Questioner 1

Q1I would like to ask you about the increase in Operating Income for the 1st half of the fiscal year ending March 2017. What is the reason for the great increase of 14.2 billion yen compared to the 1st half of the fiscal year ended March 2016? I would also like to ask you whether the profitability achieved in the 1st half can also be expected in the 2nd half.

The main reason for the increase in Operating Income is the decrease in unprofitable projects. In the 1st half of the fiscal year ended March 2016, unprofitable projects caused 10.7-billion-yen loss. As we have been managing them not to generate losses, we booked only 3.3-billion-yen loss for the 1st of the fiscal year ending March 2017.
In addition to earnings growth from revenue growth, the improvement in the profit rate of a range of projects and other factors are reasons for the Operating Income increase. There are other reasons, including extension of the consolidated financial term due to the unification of accounting periods of European subsidiaries, which led to the Operating Income increase.
In the 2nd half of the financial year ending March 2017, sales and profit will decrease due to the end of large-scale IT projects such as new program implementation for the utility industry owing to liberalization of the retail electricity market. As there will be other negative factors, Operating Income for the 2nd half is expected to be 105 billion yen as we planned at the beginning of this term.
We budgeted 8 billion yen as a risk buffer for unprofitable projects for this financial year, but the loss was only 3.3 billion yen for the 1st half of the fiscal year ending March 2017, so we are expecting to decrease the risk buffer by 2 billion yen to 6 billion yen. However, we will stay focused on completing ongoing projects as risks remain.

Q2When will the financial results of Dell Services, which you have acquired, be consolidated and booked in P/L?

Dell Services makes its financial report in January. We will consolidate their results for 3 months (November, December, and January) into our results for the fiscal year ending March 2017.

Q3The acquisition of Dell Services is reported to expect to have 7% of Operating Income to Net Sales. Is their Operating Income expected to be 20 billion yen of Operating Income?

We expect them to have 7% of Operating Income to Net Sales as some costs will not occur thanks to it joining our group.

Q41. The advisory cost and other costs for the acquisition of Dell Services are reported to be 2 billion yen through this fiscal year. How much impact will this have on your quarterly results?

The advisory cost and others for the 1st half of the fiscal year ending March 2017 was about 1 billion yen. We expect about 1 billion yen for the 2nd half.

2. You booked about 1 billion yen for the advisory cost and other costs for the 1st quarter of the fiscal year ending March 2017, if I remember correctly. How do you explain that?

We booked 1 billion yen for advisory cost for the 1st quarter by consolidating a range of costs. In reporting results this time, we broke it down into operating cost and extraordinary losses, which led us to report about 1 billion yen of operating cost and about 2 billion yen of extraordinary losses for the 1st half of the fiscal year ending March 2017. For the whole fiscal year ending March 2017, we expect to report about 2 billion yen of operating cost and about 14 billion yen of extraordinary losses.

Q51. If the cost of amortizing goodwill and PPA in acquiring Dell Services is about 5 billion yen for a period of 3 months in the fiscal year ending March 2017, is it expected to be 20 billion yen for the whole fiscal year? How much are the goodwill amortization costs and PPA amortization costs respectively? How much of the assets will remain to be amortized in and after the fiscal year ending March 2019, when you are going to apply IFRS Standards?

The values of goodwill costs and PPA costs and their proportion have the most uncertain factors in acquiring Dell Services. Reported values are forecasts and may change slightly since they need to be evaluated by a third party, which takes a very long time to process. We currently expect a total of about 5 billion yen of amortizing goodwill and PPA for the fiscal year ending March 2017, which is made up of 2 billion yen of goodwill amortization and 3 billion yen of PPA amortization.

2. How much in intangible assets will be reported in total?

This is the very item that will be fixed while fixing the PPA amortization costs. We will calculate it including the intangible assets of Dell Services and intangible assets to be fixed while preparing the first balance sheet after the acquisition.

3. There are various methods of calculating amortization of PPA, including the sum-of-the-years-digits method over five years. How do you calculate the amortization of PPA that is reported this time?

This is also what is determined during the process of fixing PPA amortization costs. Firstly, we need to allocate to goodwill and intangible assets. Then, we need to decide years of amortization for each intangible asset. That is how PPA amortization costs are fixed. I would like you to understand it will take time to calculate PPA amortization costs.
Furthermore, the details of intangible assets will vary depending on its definition: some customer bases, some backlog of orders, and some assets may be included in intangible assets. We need to decide what years of amortization are appropriate for each intangible asset. Our consolidated results of the fiscal year ending March 2017 will be affected only by their 3-month results and we assume there may be only a small gap from our forecast.

