Q&A Session at the IR Presentation Meeting for the Fiscal Year Ended March 31, 2018

Questioner 1

1. You explained that the Public & Social Infrastructure Segment obtained large-scale projects for government ministries and the telecom industry in the fiscal year ended March 2018. Could you tell us what contribution it will make to the financial results in and after the fiscal year ending March 2019?

I understand that the business for the telecom industry has been slow since completion of the large-scale projects for your major clients. Also, you appear to have been struggling hard with the business for government ministries over the past 5 years. Although these businesses have been showing a slight improvement in the past year or two, I believe NTT DATA could be more profitable with its real capabilities. Could you tell us when you will be able to achieve profitability appropriate for NTT DATA’s resources?

First of all, we would like to refrain from giving the names of our individual clients concerning the large-scale projects for the telecom industry. What we can tell you here is that our clients had accumulated ideas and finally decided in the fiscal year ended March 2018 to implement them; NTT DATA obtained major parts—not all, though—of their orders arising out of such ideas. Since we are going to start the development for these orders, which will then be followed by service provision, it will be a while until the orders actually contribute to our net sales and operating income. As you may know, the telecom industry is currently experiencing various moves. As an example, the mobile carrier sector is seeing new players entering the market, existing regulations relaxed, and security measures taken with an eye to the 2020 Tokyo Olympics and Paralympics. Having our origin as a spin-off of a telecom company, we are confident about our capabilities to respond sufficiently to these moves.

Next, as far as the large-scale projects for government ministries are concerned, system renewal tends to stick more to a predetermined schedule than the upgrading in other fields. Contractors for system renewal are always decided on through bidding. The current way of bidding has considerably changed compared with the way that prevailed 10 years ago. For example, for assessment, the point for technique as well as that for prices is tripled. We are also exerting the utmost care to work out a proposal based on our client needs for digitalization, rather than just proposing to upgrade the system when the time arrives for system renewal at a fixed period.

The Public & Social Infrastructure Segment saw a surge in new orders received during the fiscal year ended March 2018 thanks to several large-scale projects. However, this robust movement in 2018 is expected to lead to decrease due to fewer orders for large-scale projects in the fiscal year ending March 2019.

As we explained before, we see this segment from a mid- to long-term viewpoint. In such a span, we study when to upgrade systems and release services. In this sense, the Public & Social Infrastructure is a segment that will not grow greatly nor contract rapidly.

However, prices for new orders received usually decline each time we upgrade systems unless we create added value to our services. Therefore, we need to actively propose digitalization and new projects that the country as a whole should embark on. One of such efforts is the My Number System. Although various issues remain to be discussed, we expect that the system will have a considerable effect once it becomes more widely used in Japan.

2. You said that the Financial Segment is in an off-demand period. I would like to know about the clients of the large-scale projects you are expecting to work with in and after the fiscal year ending March 2019, and when you expect to receive such orders.

Here again, we would like to refrain from giving the names of individual clients in the Financial Segment.

The Financial Segment is expecting some key events, including upgrading of the Zengin System which is an interbank payment system, from 2018 onward.

In addition, regional banks have been experiencing business reorganization such as mergers and acquisitions. One of our advantages is the management and operation of the Regional Bank Integrated Services Center for core banking. The M&A or reorganization of regional banks may lead to some of our Services Center’s clients moving to other centers. The other way around can also be true. One example is Kiraboshi Bank, Ltd., a bank incorporated on May 1, 2018, which commenced using our Services Center.

Many people in financial industry share the view that the industry is going through major changes in 3 to 5 years, including this year. What we need to figure out is how to maintain our businesses in the Financial Segment, one of our core fields and competitive edges. At the same time, we also need to work out how to assist our clients in digitizing their businesses. Actually, we have launched BeSTA FinTech Lab and started discussing with our clients what the ideal financial service will look like for the next generation. Through these initiatives, we are determined to maintain our businesses in the Financial Segment.

Q2. The financial results of NTT DATA exceeded its own forecasts and the analysts’ consensus in the past 2 years. In particular, the fiscal year ended March 2017 saw the results going far beyond such forecasts and consensus. However, NTT DATA’s stock price is falling. I suspect the reason for the descending stock price despite the robust financial results is that NTT DATA has not won trust in the stock market.

A wide range of factors can cause stock prices to fluctuate. Having said that, are you willing to achieve high profit? You explained that the actual value of the operating income after adjustment for incremental investments in new fields would be 152 billion yen. Will it remain unchanged even after goodwill amortization decreases by about 24 billion yen following the adoption of IFRS? I suppose a great number of market participants believe that NTT DATA is capable of achieving higher financial results.

