Q&A Session at the IR Presentation Meeting for the Third Quarter of the Fiscal Year Ending March 31, 2017
Q1
I have the impression that your non-consolidated operating income is robust, with a year-on-year increase of 20%, which is at remarkably high profit levels even from a historical viewpoint. However, I have noticed that on a consolidated basis the Global segment bears a large amount of expenses. Please advise me of the reason for this. During the presentation, you estimated the advisory expenses to be around 3.5 billion yen for the acquisition of Dell Services. It would be appreciated if you could break down the amount of the advisory expenses by quarter, including the amount expected to be incurred in the fourth quarter. Also, please advise us of the composition of the advisory expenses including IT related expenses.
In the Global segment, we recognize advisory expenses of about 3.5 billion yen related to the acquisition of Dell Services as operating expenses in the first nine months of the fiscal year ending March 2017. Since the advisory expenses were about one billion yen in the first six months of the year, we incurred additional advisory expenses of about 2.5 billion yen in the most recent three-month period of the third quarter. Originally, we explained that the advisory expenses would amount to about 2 billion yen for the entire fiscal year ending March 2017. However, these expenses increased as a result of our close examination of the amount we should have recorded as operating expenses and correction of some portions that had originally been recorded under the line-item of extraordinary losses.
The 3.5 billion yen comprises exact advisory expenses of about 2 billion yen and attorneys’ fees and outsourcing fees to an audit corporation of 1.5 billion yen. Since the acquisition was almost closed in November, no further large advisory expenses are likely to be incurred in the fourth quarter. Although there is still about one percent of the former Dell Services’ assets left that have yet to be acquired, we do not expect the advisory expenses recognized as operating expenses to exceed the 3.5 billion yen level.
The IT related expenses accompanying the acquisition of Dell Services have been recognized as extraordinary losses in principle, with such expenses amounting to about 4 billion yen in the first nine months of the fiscal year ending March 2017. For the entire fiscal year ending March 2017, such expenses are projected to be around 14 billion yen. With that said, we still need to examine whether some additional 10 billion yen will be truly incurred in the fourth quarter. We expect that the total amount of operating expenses and extraordinary losses will be at around, or even slightly below, the level we originally projected.
The major reason for the decreased operating income in the Global segment is the incurrence of one-off expenses of about 3.5 billion yen, which is primarily composed of the advisory expenses related to the acquisition of Dell Services. Without those expenses, the Global segment would be basically on as firm a footing as it had been.
Q2
Looking at the Global segment’s results only for the three-month period of the third quarter of the fiscal year ending March 2017, I noticed a drop of about 3.6 billion yen on a year-on-year basis. Is there any reason for this other than the advisory expenses of about 2.5 billion yen related to the acquisition of Dell Services?
There are several elements, including the incurrence of one-off expenses at our other overseas subsidiaries. However, since the Global segment’s performance basically remains positive, we recognize that this dip in the operating income has been caused primarily by temporary factors.
Q3
In the second quarter of the fiscal year ending March 2017, you projected the Dell Services would generate annual net sales of about 300 billion yen with the operating income rate of about seven percent, although such figures might fluctuate depending on movements in foreign exchange rates. Now that two months have passed since the acquisition of Dell Services, please let us know if there has been any change in that projection. Concerns exist in the stock markets that there may have been additional expenses incurred such as IT related expense that were not expected at the time of the acquisition.
The acquisition is being carried out smoothly, therefore there have been no changes in the projected net sales and the operating income rate announced in the second quarter of the fiscal year ending March 2017. The CFO stationed there has briefed us that the performance of Dell Services has been as favorable as expected. The balance sheet of Dell Services has been consolidated since the third quarter of the fiscal year ending March 2017. Dell Services’ current performance is fairly close to our original expectations, with the figures of orders on hand at our projected level. We believe that Dell Services’ integration into NTT DATA, Inc. will contribute to expanding business scales and reducing overhead expenses.
The transfer of Dell Services’ IT systems is going to be completed in 18 months after the transfer began in November 2016. We will post the IT related expenses for the system transfer to the fiscal year of when the expenses are incurred, however, the total amount of such expenses is likely to be within the expected range. We have already come to a point at which the integrated North American business operations are about to start on April 1, 2017. This situation, we believe, shows how smoothly the operations related to the acquisition have been carried out. This smooth acquisition was made possible by carve-out, a method we used this time instead of the ordinary M&A method. We feel the carve-out method worked tremendously well for us in that we were able to realize such a swift integration while continuing operations.
Q4
Could you tell us whether the extraordinary losses of about 14 billion yen projected to be incurred in the entire fiscal year ending March 2017 include any IT system development expenses?