Q61. The summary said that the acquisition of Dell Services will cost you about 10 billion yen for internal IT system development. How much impact will this have on your P/L for the fiscal year ending March 2017 and March 2018 respectively? Is there anything to be capitalized?

There are three types of costs regarding internal IT system development following the acquisition of Dell Services. The first cost is for purchasing some IT systems from Dell, which has already been included in the acquisition cost. The second cost is the usage charge to allow NTT DATA Services to continue using systems that Dell still owns. This cost is included in the current balance of payments while having an impact on P/L. The Operating Income to Net Sales of 7% mentioned before is calculated including this cost.
The third cost is for transferring the systems that Dell still owns to our group’s systems before the period that is limited by contract will end. This is a temporary cost and will be booked as an extraordinary loss. The 10 billion yen mentioned before is included in this cost.

2. You explained that the third cost would be booked as an extraordinary cost. Does this indicate it will not impact Operating Income?

That is correct.

Q7Regarding the target for the Operating Income in Medium-term Management Plan. If it were 105 billion yen for the fiscal year ending March 2017, it would be 150 billion yen for the fiscal year ending March 2019, increasing to 45 billion yen. Are there any factors that would lead to an increase in the Operating Income?

First of all, there would be no more amortization of goodwill more after adopting IFRS in the fiscal year ending March 2019. We cannot tell you the specific value right now, but amortization of goodwill is expected to be about 17 billion for the whole fiscal year ending March 2017 after the acquisition of Dell Services.
In addition to this, there will be positive impacts as the depreciation method has been changed from the declining-balance method to the straight-line method since the fiscal year ending March 2017. Once the depreciation burden has decreased, the positive impacts thanks to the depreciation method change will diminish. And although this is very temporary, it is expected to increase to some billions of yen for the fiscal year ending March 2019.
The Operating Income (before amortizing goodwill and PPA) is expected to be about 20 billion yen thanks to the acquisition of Dell Services while it will vary by the results of goodwill amortization costs and PPA amortization costs. The profit after deducting PPA amortization costs from the Operating Income is a positive factor. In addition to this, we will work on increasing both domestic and overseas organic growths. We believe that another M&A from 50 billion to 100 billion yen will be possible. We will discuss this comprehensively.

Q8Additional cost of about 10 billion yen is allocated to the R&D investment, but I believe that the quantity of R&D cannot be significantly increased as the operation rate of NTT DATA for the coming three years will be high. Is it possible to execute the R&D worth 10 billion yen? Also, what kind of R&D are you going to launch?

Most of our R&D projects are classified into applied development while some are pure R&D projects like NTT’s. There are two types of R&D investment. One is investment in the development of software development methods. Japan, the U.S.A, and Europe have unique development methods. We have started developing our unique development method with a global standard.
The other is the investment in Proof of Concept (PoC) and others that allow us to realize new business models with our clients. This is the reason why the R&D investment has been allocated an additional cost of about 10 billion yen. For example, we have established alliances with pivotal, Virtustream, and other companies to reinforce cloud services, and other purposes. This of course includes pure research projects, such as deep learning of AI, with academic organizations including universities.
I personally would like to increase the R&D investment cost by 3 or 5 times from the current cost, but the additional 10 billion yen has been planned after considering the balance of cash allocation.

Questioner 2

Q1Please explain about the factors behind the results for the 1st half of the fiscal year ending March 2017, such as the profit increase for each segment, the decrease of unprofitable projects and the profit ratio improvement. Also, please explain about the composition of the unprofitable projects and the future forecast.

The losses caused by the unprofitable projects were about 3.3 billion yen for the 1st half of the fiscal year ending March 2017. Compared to the 10.7-billion-yen losses for the 1st half of the fiscal year ended 2016, the losses caused by the unprofitable projects have decreased significantly. For the 1st half of the fiscal year ended March 2016, the losses had been caused mainly by the public and social infrastructure projects. As the losses for the 1st half of the fiscal year ending March 2017 were also caused by the projects in this segment, the 7-billion-yen loss decrease is not entirely from the public and social infrastructure segment.
As for the improvement in profit rate, we could achieve it because several projects were relatively profitable in the 1st half of the fiscal year ending March 2017. We expect those projects to disappear in the 2nd half.