Next, what will you do for overseas businesses? According to your presentation, the increase of operating income in the North America Segment for the fiscal year ending March 2019 is expected to stay at about 7 billion yen despite a projected drop in PMI and restructuring costs by about 14 billion yen year on year. I presume this forecast is based on your consideration of the costs for upcoming wide-ranging reforms. Can you tell us what reforms are you planning to implement and, as a result, to what extent will the income return to the previous level in or after the fiscal year ending March 2020? Can you really demonstrate competence overseas too? In my opinion, many market investors have not regarded you fully trustworthy because you have not been able to demonstrate a clear vision of your overseas businesses.

We have successfully achieved our committed targets and, in this point, I can say we have won trust in the stock market. Meanwhile, it is true that our stock price has fallen slightly since the announcement of our financial results for the 3rd quarter. We think this has happened for the following two reasons in the short term.

First, when we explained at the time of announcing the 3rd quarter results that we had suffered losses from a large-scale unprofitable project, we failed to properly get our points across to investors. We did incur losses from such a project, which was true and should not have happened. Meanwhile, we are keeping most of the other projects under control through the mechanisms we have established to restrain unprofitable projects, including the Project Review Committee. Our group companies are also having few problems in managing projects.

The project that turned out to be enormously unprofitable was truly special and we tried to take up the challenge in a project which was globally unprecedented. However, the level of difficulty of the project was so high that it could be regarded as research and development. We are going to release this project step by step and complete it by FY2019.

What we would like you to understand is that it is true that we had a large-scale unprofitable project and we need to analyze why the project turned so unprofitable in order to take measures to prevent any recurrence. However, we are now in a totally different situation from the fiscal year ended March 2014, when we incurred a large amount of losses and inconvenienced you.

Another reason for the falling stock price is the profitability problem with our overseas businesses, which our management has acknowledged as a key management agenda. Among overseas businesses, the prime concern is about the North America Segment.

NTT DATA embarked on globalization 13 years ago, and in 2008, we merged Cirquent to acquire a base in EMEA. We faced considerable difficulty then, having incurred extraordinary losses including restructuring costs many times. However, we have bottomed out, and overcame the difficulty, and now find the EMEA & LATAM Segment’s performance on track as expected, with the segment achieving impressive results. Our overseas businesses are now seeing new projects developing in Germany and Spain, too. In addition, we have businesses with German automaker Daimler AG and various other clients globally.

Meanwhile, the EBITA margin, an index we use to see the income margin, is projected to remain at the level slightly above 4% for the fiscal year ending March 2019. We intend to raise the EBITA margin to the level of 7% by the end of the next Mid-Term Management Plan.

Our challenge lies in the North America Segment. After the merger of Keane, we integrated companies in North America area we had merged and acquired until then into one company. This is how the former NTT DATA, Inc. was established, and the company had an EBITA margin of about 9% until several years ago. When acquiring the former Dell Services, we forecast that the EBITA margin, calculated together with that of the former NTT DATA, Inc., would be around 7%. That estimation was based on the grounds that the former Dell Services had long-term BPO projects with slim margins. Accordingly, we set the target of about 7% EBITA margin for the fiscal year ended March 2018, but ended up finding the result slightly below the target.

There are two reasons why we were unable to achieve the target: One is changes in the external environment, which we regard as the principal challenge facing us. Clients in North America have already been radically pushing for digital transformation. In addition, as we told you before, the overwhelming difference between Japan and North America exists in the mobility of system engineers (SEs) in the market. When launching a large-scale project in North America, a company gathers 100, 200, or even 300 SEs from the market. A Chief Information Officer (CIO) is also hunted for such a project from the market. The company employs them and treats them as its own staff for a while, then releases them into the market once the project is completed over a period of 3 to 5 years.

In that market, some of our existing clients suddenly started insourcing in the past 1 year. Insourcing is a move in which, of the projects that used to be outsourced to vendors including NTT DATA, clients begin to perform some major projects in-house—including ones relating to digital transformation—with their own employees. Meanwhile, clients continue to outsource other enterprise systems, but they are now more eager to pick up lower-cost vendors of higher quality. Against this background, there occurs vendor consolidation. This is a move in which a client, for example, who used to outsource its projects to 10 vendors, is now selecting and focusing on a few vendors. Accordingly, the volume of tasks per vendor increases as the total number of vendors used by the client has been reduced from 10 to 2 or 3. In exchange for this, the client calls for vendors to slash costs. Although having been aware of this move, we have lost some of our projects. Since our quality had been far from deteriorating and our businesses had carried good margins until then, we continued to offer prices at the same level as before to our clients. As a result, however, we are now facing some difficulties. We sometimes lose to Indian competitors that offer lower prices than ours, or, in other cases, we are replaced with competitors when projects do not require know-how in applications such as in IT outsourcing.