Most of the expenses that will be recorded as extraordinary losses are those related to the transfer of IT systems, although they include some others such as personnel expenses, too. Since we are, and will be, integrating the systems gradually, the expenses will continue to be incurred in the fiscal years ending March 2017 and 2018 onward. We are projecting that total expenses will most likely be within the expected range. Overall, the system transfer has been, and will likely continue to be, carried out as smoothly as planned.
Q5
Will you recognize the expenses for transferring IT systems as extraordinary losses even in the fiscal year ending March 2018 as well?
Yes, we will, although I would like to refrain from presenting a specific figure here.
Please let me supplement the explanation on the IT systems. As we announced in the second quarter of the fiscal year ending March 2017, Dell Services uses 700 in-house systems, and 450 of them have been acquired by and transferred to us under an agreement. In accordance with the Transaction Service Agreement (TSA) we signed with Dell Inc., we will gradually transfer the remaining 250 systems while continuing to use those systems as Dell Services’ systems for 18 months.
The points crucial for continuation of the operations were: whether the 450 systems that have already been transferred would operate without problems; and whether we could continue operations while using the 250 systems still owned by Dell Inc. So far, we have been able to continue operations as planned without problems, and I believe that we have made a good start. During the period of 18 months after the closing, we are to finish transferring the remaining 250 systems to NTT DATA’s systems.
I have the impression that your non-consolidated operating income is robust, with a year-on-year increase of 20%, which is at remarkably high profit levels even from a historical viewpoint. However, I have noticed that on a consolidated basis the Global segment bears a large amount of expenses. Please advise me of the reason for this. During the presentation, you estimated the advisory expenses to be around 3.5 billion yen for the acquisition of Dell Services. It would be appreciated if you could break down the amount of the advisory expenses by quarter, including the amount expected to be incurred in the fourth quarter. Also, please advise us of the composition of the advisory expenses including IT related expenses.
In the Global segment, we recognize advisory expenses of about 3.5 billion yen related to the acquisition of Dell Services as operating expenses in the first nine months of the fiscal year ending March 2017. Since the advisory expenses were about one billion yen in the first six months of the year, we incurred additional advisory expenses of about 2.5 billion yen in the most recent three-month period of the third quarter. Originally, we explained that the advisory expenses would amount to about 2 billion yen for the entire fiscal year ending March 2017. However, these expenses increased as a result of our close examination of the amount we should have recorded as operating expenses and correction of some portions that had originally been recorded under the line-item of extraordinary losses.
The 3.5 billion yen comprises exact advisory expenses of about 2 billion yen and attorneys’ fees and outsourcing fees to an audit corporation of 1.5 billion yen. Since the acquisition was almost closed in November, no further large advisory expenses are likely to be incurred in the fourth quarter. Although there is still about one percent of the former Dell Services’ assets left that have yet to be acquired, we do not expect the advisory expenses recognized as operating expenses to exceed the 3.5 billion yen level.
The IT related expenses accompanying the acquisition of Dell Services have been recognized as extraordinary losses in principle, with such expenses amounting to about 4 billion yen in the first nine months of the fiscal year ending March 2017. For the entire fiscal year ending March 2017, such expenses are projected to be around 14 billion yen. With that said, we still need to examine whether some additional 10 billion yen will be truly incurred in the fourth quarter. We expect that the total amount of operating expenses and extraordinary losses will be at around, or even slightly below, the level we originally projected.
The major reason for the decreased operating income in the Global segment is the incurrence of one-off expenses of about 3.5 billion yen, which is primarily composed of the advisory expenses related to the acquisition of Dell Services. Without those expenses, the Global segment would be basically on as firm a footing as it had been.
Q2
Looking at the Global segment’s results only for the three-month period of the third quarter of the fiscal year ending March 2017, I noticed a drop of about 3.6 billion yen on a year-on-year basis. Is there any reason for this other than the advisory expenses of about 2.5 billion yen related to the acquisition of Dell Services?
There are several elements, including the incurrence of one-off expenses at our other overseas subsidiaries. However, since the Global segment’s performance basically remains positive, we recognize that this dip in the operating income has been caused primarily by temporary factors.
Q3
In the second quarter of the fiscal year ending March 2017, you projected the Dell Services would generate annual net sales of about 300 billion yen with the operating income rate of about seven percent, although such figures might fluctuate depending on movements in foreign exchange rates. Now that two months have passed since the acquisition of Dell Services, please let us know if there has been any change in that projection. Concerns exist in the stock markets that there may have been additional expenses incurred such as IT related expense that were not expected at the time of the acquisition.
