XTKS:9432 Nippon Telegraph & Telephone Corp Annual Report 20-F Filing - 3/31/2012

Effective Date 3/31/2012

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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 20-F

 

¨

  

REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g)

OF THE SECURITIES EXCHANGE ACT OF 1934

   or

x

  

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended March 31, 2012

   or

¨

  

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

   or

¨

  

SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

Date of event requiring this shell company report: N/A

Commission file number 1-8910

 

 

NIPPON DENSHIN DENWA KABUSHIKI KAISHA

(Exact Name of Registrant as Specified in its Charter)

NIPPON TELEGRAPH AND TELEPHONE CORPORATION

(Translation of Registrant’s Name into English)

JAPAN

(Jurisdiction of incorporation or organization)

3-1, OTEMACHI 2-CHOME, CHIYODA-KU, TOKYO 100-8116, JAPAN

(Address of Principal Executive Offices)

YOSHIKIYO SAKAI

3-1, OTEMACHI 2-CHOME, CHIYODA-KU, TOKYO 100-8116, JAPAN

TEL: +81(3)5205-5581

FACSIMILE NUMBER: +81(3)5205-5589

(Name, Telephone, E-mail and/or Facsimile Number and Address of Company Contact Person)

Securities registered or to be registered pursuant to Section 12(b) of the Act:

 

Title of each class

  

Name of each exchange on which registered

Common stock (“Shares”)

   New York Stock Exchange*

American Depositary Shares (“ADSs”),

each of which represents 1/2 of a Share

   New York Stock Exchange

 

* Not for trading but only in connection with the registration of ADSs pursuant to the requirements of the Securities and Exchange Commission.

 

 

Securities registered or to be registered pursuant to Section 12(g) of the Act:

None

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:

None

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.

 

Common stock

   1,223,765,423 shares

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes  x    No  ¨

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

Yes  ¨    No   x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes  x    No   ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes  x    No   ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer  x    Accelerated filer  ¨    Non-accelerated filer  ¨

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

U.S. GAAP  x    International Financial Reporting Standards as issued by the International Accounting Standards Board  ¨    Other  ¨

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.

Item 17  ¨    Item 18  ¨

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes  ¨    No   x

 

 

 


Table of Contents

TABLE OF CONTENTS

 

                   Page  
PART I   
ITEM   1          IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS      2   
ITEM   2          OFFER STATISTICS AND EXPECTED TIMETABLE      2   
ITEM   3          KEY INFORMATION      2   
ITEM   4          INFORMATION ON THE COMPANY      17   
ITEM   4A          UNRESOLVED STAFF COMMENTS      47   
ITEM   5          OPERATING AND FINANCIAL REVIEW AND PROSPECTS      48   
ITEM   6          DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES      91   
ITEM   7          MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS      99   
ITEM   8          FINANCIAL INFORMATION      101   
ITEM   9          THE OFFER AND LISTING      101   
ITEM   10          ADDITIONAL INFORMATION      104   
ITEM   11          QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK      118   
ITEM   12          DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES      120   
PART II   
ITEM   13          DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES      121   
ITEM   14          MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS      121   
ITEM   15          CONTROLS AND PROCEDURES      121   
ITEM   16A          AUDIT COMMITTEE FINANCIAL EXPERT      122   
ITEM   16B          CODE OF ETHICS      122   
ITEM   16C          PRINCIPAL ACCOUNTANT FEES AND SERVICES      122   
ITEM   16D          EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES      123   
ITEM   16E          PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS      123   
ITEM   16F          CHANGES IN REGISTRANT’S CERTIFYING ACCOUNTANT      123   
ITEM   16G          CORPORATE GOVERNANCE      123   
PART III   
ITEM   17          FINANCIAL STATEMENTS      125   
ITEM   18          FINANCIAL STATEMENTS      125   
ITEM   19          EXHIBITS      125   
      SIGNATURES      126   

 

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In this annual report, except as otherwise specified, “NTT” refers to Nippon Telegraph and Telephone Corporation (hereinafter also sometimes referred to as the “registrant”), “NTT Group” refers to NTT, its subsidiaries and its affiliated companies and any of their respective predecessors in business, and the “predecessor corporation” refers to Nippon Telegraph & Telephone Public Corporation, which operated the business of NTT prior to April 1985. “NTT East,” “NTT West” and “NTT Communications” refer to NTT’s three wholly-owned subsidiaries, Nippon Telegraph and Telephone East Corporation, Nippon Telegraph and Telephone West Corporation and NTT Communications Corporation, respectively. In addition, “NTT DOCOMO” refers to NTT DOCOMO, INC., “NTT DATA” refers to NTT DATA CORPORATION, “Dimension Data” refers to Dimension Data Holdings plc, “NTT Urban Development” refers to NTT URBAN DEVELOPMENT CORPORATION, “NTT Resonant” refers to NTT Resonant Inc. and “NTT Plala” refers to NTT Plala Inc. The Government of Japan is sometimes referred to herein as the “Government.”

References to fiscal years are to 12-month periods commencing in each case on April 1 of the prior year and ending on March 31 of the year indicated. References to years not specified as being fiscal years are to calendar years.

In this annual report, except as otherwise specified, the financial information is presented according to generally accepted accounting principles in the United States, referred to as “U.S. GAAP.”

Under the Law Concerning Nippon Telegraph and Telephone Corporation, Etc. (“NTT Law”) and for Japanese reporting purposes, NTT calculates the percentage of its Shares owned by the Government based on the total number of issued Shares regardless of whether such Shares are outstanding for U.S. reporting purposes. In this annual report, where the percentage of total issued Shares differs from the percentage of outstanding Shares, the Government’s ownership of Shares is presented using both percentages.

 

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PART I

ITEM 1—IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

Not applicable.

ITEM 2—OFFER STATISTICS AND EXPECTED TIMETABLE

Not applicable.

ITEM 3—KEY INFORMATION

Selected Financial Data

The following selected financial data for each of the fiscal years ended March 31, 2008 through 2012 have been derived from, and should be read in conjunction with, NTT’s audited consolidated financial statements. NTT’s audited consolidated financial statements as of March 31, 2011 and 2012, and for each of the three fiscal years ended March 31, 2010, 2011 and 2012, appear elsewhere in this annual report.

 

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SELECTED CONSOLIDATED STATEMENT OF INCOME DATA

Nippon Telegraph and Telephone Corporation

and Its Subsidiaries

 

     Years ended March 31,  
     2008      2009     2010      2011     2012  
     (in millions of yen)  

Operating revenues

   ¥ 10,680,891       ¥ 10,416,305      ¥ 10,181,376       ¥ 10,305,003      ¥ 10,507,362   

Operating expenses

     9,376,282         9,306,553        9,063,683         9,090,094        9,284,396   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Operating income

     1,304,609         1,109,752        1,117,693         1,214,909        1,222,966   

Other income (expenses)

     17,682         (4,589     2,378         (39,112     16,364   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Income before income taxes and equity in earnings (losses) of affiliated companies

     1,322,291         1,105,163        1,120,071         1,175,797        1,239,330   

Income tax expenses

     520,777         370,083        447,001         475,592        587,793   

Equity in earnings (losses) of affiliated companies

     31,026         (1,916     8,794         1,670        (2,986

Net income

     832,540         733,164        681,864         701,875        648,551   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Less—Net income attributable to noncontrolling interests

     197,384         194,485        189,598         192,246        180,850   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Net income attributable to NTT

   ¥ 635,156       ¥ 538,679      ¥ 492,266       ¥ 509,629      ¥ 467,701   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 
     2008      2009     2010      2011     2012  
     (in yen, except share amount)  

Per Share of common stock:(1)

            

Net income attributable to NTT

   ¥ 461.07       ¥ 400.41      ¥ 372.01       ¥ 385.16      ¥ 366.67   

Cash dividends, applicable to earnings for the year

   ¥ 90.00       ¥ 110.00      ¥ 120.00       ¥ 120.00      ¥ 140.00   

Average number of Shares outstanding (adjusted to reflect stock split)(1)

     1,377,561,362         1,345,302,411        1,323,262,483         1,323,173,389        1,275,519,400   

 

(1) On January 4, 2009, NTT carried out a 100-for-1 stock split. The figures provided for “Per Share of common stock” and “Average number of Shares outstanding” have been adjusted for the stock split. As of the end of the fiscal year ended March 31, 2012, NTT had 1,223,765,423 Shares outstanding. For further details on the stock split, please see “Item 10—Additional Information—Description of the Shares—Elimination of Fractional Shares.”

 

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SELECTED CONSOLIDATED BALANCE SHEET DATA

Nippon Telegraph and Telephone Corporation

and Its Subsidiaries

 

     As of March 31,  
     2008      2009      2010      2011      2012  
     (in millions of yen)  

Current assets

   ¥ 3,990,131       ¥ 4,068,051       ¥ 4,245,699       ¥ 4,770,297       ¥ 4,711,931   

Property, plant and equipment (net)

     10,385,579         10,201,519         10,057,546         9,900,640         9,806,356   

Total assets

     18,518,779         18,796,388         18,939,055         19,665,596         19,389,699   

Current liabilities

     3,911,909         3,694,199         3,588,310         3,689,072         3,494,253   

Long-term liabilities

     5,332,111         5,956,559         5,579,866         5,895,592         5,847,717   

Capital stock (common stock plus additional paid-in capital)

     3,779,029         3,778,987         3,776,877         3,771,979         3,770,115   

NTT shareholders’ equity

     7,410,761         7,298,110         7,788,153         8,020,734         7,882,587   

Total equity

   ¥ 9,274,759       ¥ 9,145,630       ¥ 9,770,879       ¥ 10,080,932       ¥ 10,047,729   

Dividends

NTT has paid dividends on Shares semiannually in respect of each fiscal year since its founding in 1985. The year-end dividend is suggested by the board of directors and is subject to approval by shareholders, at the ordinary general meeting of shareholders required to be held in June of each year, and by the Minister of Internal Affairs and Communications (the “Minister”). Immediately following approval thereof at the meeting and approval of the Minister, dividends are distributed to holders of record on the preceding March 31 in proportion to their respective holdings of Shares at that date. Year-end dividends may be distributed either in cash or in kind (except for Shares). In addition to year-end dividends, NTT may make cash distributions from its retained earnings (interim dividends) to its shareholders of record as of September 30 in each year by resolution of its board of directors and subject to approval by the Minister.

For NTT’s dividend policy, please see “Item 8—Financial Information—Consolidated Statements and Other Financial Information—Dividend Policy.”

The following table lists the respective shareholder (year-end dividend) and board of director (interim dividend) approval dates, as applicable, payment dates and amount of dividends (expressed in Japanese yen) paid by NTT for each of the six-month periods indicated.