For these reasons, we found new orders received in the North America Segment underperforming our forecasted target by more than 100 billion yen in the fiscal year ended March 2018. This plunge forced us to be cautious about the projection of net sales for the fiscal year ending March 2019.

There are various ways of tackling this structural challenge. Actually, we have already taken a few measures. I visited India to talk directly with our staff there. Since India is the base for our ITO and BPO, we are working to maintain our advantage over competitors by incorporating the Robotic Process Automation (RPA)—which we explained in our presentation—into the development process in India.

The other reason for our failure to achieve the target lies in our decreased sales capability and less frequent contact with existing clients because of our focus on the integration of our North American business with the former Dell Services during the fiscal year ended March 2018. We have already taken action including the review of our sales system, and will need to examine closely whether such action will be effective during the fiscal year ending March 2019. Overall, the fundamentals of the North American market are rather favorable, and clients there are highly enthusiastic about using IT to change their business. Therefore, we believe that the financial results in this segment will recover sooner than our European business, which took 3 to 4 years, as long as we take steps in the right direction.

For the fiscal year ending March 2019, we projected only a moderate EBITA margin. However, we are intending to make it return to at least around 5% as fast as we can from the fiscal year ending March 2019 onward. In the future, we would like to lift it up to the level of 7% for our overseas businesses by the final stage of the next Mid-term Management Plan although we cannot be committed to this figure right now.

Finally, the actual conditions of our domestic businesses—which had not been so healthy until the fiscal year ended March 2016—have been showing some improvement, and this business segment is now achieving an operating income margin of about 10%. This successful growth has been enabled by reviewing and improving portfolio performance and shifting to a business model that does not rely on specific large-scale projects. In addition, the domestic businesses saw their net sales surpassing 1.2 trillion yen during the fiscal year ended March 2018 for the first time. We are now seeing these businesses becoming more robust.

Q3. I have been having some discussions with investors in North America, and I have a feeling that the North American market is not so bad. It is understandable that NTT DATA’s structure has not been firmly established yet because it has been less than 1 year since the integration of the former Dell Services. Still, I think you could have acted more swiftly. What do you think in this regard? Also, could you tell us why the projected financial results for the fiscal year ending March 2019 will worsen compared to those for the fiscal year ended March 2018 despite the expected reduction in PMI and restructuring costs? Lastly, I would like to know what sort of growth you are aiming at from the fiscal year ending March 2020 onward.

I am absolutely sure that our acquisition of the former Dell Services was a great success. We have no problem with the major clients of both the former NTT DATA, Inc. and the former Dell Services after the acquisition, for we have successfully renewed contracts with them. Also, we have good relations with key employees there. In these senses, PMI is on track and expected to complete soon. PMI-related costs, including restructuring expenditure, are expected to be around 5 billion yen for the fiscal year ending March 2019. However, from the fiscal year ending March 2020 onward, we will be free from these kinds of temporary costs.

The EBITA margin for the fiscal year ending March 2019 measures up favorably to that in the previous fiscal year. While I fully understand this level of the EBITA margin is not satisfactory yet, I think one of the things that matters the most is the amount of new orders received we will be able to obtain this fiscal year.

Q4. I would like to ask you about returns to shareholders. Your dividend payout ratio for the fiscal year ending March 2019 is in the range of 20%. I suppose you are in a minority, looking around at other companies. I reckon NTT DATA does not buy back its own shares. In contrast, NTT, your parent company, repurchased its own stock when NTT’s stock price tumbled, although I assume there were various reasons behind that. In my opinion, NTT is closely monitoring share prices.

Could you advise us what you make of the current stock price, and tell us your policy for shareholder returns?

We see the dividend payout ratio in terms of the mid- to long-term consolidated cash flow dividend payout ratio, and intend to maintain the current level.

We certainly consider repurchasing our own stock as one of the major methods of providing shareholder returns. However, we would like to use any cash for the following two purposes:

First, definitely mergers and acquisitions. We still need to push further for more M&A deals. With our current capabilities, I am sure that we will be able to strike 2 or 3 100-billion-yen M&A deals in 3 years or so. Meanwhile, the success of an M&A deal also depends on the relationship with other party and we cannot make decisions on our own, so it is difficult to proceed with a deal as planned. For this reason, we would like to put aside a sizable amount of money just in case.

