Questioner 1

Q1Regarding 59 billion yen, the net income attributable to owners of the parent for the fiscal year ending March, 2018, if comparing it with those 2 previous fiscal years, it should be between 65 - 70 billion yen without any major factors for fluctuation. Why is your forecast lower?

This is because our forecast for ordinary income and the following items for the fiscal year ending March 2018 are including our expectation of another loss on restructuring of subsidiaries and affiliates related to the former Dell Services and an extraordinary loss of 15 billion yen in the fiscal year ended March 2017, but not including the extraordinary income.
Also for the fiscal year ended March 2017, the tax expenses temporarily decreased due to the reviewing of accounting methods on deferred tax assets, and for this, as for the fiscal year ending March 2018, the tax expenses will increase on year-on-year basis reacting this decrease.

Q2The operating income of the Public & Social Infrastructure segment and the Financial segment in the fiscal year ended March 2017 increased by 32% respectively on year-on-year basis, please advise us if there was any one-off project or highly profitable project and also give us the breakdown of the increase in operating income and decrease in unprofitable projects.

The amount of operating income increased due to the decrease in unprofitable projects is approx. 4 billion yen for the Public & Social Infrastructure segment and approx. 5 billion yen for the Financial segment respectively. The other income increased is attributable to the actual value.
Though the profit margins differ by project, if looking at the fiscal year ended March 2017, relatively large numbers of high-profitable projects were in the Public & Social Infrastructure segment. We see this is the slight change of yearly fluctuation rather than temporary.

Q3For operating income before goodwill amortization, no figure is indicated in “Others” of change factors by segment, however, if calculating back, approx. 2 billion yen loss in the fiscal year ended March 2017 and also approx. 11 billion yen loss in the forecast of the fiscal year ending March 2018 are included. Please give us the breakdown.

Though the “Others” should include the part which are not classified in those 4 segments, for the fiscal year ending March 2018, approx. 7 billion yen of investment for the new areas is reflected in the budget plan.

Q4Don’t you allocate the budgets of investment for the new areas to each segment?

Though those budgets are secured by the headquarters, the results of those investments will come out to each segment.

Q5Is the new areas’ investment plan a sort of a budget buffer?

The investment plan for the new areas is not a budget buffer, but the definite intention. As we announced at our Medium-term Management Plan, we are aiming at over 2 trillion yen for the consolidated net sales in the fiscal year ending March 2019 and 50% increase for the adjusted consolidated operating income compared to the fiscal year ended March 2016. Since the operating income in the fiscal year ended March 2016 was 100.8 billion yen, the target for the fiscal year ending March 2019 would be 150 billion yen, and also would like to invest as much as 10 billion yen for the new areas R&D and others. Responding to those, we have budgeted approx. 7 billion yen for this investment in the fiscal year ending March 2018.

Questioner 2

Q1Regarding the impact from the unification of accounting periods of group companies including the former Dell Services, etc., the net sales are forecasted as increase by approx. 90 billion yen in the fiscal year ending March 2018. Any impact on operating income?

Regarding the impact of the unification of accounting periods in the fiscal year ending March 2018, forecasted the increase in net sales by approx. 90 billion yen and also increase in operating income before goodwill amortization by approx. 3 billion yen.

Q2For the fiscal year ended March 2017, give us the reason why the results shown upward to the forecasts. There was an impression that the results exceeded the forecasts in all segments in Japan, but the results fell slightly below in the Global segment. Was the increase in operating income due to the net sales in the areas of your specialty? The order situation in Japanese domestic IT service market seems good, and if such an environment remains the same for the fiscal year ending March 2018, can we expect similar results for net sales in your specialty exceeding the forecasts?

The order situation in the fiscal year ended March 2017 was quite favorable, so the net sales overall have increased. Also, we recognize that operating income exceeded the forecasts since we have tightly controlled unprofitable projects while profit margins differ from project to project, and been setting up a structure in which each project generates profits.

Q3Will the business environment in the fiscal year ending March 2018 be similar to that in the fiscal year ended March 2017?

At this time, we believe that there will be no major changes in the environment. As for our control over unprofitable projects, while we forecasted a loss of approx. 8 billion yen for the fiscal year ended March 2017 at the beginning of the year, and actually posted a loss of 7.4 billion yen. As mentioned before, we believe it would be the best if we could control unprofitable projects account for less than 0.3% of consolidated net sales; and if the percentage is as low as 0.5%, management is deemed to control the risks of such projects and could recover from the loss by increasing the net sales, reducing administrative costs or taking other measures even if the percentage is approx. 1% at the highest. In the fiscal year ending March 2018, the consolidated net sales will be approx. 2 trillion yen, so 0.3% of consolidated net sales is approx. 6 billion yen.
However, since not only the continued attempts of the Project Reviewing Committee, but also tough internal control of each segment as basic foundation is especially important, we will aim to develop a management structure in which even if there is an unprofitable project in a segment, we can achieve the profit target by making up for it with other factors. Therefore, for the fiscal year ending March 2018, we have not set a profit target in such a way of including assumed loss from unprofitable projects in the financial forecasts.

