NTT Data Corp

TSE:9613

Earnings Call Analysis

Strong Quarter with Steady Progress Towards Midterm Goals

In Q1 ending March 2025, NTT Data reported robust growth driven by strong performances in both domestic and overseas segments. New orders surged by JPY 466 billion, with net sales rising JPY 97.1 billion year-over-year. The data center business notably excelled, propelling overseas revenue. Despite a dip in profitability by JPY 6.4 billion, the company remains on track to meet its full-year guidance. The management highlighted continued investments in high-demand areas like data centers and artificial intelligence, aiming for a substantial productivity boost and EBITDA growth. The target remains to achieve JPY 4.7 trillion in net sales by FY2025, supported by aggressive M&A activities and efficient business integrations.

Overview of Financial Results

NTT Data Group reported strong performance in the first quarter of the fiscal year ending March 2025. The company achieved a substantial increase in new orders received, amounting to JPY 466.6 billion year-on-year. Net sales saw a rise of JPY 97.1 billion, though profit attributable to shareholders decreased by JPY 6.4 billion. However, the overall financial trajectory remains consistent with full-year forecasts.

Segmentation Restructure

Since April 2024, NTT Data has restructured its global business operations. The overseas segment is now divided into North America, EMEAL, APAC, and Global Technology and Solutions Services (GTSS). The Japan segment's breakdown remains unchanged. This restructuring is intended to streamline operations and enhance reporting clarity.

Performance Across Segments

New orders in both Japan and overseas markets performed strongly, contributing to the year-on-year increase. In Japan, the public and social infrastructure business secured large deals from the central government and ministries, adding JPY 72.8 billion. Overseas, GTSS, particularly in the UK and India, boosted its data center business for hyperscalers, leading to an increment of JPY 394.3 billion. Even excluding the FX impact of JPY 117.5 billion, the overseas segment achieved a robust increase of JPY 276.8 billion.

Net Sales and Operating Income

Net sales increased by JPY 97.1 billion, with an FX impact of JPY 82.2 billion. In Japan, upscale projects for the central government and ministries, as well as growth in financial and enterprise businesses, contributed to an additional JPY 15.9 billion. In the overseas segment, while GTSS saw a rise in data center business, North America, EMEAL, and APAC experienced a reduction in sales of communications equipment. Operating income remained nearly on par with the previous fiscal year, showing minor improvements thanks to the absence of last year's overseas structural transformation costs and growth in Japan. Overall, there was an increase of JPY 300 million.

Future Outlook and Business Combinations

NTT Data anticipates continued growth in the data center market driven by demand for generative AI. The goal is to increase EBITDA 1.7 times over fiscal year 2023 levels through sustained investment. In terms of M&A activity, the company aims to allocate JPY 100 billion by the end of fiscal year 2025 to strategically acquire capabilities that drive domestic business. Recent steps include making JASTEC a subsidiary, forming a capital and business alliance with TerraSky, and acquiring GHL Systems.

Debt and Financial Strategy

NTT Data’s consolidated interest-bearing debt balance stood at JPY 2.4 trillion, with a reduction of JPY 16.7 billion in financial income increment costs. The company is adopting an asset-light model, utilizing REITs and other instruments to manage debt and financial costs. Recent actions include selling a subsidiary, XNET Corporation, and offloading strategic shares in a recruit company to enhance capital efficiency.

Leadership and Strategic Goals

The NTT Data Group has appointed new CEOs for both its holding company and overseas business operating company, underlining a commitment to drive the group's business forward. The strategic goal is to achieve consolidated net sales of JPY 4.7 trillion by fiscal year 2025. This will be supported by regional units leveraging cross-functional growth drivers, creating assets and solutions, and forging partnerships.

Earnings Call Transcript 2025-Q1

[Operator]

[Interpreted] Thank you very much for waiting and taking the time out to join us today. We will now start the press conference for NTT Data Group financial results for the first quarter of the year ending March 2025.