Second, investment in new fields. We are planning to invest about 10 billion yen during the fiscal year ending March 2019, as already explained. In the fiscal year ended March 2018, we announced a 7 billion investment at the beginning of the fiscal year and attained it as planned. We are intending to use some 10 billion yen in the fiscal year ending March 2019.

We have three major areas to invest in: The first is the core banking for the next generation.

Management of Integrated Services Centers for core banking in the Japanese financial industry is one of our main advantages. However, such services centers for core banking may no longer continue to be based on the current IT architecture. Some vendors have already begun to suggest making systems open, or, in some cases, transferring to cloud-based services. Therefore, we also need to invest and embark on development in this area. We will increase the focus on research and development of digital transformation in which we have a competitive edge.

The second area is across-the-board and wide-ranging technology, such as AI, IoT and Blockchain. Toyota Motor Corporation said at their financial results conference for the fiscal year ended March 2018 that they would invest about 1 trillion yen in research and development. We take this as their sense of crisis. Meanwhile, the technology of Blockchain, for example, is still incomplete although we consider it splendid. Since we are not capable of investing in all of the technology, we would like to focus and invest on selected targets.

The third area is linked to the business contest called Toyosu no minato kara (From the Port of Toyosu). In the fiscal year ended March 2018, we held the contest in 15 cities worldwide and are currently working to form an alliance with start-ups. Also, we are forging ties with a coordinating organization that specializes in the arrangement of alliances. We cannot immediately commit ourselves to any firm results from this initiative right now, but consider this sort of activity essential for our future.

There are also other areas, but these are the 3 main areas that we would like to invest about 10 billion yen in. This means the investment is for our future growth, being made separately from the necessary expenditure for the existing research and development.

I think you would like to know when this sort of investment will pay and the fruit of it be returned to shareholders. I am going to clearly answer your question in the next Mid-Term Management Plan or in other occasion.

Questioner 2

Q1. You said you will adopt IFRS from the fiscal year ending March 2019. Could you tell us how it will affect your financial results?

There will be two major effects. One is a positive effect on operating income. This effect is brought about by one of IFRS’s provisions that does not require amortization of goodwill. The other impact is the inclusion of some parts of the non-operating income and loss and the extraordinary income and loss into the operating income and loss. For example, under IFRS, the financial results for the fiscal year ended March 2018 were affected in the following way: the PMI and other costs of slightly less than 20 billion yen—arising from the incorporation of the former Dell Services—undermined operating income. These two impacts are the principal changes coming about by the adoption of IFRS, although there are some other impacts.

Q2. You are forecasting that the North America and the EMEA & LATAM Segments will grow in new orders received and net sales during the fiscal year ending March 2019. Could you explain specifically what will enable these segments’ organic growth, what will be a temporary factor for the projected growth, if any, and how you have projected these financial results?

We have an increasing number of clients who boast annual net sales of at least 50 million US dollars in the North America and the EMEA & LATAM Segments, with the number of such clients having exceeded 20 companies overseas. With these clients, we mostly strike relatively long-term deals. Otherwise, if we enter into a contract that requires an annual renewal, the contract tends to be one based on a framework that narrows down the number of vendors to a couple of those that are large and have close relationships with the client. These types of contract allow us to rely on longer-term net sales and income.

What I have just explained is most clearly demonstrated by an order backlog. Our Japanese businesses have had a large order backlog since before, and the former Dell Services in the North America Segment has traditionally had a great number of multiple-year contracts. For these reasons, our order backlog is well above the 2 trillion yen, with the actual value of the backlog standing at around 2.3 trillion yen.

Meanwhile, I must point out that the order backlog of EMEA & LATAM Segment unfortunately was not so large. Given this situation, we will need to put more emphasis on forging long-term relationships with a large number of clients there. We believe that the longer our order backlog based on multiple-year contracts will become, the more stable our management will be in the future.

Here, we also need to pay attention to marked differences from nation to nation in Europe and Latin America when talking about the EMEA & LATAM Segment. I visited Colombia, Peru, Chile in 2017 and Brazil and Argentina before that. Through these trips, I felt firsthand that there were some, or slight, differences in business models among those countries. What was notable is that everis’ business in Latin America has achieved enormous organic growth, with the number of employees more than doubling compared with the time when we merged and acquired the company. everis’ expansion has been attained by their own organic growth, not by the influence of the M&A.