Q4As for the situation of the former Dell Services, the effect of the consolidation will become tangible on a full scale in the fiscal year ending March 2018, but under the new U.S. administration of President Trump, the business environment has been changed since the decision of the acquisition, for instance, reduced enforcement of Obamacare and qualification change in H-1B visa program. Please advise us whether there are any business concerns.

After the acquisition, we visited the former Dell Services several times, and exchanged our opinions with their directors. We have discussed over Obamacare, too. Also in last month, we had asked the opinion on Obamacare during the conference with experts in Washington D.C.
Obamacare largely consists of Medicare and Medicaid programs. Medicaid is a social healthcare program for low-income individuals in U.S. and has 70 - 80 million enrollees. As changes in the program would have substantial impacts, Obamacare reform has not progressed quickly, for example, the Obamacare replacement bill needed to be toned down the other day. We do not know how the program will be changed in the future, but not think that all parts of Obamacare will be repealed.
Approx. half of net sales of the former Dell Services, 300 billion yen, is hospital-related and medical insurance related; and the revision of Obamacare may have no impact on these businesses. Rather, changes in situations would provide us new opportunities, and we believe that it would offer advantages for us instead of disadvantages.
Also, the former Dell Services have long-term contracts with most of its customers and its business model is not affected by short-term changes. Of course, we conducted Due Diligence before we decided to acquire the former Dell Services, and believe that synergies examined in the process will not be affected by the current changes in the environment. Furthermore, we posted 2.7 billion yen of gain on transfer of affiliated business in the fiscal year ended March 2017 by selling off the overlapped business with the former Dell Services. Though this is the solution business for medical institutions, we decided to retain more competitive solutions and sell off less competitive solutions between those from the former Dell Services and NTT DATA, Inc.
Therefore, all is well regarding PMI and no concerns approx. the acquisition of the former Dell Services at this time. The most important challenge is to transfer some internal IT systems for which we pay a usage fee to Dell Inc. to us in about 4 steps over 18 months or so. We consider the most important is to implement this large project, involving approx. 500 people at most, on schedule and within the budget.

Questioner 3

Q1For Global segment, though operating loss for the fiscal year ended March 2017 marked 3.3 billion yen deficit, forecasted 5 billion yen surplus for operating income in the fiscal year ending March 2018. Give us the increase and decrease analysis of operating income including the regional trend of net sales.

The biggest factor for the increase of operating income for the fiscal year ending March 2018 is that the temporary cost of approx. 4.3 billion yen which incurred as an advisory expenses, etc. of the former Dell Services acquisition in the fiscal year ended March 2017 will be gone. While net sales and operating income of the former NTT DATA Inc. will almost remain the same from the previous fiscal year, as for everis and Business Solutions, net sales and operating income are expected to improve, and for EMEA, already recovered from the temporary deterioration of business performance and turned into marking surplus, so the regional conditions are getting better . Each of them may be a small amount, but the accumulation leads to the overall increase in operating income in the Global segment.

Q2As for advisory expenses associated with the acquisition of the former Dell Services, there may be some other expenses incurring after the acquisition, but no such expense will come out for the fiscal year ending March 2018?

The accumulated total of advisory expense associated with the acquisition of the former Dell Services in 3Q of the fiscal year ended March 2017 was around 3.5 billion yen and no additional expenses would be incurred, but we actually recorded additional expenses in 4Q. Thus, it is difficult for us to assure that no advisory expenses will be incurred in the fiscal year ending March 2018, but we expect that it would be as low as several hundred million yen even if it is unavoidable, so brings no significant impact on our plan.

Q3As for the impact of the consolidation of the former Dell Services in the fiscal year ending March 2018, you explained that operating income after goodwill / PPA amortization is the break-even point. Any changes in this precondition?

Technically speaking, in the fiscal year ended March 2017, we consolidated the former Dell Services for 3 months and posted net sales of approx. 70 billion yen and operating income before goodwill / PPA amortization of approx. 5 billion yen as expected. As the amount of PPA has not been finalized yet, we booked goodwill / PPA amortization for the fiscal year ended March 2017 based on the provisional estimate, which resulted in the increase in operating income of the fiscal year ended March 2017 by 1 billion yen due to the consolidation of the former Dell Services. Though we can expect approx. 4 times increase in operating income in the fiscal year ending March 2018, will see operating income increase by 1 billion to 2 billion yen due to the consolidation of the company for the full year partly due to the finalization of PPA and the risks of cost increase. Overall, we recognize that business management is performed as we planned when we started the acquisition.

Q4Looking at the consolidated data, you project that the gross margin for the fiscal year ending in March 2018 will decrease on year-on-year basis. This may be for the consolidation of the former Dell Services, so give us the reason for decrease.