The acquisition is being carried out smoothly, therefore there have been no changes in the projected net sales and the operating income rate announced in the second quarter of the fiscal year ending March 2017. The CFO stationed there has briefed us that the performance of Dell Services has been as favorable as expected. The balance sheet of Dell Services has been consolidated since the third quarter of the fiscal year ending March 2017. Dell Services’ current performance is fairly close to our original expectations, with the figures of orders on hand at our projected level. We believe that Dell Services’ integration into NTT DATA, Inc. will contribute to expanding business scales and reducing overhead expenses.
The transfer of Dell Services’ IT systems is going to be completed in 18 months after the transfer began in November 2016. We will post the IT related expenses for the system transfer to the fiscal year of when the expenses are incurred, however, the total amount of such expenses is likely to be within the expected range. We have already come to a point at which the integrated North American business operations are about to start on April 1, 2017. This situation, we believe, shows how smoothly the operations related to the acquisition have been carried out. This smooth acquisition was made possible by carve-out, a method we used this time instead of the ordinary M&A method. We feel the carve-out method worked tremendously well for us in that we were able to realize such a swift integration while continuing operations.
Q4
Could you tell us whether the extraordinary losses of about 14 billion yen projected to be incurred in the entire fiscal year ending March 2017 include any IT system development expenses?
Most of the expenses that will be recorded as extraordinary losses are those related to the transfer of IT systems, although they include some others such as personnel expenses, too. Since we are, and will be, integrating the systems gradually, the expenses will continue to be incurred in the fiscal years ending March 2017 and 2018 onward. We are projecting that total expenses will most likely be within the expected range. Overall, the system transfer has been, and will likely continue to be, carried out as smoothly as planned.
Q5
Will you recognize the expenses for transferring IT systems as extraordinary losses even in the fiscal year ending March 2018 as well?
Yes, we will, although I would like to refrain from presenting a specific figure here.
Please let me supplement the explanation on the IT systems. As we announced in the second quarter of the fiscal year ending March 2017, Dell Services uses 700 in-house systems, and 450 of them have been acquired by and transferred to us under an agreement. In accordance with the Transaction Service Agreement (TSA) we signed with Dell Inc., we will gradually transfer the remaining 250 systems while continuing to use those systems as Dell Services’ systems for 18 months.
The points crucial for continuation of the operations were: whether the 450 systems that have already been transferred would operate without problems; and whether we could continue operations while using the 250 systems still owned by Dell Inc. So far, we have been able to continue operations as planned without problems, and I believe that we have made a good start. During the period of 18 months after the closing, we are to finish transferring the remaining 250 systems to NTT DATA’s systems.
Q1
You mentioned that the losses caused by unprofitable projects were 4.3 billion yen in the first nine months of the fiscal year ending March 2017. Can you explain the breakdown by non-consolidated and subsidiaries’ accounts, respectively?
The non-consolidated account is about 3 billion yen and the rest is for the subsidiaries’ accounts.
Q2
Has the unification of accounting periods of EMEA also affected the operating income favorably? Could you also tell us to which quarter the effects of EMEA’s fiscal term adjustment are to be allocated?
The unification of accounting periods of EMEA has brought about an additional period when compared with the previous fiscal year. In the fiscal year ending March 2017, the three months from October to December fall under this additional period. In terms of value, this adjustment benefited new orders received by about 16 billion yen and net sales by about 21 billion yen. It also benefited the operating income as well, but the increased amount was as small as about 100 million yen because EMEA’s profit margins are still low. The segment profit experienced a slight drop because the additional three months’ goodwill amortization is also reflected. However, the impact on the operating income is limited at levels of several hundred million yen. Thus, EMEA’s fiscal term adjustment had a great impact on new orders received and net sales, but a limited impact on the operating income.
Q3
You mentioned Fintech, digital business and embedded software as your recent principal measures. Please advise us if you have any potential business other than Dell Services that is challenging, giving you a potential edge over your competitors, or is looking likely to grow greatly.
In terms of digital business, NTT DATA Group has been working on a wide range of areas from AI, IoT, big data, robotics, and virtual reality.
As a specific case of AI, there is a solution cluster called Corevo, one of NTT’s research results. NTT’s research results encompass voice recognition, natural language processing and video composition technology, all of which are at the world’s highest levels. We are making full use of AI in the receptionist service—such as customer service operations at banks—and in the middle- and back-office service—such as support operations for call-center operators and screening operations. Our project with Rakuten Baseball, Inc. for the development of their training system utilizes video composition technology. We would like to further develop such an area with the use of virtual reality.