 

Record Date/Six months ended

   Approval Date    Payment Date    Dividend per  Share(*)  
               (in yen)  

September 30, 2007

   November 9, 2007    December 6, 2007      ¥45   

March 31, 2008

   June 25, 2008    June 26, 2008      ¥45   

September 30, 2008

   November 7, 2008    December 9, 2008      ¥55   

March 31, 2009

   June 24, 2009    June 25, 2009      ¥55   

September 30, 2009

   November 9, 2009    December 10, 2009      ¥60   

March 31, 2010

   June 24, 2010    June 25, 2010      ¥60   

September 30, 2010

   November 9, 2010    December 13, 2010      ¥60   

March 31, 2011

   June 23, 2011    June 24, 2011      ¥60   

September 30, 2011

   November 9, 2011    December 12, 2011      ¥70   

March 31, 2012

   June 22, 2012    June 25, 2012      ¥70   

 

(*) On January 4, 2009, NTT carried out a 100-for-1 stock split. The figures provided for Dividend per Share are adjusted for the stock split. For further details on the stock split, please see “Item 10—Additional Information—Description of the Shares—Elimination of Fractional Shares.”

 

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See Note 13 to the Consolidated Financial Statements for a discussion of Japanese Corporation Law with respect to dividends.

The payment, as well as the amount, of dividends in the future will be subject to the level of NTT’s earnings, NTT’s financial condition and other factors, including applicable Government regulatory actions and approval by shareholders and the board of directors, as applicable, and the Minister.

Under Japanese foreign exchange controls currently in effect, dividends paid on Shares held by non-residents of Japan may be converted into any foreign currency and repatriated abroad. Under the terms of the deposit agreement pursuant to which American Depositary Receipts (“ADRs”), evidencing ownership interests in the ADSs, are issued by JPMorgan Chase Bank, N.A., (formerly known as Morgan Guaranty Trust Company of New York), as depositary (the “Depositary”), the Depositary is required, to the extent that in its judgment it can convert Japanese yen on a reasonable basis into U.S. dollars and transfer the resulting dollars to the United States, to convert all cash dividends that it receives in respect of deposited Shares into U.S. dollars and to distribute amounts received (after deduction of applicable withholding taxes and expenses of the Depositary) to the holders of ADRs. See “Item 10—Additional Information—Exchange Controls and Other Limitations Affecting Security Holders.”

For a discussion of the tax treatment of dividends paid to U.S. holders of ADSs, please see “Item 10—Additional Information—Taxation.”

Exchange Rate Information

In this annual report, all amounts are expressed in Japanese yen (“¥” or “yen”), except as otherwise specified.

On June 8, 2012, the Noon Buying Rate (as defined below) was US$1 = ¥79.47.

The following table sets forth, for the fiscal periods indicated, certain information concerning the exchange rates for Japanese yen and U.S. dollars based on the noon buying rate in New York City for cable transfers payable in Japanese yen as announced for customs purposes by the Federal Reserve Bank of New York (the “Noon Buying Rate”):

 

Years ended March 31

   High(1)      Low(1)      Average(2)      Period-end(3)  
     (yen per dollar)  

2008

     123.39         99.85         113.61         99.85   

2009

     108.69         89.83         100.85         99.15   

2010

     98.76         86.12         92.49         93.40   

2011

     94.24         80.48         85.00         82.76   

2012

     82.41         76.34         78.86         82.41   

Months of 2012

   High(4)      Low(4)      Average(5)      Period-end(6)  

January

     78.13         76.28         76.96         76.34   

February

     81.10         76.11         78.47         81.10   

March

     83.78         80.86         82.47         82.41   

April

     82.62         79.81         81.25         79.81   

May

     80.36         78.29         79.67         78.29   

June (through June 8, 2012)

     79.67         78.21         78.89         79.47   

 

(1) The highest and lowest of the Noon Buying Rates on the last business day of each month during the relevant year.
(2) The average of the Noon Buying Rates on the last business day of each month during the relevant year.
(3) The Noon Buying Rates on the last business day of each relevant year.
(4) The highest and lowest of the Noon Buying Rates of each business day in the relevant month/period.
(5) The average of the Noon Buying Rates of each business day in the relevant month/period.
(6) The Noon Buying Rates on the last business day of each relevant month/period.

 

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Risk Factors

In addition to the other information contained in this annual report, prospective investors should carefully consider the risks described below. These have been summarized after a comprehensive assessment of the risks related to NTT Group’s business environment and its business strategy and operations and risks related to regulations and NTT’s relationship with the Government. Additional risks not currently known to NTT or that NTT now deems immaterial may also impair NTT Group’s business operations. This annual report also contains forward-looking statements that involve risks and uncertainties. NTT Group’s actual results could differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including the risks NTT Group faces as described below and elsewhere in this annual report.

Risks associated with the business environment and NTT Group’s corresponding business strategies

NTT Group’s business may be affected by the economic situation globally and in Japan.

In the fiscal year ended March 31, 2012, the European sovereign bond crisis caused further instability in the economies of developed countries which, when combined with the slow-down in the growth rates of emerging economies, led to an overall slow-down in the pace of global economic recovery. The Japanese economy, despite increased demand after the severe conditions following the Great East Japan Earthquake, experienced only a modest recovery due to the impact of the sluggish global economy, the protracted period of the strong yen, damage to its business and trade from the flooding in Thailand and other factors.

With respect to the future of the Japanese economy, despite expectations that the economic recovery will stabilize as a result of various background regulatory effects, there is a risk of an economic downturn due to a downward swing in overseas economies caused by the European sovereign debt crisis and the increasing price of crude oil. In addition, the effects of the shutdown of all nuclear power plants in Japan and power supply restrictions related to the accident at the Fukushima Daiichi Nuclear Power Plant, deflation and the potential for a worsening of employment conditions remain as concerns. As a large amount of NTT Group’s business revenues are attributed to the provision of services in Japan, NTT Group’s financial condition and results of operations may be affected. In the solutions business in particular, corporate IT investments have been restrained by, among other things, a decline in corporate earnings. Meanwhile, customers are making increasingly severe demands regarding costs and requiring very stringent evaluations of potential IT investments, which may lead to declines in the sales prices of systems and services provided by NTT Group in the current market environment.

NTT Group’s other businesses include the real estate business and finance business. In the real estate business, NTT Group’s financial condition and results of operations may be impacted by a decrease in the profitability of investments if there is a decrease in demand in the real estate leasing market or apartment sales market as a result of the economic slowdown. In the finance business, in order to minimize losses incurred through the insolvency of counterparties, NTT Group has been making an effort to manage the extension of credit based on the creditworthiness of its counterparties. However, the economic circumstances of these counterparties may change due to the impact of the economic slowdown, which may lead to unrecoverable loans, potentially affecting NTT Group’s financial condition and results of operations.

NTT Group evaluates various means of capital procurement, including the issuance of corporate bonds and debt. Although NTT is working towards securing low interest financing and stable funds, NTT Group’s capital procurement costs may increase if there are major fluctuations in the financial market. Further, if the asset value of investment securities and other assets owned by NTT Group declines because of depressed stock and financial markets, impairment losses may adversely affect NTT Group’s results of operations. In addition, real estate sales and pension investments by NTT Group may suffer further effects from a slow economy.

 

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NTT Group’s market share and revenues may suffer from competition.

It is anticipated that competition in the information and communications market in Japan will grow increasingly fierce with the entry of companies employing a variety of business models. NTT Group faces competition in all of its business segments. For details, please see “Item 4—Information on the Company—Competition.”

In the current information and communications market, against the backdrop of the rapid spread and diversification of smartphones, tablet devices and other mobile devices and the development of IP and broadband technologies, the structure of the market itself is undergoing significant change as a result of, among other things, the worldwide deployment by various market players of new business models that leverage cloud networks. In addition, the development of a variety of new fixed-mobile convergence services that combine fixed-line with mobile services is expected to accelerate going forward.

NTT Group believes that it maintains a competitive advantage over other companies in Japan’s information and communications market. However, along with the changing competitive environment, NTT Group must further expand its business in the highly competitive broadband market as the conventional fixed-line telephone market shrinks. There is no guarantee that NTT Group will be able to maintain its current competitive advantage. Such competition from other market participants may have an effect on NTT Group’s future growth and profitability.

The conventional fixed-line telephone services market continues to shrink as a result of the shift to IP telephone services and other factors. To be more competitive, NTT Group plans to strengthen its “Hikari Denwa” and other IP telephone services. However, revenues could fall more than expected as customers of NTT East and NTT West may switch to services of competitors offering IP telephone services using fiber-optic services or CATV lines.

In the fixed-line broadband business market, access lines are becoming more diverse, faster and less expensive. In addition to increasing facility and service competition among service providers, the market environment is undergoing major change as a result of the expansion of triple play service offerings, including video distribution and IP telephony, and the appearance of new services for information devices other than personal computers. In this market environment, fiber-optic services have expanded to account for over half of broadband services in Japan. However, NTT Group expects that competition with providers of other fiber-optic access, CATV and wireless broadband, due to the spread of smartphones and tablet devices, will continue. As a result, NTT Group may experience a decrease in market share or a slowdown in the growth of its subscriber base and need to reduce its rates further. To address such competition, NTT may be required to incur more expenses than anticipated to increase its customer base, which may have an effect on NTT Group’s financial condition and results of operations.

With regard to the upper layer services (platforms, content and applications), which are expected to have increasing importance for the development of NTT Group, new companies are expected to continue entering the market in a variety of forms from a multitude of fields. If the competitive environment going forward is more severe than anticipated, NTT may not secure its anticipated market share.

In the mobile communications market, there is a move away from the conventional vertically integrated market, the application market is expanding in conjunction with the popularity of smartphones, ultra-high-speed broadband is now available using Long Term Evolution (“LTE”)* and other technologies, and competition is growing more intense not only within each market layer (handset, network, communication platform, and content and application layers), but across the layers as well. For example, with Mobile Number Portability, the emergence of new businesses, the rollout of attractive mobile devices from other service providers that appeal to customers, the diversification of rate plans, and the introduction of new services, NTT Group faces fierce competition. Moreover, some carriers are already offering fixed-mobile convergence services with features such as combined point programs for both mobile and fixed-line services, free calls between mobile and fixed-line

 

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phones and set discounts on fixed-line broadband services, and it is possible that these carriers will further develop their line-up of services that provide a high level of customer convenience. NTT Group’s ability to provide such services may be restricted by regulations. Under these market conditions, the number of subscriptions that NTT Group acquires or retains may be lower than anticipated, and the costs required to acquire or retain subscribers may be greater than anticipated, which consequently may adversely affect the financial condition and performance of NTT Group. In this competitive market environment, in order to provide more advanced and wide-ranging services and increase convenience for its customers, NTT Group has provided various new rate plans and services and has revised its rates. However, NTT Group cannot be certain that these measures will enable it to acquire new subscriptions or maintain existing subscription levels. While the diversification of rate plans could lead to a decline in ARPU, if the subscription rate for various discount services or the trend of subscribers using and switching to flat-rate services is not in accordance with NTT Group’s expectation, its ARPU may decrease more than expected. The foregoing factors may have an effect on NTT Group’s financial condition and operating results.

The solutions business, which is the focal area of NTT DATA’s business, is expected to be a major area of growth in the information services market, and hardware vendors and others are committing their efforts to this business. Moreover, the growth of information service companies in rapidly developing nations, such as India and China, is bringing about global competition, and the intensification of competition resulting from the aggressive market entry of competing companies may have an effect on NTT Group’s financial condition and its operating results.