Q21. Domestic incoming orders were very strong despite the undesirable FX environment. What is your understanding of the clients’ attitudes toward IT investment for their own companies? Also, the forecast for the next financial term and thereafter will be good as the backlog of orders has really increased. Please explain about clients’ order trends and sales forecasts for NTT DATA for the next financial term and thereafter.

The forecast varies widely depending on the segment. As for the public and social infrastructure segment, we received many orders to renew the systems from our clients in the fiscal year ended March 2016 and we won every order that we should take.
We assumed that the orders would decrease in terms of amount of money in this financial term, but orders were still strong. New orders are also for the projects of public and social infrastructure segment. Those business fields will not grow by themselves as the total budget for them is fixed. We need to win orders for business fields with a limited market size. As we have been working on the projects of public and social infrastructure segment for a long time, we will win orders for the ongoing projects. Also, we are working on winning orders for new projects including projects regarding My Number system. Those efforts are making good results for the fiscal year ending March 2017.
We have established data centers cooperating with some financial institutions to support their data processing, and we assume that it would be fair to expect constant orders from them. The reason for the order increase in the fiscal year ending March 2017 is that we won a big project, which was supposed to take in the next fiscal year, ahead of schedule. Therefore, we do not understand that our business environment is improving. One thing that outstands in the financial field is that FinTech is growing dramatically. Although the market size will not be that big, most financial institutions are promoting FinTech and insurance companies are promoting InsTech. It is obvious that new businesses will grow.
In Enterprise and Solutions segment, the settlement infrastructure area is experiencing great changes globally. For example, 4 companies among the top 5 FinTech-related companies are Chinese, including Alipay. As this area is one in which we have strength, we will cooperate with those companies in the domestic market.
There is a remarkable trend especially in the manufacturing industry, which we call “the second SAP boom,” where the existing SAP is transferred from on-premises to cloud or the existing individual systems are integrated into SAP. Understaffing situation makes us unable to take all orders, but we will focus on catching up with this trend as we have been aiming to reinforce our competitiveness in the enterprise and solutions segment.
As for global segment, orders and sales are growing constantly especially in Europe and the U.S.A. Regarding everis, we assume that the recovery of the Spanish economy is contributing. For businesses in the U.K., we need to pay attention to the impact of Brexit, but our businesses will remain with the status quo as they are going well for now. However, situations in Latin America and Southeast Asia are changing and we understand that we have to pay close attention to these markets.

2. Regarding investment in the manufacturing industry, we understand it is in a tough situation due to the undesirable FX environment, etc. and other reasons. What is the current IT investment trend in the industry? Is it renewal of the legacy main frame system, or piling-up of digital projects?

There are various businesses in the manufacturing industry and the investment details vary considerably, but I understand they are willing to make an IT investment. Companies that understand that they will be left behind in the business unless they make IT investment are ready to make one.It is just a matter of how to balance it with the overall impacts, including the impact by the stronger yen, as they have to consider FX and other business environments before making an investment.

Q31. How much did you reflect the synergy from the acquisition of Dell Services to the figures in the Medium-term Management Plan?

NTT DATA has the aim of reinforcing the U.S. businesses as they are a very big market. NTT DATA, Inc currently has a market share of about 0.5% and stands around 40th in sales ranking, which will go up to around 20th when including Dell Services. The acquisition of Dell Services will make American companies recognize the NTT DATA brand as their core business was the former Perot Systems, which was known well in the U.S.A. Besides, their most profitable business is for the healthcare industry, with which we aim to reinforce our businesses. NTT DATA, Inc and Dell Services are complementary partners, not competing partners, and we have high expectations of our partnership.

2. The M&A of Dell Services was a carve-out. What are your ideas on their operations or management? How will you manage businesses in America?

I understand that a carve-out M&A makes management very difficult. We assume that it would take 2 years for the transition period, including IT system transfer. We would not change the organizational structure of Dell Services during the transition period, that is, we would manage them including businesses outside America as one entity of NTT DATA Services in North America. We would create post-merger integration (PMI) plans to steadily advance integration. To make a large-scale M&A successful, it is very important to have employee retention plans and to seek clients’ understanding to the change of control agreements. In our M&A case, we are solving those issues successfully to close the contract. We would establish new management systems, etc. while proceeding the PMI plan during the transition period of two years, but as for now, NTT DATA Inc. will manage them.