Let me introduce today's presenters. NTT Data Group Representative Director and Senior Executive Vice President, Kazuhiko Nakayama. Director and Senior Vice President, Head of Corporate Headquarters, Tadaoki Nishimura. Corporate Headquarters and Head of the Finance Department, Keisuke Kusakabe. I am your facilitator, Fukinagawa of the Public Communications Department.

In today's presentation consists of two materials, financial results summary and in the company presentation, which are available for download on our website in the Investors section. Now Mr. Nakayama will present the financial results for the first quarter of the year ending March 2025. Floor is yours, Mr. Nakayama.

[遠藤 荘太, executive]

[Interpreted] This is Nakayama from NTT Data Group. Firstly, thank you very much for attending the earnings result briefing session despite your busy schedule. Here is today's agenda. Firstly, I will explain Q1 results of the fiscal year ending March 2025.

Please move to Page 4. This shows the outline of Q1 results. New orders received helped by data center business abroad and domestic business that are performing strongly, posted a large increase of JPY 466 billion year-on-year. Net sales was up by JPY 97.1 billion year-on-year. And against the full year forecast, it is making a steady progress. Operating income was on par with the previous fiscal year, while profit attributable shareholders of NTT Data was down by JPY 6.4 billion. However, it was broadly on track. There's no change to the original full year guidance.

Please move to Page 5. Before I walk you through, let me explain how we have segmented our businesses in our disclosure. Since April 2024, we have moved to a new global business operating structure. As shown at right, the overseas segment is now broke down into North America, EMEAL, APAC and Global Technology and Solutions Services or GTSS. So this is a change. The Japan segment's breakdown remains unchanged. Now let me take you through some details by each major.

Please, Page 6, please. New orders received, both Japan and overseas performed strongly, and the year-on-year result was significantly up by JPY 466.6 billion in the Japan segment, the public and social infrastructure business, one large deals from central government and ministries plus the enterprise and financial businesses performed well in taking orders and the result was up by JPY 72.8 billion.

In the overseas segment, GTSS, mainly in U.K. and India, increased data center business for hyperscalers, leading to an increment of JPY 394.3 billion. Even excluding the FX impact of JPY 117.5 billion, the result increased by JPY 276.8 billion. Next, net sales. All in all, it was up by JPY 97.1 billion, but this includes the FX impact of JPY 82.2 billion. As for the upward downward factors other than the FX impact in the Japan segment, the public and social infrastructure business upscaled its project for the central government and ministries, contributing to an increase in the financial and enterprise businesses also grew sales therefore, recorded an uplift of JPY 15.9 billion.

In the overseas segment, GTSS data center business for hyperscalers and ACP business should conversely North America, EMEAL and APAC reduced sales of communications equipment. And the segment result was slightly down if we exclude the FX impact.

Please move to Page 8. Next, operating income. It's almost on par with the previous fiscal year, but it is, as mentioned earlier, against the full year forecast, it is almost on track. Incremental factors include three businesses in Japan grew sales and profit and previous year's overseas business structure transformation cost, which is absent in this fiscal year. On the other hand, downward factors can be found in the Japanese financial business, which had one high profitable deal in the previous fiscal year. And that's absent this fiscal year. And also, the overseas segment, which recorded lower sales of communication equipment, leading to less profit. As a whole, the result was up by JPY 300 million.

Please move to Page 9. This slide supplements information on the overseas segment results. As explained so far, the overseas segment sales experienced the FX impact in data center and SAP business growth, recording an increase and North America, EMEAL and APAC unit in the previous fiscal year had the upward impact in communication equipment sales owing to supply chain recovery. And that impact is absent this fiscal year. So due to such reduced sales, it indicates a moderate year-on-year growth rate. As for EBITDA, it was impacted by the equipment sales reduction. However, the absence of the structural transformation costs pushed up the overall segment profit. From here, let me cover some major topics.