 

* Abbreviation of Long Term Evolution, a mobile communications protocol with specifications formulated by the 3rd Generation Partnership Project.

Growth of new businesses and migration from existing businesses accompanying the expansion of IP, broadband and ubiquitous services and other market developments may not progress as anticipated.

In Japan’s information and communications market, as the rollout of broadband and ubiquitous services rapidly progresses, optical broadband services are increasing in the fixed-line communications field and conventional fixed-line telephony is transitioning to optical IP telephone services. In the mobile communications field, services and handsets are becoming more diverse and advanced. Many other changes and developments are occurring in conjunction with the increased use of IP, including convergence between fixed-line communications and mobile communications and between communications and broadcasting services, and the creation of diverse new ICT (Information Communication Technology)-based businesses.

NTT Group expects that the further development of broadband services will lead to increased distribution of content and applications, and the importance of the content and applications layer in business development will grow. As a result, NTT Group has worked to develop new products and services to capitalize on this trend. For example, with respect to the IP television service “Hikari TV” distributed over “FLET’S Hikari,” NTT Group launched a service which enables the viewing of video programs on smartphones and tablet devices, as well as on TV. Also, with respect to the cloud services, for which market expansion is anticipated going forward, NTT Group expanded its service menus for services such as “BizCity” and “BizXaas” to promote the building and provision of customer systems, and launched “Mobile Groupware” and other services that provide web-based email and schedule functions that enable customer use without regard to differences in devices between smartphones and PCs.

Further, while making an effort to expand its broadband user foundation by launching the two-tiered fixed-rate service “FLET’S Hikari Light,” which offers lower basic monthly charges to access the Internet, NTT Group, through efforts in collaboration with other businesses, endeavored to achieve further popularization and expansion of fiber-optic services.

However, revenues may not grow as anticipated if the following were to occur: the market for fiber-optic services does not expand as anticipated due to diminished investment by businesses and a decline in consumer

 

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confidence, or less than anticipated expansion of video delivery services and other fiber-optic services; rate reductions for fiber-optic access services are greater than anticipated; any issues relating to the formulation of business models, construction of networks or development of technology for the provision of broadband and ubiquitous services cannot be easily resolved; or ICT use in the public sector, including in medicine, education and government, does not progress as anticipated.

In both the corporate and residential markets, fiber-optic IP telephone services that permit the use of conventional fixed-line telephone numbers have grown in popularity. Although NTT Group is working to increase the number of subscribers for the high quality “Hikari Denwa” fiber-optic access IP telephone service and its other IP telephone services, NTT expects that the migration of customers to these IP telephone services will have a negative effect on the profitability of conventional fixed-line telephone services. Growth in revenues from fiber-optic services and broadband and ubiquitous services, as well as cost reductions achieved through the efficiencies of IP technology are projected to offset the negative effect on fixed-line telephone services. Nevertheless, as discussed above, if revenues in these areas do not grow as anticipated, if one-time costs for the migration from the existing networks to the Next Generation Network (“NGN”) become greater than anticipated, or if the burden of maintaining duplicative facilities for the existing networks and the NGN does not decline as anticipated, there is a risk that NTT Group’s earnings and expenses may be adversely affected.

In the fiscal year ended March 31, 2011, NTT Group began its systematic migration from the existing IP network to the NGN, targeted for completion in the fiscal year ending March 31, 2013. NTT Group announced its migration plan from existing PSTN networks to the NGN in November 2011. However, if the migration to the NGN does not progress as anticipated, the maintenance costs for duplicative facilities for a prolonged period and other transient costs may affect the financial condition and results of operations of NTT Group.

In the mobile communications business, NTT Group believes that an increase in revenues from factors such as the expansion of “i-modes” services, smartphones services, “FOMA” and “Xi,” the resulting increase in packet and other communications services, and measures for new value creation in collaboration with various services and industries, is a critical element for future growth. Nevertheless, growth of these services may potentially be curtailed and NTT’s financial condition and results of operations may be negatively impacted if operating systems, applications and content-providing partners required for the provision of services do not cooperate or collaborate on acceptable term as expected, new services fail to meet expectations in terms of scheduling, costs, customer demand and appeal, the various current or future services of NTT DOCOMO are insufficient or not attractive enough to maintain current subscribers or attract new ones, market demand for handset functions is not as envisioned, or higher communication speed through LTE cannot be expanded as scheduled.

NTT Group’s international and domestic investments, alliances and collaborations and investments directed at new fields of business may not produce the returns or provide the opportunities NTT Group expects, and may be beyond the control of NTT Group.

NTT Group has sought to enter into joint ventures, alliances and collaborations, with both domestic and overseas companies and organizations, to more actively respond to changes in the telecommunications market, such as globalization, migration to cloud services and the diversification of user devices. NTT has focused on the steady expansion of total ICT services by utilizing the group’s abilities, in order to respond to the need for high-quality, comprehensive ICT services from corporate customers in Japan and abroad with global end-to-end, one-stop services. However, NTT Group may not be able to maintain or enhance the value or financial performance of domestic and overseas operations in which it has invested or agreed to invest, or which NTT Group will invest in or ally with in the future, or achieve sufficient synergies with these operations.

Over the past few years, NTT Group has made proactive efforts to strengthen its global businesses. With regards to its global customer base of 10,000 companies, including those of overseas subsidiaries of group companies, along with providing rapid and low-cost services by harnessing group company synergies and cross

 

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selling, NTT Group will make an effort to expand its global area coverage and ICT service lineup in order to strengthen its services. To strengthen the framework for promoting such global strategy, a “Global Strategy Committee” and a “Global Personnel Committee” have been established consisting of representatives from group companies, including foreign subsidiaries. However, with the increase in foreign subsidiaries having different corporate cultures, there is the possibility that the merits of diversification will be outweighed by the inability to implement appropriate controls, or that differences in thinking and awareness with respect to managerial ideas and vision will lead to difficulties in the implementation of business strategies and conduct of operations.

For the reasons stated above, NTT may record write-downs related to the impaired value of investments in future periods.

NTT Group may not achieve anticipated cost savings.

NTT Group will continue to make efforts to reduce personnel costs and improve overall operating efficiency in its fixed-line communications business. Moreover, with the transition to fiber-optic access and IP networks, NTT Group is aiming to reduce costs by improving operational systems efficiency and through business process reengineering of call center operations. However, if countermeasures become necessary to address changes in the competitive environment or changes in the market environment due to the economic slowdown, or if the development of the IP network or migration from the existing IP network to the NGN is slower than anticipated, then sufficient cost reductions may not be achieved due to factors such as costs for simultaneously maintaining duplicate facilities for the existing IP network and the NGN not decreasing to the extent anticipated.

Also, with respect to capital expenditures, NTT Group expects to achieve significant cost reductions by reducing capital expenditures for fiber-optic access and the NGN by deploying the results of technical innovations, lowering the cost of equipment and improving construction methods. NTT Group aims to reduce the total amount of capital expenditures as a percentage of operating revenues by shifting the focus of capital expenditures to service creation businesses after capital expenditures in fiber optic access and the NGN stabilize at a lower level. However, in a case where capital expenditure efficiency is not attained as envisioned due to such factors as network capacity expansion in conjunction with the spread of devices, including smartphones and tablet devices, or the enhancement of data centers in conjunction with the development of cloud services, it is possible that capital expenditures will exceed what was envisioned.

Other mobile service providers in the world may not adopt or continue to use technologies and frequency bands that are compatible with those used by NTT DOCOMO’s mobile communications system, which could affect NTT Group’s ability to offer international services.

NTT DOCOMO is able to offer global roaming services on a worldwide basis on the condition that a sufficient number of other mobile service providers have adopted technologies that are compatible with the technologies it uses on its mobile communications systems. NTT Group expects that its overseas affiliates, strategic partners and many other mobile service providers will continue to use technologies compatible with NTT DOCOMO’s, but there is no guarantee of this in the future.

If a sufficient number of mobile service providers do not adopt technologies compatible with NTT DOCOMO’s, if mobile service providers switch to other technologies, or if there is a delay in the introduction of compatible technologies, NTT DOCOMO may not be able to offer international roaming or other services as expected and may not be able to offer its subscribers the convenience of overseas services.

Also, NTT DOCOMO cannot ensure that handset and network vendors will be able to modify their handsets and networks appropriately and promptly if the actions of standardization organizations result in changes to the standardized technologies that NTT DOCOMO adopts, which would require modifications to the handsets and networks that NTT DOCOMO uses.

 

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If such technologies compatible with the technologies NTT DOCOMO has adopted do not develop as expected and NTT DOCOMO is not able to maintain or improve the quality of its overseas services or enjoy the benefits of global economies of scale, this may have an effect on NTT Group’s financial condition and results of operations.

If NTT Group and its business partners are unable to obtain licenses or other rights to use the intellectual properties of third parties that are necessary for NTT Group to conduct its business, NTT Group may not be able to offer certain technologies, products, or services. In addition, NTT Group may be liable for damages due to infringement of the intellectual property rights of other companies.

In order for NTT Group and its business partners to carry out its business operations, it is necessary for NTT Group and its business partners to obtain licenses and other rights to use the intellectual property and other rights of third parties. Currently, NTT Group and its business partners have obtained licenses from the holders of such rights by concluding agreements with such holders, and NTT Group plans to continue to obtain licenses from the holders of other intellectual property rights that are necessary for carrying out its future business. However, if agreement cannot be reached with the holders of such rights or if agreement concerning rights once granted cannot be maintained thereafter, NTT Group and its business partners may not be able to provide certain technologies, products or services. Further, as NTT Group companies acquire foreign corporations, NTT Group businesses are becoming increasingly internationalized, and as a result, it is increasingly possible that a foreign corporation will assert infringement of intellectual property or other rights against NTT Group. If NTT Group is subject to assertions of infringement of intellectual property rights, NTT Group may be forced to expend considerable time and incur costs in reaching a resolution, and if such claims are determined adversely to NTT Group through a court judgment or through a settlement between the relevant parties, revenues from businesses related to such rights may decrease and NTT Group may be liable for damages for infringement of such rights, and NTT Group’s relevant business may be subject to an injunction, which may in turn adversely affect its financial condition and results of operations.

Risks associated with business management

System and network disruptions and issues with system architecture may affect NTT Group’s financial condition and operating results.

In order to provide fixed and mobile voice and data communications services to subscribers, NTT Group has built, deployed nation-wide and maintains fixed-line subscriber telephone, fiber-optic access, W-CDMA and LTE networks. With respect to NTT Group’s networks and systems necessary for service provision, NTT Group has implemented a variety of measures to ensure safe and stable services, including strengthening the durability of exchange offices and establishing multiple transmission lines, but it is possible that notwithstanding these measures, natural disasters such as earthquakes, tsunamis, typhoons and floods, security-related issues including hardware and software failure, terrorism, cyber-terrorism and various other events could cause system and network failure or result in an inability to provide stable services. In such event, NTT Group’s financial condition and results of operations may be affected.

In particular, the occurrence of a large scale disaster could cause severe damage to NTT Group’s telecommunications networks which could take a long time to restore, and emergency electricity use restrictions which could hinder NTT Group’s ability to provide stable services. These events may result in the deterioration of NTT Group’s reputation for reliability and its corporate image, reductions in income and substantial repair costs.