Questioner 3

Q1Regarding the target figures mentioned in the Medium-term Management Plan on page 24 of the presentation material. What is the baseline of “Operating Income +50%”?

We are targeting achieving 50% increase compared to the Operating Income of 100.8 billion yen for the fiscal year ended March 2016. The 100.8 billion yen included goodwill amortization cost. However, there will be no goodwill amortization cost in the fiscal year ending March 2019 when IFRS will have been adopted. Including the impact of the no goodwill amortization cost, we set the target of 50% increase compared to the results for the fiscal year ended March 2016.

Q2You are targeting achieving 150 billion yen of Operating Income, which is an increase of 50% compared to the results for the fiscal year ended March 2016, and an additional 10 billion yen of investment in new business fields. You have explained that 15 billion yen will be achieved thanks to no goodwill amortization cost and that 20 billion yen will be achieved thanks to the acquisition of Dell Services. This means you can expect 35 billion yen. Your Operating Income forecast for the fiscal year ending March 2017 is 105 billion yen. When we add 35 billion yen to 105 billion yen, we get 140 billion yen. The 150-billion-yen target seems easy to achieve, doesn’t it?

The baseline is 100.8 billion yen of the Operating Income for the fiscal year ended March 2016. We can add 15 billion yen thanks to the no goodwill amortization cost and 20 billion yen from Dell Services acquisition (contributed to Operating Income). However, we will have more than 10 billion yen of PPA amortization cost. This means we expect 125 billion yen. We will need to have more than 20 billion yen from profit growth including organic growth in order to achieve 150 billion yen of Operating Income. In addition to organic growth, we will consider another M&A.

Q3You have explained that orders in enterprise and solutions segment are increasing thanks to SAP and other reasons. Other companies told me that the projects are changing from specific optimization to total optimization. NTT DATA has acquired overseas pure SAP players, so does the synergy bring you orders for “total optimization” projects? Or do orders for the manufacturing industry increase specifically in each country?

I’m sure that orders for enterprise and solutions segment are increasing, but they are not only about SAP. Also, we fail to fulfil all of what the clients demand. I believe that orders will increase more if we are able to fulfill all of our clients’ needs, but it is difficult to do so as our resources are limited.
There must be a certain degree of synergy because we have solution teams across the world regarding SAP businesses. However, we cannot expect great synergy in the domestic market. It has been observed strongly with projects in which global companies integrate their worldwide SAP systems. It has also been observed in Southeast Asia.

Q4Do Japanese clients who expand overseas offer projects with synergy from SAP businesses?

That’s right. In addition to Japanese clients, the projects are offered by overseas multinational companies, too.

Questioner 4

Q1You said that one of your objectives in acquiring Dell Services was that they are highly competitive in the healthcare market. What is the ratio of the sales of their healthcare businesses to total sales? Specifically, what business operations do you have in the healthcare industry? Do you think that their healthcare businesses can be deployed laterally in the existing NTT DATA businesses in Japan and other countries?

They have major clients in the hospital industry and medical insurance industry. Regarding lateral deployment of their healthcare businesses, we will need to discuss the strategy in detail, but I believe that some of them can be deployed successfully in Japan or other countries. The ratio of the sales of their healthcare business to the total sales is about 45%.

Q2According to the materials disclosed in March, Dell Services has experienced slow sales, or a slight decrease in sales for the past three years. How do you explain this? Is it possible for Dell Services to increase sales after being merged into NTT DATA? Or are you going to focus on increasing their profit rate for the time being? What is your plan?

I assume that they focused on increasing the profit rate instead of revenue growth for the past three years before joining our group. NTT DATA and Dell Services have synergy because they have been maintaining a certain level of profit recently, they will not covet our clients especially in the U.S. market, both of us will have more core businesses, and we will be complementary partners in solutions. I believe that they will be able to improve the topline.

Q3Please explain about global ongoing businesses in the 1st half of the fiscal year ending March 2017. Except for the cost of 1 billion yen for acquisition, profit seems improved by 2 billion yen compared to the 1st half of the previous fiscal year. What are the reasons for the improvement?

We improved the global business results for the 1st half of the fiscal year ending March 2017 because we won huge projects regarding systems for electric tickets of public transportation (trains, buses) in Australia. As for sales and profit, there are no projects with remarkable results in specific areas. Every area, including the U.S.A. and EMEA, and every company, including everis, are growing steadily.