? Or do you believe that this -- you have to work further to deliver concrete services together with DOCOMO. Is that going to take years? How do you see that? How do you see the time line? .

[Akira Shimada, executive]

Well, already, as far as DOCOMO is concerned, they already have 5G services, and I believe that they have some 40 projects on the go already in the 5G area. And they want to combine that with solution services offered by NTT Communications, which means that they'll be able to enhance their service and their delivery capability.

[Daisaku Masuno, analyst]

Okay. My second question is about NTT East and West and the telephony services in NTT East and West. Nihon Denwa. What impact -- what retention impact will this have on NTT East and West subscriber customers? If customers shifted to this newer service, this should help the cost, so how do you see the last one mile for NTT East and West? Can you talk about the long-term outlook for the last one mile for NTT similar services?

[Akira Shimada, executive]

Masuno-san, might I say that, that is a very difficult question you have raised. You've raised a very difficult question. Of course, we want to migrate from PSTN to IP network. We already have the plans for shifting from PSTN to IP network. So at the next stage, how are we going to translate or transfer from IP network to the next-generation network, that's something that we have to consider. It's a very important issue, which we have to consider in the future, shifting from IP to the next-generation network.

Now DOCOMO is going to be launching Nihon Denwa. This is more or less in response to what the competition is offering. We are offering this service because it's one that we counter the services delivered by our competition. So Nihon Denwa does not represent something that will cover the existing fixed telephony network. That is not what we -- that is not how we characterize this product. But as we look into the future, PSTN will be shifting to IP network. And what will happen to IP network and the services, what will happen to services with IP network, that is an important issue that we need to consider. So it's important that we scrutinize this model.

[Daisaku Masuno, analyst]

If I could ask just one more question. It's about your overseas business. You've been spending 10 years -- you're spending labor and costs for the last 10 years in this segment and you've been pursuing transformation repeatedly. Are you saying that this will be the last effort necessary for next fiscal year? Maybe it -- would it be better for the management of your company to just focus on data center? Wouldn't that translate into better returns rather than focus on overseas business? So do you believe that you'll be able to restructure the overall overseas business as a result of the structural transformation cost?

[Akira Shimada, executive]

Well, as far as NTT Ltd. is concerned. And so combining -- look, we are competing on a full stack basis by combining NTT Ltd. services as well as NTT DATA services. Of course, as far as NTT Ltd. is concerned just for data center business, they're now positioned as #3 player. So it's important that we expand and reinforce that position. At the same time, with the [indiscernible] IP backbone network, it's important that we'll be among the Tier 1 players. Tier 1 members are very small in number. We have that strength. So it's important that we reinforce the strength we have.

At the same time, it's important that we provide services to the customers to acquire. That is very important. So Mr. Masuno, you pointed out about the need to focus on specific service in your comment. But we have to fully respond to any requirements for which the customers ask of us. We have to fully respond to the customers. So we'll continue to reinforce our services going forward. At the same time, it's important that we also want to tackle new challenges as well. Thank you.

[Daisaku Masuno, analyst]

So at NTT Ltd., will the work with NTT Ltd. be completed for this fiscal year -- [ in ] next fiscal year? Do you think these efforts of the transformation will be completed 2022?

[Akira Shimada, executive]

For NTT Ltd., we'll do our best. Thank you.

[Operator]

Okasan Securities, Mr. Okumura.

[Yusuke Okumura, analyst]

My name is Okumura from Okasan Securities. Can you hear me?

[Natsuko Fujiki, executive]

Yes, we can hear you.

[Yusuke Okumura, analyst]

I would like to know about 2 things about NTT Ltd. briefly. Sorry, I was not joining from the beginning, so sorry for the overlap. The high added value products for the 3 quarters, can you share with me that impact on the profit? And without that, it is increasing from the second quarter is my understanding. But even though there's a shortage of semiconductors, you did talk about the data center, but -- data center and managed services. Can you elaborate more in detail? That's my first question.

[Akira Shimada, executive]

Regarding the high value-added service, increase was JPY 52.3 billion. And out of that, the foreign exchange impact is about JPY 20 billion.

[Yusuke Okumura, analyst]

So the 2 quarters accumulated is JPY 15 billion, so third quarter is JPY 5 billion. So even though you subtract that, the profit did increase quite a bit. Is that understanding correct?

[Akira Shimada, executive]

Yes.

[Yusuke Okumura, analyst]

And also another point I would like to ask, the high value-added services of NTT Ltd., the order received amount, you probably -- the money amount, you know that. I would like to know that, that situation NTT DATA through the structural reforms, they have a positive impact in terms of the orders received. So for NTT Ltd., are you seeing any signs of changes in the positive way moving forward looking at the orders received?

[Takashi Taniyama, executive]

This is Taniyama from Corporate Strategy and Planning. Regarding the order received situation for NTT Ltd., as explained, the data centers are performing strongly and increasing. And as for managed services, year-on-year basis, they're experiencing an increase. As for network, unfortunately, year-on-year, it is showing a decline. So the overall value-added services due to the data centers being the driver. Overall, it is increasing.

[Operator]

That seems to be all the questions.

[Natsuko Fujiki, executive]

As we are running out of time, I'm afraid we have to conclude the session. That completes the presentation of third quarter results for fiscal 2021 by NTT Holding Company. This will be followed by a presentation by NTT DOCOMO, please stay with us. Please stay connected and wait for the start of the session by NTT DOCOMO. Thank you very much for your attendance today.

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