As for the decrease of gross margin, technically speaking, most of the PPA amortization of the former Dell Services was recorded as cost of sales. Therefore, its financial results for 14 months will be consolidated for the fiscal year ending March 2018, which will result in a decrease in the gross margin. Our projection does not reflect other factors of cost increase such as unprofitable projects.
In addition, the investment of approx. 7 billion yen to the new areas which are included in the plan for the fiscal year ending March 2018, will increase Selling and Administrative Expenses (SGE) which will result in the decrease in operating profit.
As for 3 Japanese domestic segments, profitability for the fiscal year ending March 2018 will remain almost the same from the previous fiscal year, and basically, the decrease in overall gross margin is attributable to investment in the new areas and goodwill / PPA amortization of the former Dell Services.
For all projects, we estimate the costs by including risk expenses. Though unable to say which project needs more risk expense, if the project proceeds smoothly, the risk expense will finally turn into the increase of gross margin. So hope you to understand that another reason for decrease in profit margin is our circumspect calculation in the process of the establishment of the business plan.

Q5The forecast for unprofitable projects will 6 billion yen around for the fiscal year ending March 2018, but some additional unprofitable projects were still posted in the 4Q of the fiscal year ended March 2017. Seems to be a little uneasy whether you can reduce the amount to a level as low as 6 billion yen, so what is your view on this?

The amount of unprofitable projects was 7.4 billion yen in the fiscal year ended March 2017. Though we explained that we could reduce the amount to around 6 billion yen at the presentation for 2Q of the fiscal year ended March 2017, we posted unprofitable projects of 7.4 billion yen for the full year due to the additional costs for the projects which turned to unprofitable before the fiscal year ended March 2016 were incurred.
In the fiscal year ending March 2018, we believe that we can keep the amount of unprofitable projects below 6 billion yen as there will be a little risk of posting additional costs of unprofitable projects in the past and new projects will be appropriately controlled by the Project Examination Committee, etc.

Q6As for the businesses overall in North America including the former Dell Services, under the Trump administration, some uncertainties are lying such as the foreign workers’ H-1B visa issue and this will bring you the concerns on dispatching the engineers. Share your additional perspective on these situations.

We see the issue of visa examination is critical, but our employees who need visa for U.S. is fewer comparing to the other U.S. competitors. While some uncertainties there for the future, no actual critical issues will arise.
Of course, we have around 20,000 of development engineers in India including the former Dell Services, and some of those need visa when coming to the U.S., so unable to say there is no impact on us, but still controllable.

Questioner 4

Q1As for the investment of approx. 7 billion yen to the new areas during the fiscal year ending March 2018, seems to continue the investment for the future, share your ideas approx. returns on the investment such as ROI.

As the characteristics of investment in the new area are different from those of investments in M&A, would like you to consider them as R&D expenses for simple understanding. Since there are many ways of using R&D expense, not easy to discuss on this matter, but our principal purpose of R&D is to create a solution by developing application rather than developing a new technology. Also, if we call it as investment, you may have a stronger impression that the concept of short-term ROI is important, so would like you to take it as an investment for a technology development in broad meaning.
Also, as a concrete example of our investment in the new areas, conducting Proof of Concept (PoC) in the new digital technology area is raised. This is a sort of demonstration experiment. Though there are some exceptions since we do not bear all those expenses and sometimes the customers bear the expenses for joint experiments and also we use national budgets in some cases, we have set the goal of creating a new solution, establishing a sales strategy and selling it.

Q2If investing approx. 7 billion yen for the new areas in the fiscal year ending March 2018, no meaning if the returns are lower than the investment. Is my understanding correct that you are expecting the returns over the investment?

Exactly. However, as you know, an ordinary investment is made in anticipation of recovering it within 3 to 5 years, which is not always the case for R&D expenses.

Q3The operating income before goodwill amortization seems a considerably high and would exceed your forecast for the fiscal year ending March 2018 and the target of the Medium-term Management Plan even if you still need to carry out PPA amortization in the fiscal year ending March 2019, after transferring to IFRS. However, have the impression that you intentionally lower the forecast of operating income for the fiscal year ending March 2018 by posting additional expenses. What is your background for trying to post the lower operating income by making comments on additional expenses.

There is no intention for posting a lower operating income. We consider our forecast for the fiscal year ending March 2018 as a challenging target. Maybe giving you the impression for making a profit in the fiscal year ending March 2018 based on our forecast that net sales would increase by approx. 90 billion yen and operating income before goodwill amortization would increase by approx. 3 billion yen due to the consolidation of the former Dell Services, but these are just the temporary factors. We are targeting the consolidated net sales exceeding 2 trillion yen at the Medium-term Management Plan and 50% increase of operating income after adjustment from the fiscal year ended March 2016, and now making steady effort for achieving those. Though planning to invest approx. 7 billion yen for the new areas in the fiscal year ending March 2018, it is far less than the level of our competitors.
Still unknown that which players will become our competitors when reaching at the Global 3rd Stage, but U.S. competitors are investing huge amount of money for R&D. For catching up with them, ten times or more investment is needed for R&D investment, and therefore, would like you to understand that we have never develop our plans for controlling the operating income lower.