Please move to Page 11. This shows the new leadership of the NTT Data Group. In June, the NTT Data Group, the holding company appointed Yutaka Sasaki, as new CEO and NTT DATA Inc., the overseas business operating company appointed Abhijit Dubey as new CEO, and the management has been working together to further drive the group's business. Page 12, please. This slide is a part of the debt used at the fiscal year '23 earnings results briefing session shown in the current midterm plan objectives. Under the new leadership team, we will continuously strive for delivering targets.

Page 13, please. Here, let me take up one of the goals, consolidating net sales of JPY 4.7 trillion. This is for fiscal year '25. And let's look at it from a strategy perspective. Each region is horizontally supported by cross-functional growth drivers by creating assets and solutions and by tapping into DC demand and others, we will continuously drive each region's growth. In addition, each region is working on growing existing business, improving productivity and increasing delivery by leveraging assets and forging partnerships. In this way, regional unit growth is supported by cross functional units to deliver JPY 4.7 trillion in fiscal year '25, which is our target.

Please move to Page 14. Achievements by regional units in the first quarter. Let me share a couple of cases. Japan successfully grew existing business and overseas use assets to increase delivery. The first one is Japan's large system digitization project for the central government and ministries by harnessing our strengths of deployment capability to build cloud integration for the client and won a mega deal of around JPY 50 billion. This has helped digitalized government services as well as improved user experience.

For the case, leveraging assets to drive business in EMEAL the leading global energy corporation signed a framework contract with us for continued long-term use of assets. These key assets have been provided mainly in Europe already for over five clients, helping the energy sector to improve operational management efficiency.

Page 15, please. This shows the progress on Gen AI initiatives in order to increase software development productivity, fiscal year '23 mainly focus on implementation and testing phases in using Gen AI tools. And 140 projects apply Gen AI have improved productivity by 7%. Going forward, as mentioned earlier, not only at implementing and testing phases, but through out all phases in the project management life cycle. We will promote the use of Gen AI. The target number of such projects is 200 in fiscal year '24 and 400 in fiscal year '25, where 20% productivity improvement is targeted.

Page 16, please. This shows progress on data center business. Q1 recorded $590 million (sic) [ $0.59 Billion ] in sales with EBITDA $190 million (sic) [ $0.19 Billion ], steadily achieving year-on-year growth. Going forward, the data center market is expected to enjoy strong demand driven by Gen AI and others to which we will continue to respond and we target to increase EBITDA 1.7x more than that in fiscal year '23 with continued aggressive investment. This shows M&A status.

In order to nimbly acquire necessary capabilities to drive domestic business, by the end of the current midterm plan in fiscal year '25, we will look into M&A opportunities at a level of JPY 100 billion. In Q1, we have taken steps to make JASTEC subsidiary company, signed the Capital and Business Alliance with TerraSky and turning GHL Systems into subsidiary. Page 18, please. Next, the progress of the overseas business combination. In Q1, we mainly promoted overseas business combination and integrated IT systems with a spend of JPY 1.6 billion. This fiscal year plans to spend JPY 30 billion for business combination costs and in order to accelerate synergies we will mainly work on transforming business portfolio, optimizing corporate functions and IT systems, and we plan to spend more towards the second half of the fiscal year.

Page 19, please. Finally, let me cover the status of interest-bearing debt and financial increment costs. Q1 recorded JPY 2.4 trillion in consolidated interest-bearing debt balance and a drop of JPY 16.7 billion in financial income increment costs, which is on track as per our expectation. Towards fiscal year '25, we are promoting initiatives toward an asset-light model by using REIT and other instruments through which we will control the increase of interest in bearing debt and financial costs. Recent actions include sales of our subsidiary, which is listed in the market XNET Corporation and sold recruit company shares that we uses strategically on, and we are making efforts to increase capital efficiency.

This concludes my presentation. Thank you for listening.

[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]