NTT Group services and products using advanced technology have increased, resulting in increased quality control risk. In particular, smartphone and tablet device applications contain elements which could increase the load on NTT Group’s network facilities beyond the level contemplated, such as communications applications that can secure or cut off connections, which cause an increase in control signals between a device and the network.

 

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While NTT Group is making efforts to enhance service quality and reliability by making capital investments in its network facilities to strengthen network resilience and to accelerate response time, if such traffic cannot be processed or a service or product of NTT Group has a defect or a human error, such as an error in equipment settings, NTT may be held liable for damages, and the reputation of NTT Group services and products may be affected.

In addition, in recent years, information security countermeasures for smartphones, cloud services and other new ICT services are becoming an increasing concern. NTT Group is thoroughly working on security countermeasures as a responsible service provider in the information and communications industry, but if an unforeseeable event occurs, it is possible that there will be cases of unauthorized access and virus infections, causing customers’ trust in NTT Group to diminish. Further, NTT DOCOMO’s mobile phones are equipped with various functions, such as payment settlement functions, and NTT DOCOMO provides the services of many other service providers on its mobile phones, which may increase the risk of malfunctions, defects, leaking of personal information from phones and other issues caused by flaws or deficiencies in the services of such service providers.

With respect to the solutions business, NTT Group generally assumes full contractual responsibility at all stages—from the receipt of orders to delivery—for the building of systems and their delivery to clients. There is the possibility that a deviation from initial estimates or problems in project management at the development stage could result in cost overruns or losses due to delivery delays.

NTT’s reputation and credibility may be affected by fraud or misconduct in Japan or abroad, or by an inappropriate use or leak of confidential business information and personal information.

NTT Group is subject to a wide variety of related laws and regulations because of its network of offices which handle a variety of products and services both in Japan and abroad. As a result, some of NTT Group’s business activities require licenses, notifications, and permit approvals. In addition, with respect to overseas business operations, there is a possibility that the burden on the overseas business will increase from, among other things, the rules and regulations of the local country, or the lack thereof, the unpredictable interpretations of such local laws, the adoption of new laws and the revision of existing laws.

NTT Group considers legal compliance to be an extremely important corporate responsibility and works to strengthen its compliance systems and ensure thorough compliance. In addition, in light of the recent tightening of bribery and anti-corruption laws in foreign countries, particularly the United States and the United Kingdom, NTT is working towards further strengthening its compliance systems. However, even with such countermeasures, there may be cases where it is not possible to eliminate compliance risks and reputation risks, including cases of improper personal behavior on the part of an employee. In such cases, there may be an impact on NTT Group’s financial conditions and results of operations.

In addition, mindful of its position of responsibility in the telecommunications business, NTT Group has historically made efforts to protect confidential information obtained in the course of its business, including the personal information of customers. At the same time, NTT Group is currently implementing the “NTT Group Information Security Policy,” which includes enhanced internal information management, training and awareness-raising for officers and employees, publication of manuals and other measures intended to fully address the issue of protection of confidential information including personal information. NTT Group expects to be able to ensure proper management of confidential information including personal information in accordance with its policy. However, if such confidential information is leaked or otherwise misused, there is a risk that such action may affect NTT Group’s business, including its reputation and credibility, and NTT Group’s ability to obtain new subscribers or secure governmental contracts.

 

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Misuse of products and services offered by NTT Group may have an adverse impact on the credibility and corporate image of NTT Group and could expose NTT Group to liabilities.

Inappropriate use of NTT Group’s products and services by users may result in a decrease in the credibility of NTT Group’s products and services and tarnish NTT Group’s corporate image, which may in turn affect NTT Group’s financial condition and results of operations.

A representative example is the occurrence of unsolicited bulk e-mails being sent through NTT DOCOMO’s e-mail services, including “i-mode” mail service, “sp-mode” mail service and “Short Message Service.” Despite NTT DOCOMO’s extensive efforts to address this issue by protecting its subscribers from incurring any economic disadvantage caused by unsolicited bulk e-mails, including notifying its subscribers via various brochures, providing unsolicited bulk e-mail filtering functions with its handsets and suspending the use of or terminating contracts with companies which distribute large amounts of such unsolicited bulk e-mails, the problem has not yet been eliminated. If NTT DOCOMO’s subscribers receive a large amount of unsolicited e-mail, it may cause a decrease in customer satisfaction and damage NTT DOCOMO’s corporate image, leading to a reduction in the number of “i-mode” and “sp-mode” subscriptions.

Further, there has been a wide range of debate regarding issues such as the possibility that a minor’s access to illegal or harmful websites will have a negative impact and regarding the effectiveness of filtering services intended to restrict minors from accessing such harmful sites. These issues may similarly damage NTT DOCOMO’s corporate image.

Mobile phones have also been used in crimes such as the “it’s me” fraud, whereby callers request an emergency bank remittance pretending to be a relative. To combat these misuses of NTT DOCOMO’s services, NTT DOCOMO introduced various measures such as more strict identification confirmation requirements at points of purchase, and ending the provision of pre-paid mobile phones capable of making voice calls as of the end of March 2012 because such pre-paid mobile phones are easier to use in criminal activities. However, in the event criminal usage increases, mobile phones may be regarded as a problem and this may lead to an increase in the cancellation of subscriptions.

In addition, as handsets and services become more sophisticated, new issues may arise when subscribers are charged higher fees for packet transmission than they are aware of as a result of using handsets without fully recognizing the extent of their use of packet transmission in terms of frequency and volume. There are also concerns over the occurrence of accidents caused by the use of mobile phones while operating vehicles or bicycles. In addition, there are issues concerning the high fees charged from the excess use of paid content by subscribers and, in conjunction with the spread of smartphones, the leaking of private information by fraudulent applications (software) on the Internet.

NTT Group believes that it has properly addressed these social issues, but it is not certain whether NTT Group will be able to continue to carry out proper measures in the future. If NTT Group is unable to address these issues in an appropriate manner, this may result in an increasing number of cancellations among current subscribers and an inability to acquire the anticipated number of new subscribers, which may impact NTT Group’s financial condition and results of operations.

Risks associated with the government, including rules, regulations, and others

Changes or decisions regarding telecommunications regulations may affect NTT Group’s business.

The regulation of the Japanese telecommunications industry has been changed in many areas, including the elimination of foreign ownership restrictions (except in the case of NTT), retail price deregulation and the implementation of a Long Run Incremental Cost Methodology (“LRIC Methodology”) for interconnection

 

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charges and amendments to telecommunications laws aimed at promoting competition. Decisions relating to Government regulations and the resulting changes in the telecommunications industry may affect NTT Group’s financial condition and results of operations.

For a summary of Government regulations currently under review, please see “Item 4—Information on the Company—Regulations.”

The frequencies that NTT DOCOMO can use are limited, and it is possible that it will not be able to secure adequate frequency spectrum for its operations.

NTT DOCOMO has limited frequencies available for its services. In areas such as the vicinity of major train stations in Tokyo and Osaka, NTT DOCOMO’s mobile communications network may suffer deterioration of service quality at peak times, when use of available frequencies is at or near its limit.

In addition, while the number of NTT DOCOMO subscribers and the traffic from such subscribers increases in conjunction with the expansion of devices, such as smartphones and tablet devices, there may be a decline in the quality of services if government agencies do not allocate the frequency spectrum required for unhindered operation, or if changes are made to the frequency spectrum allocation system, for example, by the introduction of reallocation through an auction system, and the necessary frequency spectrum cannot be obtained. Currently, government agencies are conducting internal deliberations regarding the implementation of an auction system, which has included the submission of a “bill to amend a portion of the Radio Act” to the Diet in March 2012. If the auction system is implemented and the amounts paid by NTT DOCOMO to obtain the frequencies under the system rise, it is possible that NTT Group’s financial condition or results of operations will be affected. For details, please see “Item 4—Information on the Company—Regulations—Radio Act.”

NTT DOCOMO is making efforts to obtain new frequencies and to improve efficiency of frequency use through the application of its technologies, such as LTE, and through the promotion of migration to LTE. However, there can be no assurance that NTT DOCOMO’s efforts will be sufficient to avoid a deterioration in service quality. If NTT DOCOMO is unable to address such problems sufficiently and in a timely manner, it is possible that NTT Group’s financial condition or results of operations will be materially affected due to constraints in providing its wireless services or to the loss of subscribers to competitors.

NTT Group may be impacted by laws, regulations and systems relating to the reduction of greenhouse gas emissions.

In conjunction with the increasing diversification and sophistication of subscriber services, NTT has been expanding its telecommunication facilities and data centers, and, as a result, its power usage has trended upwards. NTT Group has implemented measures directed at reducing its greenhouse gas emissions, including the deployment of power-saving ICT devices, highly efficient power sources and air conditioning devices, as well as natural energy systems. It is possible, however, that the introduction of regulations for reducing greenhouse gases will result in cost increases, which may have an impact on the financial condition and results of operations of NTT Group.

The Government owns enough NTT Shares to give it considerable influence over whether resolutions at NTT shareholder meetings are adopted, and rules and regulations in Japan provide the Government with regulatory authority over NTT Group companies.

The Government, through the Minister of Finance, currently owns 32.59% of NTT’s issued Shares (35.24% of NTT’s outstanding Shares excluding treasury stock), which equates to 35.29% of the voting rights, calculated on the basis of issued shares minus treasury stock and less-than-one-unit shares. The Government, in its capacity as a shareholder, votes at shareholder meetings of NTT and, by virtue of its statutorily mandated position as the largest shareholder, has the power to exert considerable influence over decisions made at such meetings. In 1997,

 

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in a statement at the Diet, it was stated that the Government did not intend to actively use its position as a shareholder to direct the management of NTT. In fact, the Government has not used its power as a shareholder to direct the management of NTT in the past.

The issuance or sale of additional NTT Shares or concerns regarding additional supply of NTT Shares in the stock market may affect the trading price of NTT Shares and ADSs.

Until October 1986, the Government owned 100% of the issued Shares of NTT. As a result of sales of Shares by the Government to the public and sales of Shares by the Government to NTT as part of NTT’s Share repurchase programs, as of March 31, 2012, the Government’s ownership of Shares was approximately 32.59% of NTT’s issued Shares (35.24% of NTT’s outstanding Shares excluding treasury stock). In the case that the NTT Law is revised again in order to ease or repeal the requirements regarding Government ownership of Shares, or if NTT cancels treasury stock, the number of Shares the Government is allowed to sell would increase.

The sale of Shares by the Government or the issuance, sale or other disposal of treasury stock by NTT (or the potential for such transactions) could have an impact on the market price of Shares and ADSs.

For details regarding NTT Group’s relationship with the Government, please see “Item 4—Information on the Company—Matters Relating to NTT’s Shares.”

Investors may have difficulty enforcing judgments under the laws of foreign countries, including the U.S. securities laws regarding the civil liabilities of NTT.