As examples of a business model using IoT, we are working on various projects including “FIELD system” with Fanuc Corporation and “ANYSENSE,” a platform for the public water supply and sewerage system. Some of these projects are being carried out as Proof of Concept (PoC) and others are under development with our clients as ongoing projects. We are determined to further develop the digital business.
Q4
Could you advise to us the potential of the digital business, specifically, in terms of net sales and operating income in the future?
I would like to refrain from presenting specific figures here, but we estimate that the ratio of the digital business, including cloud services, will rise significantly and we are resolute in fostering the digital business.
You mentioned that the losses caused by unprofitable projects were 4.3 billion yen in the first nine months of the fiscal year ending March 2017. Can you explain the breakdown by non-consolidated and subsidiaries’ accounts, respectively?
The non-consolidated account is about 3 billion yen and the rest is for the subsidiaries’ accounts.
Q2
Has the unification of accounting periods of EMEA also affected the operating income favorably? Could you also tell us to which quarter the effects of EMEA’s fiscal term adjustment are to be allocated?
The unification of accounting periods of EMEA has brought about an additional period when compared with the previous fiscal year. In the fiscal year ending March 2017, the three months from October to December fall under this additional period. In terms of value, this adjustment benefited new orders received by about 16 billion yen and net sales by about 21 billion yen. It also benefited the operating income as well, but the increased amount was as small as about 100 million yen because EMEA’s profit margins are still low. The segment profit experienced a slight drop because the additional three months’ goodwill amortization is also reflected. However, the impact on the operating income is limited at levels of several hundred million yen. Thus, EMEA’s fiscal term adjustment had a great impact on new orders received and net sales, but a limited impact on the operating income.
Q3
You mentioned Fintech, digital business and embedded software as your recent principal measures. Please advise us if you have any potential business other than Dell Services that is challenging, giving you a potential edge over your competitors, or is looking likely to grow greatly.
In terms of digital business, NTT DATA Group has been working on a wide range of areas from AI, IoT, big data, robotics, and virtual reality.
As a specific case of AI, there is a solution cluster called Corevo, one of NTT’s research results. NTT’s research results encompass voice recognition, natural language processing and video composition technology, all of which are at the world’s highest levels. We are making full use of AI in the receptionist service—such as customer service operations at banks—and in the middle- and back-office service—such as support operations for call-center operators and screening operations. Our project with Rakuten Baseball, Inc. for the development of their training system utilizes video composition technology. We would like to further develop such an area with the use of virtual reality.
As examples of a business model using IoT, we are working on various projects including “FIELD system” with Fanuc Corporation and “ANYSENSE,” a platform for the public water supply and sewerage system. Some of these projects are being carried out as Proof of Concept (PoC) and others are under development with our clients as ongoing projects. We are determined to further develop the digital business.
Q4
Could you advise to us the potential of the digital business, specifically, in terms of net sales and operating income in the future?
I would like to refrain from presenting specific figures here, but we estimate that the ratio of the digital business, including cloud services, will rise significantly and we are resolute in fostering the digital business.
Q1
Looking into the operating income only for the three-month period of the third quarter of the fiscal year ending March 2017, it decreased by 3.9 billion yen year on year. Please advise us of the reason for this drop.
This is mainly because of the advisory expenses of about 2.5 billion yen related to the acquisition of Dell Services, as I mentioned before. Also, there were one-off expenses incurred in the Global segment. For these reasons, the operating income fell in proportion to such expenses.
Q2
You projected the IT related expenses recorded as extraordinary losses in relation to the acquisition of Dell Services to be 14 billion yen on a full-year basis. Will these expenses be recorded in the fiscal year ending March 2017 as either of the payment for the contractual use of Dell Inc.’s systems for the period of 18 months or the development expenses of the 250 systems? Are there any discrepancies of the acknowledgement of the development of systems? Furthermore, is a certain amount of these types of expenses going to be incurred in the fiscal year ending March 2018 in addition to the 14 billion yen to total around 20 billion yen? Of the 20 billion yen, could you advise the breakdown for the system use charges and the development expenses?
The 250 systems that are being transferred are under development by NTT DATA, Inc. in the U.S.
The charges for using Dell Inc.’s systems is not included in the 14 billion yen that will be recorded as extraordinary losses; but they will be accounted for as the operating expenses of our North American business. The extraordinary losses of the 14 billion yen include the development expenses of the systems that are under transfer and other expenses related to the transfer work. Those expenses are expected to be incurred at the same level as that of the current fiscal year in the fiscal year ending March 2018.
Q3
The charges for using Dell Inc.’s systems and the expenses related to the system transfer are putting downward pressure on the operating income. Once the TSA expires in 18 months, and suppose you do not renew the agreement, how much do you estimate the operating income will increase by?