Once a new project is obtained, we need to recruit staff from the market to deliver the project. This process has a significant impact on the company. Every year, we employ twenty-odd thousand people although as many people leave. In this situation, HR departments play a crucial part in management. At least in Spain and Latin America, we are required to gather staff for project delivery once we receive orders after making proposals to new clients.

In the fiscal year ended March 2018, operating income dropped from a year earlier—if excluding temporary effects arising from the unification of the accounting periods—as a result of gathering staff in advance, making a large number of offers, and using a great amount of selling expenses as just explained.

However, these activities will have positive effects on operating income in the fiscal year ending March 2019. We are trying to find the best way while discussing with the local management and other staff how to manage this business model.

Questioner 3

1. Could you tell us what factors are behind the year-on-year fluctuation in operating income for the fiscal year ending March 2019? You have projected the income to climb by about 19 billion yen from a year earlier while it appears that costs are expected to rise by around 3 billion yen year on year due to the investment in new areas. Aren’t you expecting an increase or decrease in goodwill amortization? To what extent will PMI and restructuring costs—which were regarded as extraordinary loss under the Japanese accounting standards—contract? Lastly, I assume other figures represent organic growth. In this regard, your detailed explanation would be appreciated.

First of all, we used IFRS-based figures for comparing the results for the fiscal year ended March 2018 with the forecasts for the fiscal year ending March 2019. Therefore, goodwill amortization is null in both the data and has no effect. What has been most affected is, as you have just pointed out, PMI and restructuring costs in the North America Segment. Since the said costs recorded about 19 billion yen in the fiscal year ended March 2018 and are projected to be around 5 billion yen for the fiscal year ending March 2019, we forecast that the said costs will be slashed by some 14 billion yen as the balance of the just mentioned two figures.

Other than these costs, figures basically represent organic growth. These figures include an increase in investment in new areas and a slight drop in the North America Segment’s income. With these points considered, we have projected the operating income to be 142 billion yen in hopes of securing firm income growth as the whole company.

2. In the 4th quarter of the fiscal year ended March 2018, the EMEA & LATAM Segment saw sales rising but income falling during this 3 month-period. Could you tell us the reason for this? Also, in the fiscal year ending March 2019, when combining operating income in the North America Segment with that in the EMEA & LATAM Segment, we will see operating income increase by about 13 billion yen. However, if offsetting this 13 billion yen by the projected falling PMI and restructuring costs, I wonder whether their organic growth will end up being negative in terms of income.

Basically, we rely on the EBITA margin to see the profitability of our overseas businesses. As you have pointed out, we spent considerable costs on obtaining new orders and geographically expanding our businesses in the EMEA & LATAM Segment during the fiscal year ended March 2018. Especially in Latin America, where we launched offices and recruited staff there, we posted a slight income loss. In the fiscal year ending March 2019, however, we forecast that this kind of cost will considerably decrease and the EMEA & LATAM Segment will see income improving on an actual basis.

On the other hand, the North America Segment experienced a fall in net sales associated with a plunge in new orders received during the fiscal year ended March 2018. We are striving to achieve a 50-billion-yen increase in new orders received in the fiscal year ending March 2019, but we are also feeling keenly the body blows to income that have been dealt by the decreased net sales we suffered in the fiscal year ended March 2018 because of our lost orders. Also, as I’ve just mentioned, we have forecast a slight income loss on an actual basis in the North America Segment as a result of taking into account a margin decrease associated with outsourcing projects. Overall, however, we believe that overseas businesses will work out in the end while the North America Segment and EMEA & LATAM Segment offset each other as they grow and improve profits. Anyway, improvement in the North America Segment will be a key agenda in the fiscal year ending March 2019.

3. I think you originally projected PMI costs to be around 15 billion yen for the fiscal year ended March 2018, but the costs ended up rising close to 20 billion yen. Why did they increase?

As you said, we expected PMI costs to be around 15 billion yen at the beginning, and, as a matter of fact, these costs registered 15.8 billion yen in the fiscal year ended March 2018, roughly as planned.

Except for these costs, the extraordinary loss in the North America Segment represents restructuring costs of about 3.5 billion yen associated with the business that has been scaled down due to a reduction in new orders received. We will discuss whether to continue the restructuring there in the fiscal year ending March 2019 in the process of management. Meanwhile, we have reserved about 2 billion yen for any possible restructuring. This reserve has already been taken into consideration for the forecast for the fiscal year ending March 2019.
As a result, PMI and restructuring costs for the fiscal year ended March 2018 totaled 19.3 billion yen, and those for the fiscal year ending March 2019 are expected to be around 5 billion yen.