NTT is a limited liability, joint-stock corporation established under the laws of Japan. Most, if not all, of NTT’s directors and management reside in Japan. All or a substantial portion of the assets of such persons or NTT are located in Japan. As a result, it may not be possible for investors to effect legal service of process outside Japan upon such persons or NTT or to enforce against them judgments predicated upon the laws of foreign countries, including the civil liability provisions of the U.S. securities laws, in federal or state courts in the United States or other foreign courts. NTT has been advised by its Japanese counsel that there is uncertainty as to the enforceability, in actions originated in Japan, of liabilities predicated solely upon the laws of foreign countries, including the U.S. securities laws, and as to the enforceability in Japan of judgments of federal or state courts in the United States or other foreign courts obtained in actions predicated upon the laws of foreign countries, including the civil liability provisions of the U.S. securities laws.

Forward-Looking Statements

Some of the statements made in this annual report are forward-looking statements. These include statements with respect to NTT’s plans, strategies and beliefs and other statements that are not historical facts. The statements are based on management’s assumptions and beliefs in light of the information currently available to it. These assumptions and beliefs include information concerning:

 

  (i)   NTT Group; and

 

  (ii)   the economy and telecommunications industry in Japan and overseas.

The assumptions also involve risks and uncertainties which may cause the actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Potential risks and uncertainties include:

 

  (i)   changes in economic conditions, fluctuations in exchange and interests rates, and volatility in securities and other financial markets in Japan and other countries;

 

  (ii)   risks and uncertainties associated with NTT Group’s fund procurement;

 

  (iii)   the effects of increased competition on market share and revenue;

 

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  (iv)   risks and uncertainties associated with the pricing of services, including risks and uncertainties associated with the reduction in revenues that may result from changes in rates;

 

  (v)   the ability of NTT Group to maintain growth and the success of new products and services and new businesses;

 

  (vi)   risks and uncertainties associated with the growth of new businesses, migration from existing businesses accompanying the expansion of IP, broadband and ubiquitous services, and other market developments;

 

  (vii)   risks and uncertainties associated with projections of future usage of NTT Group’s networks, including broadband services, 3G mobile subscriber services, wireless broadband services through the LTE and other Internet-related businesses;

 

  (viii)   risks and uncertainties associated with the effects of NTT Group’s international and domestic investments, alliances and collaborations and investments directed at new fields of businesses on NTT Group’s financial condition and operating results;

 

  (ix)   risks and uncertainties associated with the progress of NTT Group’s efforts to reduce costs;

 

  (x)   technology substitution and changes in available technology;

 

  (xi)   risks and uncertainties associated with NTT Group’s ability to obtain licenses or other rights to use the intellectual properties of third parties that are necessary for NTT Group to conduct its business;

 

  (xii)   the ability of NTT Group to add capacity to NTT Group’s existing networks; for example, the possibility that NTT DOCOMO is unable to secure the necessary frequency spectrum for operation or expand its facilities;

 

  (xiii)   the impact on NTT Group’s financial condition and operating results of system/network failures and problems arising during system construction due to causes including: earthquakes and typhoons, epidemics and other natural disasters; power shortages, malfunctioning of equipment, hardware or software failures resulting from, among other things, flaws in system construction; acts of terrorism, cyber attacks, intentional wrongdoing and sabotage; and other similar natural disasters or acts of wrongdoing;

 

  (xiv)   the improper handling and leaking of confidential information obtained in the course of NTT Group’s business, such as personal information;

 

  (xv)   the occurrence of crime and other social problems resulting from improper use by certain users of products or services offered by NTT Group;

 

  (xvi)   concerns over health risks and safety issues associated with the use of products and services offered by NTT Group;

 

  (xvii)   the effect of the introduction of, or changes to, various laws and regulations, including changes or decisions regarding telecommunications regulations, such as future decisions regarding the setting of interconnection rates or the outcome of discussions contemplating changes to the NTT Law;

 

  (xviii)   risks and uncertainties associated with the introduction of laws and regulations relating to the reduction of greenhouse gas emissions;

 

  (xix)   the impact of ongoing or potential litigation, and the subsequent outcome or rulings of government agencies; and

 

  (xx)   any decision by the Government of Japan to exercise its power to exert influence over decisions made at NTT general meetings of shareholders.

NTT desires to qualify for the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995.

 

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ITEM 4—INFORMATION ON THE COMPANY

NTT Group

Operations and Segment Overview

 

LOGO

 

* Percentage of equity provided as of June 29, 2012. The figures represent equity held by NTT, directly or indirectly, in relation to each company’s outstanding shares.

NTT Group is the largest provider of fixed and mobile voice related services, IP/packet communications services, sales of telecommunications equipment, system integration and other telecommunications-related services in Japan and operates one of the largest telephone networks in the world. NTT Group consists of NTT (Holding Company), its 772 subsidiaries and 106 affiliated companies (as of March 31, 2012). The principal businesses of NTT Group are its regional communications business, long distance and international communications business, mobile communications business, and data communications business. Details of each principal business and the consolidated subsidiaries within each principal business are described below. NTT Group’s five operating segments are the same as those described under Note 15 to the Consolidated Financial Statements.

The principal services in the regional communications business are intra-prefectural communications services and related ancillary services. The consolidated subsidiaries in the regional communications business are NIPPON TELEGRAPH AND TELEPHONE EAST CORPORATION (NTT East), NIPPON TELEGRAPH AND TELEPHONE WEST CORPORATION (NTT West), NTT EAST-TOKYO CORPORATION, NTT-ME CORPORATION, NTT INFRASTRUCTURE NETWORK CORPORATION, NTT WEST-KANSAI CORPORATION, NTT NEOMEIT CORPORATION, NTT MARKETING ACT CORPORATION, NTT DIRECTORY SERVICES Co., NTT Quaris Corporation, TelWel East Japan Corporation, NTT Solco Corporation, NTT CARD SOLUTION CORP., NTT TELECON Co., Ltd., NTT SOLMARE CORPORATION, NTT WEST ASSET PLANNING CORPORATION, TelWel West Nippon Corporation, and 69 other companies.

The principal services in the long distance and international communications business are inter-prefectural communications services, international communications business, solution business and related services. The consolidated subsidiaries in the long distance and international communications business are NTT COMMUNICATIONS CORPORATION (NTT Communications), Dimension Data Holdings plc, NTT PC Communications Incorporated, NTT Plala Inc., NTT Resonant Inc., NTT America, Inc., NTT EUROPE LTD., NTT COM ASIA LIMITED, NTT AUSTRALIA PTY. LTD., Verio Inc., Integralis AG, NTT WORLD ENGINEERING MARINE CORPORATION, NTT WORLDWIDE TELECOMMUNICATIONS CORPORATION, Spectrum Holdings Inc, Dimension Data Commerce Centre Ltd, Dimension Data (US) II Inc, Dimension Data (US) Inc, Dimension Data North America, Inc, Datacraft Australia Pty Ltd, NTT Com CHEO CORPORATION, NTT Com Technology Corporation, NTT BizLink, Inc., NTT Com Solution & Engineering Corporation(*) and 231 other companies.

 

(*) NTT FANET SYSTEMS Corp. changed its name to NTT Com Solution & Engineering Corporation on November 1, 2011.

The principal services in the mobile communications business are mobile telephone services and related services. The consolidated subsidiaries in the mobile communications business are NTT DOCOMO, INC.

 

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(NTT DOCOMO)(*1), DOCOMO Service Inc., DOCOMO Engineering Inc., DOCOMO Mobile Inc., DOCOMO Support Inc., DOCOMO Systems, Inc., DOCOMO Technology, Inc., DOCOMO Business Net, Inc., DOCOMO PACIFIC, INC., net mobile AG, OAK LAWN MARKETING, INC., D2 Communications Inc. (*2), DOCOMO.COM, INC., mmbi, Inc., Radishbo-ya Co., Ltd., DOCOMO interTouch Pte. Ltd., and 112 other companies.

 

(*1) NTT DOCOMO was incorporated in Japan as a joint-stock company in 1991. As of June 29, 2012, NTT’s ownership interest in NTT DOCOMO was 66.66% (includes shares owned indirectly).
(*2) D2 Communications Inc. changed its name to D2C Inc. on June 1, 2012.

The principal services in the data communications business are system integration services and network system services. The consolidated subsidiaries in the data communications business are NTT DATA CORPORATION (NTT DATA)(*1), NTT DATA SYSTEM TECHNOLOGIES INC., NTT DATA i CORPORATION, NTT DATA INTERNATIONAL L.L.C., NTT DATA FINANCIAL CORE CORPORATION, NTT DATA FORCE CORPORATION, NTT DATA WAVE CORPORATION, Nihon Card Processing Co., Ltd, NTT DATA FRONTIER CORPORATION, NTT DATA BUSINESS SYSTEMS CORPORATION(*2), NTT DATA Getronics Corporation, NTT DATA EUROPE GmbH & Co. KG, itelligence AG, NTT DATA CCS CORPORATION, Cirquent GmbH, NTT DATA MSE CORPORATION, JSOL CORPORATION, XNET Corporation, NJK Corporation, NTT DATA International Services, Inc.(*3), NTT DATA Inc.(*4), Value Team S.p.A.(*5), JBIS Holdings, Inc., NTT DATA SMS CORPORATION, NTT DATA CUSTOMER SERVICE CORPORATION, and 198 other companies.

 

(*1) NTT DATA was incorporated in Japan as a joint-stock company in 1988. As of June 29, 2012, NTT’s ownership interest in NTT DATA was 54.21% (includes shares owned indirectly).
(*2) NTT DATA SYSTEMS CORPORATION merged with NTT DATA QUICK CORPORATION, and changed its name to NTT DATA BUSINESS SYSTEMS CORPORATION on April 1, 2011.
(*3) Keane International, Inc. changed its name to NTT DATA International Services, Inc. on January 31, 2012.
(*4) Keane, Inc. changed its name to NTT DATA, Inc. on January 31, 2012.
(*5) Value Team S.p.A. changed its name to NTT DATA Italia S.p.A. on April 2, 2012.

Other businesses include the operations of NTT (Holding Company), in addition to real estate, finance, construction and power, systems development and development of advanced technologies. The consolidated subsidiaries in these other businesses are NTT URBAN DEVELOPMENT CORPORATION, UD EUROPE LIMITED, NTT FINANCE CORPORATION, NTT FACILITIES, INC., NTT COMWARE CORPORATION, NTT ADVANCED TECHNOLOGY CORPORATION, NTT Electronics Corporation, NTT Software Corporation, NTT ADVERTISING, INC., InfoCom Research, Inc., NTT Human Solutions Corporation, NTT LEARNING SYSTEMS CORPORATION, NTT BUSINESS ASSOCIE Corporation, NTT LOGISCO Inc., NTT Investment Partners, Inc. and 66 other companies.

Main Services

NTT Group provides fixed-line broadband and fixed-line telephone services through NTT East and NTT West, and is the biggest provider of such services in Japan. As of March 31, 2012, the number of combined NTT East and NTT West broadband service subscriptions, for the FTTH service “FLET’S Hikari” and for the ADSL service “FLET’S ADSL” was 16,564 thousand subscriptions and 2,322 thousand subscriptions, respectively. The aggregate of subscriber line subscriptions, which is the sum of fixed-line telephone service subscriptions and ISDN service subscriptions, was 31,672 thousand subscriptions. In addition, NTT Group provides ISP services through NTT Communications and others. As of March 31, 2012, the number of ISP service subscriptions was 11,882 thousand subscriptions.