During the period of 18 months set forth in the TSA, we divide the system transfer into three phases rather than continuously transferring the 250 systems one by one over that period. Every six months, we will release new systems corresponding to about one third of the entire 250 systems. This means that the charges for using Dell Inc.’s systems will decline every six months by the amount corresponding to newly released systems. According to our plan, all the systems will be completely transferred in the period of 18 months after November 2016. This means that no more charges for using Dell Inc.’s system will be incurred once the period of 18 months has passed. On the other hand, the new systems will incur operating expenses as NTT DATA Group’s assets. For this reason, the diminished amount of charges for using Dell Inc.’s systems and the transfer expenses will not necessarily turn into an increase in operating income. We estimate that the likely increase in operating income after the expiration of the TSA will be several billion yen.
Q4
You just mentioned that operating expenses of your in-house systems will be incurred. Will you record the portion of the expenses incurred for your own development as extraordinary losses? In most cases, the expenses for in-house systems are amortized over a period of several years after such systems have been recorded as a company’s own assets. In this regard, how you will account for those expenses?
It is the system transfer expenses that we will account for as one-off extraordinary losses. At NTT DATA, any cost incurred for in-house system development in NTT DATA Group is accounted for as its own assets and amortized over a number of fiscal years that are corresponding to the use of an in-house system.
Looking into the operating income only for the three-month period of the third quarter of the fiscal year ending March 2017, it decreased by 3.9 billion yen year on year. Please advise us of the reason for this drop.
This is mainly because of the advisory expenses of about 2.5 billion yen related to the acquisition of Dell Services, as I mentioned before. Also, there were one-off expenses incurred in the Global segment. For these reasons, the operating income fell in proportion to such expenses.
Q2
You projected the IT related expenses recorded as extraordinary losses in relation to the acquisition of Dell Services to be 14 billion yen on a full-year basis. Will these expenses be recorded in the fiscal year ending March 2017 as either of the payment for the contractual use of Dell Inc.’s systems for the period of 18 months or the development expenses of the 250 systems? Are there any discrepancies of the acknowledgement of the development of systems? Furthermore, is a certain amount of these types of expenses going to be incurred in the fiscal year ending March 2018 in addition to the 14 billion yen to total around 20 billion yen? Of the 20 billion yen, could you advise the breakdown for the system use charges and the development expenses?
The 250 systems that are being transferred are under development by NTT DATA, Inc. in the U.S.
The charges for using Dell Inc.’s systems is not included in the 14 billion yen that will be recorded as extraordinary losses; but they will be accounted for as the operating expenses of our North American business. The extraordinary losses of the 14 billion yen include the development expenses of the systems that are under transfer and other expenses related to the transfer work. Those expenses are expected to be incurred at the same level as that of the current fiscal year in the fiscal year ending March 2018.
Q3
The charges for using Dell Inc.’s systems and the expenses related to the system transfer are putting downward pressure on the operating income. Once the TSA expires in 18 months, and suppose you do not renew the agreement, how much do you estimate the operating income will increase by?
During the period of 18 months set forth in the TSA, we divide the system transfer into three phases rather than continuously transferring the 250 systems one by one over that period. Every six months, we will release new systems corresponding to about one third of the entire 250 systems. This means that the charges for using Dell Inc.’s systems will decline every six months by the amount corresponding to newly released systems. According to our plan, all the systems will be completely transferred in the period of 18 months after November 2016. This means that no more charges for using Dell Inc.’s system will be incurred once the period of 18 months has passed. On the other hand, the new systems will incur operating expenses as NTT DATA Group’s assets. For this reason, the diminished amount of charges for using Dell Inc.’s systems and the transfer expenses will not necessarily turn into an increase in operating income. We estimate that the likely increase in operating income after the expiration of the TSA will be several billion yen.
Q4
You just mentioned that operating expenses of your in-house systems will be incurred. Will you record the portion of the expenses incurred for your own development as extraordinary losses? In most cases, the expenses for in-house systems are amortized over a period of several years after such systems have been recorded as a company’s own assets. In this regard, how you will account for those expenses?
It is the system transfer expenses that we will account for as one-off extraordinary losses. At NTT DATA, any cost incurred for in-house system development in NTT DATA Group is accounted for as its own assets and amortized over a number of fiscal years that are corresponding to the use of an in-house system.
Q1
As for the results for the three months of the third quarter of the fiscal year ending March 2017, the Public & Social Infrastructure segment achieved positive net sales but had a decreased operating income. Meanwhile, during the same period, the financial segment had negative net sales but its operating income appeared to remain unchanged. Please explain the reason for this.