NTT Group provides mobile broadband and mobile voice communications services through NTT DOCOMO. This service is provided through three networks, LTE, W-CDMA and PDC (terminated as of March 31, 2012). As of March 31, 2012, NTT DOCOMO had 60,129 thousand subscribers and was the largest provider of mobile phone services in Japan.

 

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NTT Group provides data communications services through NTT DATA. NTT DATA is the leading provider of data communications systems and information systems using computer networks as a platform in Japan. NTT DATA primarily engages in strategic planning, designing, installing and operating data communications systems and information systems using computer networks as a platform, and providing IT services.

In addition, NTT Group provides through its subsidiaries financial services, including issuing leases and credit cards, real estate services, including building rentals and apartment sales, systems development services, and construction-related services, including the design, construction and maintenance of buildings.

NTT’s Agent for U.S. Federal Securities Law Purposes

NTT’s agent for U.S. federal securities law purposes is NTT America, Inc., located at 101 Park Avenue, 41st Floor, New York, NY 10178. NTT is located at 3-1, Otemachi 2-chome, Chiyoda-ku, Tokyo 100-8116, Japan (Phone number: 81-3-5205-5581). NTT’s Internet website address is http://www.ntt.co.jp/index_e.html. The information on NTT’s website is not incorporated by reference into this document. This annual report will be placed on NTT’s Internet website concurrently with its filing with the United States Securities and Exchange Commission (the “SEC”).

History

 

(1) Background

On August 1, 1952, pursuant to the Nippon Telegraph and Telephone Public Corporation Act (July 31, 1952, Law No. 250), Nippon Telegraph and Telephone Public Corporation (“NTT Public”) was incorporated and its capital stock was wholly-owned by the Government. On April 1, 1985, pursuant to the Nippon Telegraph and Telephone Corporation Act (December 25, 1984, Law No. 85), Nippon Telegraph and Telephone Corporation was established with its capital stock wholly-owned by the Government. When NTT was established, it succeeded to all the rights and obligations of NTT Public.

 

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(2) History

 

April 1985

   NTT incorporated as a limited liability, joint-stock company.

February 1987

   NTT’s Shares are listed on the Tokyo, Osaka, Nagoya, Kyoto, Hiroshima, Fukuoka, Niigata and Sapporo stock exchanges.

July 1988

   NTT’s DATA Communications Division was transferred to NTT DATA System Service Corporation.

April 1992

   Implemented organizational reform corresponding to the long distance and regional communication service divisions through a review of, and commitment to, a divisional system.

July 1992

   Business operations relating to car phone, mobile phone, maritime telephones, aircraft passenger telephones and radio paging were transferred to NTT Mobile Communications Network, Inc.

December 1992

   NTT’s electricity, construction and building management operation was transferred to NTT FACILITIES, INC.

September 1994

   NTT ADSs are listed on the New York Stock Exchange.

October 1994

   NTT’s Shares are listed on the London Stock Exchange.

April 1995

   NTT DATA System Service Corporation listed on the Tokyo Stock Exchange.

September 1997

   NTT’s Software Headquarters was transferred to NTT COMMUNICATIONWARE CORPORATION.

August 1998

   NTT DATA System Service Corporation changed its business name to NTT DATA CORPORATION.

October 1998

   NTT Mobile Communications Network, Inc. listed on the Tokyo Stock Exchange.

July 1999

   Implemented a group reorganization with NTT becoming a holding company. Among NTT’s operations, operation of intra-prefectural communications services was transferred to its two wholly-owned subsidiaries, NTT East and NTT West, and inter-prefectural communications services were transferred to NTT COMMUNICATIONS CORPORATION, also a wholly-owned subsidiary of NTT.

April 2000

   NTT Mobile Communications Network, Inc. changed its business name to NTT DOCOMO, INC.

November 2000

   NTT COMMUNICATIONWARE CORPORATION changed its business name to NTT COMWARE CORPORATION.

March 2002

   NTT DOCOMO, INC. listed on the London Stock Exchange and the New York Stock Exchange.

November 2004

   NTT URBAN DEVELOPMENT CORPORATION listed on the Tokyo Stock Exchange.

January 2009

   NTT implemented a 100-for-1 common stock split.

Reorganization

On July 1, 1999, certain of NTT’s business activities were transferred to NTT’s wholly-owned subsidiaries, NTT East, NTT West and NTT Communications. Under the Law Concerning Partial Revision to the Nippon Telegraph and Telephone Corporation Law promulgated in June 1997, NTT is required to hold all the shares of NTT East and NTT West. NTT East provides regional telecommunications and related services in the Hokkaido, Tohoku, Kanto and Shin-etsu regions of Japan. NTT West provides regional telecommunications and related services in the Tokai, Hokuriku, Kansai, Chugoku, Shikoku and Kyushu regions of Japan. NTT Communications provides domestic inter-prefectural telecommunications, data transmission services such as IP-VPN and OCN, and other network and ancillary services throughout Japan and commenced offering international telecommunications services in October 1999. In May 2001, NTT Communications also began offering intra-city telecommunications services in Tokyo, Osaka and Nagoya.

 

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After the transfer of certain business activities, NTT continues to exist and operates primarily as a holding company. The principal sources of NTT’s cash revenues consist of three categories. NTT receives:

 

   

dividends from its subsidiaries;

 

   

payments for providing management services through contracts with its subsidiaries; and

 

   

payments for its fundamental research and development activities through contracts with each of its subsidiaries that benefit from NTT’s research and development activities.

NTT is directly responsible for formulating and promoting the overall strategy of NTT Group, setting financial targets and conducting basic research and development for NTT Group. The presidents of NTT East, NTT West, NTT Communications, NTT DOCOMO, NTT DATA and NTT meet from time to time to discuss the strategy of NTT Group. Generally, each of the companies within NTT Group operates autonomously. However, each of the companies within NTT Group is to discuss with, or report to, NTT on certain fundamental business decisions relating to that company, including amendments to their respective articles of incorporation, mergers and consolidations, assignments and transfers of businesses, election and removal of directors and corporate auditors, appropriation of profits, increases in share capital, investments, including international investments, loans and guarantees, and establishment of business operation plans.

Please see “Item 4—Regulations—NTT Law” regarding the recent discussions of NTT Group’s managerial structure.

Business Operations of Subsidiaries

NTT Group has undertaken several initiatives to improve its management efficiency and promote cost savings. These include the transfer from NTT to its subsidiaries of certain functions, including telecommunications software and systems development, facility management and maintenance, equipment sales and directory assistance. In addition, NTT Group has begun making these services available not only to NTT Group companies but also to third parties, thereby creating new revenue sources. NTT expects these subsidiaries, as independent companies, to take greater responsibility for the profit and loss of their operations and to have a stronger incentive to boost revenues and cut costs as compared to when they were divisions of NTT. As of March 31, 2012, NTT had 878 subsidiaries and affiliated companies.

Reorganization of Business Operation Structure of NTT East and NTT West

In May 2002, approximately 100 outsourcing subsidiaries began operations. NTT transferred an aggregate of approximately 100,000 NTT East and NTT West employees to these outsourcing companies, each specializing in one of three fields:

 

   

facilities and equipment: design, installation and maintenance of user systems for corporations, local governments and others; support services for information-related equipment (PCs, routers, etc.);

 

   

marketing: marketing of local portals; collection, processing and editing of local content; planning and implementation of IT seminars; planning, design and operation of websites; and

 

   

administrative: outsourcing services for payroll settlement, accounting and others.

While NTT East and NTT West maintain close relationships with the outsourcing subsidiaries, they are focused on providing reliable, high-quality services, including universal services, and are working to reduce labor costs through an arrangement with outsourcing subsidiaries whereby employees, primarily those 51 years of age and over, retire from NTT East and NTT West and are then re-employed by the outsourcing companies at wage levels 15% to 30% lower than before. Each outsourcing subsidiary lowered its wage level to a level consistent with the standards of the region and type of business, depending on its respective expertise (maintenance, sales, general affairs and accounting). This system of regional subsidiaries has the advantage of

 

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giving NTT a local presence throughout Japan, thereby enabling NTT to respond to the IT needs of local governments, companies and individuals, which have grown in proportion to the spread of broadband services.

In July 2005, in order to offer customers greater opportunities for one-stop shopping and to achieve further efficiencies through flow-through services, NTT East, among other things, consolidated the three fields of regional outsourcing companies—i.e., marketing, facilities and administration—into prefectural units, and outsourced branch corporate marketing operations to these new companies. Furthermore, beginning in June 2007, NTT East implemented plans to consolidate various sites, including “116” call centers, by integrating bases, mainly in regional districts, and increased its reliance on outsourcing operations to group companies in its efforts to improve business efficiency.

In July 2006, NTT West modified its headquarters organization to provide specialized handling of broadband services, and reinforced its prefectural branch functions to promote businesses with strong local ties. In conjunction with these developments, NTT West also consolidated its marketing, facility, and administrative subsidiaries. Furthermore, in April 2008, anticipating an increase in demand for one-stop consulting, configuration and operational support services for customers’ home IT environments that are tailored to their individual needs and lifestyles, NTT West established six companies, including NTT West-Home Techno Kansai, and began operations in July 2008.

Reorganization of Business Operation Structure of Corporate Businesses and Upper Layer Businesses

Based on the document entitled “Promoting the NTT Group Medium-Term Management Strategy” (released November 2005), in the fiscal year ended March 31, 2007, NTT Group conducted a review of its corporate businesses and upper layer businesses in order to address user needs with respect to both the convergence of services associated with the growth of IP networks and one-stop services and to enhance competitiveness through efficient allocation of NTT Group resources. Specifically, with respect to its corporate businesses, NTT Group also revised its customer accounts system. Going forward, NTT East and NTT West are responsible for customers who require more locally oriented service, while NTT Communications is responsible for other customers such as central government agencies, city banks, and trading companies. With these changes, NTT Group reassigned approximately 1,200 of NTT East and NTT West’s sales staff and system engineers to NTT Communications. Further, with respect to upper layer businesses, the following companies became subsidiaries of NTT Communications: NTT Resonant Inc., which operates the portal website “goo”; NTT Plala Inc. (formerly Plala Networks, Inc.), which provides Internet access services and video distribution services for TV; and On Demand TV K.K. (liquidated in December 2008), which also provides video distribution services. In March 2008, to increase business efficiency and provide more attractive services, NTT Group’s video distribution services for television were consolidated in NTT Plala Inc. and a high-quality video distribution service compatible with the NGN, known as Hikari TV, was launched.

Reorganization of Business Operation Structure of NTT DOCOMO

In July 2008, NTT DOCOMO reorganized its group structure to merge its eight regional subsidiaries, including NTT DoCoMo Hokkaido, Inc., into NTT DOCOMO with a goal of achieving “enriched and enhanced customer services,” “streamlined group management” and “faster decision-making” for the purpose of enhancing the speed and effectiveness of its operations.