Depending on whether segments have large-scale projects, and also because of the different operating income rates of the respective projects, there could be variations in the results if looked at for a period of only three months. The Public & Social Infrastructure segment had comparatively highly profitable projects from around the third quarter of the fiscal year ended March 2016 through the middle of the third quarter of the fiscal year ending March 2017. For this reason, it enjoyed a large profit in the first half of the fiscal year ending March 2017 compared with the fiscal year ended March 2016. However, in the third and fourth quarter of the fiscal year ending March 2017, such large portion of profit is and will continue to gradually diminish. Regarding the Financial segment, our efforts to refrain from engaging in unprofitable projects were effective in improving profitability. Although the Public & Social Infrastructure segment is successfully restraining unprofitable projects, they slightly edged up in value by several hundred million yen year on year in the three-month period of the third quarter of the fiscal year ending March 2017. We consider this as the reason for the decreased operating income.
Q2
I had the impression that the income taxes up to the third quarter of the fiscal year ending March 2017 are small in value. As for the income taxes as well as the net income before income taxes, if we deduct the figures for the first nine months from the full-year forecasts, the amount of income taxes that is to be recorded in the fourth quarter seems to be considerably large. Does this mean that something special in terms of taxes will be incurred regarding the acquisition of Dell Services? In addition, the short-term loans payable on the balance sheet rose by 220 billion yen compared with the third quarter of the fiscal year ended March 2016. Please also advise us whether this is also related to the acquisition of Dell Services.
In principle, the expenses related to taxes have nothing to do with the acquisition of Dell Services. One reason for the decreased amount of taxes is that the Japanese statutory tax rate has been down by about two percent since last year. This decreased statutory tax rate has had an effect not only in the third quarter but also in the first quarter onward; therefore, such an effect has been showing up. Another reason could be, although it was irregular, that a part of the losses experienced by one of our overseas subsidiaries became likely to be collected and thus we recorded an increased amount of tax assets. That brought about the effect of fiscally diminishing the expenses for taxes by around two billion yen. Neither of the reasons I have mentioned is related to the acquisition of Dell Services. We consider the amount of income taxes is within our original expectation.
Next, the short-term loans payable: as Mr. Tanabe pointed out, we borrowed 210 billion yen in the third quarter of the fiscal year ending March 2017 to acquire the Dell Services. Of the outstanding balance of 220 billion yen at the end of the third quarter, the remaining 10 billion yen derived from accounting adjustment with long-term loans payable and additional borrowing depending on the condition of operating capital. We are intending to gradually turn this short-term loans payable into long-term loans payable from the end of the fourth quarter of the current fiscal year to the fiscal year ending March 2018. The balance sheet may be modified accordingly.
Q3
So, does that mean there are no factors that will enormously inflate income taxes in the fourth quarter?
That’s right. We will continue to benefit from the effect of the decreased statutory tax rate that I have just explained in the fourth quarter, too. Regarding the fiscally diminished two billion yen of the expenses for taxes, there has been no actual move of the same amount and we expect it to remain.
As for the results for the three months of the third quarter of the fiscal year ending March 2017, the Public & Social Infrastructure segment achieved positive net sales but had a decreased operating income. Meanwhile, during the same period, the financial segment had negative net sales but its operating income appeared to remain unchanged. Please explain the reason for this.
Depending on whether segments have large-scale projects, and also because of the different operating income rates of the respective projects, there could be variations in the results if looked at for a period of only three months. The Public & Social Infrastructure segment had comparatively highly profitable projects from around the third quarter of the fiscal year ended March 2016 through the middle of the third quarter of the fiscal year ending March 2017. For this reason, it enjoyed a large profit in the first half of the fiscal year ending March 2017 compared with the fiscal year ended March 2016. However, in the third and fourth quarter of the fiscal year ending March 2017, such large portion of profit is and will continue to gradually diminish. Regarding the Financial segment, our efforts to refrain from engaging in unprofitable projects were effective in improving profitability. Although the Public & Social Infrastructure segment is successfully restraining unprofitable projects, they slightly edged up in value by several hundred million yen year on year in the three-month period of the third quarter of the fiscal year ending March 2017. We consider this as the reason for the decreased operating income.
Q2
I had the impression that the income taxes up to the third quarter of the fiscal year ending March 2017 are small in value. As for the income taxes as well as the net income before income taxes, if we deduct the figures for the first nine months from the full-year forecasts, the amount of income taxes that is to be recorded in the fourth quarter seems to be considerably large. Does this mean that something special in terms of taxes will be incurred regarding the acquisition of Dell Services? In addition, the short-term loans payable on the balance sheet rose by 220 billion yen compared with the third quarter of the fiscal year ended March 2016. Please also advise us whether this is also related to the acquisition of Dell Services.