Listing of NTT Urban Development

The principal business activities of NTT Urban Development are real estate leasing and sales, along with the design management and construction operations of buildings. On November 4, 2004, NTT Urban Development was listed on the First Section of the Tokyo Stock Exchange. NTT sold 83,277 common shares with no par value of NTT Urban Development, and NTT Urban Development issued 132,000 new shares. As a result, NTT Group’s ownership of NTT Urban Development’s shares declined from 100% to 67.3%.

 

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Reorganization of Business Operation Structure of NTT DATA

Starting in January 2012, NTT DATA initiated plans for the integration and reorganization of operations at overseas group companies in response to the accelerating global business needs of its customers, with the goals of both building a structure that provides an operational system supported with speedy service on a global scale, and of strengthening the NTT DATA brand abroad, focusing on NTT DATA, Inc. in the U.S., NTT DATA EMEA Ltd. in Europe, Middle East and Africa, NTT DATA (CHINA) Co., LTD. in China, and NTT DATA Asia Pacific Ptd. Ltd. in the Asia-Pacific region. Further, in April 2012, NTT DATA changed its corporate logo to a globally uniform design and started business development under the new brand logo.

Principal Business Activities

NTT Group’s businesses are segmented according to its five primary lines of businesses: regional communications business, long distance and international communications business, mobile communications business, data communications business, and other businesses. See Note 15 to the Consolidated Financial Statements attached hereto.

The business results for each segment for the fiscal year ended March 31, 2012 are as follows:

Regional Communications Business Segment

NTT East and NTT West, which are the main subsidiaries of NTT in the regional communications business segment, worked to secure solid revenue structures by collaborating with other business operators, expanding FLET’S Hikari service menus, promoting fiber-optic and IP services through the expansion of Hikari use through Wi-Fi, and improving support services that lead to customer retention.

The main initiatives in this segment are as follows.

 

[1] Number of Subscriptions for Major Services

 

   

FLET’S Hikari: 16.56 million subscriptions (an increase of 1.51 million subscriptions from the previous fiscal year)

 

   

Hikari Denwa: 13.90 million channels (an increase of 1.79 million channels from the previous fiscal year)

 

   

FLET’S TV: 0.86 million subscriptions (an increase of 0.27 million subscriptions from the previous fiscal year)

 

[2] Promotion of Fiber-optic and IP Services

Major Services and Products Launched in the Fiscal Year Under Review

 

Service or Product

  

Description

FLET’S Hikari Light

(NTT East Ÿ NTT West)

   Optical broadband service providing a two-tier fixed rate system with low basic monthly charges for customers who are just starting to use the Internet or have few opportunities to use the Internet.

FLET’S Joint

(NTT East Ÿ NTT West)

   A service that delivers software held on a software delivery server on behalf of service providers, including, among other things, digital home electronics and remote control of surveillance cameras, to home gateways of “FLETS Hikari Next” users.

Hikari Portable “Wi-Fi Cradle”

(NTT East)

   An optional desktop cradle equipped with high-speed wireless LAN available for rent with the mobile Wi-Fi router, “Hikari Portable.” Allows the use of wireless LAN at home even while taking “Hikari Portable” outside.

 

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Service or Product

  

Description

Hikari Station

(NTT East)

   A service offered for “FLET’S Hikari Next” customers operating chain stores, stores in shopping arcades and public facilities, among others, that provides an Internet connection environment for visitors and distributes store information and coupons by installing Wi-Fi access points.

Ninen-wari

(NTT East)

   A discount plan for the single-unit family plan of “FLETS Hikari Next” and “B FLET’S” services, conditioned on the user remaining subscribed for a period of 2 years.

Hikari BOX+

(NTT West)

   A device that enables the viewing of video services on the Internet by connecting to the TV, easily operated via remote control.

Major Collaborative Projects with Other Businesses Relating to Provision of Services Entered into During the Fiscal Year Under Review

 

Business Partner

  

Description

OMRON Corporation

(NTT West)

   Established NTT Smile Energy, a joint venture providing energy-saving support services to households, utilizing the combined business know-how of OMRON Corporation’s advanced sensing and control technology (an automatic control technology of devices using sensors) and NTT West’s network technology. Began providing “Eco-Megane,” a service of “visualizing” domestic power consumption and power generation of solar power systems.

Seven & i Holdings Co., Ltd.

(“Seven & i”)

(NTT East)

   Entered into a comprehensive business collaboration agreement to utilize resources of both Seven & i and NTT East, including Seven & i’s store locations, such as 7-Eleven convenience stores, and NTT East’s optical broadband services. In addition to the development of Wi-Fi bases at store locations and the provision of shopping support, NTT East and Seven & i started working on preparing information stations (offering free public wireless LAN spots during disasters and installing special public telephones) for emergency situations in the 23 wards of the Tokyo metropolitan area.

Gurunavi, Inc.

(NTT East)

   Began collaboration on services, by utilizing Gurunavi, Inc.’s relationships with restaurants, to market installation of “FLET’S Hikari + Wi-Fi” at such restaurants and combining invoices of Gurunavi’s shopping sites with FLET’S Hikari’s invoice.

 

[3] Improving Customer Service

Expanding and Enhancing Customer Support

 

   

Subscriptions for “Remote Support Service,” which provides remote responses to a broad range of customer inquiries concerning all aspects of broadband services, reached 4.30 million (NTT East/NTT West).

 

   

Subscriptions to the “FLET’S Hikari Members Club,” (for NTT East) and “CLUB NTT-West” (for NTT West), membership privilege programs that offer points based on monthly usage and special content, reached a total of 7.76 million.

 

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Major Collaborative Projects with Other Businesses Relating to Support Services Entered into During the Fiscal Year Under Review

 

Business Partner

  

Description

Canon Marketing Japan Inc.

(NTT East • NTT West)

   Call centers and maintenance support departments of each business partner, NTT East and NTT West are collaborating to establish a system for providing one-stop customer support (for breakdowns and other troubleshooting) to their respective customers in order to handle the increased variety of office ICT equipment, including network-connectable PCs and business phones, and to respond to the increasingly complex user environment.

Epson Sales Japan Corp.

(NTT East)

  

RICOH JAPAN Corporation

(NTT West)

  

TOSHIBA TEC CORPORATION

(NTT West)

  

Allied Telesis K.K

(NTT West)

  

Long Distance and International Communications Business Segment

NTT Communications, one of NTT’s main subsidiaries in the long-distance and international communications business segment, with the goal of being perceived by its customers around the world as a truly leading global player with the “Global ICT Partner—Innovative. Reliable. Seamless—” slogan, developed the “Global Cloud Vision” in response to customers’ requests for cloud migration and worked towards the “development of end-to-end, one-stop, global and seamless services to provide cloud to network, applications, and security services.” The main initiatives in this segment are as follows.

 

[1] Number of Subscriptions for Major Services

 

   

Hikari TV: 2.00 million subscriptions (an increase of 0.59 million subscriptions from the previous fiscal year)

 

   

OCN: 8.44 million subscriptions (an increase of 0.20 million subscriptions from the previous fiscal year)

 

   

Plala: 3.12 million subscriptions (an increase of 0.02 million subscriptions from the previous fiscal year)

 

[2] Development of Services for Individual Customers

Main Services Launched in the Fiscal Year Under Review

 

Service

  

Description

050 plus    Service that enables 050 IP phones to be used on smartphones and tablet devices by installing dedicated applications. Telephone numbers starting with 050 can be obtained, and phone calls between “050 plus” users and users of “OCN Dot Phone” or 050 IP phones of mobile providers are free of charge.

Hikari TV Dokodemo

(NTT Plala Inc.)

   Service that enables “Hikari TV” users to view videos on smartphones or tablet devices by installing a dedicated application.

Hikari TV Mobile

(NTT Plala Inc.)

   Dedicated service for mobile devices that enables viewing of videos on smartphones or tablet devices by installing a dedicated application.

 

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[3] Development of Services for Corporate Customers

Main Services Launched in the Fiscal Year Under Review

 

Service

  

Description

BizCITY

  

Biz Hosting E-Mail and Web

   Hosting service that specializes in e-mail and Web server functions, with three types of plans depending on usage fees, server space and customizations.

Biz Simple Disk

   Hard disk service that specializes in storage and saving of large amounts of data, such as IT system backup data and video data. Data capacity of up to 3 petabytes, depending on the user’s scale of use. (One petabyte equals one million gigabytes.)

Cloudn

   New public cloud service to allow customers to flexibly and cost efficiently increase or decrease data capacity, equipped with a variety of APIs compatible with the industry leader Amazon Web Services LLC.

Arcstar Universal One

   VPN service optimized for cloud use with high quality and high reliability features. Four types of plans available according to reliability and price. Service is provided in 159 countries and regions worldwide.

050 plus for Biz

   Expanded service with convenient functions of 050 plus for corporate customers. The functions include usage of the 050 IP phone, a subscription for 050 IP phone with multiple IDs, comprehensive billing of fees, and online billing statements for calls.
Arcstar Unified Communications Service    Integrated voice services for corporate customers developing businesses overseas. Offers three types of plans: services for internal extension communications service between customers’ offices in Japan and overseas; external line services from customers’ overseas offices; and cloud based services equipped with the messages and conference call functions.

 

[4] Development of Global Business

Main Activities During the Fiscal Year Under Review

 

   

Network Expansion

- Efforts were made to increase IP backbone capacity in order to provide speedy and stable distribution of Internet data around the world. NTT increased the connection speed of the IP backbone between Japan and the U.S., where the highest volume of data in the world is exchanged, to 600Gbps.

 

   

Business Site Development

- NTT Com Asia Ltd. opened a branch in Macau Special Administrative Region.

- NTT Communications (Thailand) Co., Ltd. opened an office in Vientiane, Lao PDR.

 

   

Strengthening of Service Provision Systems

- NTT Communications acquired Frontline Systems Australia Pty Ltd. which provides ICT services centered in Australia, such as IT infrastructure and sales, IT consulting, data centers and managed services.

- NTT Communications reached an agreement with Netmagic’s shareholders for the acquisition of Netmagic Solutions Private Limited, which provides data center related services in India.

Dimension Data, one of NTT’s main subsidiaries in the long-distance and international communications business segment, worked to provide comprehensive cloud services as an ICT services and solution provider,

 

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with the goal of accelerating the introduction of cloud computing to corporations. Dimension Data’s globally available cloud services help simplifying the planning, design, development and administration of private, public and hybrid clouds and reduces the administration cost of IT infrastructure. It also facilitates a corporation’s smooth transfer to a cloud system by reducing the complexity of and risks associated with such transfer.

Main Services Launched in the Fiscal Year Under Review

 

Service, etc.

  

Description

Compute as a Service (CaaS)

   Virtual servers and storage provided as a service in both shared (public) and dedicated (private) environments. The options are public, private and hosted private CaaS. Currently private CaaS is deployed in the United States, the European Union, South Africa, Australia and will be deployed in Asia soon.

Managed Hosting

   Dedicated infrastructure and application management services interconnected to Dimension Data public and private cloud.

Dimension Data also provides Advanced Cloud services and Application services, and all offerings’ underlying architect is based on Dimension Data Managed Cloud Platform—a fully managed cloud architecture that is automated and orchestrated via Dimension Data CloudControl, an integrated cloud management system.