In principle, the expenses related to taxes have nothing to do with the acquisition of Dell Services. One reason for the decreased amount of taxes is that the Japanese statutory tax rate has been down by about two percent since last year. This decreased statutory tax rate has had an effect not only in the third quarter but also in the first quarter onward; therefore, such an effect has been showing up. Another reason could be, although it was irregular, that a part of the losses experienced by one of our overseas subsidiaries became likely to be collected and thus we recorded an increased amount of tax assets. That brought about the effect of fiscally diminishing the expenses for taxes by around two billion yen. Neither of the reasons I have mentioned is related to the acquisition of Dell Services. We consider the amount of income taxes is within our original expectation.
Next, the short-term loans payable: as Mr. Tanabe pointed out, we borrowed 210 billion yen in the third quarter of the fiscal year ending March 2017 to acquire the Dell Services. Of the outstanding balance of 220 billion yen at the end of the third quarter, the remaining 10 billion yen derived from accounting adjustment with long-term loans payable and additional borrowing depending on the condition of operating capital. We are intending to gradually turn this short-term loans payable into long-term loans payable from the end of the fourth quarter of the current fiscal year to the fiscal year ending March 2018. The balance sheet may be modified accordingly.
Q3
So, does that mean there are no factors that will enormously inflate income taxes in the fourth quarter?
That’s right. We will continue to benefit from the effect of the decreased statutory tax rate that I have just explained in the fourth quarter, too. Regarding the fiscally diminished two billion yen of the expenses for taxes, there has been no actual move of the same amount and we expect it to remain.
Q1
The total of interest-bearing liabilities in the third quarter of the fiscal year ending March 2017 rose to some 600 billion yen from the about 400 billion yen recorded in the previous fiscal year. Does this mean that the expenses related to the borrowing interest rate are estimated to be 1.5 times higher in the fourth quarter onward?
Of some 350 billion yen required for the acquisition of Dell Services, about 140 billion yen came from our cash reserves and the remaining some 210 billion yen was from borrowing. This 210 billion yen is the reason for the rise in interest-bearing liabilities.
We are currently discussing the methods of how to turn short-term loans payable into long-term loans payable. However, since the financing environment has become significantly better than it used to be for the borrowing of currently accumulated interest-bearing liabilities, we don’t expect that the expenses related to borrowing interest rate will necessarily become high as the amount of liabilities becomes large. At the present time, we are optimistic that we will be able to borrow at advantageous rates, but we still need to carefully control our borrowing given the uncertain financial market situation.
Q2
Let me clarify one thing about the transfer of Dell Services’ IT systems: Is it possible to integrate systems into existing systems, or would you need to newly set up separate systems for the integration?
Whether we can integrate Dell Services’ system into NTT DATA, Inc.’s existing systems, or vice versa, varies from system to system.
Mostly, we are using the 450 systems that have already been acquired by and transferred to us on an as-is basis. Of the remaining 250 systems for which we have concluded the TSA for the period of 18 months after the closing on November 2016, some systems cannot be integrated with the systems of NTT DATA, Inc. in a short period. Basically, we are going to use the current systems of NTT DATA Inc. However, there are indeed some cases in which it is structurally impossible to substitute the systems of NTT DATA Inc. Personnel systems fall under such a case because NTT DATA Inc. and Dell Services have totally different organizational structures.
On the other hand, other systems, such as financial and accounting systems, would work more effectively if integrated into the systems of NTT DATA Inc. We will certainly integrate that type of system.
As for the projected amount of extraordinary losses of the entire fiscal year ending March 2017, we calculated it after sorting out the method of system transfer as I have just mentioned.
Q3
Dell Services has been promoting offshore development. With the Trump administration coming in, are there any matters that require particular attention?
Not only Dell Services but also other companies in the U.S. are now in the same situation. With the U.S. reigning as the largest IT market, we will remain committed to our global strategies with a focus on North America. We will continuously work to improve our local presence in North America through the “Game-Changing Approach,” or further development of remarketing, by utilizing every opportunity that may arise from changes in governmental policies.
The change of the U.S. administration has not yet affected NTT DATA Group’s business much. However, we are paying close attention to the following three points:
The first point is whether there will be any move to ban the entry of people of certain nationalities or any changes in visa issuance requirements because these changes could lead to imposing limitations on people’s free movement and hampering companies’ efforts to secure human resources. In addition, we also need to monitor any move to accelerate the trend toward protectionism, which might put restrictions on our offshore outsourcing. In the North American market, we have established a global delivery structure centered on India. About half of the staff of our North American group companies are delivery personnel at our offshore bases including India. In addition, some of our U.S. staff are on short-term visas. Given these circumstances, we will closely watch future developments.
The second point is the impact of foreign exchange. A weaker dollar would only have a slight effect on our operating income, but it would severely affect our new orders received and net sales. Furthermore, a depreciation of the dollar might also hinder the business performance of our group’s clients, which could indirectly and adversely affect us because they might refrain from making IT investments. We will keep a close eye on this point, too.
The last point, in contrast to the previous two points, which is likely to turn into business opportunities. This is the potential IT investments in the healthcare area due to possible system changes accompanying the large-scale tax cut, public works investment, and the review of Obamacare planned by the Trump administration. Some economy watchers are estimating that IT investment will indeed grow, so we need to monitor the situation as not to lose any business opportunities.
The total of interest-bearing liabilities in the third quarter of the fiscal year ending March 2017 rose to some 600 billion yen from the about 400 billion yen recorded in the previous fiscal year. Does this mean that the expenses related to the borrowing interest rate are estimated to be 1.5 times higher in the fourth quarter onward?
Of some 350 billion yen required for the acquisition of Dell Services, about 140 billion yen came from our cash reserves and the remaining some 210 billion yen was from borrowing. This 210 billion yen is the reason for the rise in interest-bearing liabilities.
We are currently discussing the methods of how to turn short-term loans payable into long-term loans payable. However, since the financing environment has become significantly better than it used to be for the borrowing of currently accumulated interest-bearing liabilities, we don’t expect that the expenses related to borrowing interest rate will necessarily become high as the amount of liabilities becomes large. At the present time, we are optimistic that we will be able to borrow at advantageous rates, but we still need to carefully control our borrowing given the uncertain financial market situation.
Q2
Let me clarify one thing about the transfer of Dell Services’ IT systems: Is it possible to integrate systems into existing systems, or would you need to newly set up separate systems for the integration?
Whether we can integrate Dell Services’ system into NTT DATA, Inc.’s existing systems, or vice versa, varies from system to system.
Mostly, we are using the 450 systems that have already been acquired by and transferred to us on an as-is basis. Of the remaining 250 systems for which we have concluded the TSA for the period of 18 months after the closing on November 2016, some systems cannot be integrated with the systems of NTT DATA, Inc. in a short period. Basically, we are going to use the current systems of NTT DATA Inc. However, there are indeed some cases in which it is structurally impossible to substitute the systems of NTT DATA Inc. Personnel systems fall under such a case because NTT DATA Inc. and Dell Services have totally different organizational structures.
On the other hand, other systems, such as financial and accounting systems, would work more effectively if integrated into the systems of NTT DATA Inc. We will certainly integrate that type of system.
As for the projected amount of extraordinary losses of the entire fiscal year ending March 2017, we calculated it after sorting out the method of system transfer as I have just mentioned.
Q3
Dell Services has been promoting offshore development. With the Trump administration coming in, are there any matters that require particular attention?
Not only Dell Services but also other companies in the U.S. are now in the same situation. With the U.S. reigning as the largest IT market, we will remain committed to our global strategies with a focus on North America. We will continuously work to improve our local presence in North America through the “Game-Changing Approach,” or further development of remarketing, by utilizing every opportunity that may arise from changes in governmental policies.
The change of the U.S. administration has not yet affected NTT DATA Group’s business much. However, we are paying close attention to the following three points:
The first point is whether there will be any move to ban the entry of people of certain nationalities or any changes in visa issuance requirements because these changes could lead to imposing limitations on people’s free movement and hampering companies’ efforts to secure human resources. In addition, we also need to monitor any move to accelerate the trend toward protectionism, which might put restrictions on our offshore outsourcing. In the North American market, we have established a global delivery structure centered on India. About half of the staff of our North American group companies are delivery personnel at our offshore bases including India. In addition, some of our U.S. staff are on short-term visas. Given these circumstances, we will closely watch future developments.
The second point is the impact of foreign exchange. A weaker dollar would only have a slight effect on our operating income, but it would severely affect our new orders received and net sales. Furthermore, a depreciation of the dollar might also hinder the business performance of our group’s clients, which could indirectly and adversely affect us because they might refrain from making IT investments. We will keep a close eye on this point, too.
The last point, in contrast to the previous two points, which is likely to turn into business opportunities. This is the potential IT investments in the healthcare area due to possible system changes accompanying the large-scale tax cut, public works investment, and the review of Obamacare planned by the Trump administration. Some economy watchers are estimating that IT investment will indeed grow, so we need to monitor the situation as not to lose any business opportunities.