Mobile Communications Business Segment

NTT DOCOMO, NTT’s main subsidiary in the mobile communications business segment, developed the “Medium-Term Vision 2015: Shaping a Smart Life” as its medium-term management policy with a goal of becoming an “integrated service company placing mobile services at the core.” Based on this medium-term vision, NTT DOCOMO has worked towards new value creation through the convergence of various industries and services, while aiming for further development of handsets and services with a focus on smartphones, in order to offer enhanced safety and security and deliver more convenient and efficient solutions to people’s everyday lives and businesses. The measures being undertaken are as follows:

 

[1] Number of Subscriptions to Main Services

Number of mobile phone service subscriptions: 60.13 million (an increase of 2.12 million subscriptions from the previous fiscal year)

(Partial listing only) FOMA service subscriptions: 57.90 million (an increase of 1.16 million subscriptions from the previous fiscal year)

(Partial listing only) Xi service subscriptions: 2.22 million (an increase of 2.20 million subscription from the previous fiscal year)

Number of subscriptions to mobile phone services, FOMA services and Xi services include communication module service subscriptions. The “mova” service was terminated as of March 31, 2012.

 

[2] Expansion of Smartphone Sales

With respect to smartphones, NTT DOCOMO launched a new portal site for smartphones, “dmenu,” and the content market that NTT DOCOMO operates, “dmarket,” while expanding its handset lineup. NTT DOCOMO enhanced customer convenience by providing services for smartphone use such as the main services for i-mode, including “i-channel,” “i-concier,” and “Keitai Data Oazukari Service,” and by offering discount services for customers who subscribe to more than one tablet device. As a result of these efforts, smartphone sales showed a significant increase, with handset sales of 8.82 million for the fiscal year ended March 31, 2012.

 

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[3] Development of “Xi” Services

With respect to Xi, the high-speed, large capacity and low latency LTE service that was launched in December 2010, NTT DOCOMO launched voice services in addition to data transmission services, expanded the Xi-compatible handset lineup and enhanced rate plans. Further, in December 2011, NTT DOCOMO increased the communication speed in limited areas (75 Mbps) when outdoors. In January 2012, NTT DOCOMO expanded the coverage area to major cities of prefectural capitals, and increased the number of base stations for Xi services to over 7,000 stations.

 

[4] Enhancement of Services

Main Services Launched in the Fiscal Year Under Review

 

Service

  

Description

dmenu

   Portal site for smartphones that enables easy searches of diverse content provided by content providers, and of services provided by NTT DOCOMO.

dmarket

   Contents marketplace for smartphones managed by NTT DOCOMO comprising the “Video Store,” “Book Store,” and “Music Store,” and “Applications and Reviews” content store, which introduces recommended applications.

Shabette Concier

   Voice-agent application that searches for and provides information, and handles mobile phone functions, just by speaking into the smartphone (free-of-charge).

DOCOMO Anshin Scan

   Anti-virus service for smartphones (free-of-charge).

Mobile Groupware

   Cloud service for corporate customers with various functions, including enabling the sharing of internal company information, accessing webmail and scheduling from outside the company via smartphones.

Pre-paid data plan

   Special data communications pre-paid plan that can be used on the PlayStation®Vita released by Sony Computer Entertainment Inc. Two fee rate plans depending on use time (20 hours and 100 hours).

After-sales Support Effort

 

   

NTT DOCOMO launched “Smartphone Anshin Remote Support” to provide customers with professional assistance with the operation or settings of smartphones or tablet devices from its call center staff who can monitor the handset operations from remote locations.

 

[5] Activities for New Value Creation

 

   

In conjunction with the April 2012 launch of “Mobacas” (mobile-dedicated broadcasting) services, NTT DOCOMO increased its investment in mmbi, Inc., an approved key terrestrial broadcasting business operator for the mobile reception of “Mobacas,” prepared for the launch of the broadcasting station for smartphones, “NOTTV,” and started sales of two handsets compatible with such services.

 

   

With the expansion of business synergies as a goal, NTT DOCOMO acquired Radishbo-ya Co., Ltd. (“Radishbo-ya”), which provides membership-based home-delivery of organic and low-pesticide vegetables and additive-free foods, through a tender offer, and entered into a business and capital alliance between Radishbo-ya and Lawson, Inc.

 

   

NTT DOCOMO has entered into a capital and business alliance with OMRON HEALTHCARE Co., Ltd. based on the premise of founding a new company for the purpose of developing and providing health and medical support services.

 

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[6] Series of Service Interruptions

With respect to the series of service interruptions of the “sp-mode” service (an ISP service for smartphones) and packet switching, NTT DOCOMO received administrative guidance from the Ministry of Internal Affairs and Communications (the “MIC”) on January 26, 2012. NTT DOCOMO submitted a report on March 30, 2012 summarizing the measures it has taken to prevent mobile communications service interruptions, protect the confidentiality of communications and appropriately manage personal information. NTT DOCOMO extends its deepest apologies to customers for any inconvenience caused by these service interruptions.

NTT DOCOMO takes these matters very seriously. After the service interruptions in December 2011, NTT DOCOMO established the “Task Force for Improvement of Network Infrastructure,” headed by its president and Chief Executive Officer, to promptly identify the cause and resolve these problems and implemented drastic measures to improve the reliability of NTT DOCOMO’s services for its customers. In addition, NTT DOCOMO will make efforts to ensure that customers can continue to use its services safely and with peace of mind going forward by implementing measures to improve trust and expandability toward the creation of a network infrastructure that can support as many as 50 million smartphones. NTT DOCOMO plants to continually work to strengthen its facilities.

Data Communications Business Segment

NTT DATA, NTT’s main subsidiary in the data communications business segment, pursued the pillars of its Medium-term Management Policy, “Strengthening of Service Provision Capability,” “Group Business Enhancement and Expansion,” and “Environment-Oriented Management” with the goal of being ranked “No. 1 in customer satisfaction” as a leading-edge innovator. NTT DATA’s main activities are discussed below.

 

[1] Management Policies

Strengthening of Service Provision Capability

 

   

NTT DATA set up “M2M Cloud Promotion Office” as an organization to promote the provision of new services centered on machine-to-machine (“M2M”), which is necessary to improve the further use of ICT in society and to realize a variety of additional services.

 

   

NTT DATA acquired Mathematical Systems, Inc., a company that mainly engages in the development and sales of software packages and a consulting business for application development and analysis, with advanced data analysis technology and personnel.

Group Business Enhancement and Expansion

 

   

NTT DATA has announced changes to its uniform corporate logo design in response to accelerating customer needs for global business, with the goals of building a structure that provides an operational system supported on a global scale with speedy service, and of strengthening the NTT DATA brand abroad. NTT DATA incorporated plans for the integration and reorganization of business at overseas group companies, and revamped its new organizational structure, with a focus on NTT DATA, Inc. in the U.S., NTT DATA EMEA Ltd. in Europe, the Middle East and Africa, and NTT DATA (CHINA) Co., LTD. in China.

 

   

NTT DATA acquired Value Team S.p.A. (which changed its name to “NTT DATA Italia S.p.A.” as of April 2, 2012), which has strengths in IT consulting and system development in the areas of telecommunications, manufacturing, energy and finance in Italy, and has significantly growing businesses in Brazil and Turkey.

Environment-Oriented Management

 

   

NTT DATA started collaborating with NEC Corporation, Hitachi, Ltd., KANEMATSU CORPORATION and Saitama City for the standardization of an ID card system for an authentication service using IC cards at electric vehicle charging stations.

 

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NTT DATA built the first commercial-use system to use a high-voltage DC power supply in Japan, which is a next-generation power supply method with greater power efficiency compared to AC, and commenced its operation as the internal system at Japan Radio Co., Ltd..

 

[2] Status of Business Activity Measures

Main Activities During the Fiscal Year Under Review

 

   

The Regional Bank Integrated Services Center, a shared use format center for regional banks (member banks of the Regional Banks Association of Japan and The Second Association of Regional Banks) began providing services to Ashikaga Bank, Ltd. and system integration services to The Senshu Ikeda Bank, Ltd. In addition, the “STELLA CUBE,” a shared core center for regional banks began providing services to The Tokyo Tomin Bank, Limited.

 

   

NTT DATA decided to launch “BeSTAcloud,” a shared core service for new financial institutions, and entered into a basic agreement regarding its usage with FIDEA Holdings Co. Ltd.

 

   

In order to respond to the varying needs of data centers for BCP (“Business Continuity Plans”) of Japanese companies and for disaster countermeasures, NTT DATA entered into a basic agreement with LG CNS Co., Ltd. of South Korea concerning joint businesses in the area of data centers, including cross-servicing of data centers in Japan and South Korea and related solutions.

Main Services Launched in the Fiscal Year Under Review

 

Service

  

Description

BizXaaS

  

BizXaaS Contact (Fast Help)

   Cloud service to provide necessary functions for contact centers (call centers). A contact system with call management functions, which can be used with CRM (“Customer Relationship Management”) for customer inquiries and applications. The system can be ready for use within as short as 72 hours.

BizXaaS EC

   Service providing over 150 e-trading functions on cloud networks. A website with e-trading functions can be created in as little as 72 hours.

BizXaaS Office

   Service that provides employees’ PC environment through cloud networks, such as desktop services, file server services using Microsoft products, e-mail services, and document management services, among others.

BizXaaS BCP/DR Consulting Services

   Service enabling the development of BCP in a short period of time (as few as five meetings) using the BCP methodology developed by NTT DATA. The service also analyzes financials and calculates the appropriate investment amounts for disaster recovery measures.

TISAFYS

   An operation and maintenance service tailored for a customer’s own business applications, developed by combining NTT DATA’s areas of strengths in advanced operations and maintenance know-how with its overseas subsidiaries’ operating structures, methodologies and tools.

 

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Global Businesses

The international communications market is undergoing drastic changes and developments with the rapid advances in ubiquitous broadband technologies, and the convergence between fixed and mobile services and between telecommunications and broadcasting services. In addition, as the activities of businesses and individuals become increasingly globalized, demand for integrated domestic-international ICT services is increasing. Asia remains an important market, led by China and India, where mobile phone use is rapidly expanding. Emerging areas such as Russia and the Middle East also present growth opportunities.

To meet the demands of its corporate customers for integrated domestic-international ICT capabilities and end-to-end network quality assurance, NTT Group, working in collaboration with its overseas partners, is seeking to provide ICT services that exploit its comprehensive strengths. NTT Group will continue to expand globally by building on its reputation for high quality and on its comprehensive service offerings that include networks, data centers, system integration and cloud services. In addition, NTT Group is seeking to develop businesses tailored to the market environment of each region and country by utilizing its track record and know-how in providing services based on cutting-edge research and development, including the NGN.

In addition, NTT Group is planning to develop a content distribution platform geared towards individual customers in order to build a new revenue base in the Internet business (BtoC), which enables it to reach users directly, and to enhance international services, such as roaming services, through the provision of new services for smartphones.

With the goal of expanding global businesses for corporate customers, in October, 2010, NTT completed its acquisition of 96.6% of the ordinary shares of Dimension Data, a company based in the Republic of South Africa, that offers development, operation and maintenance of IT infrastructure for corporate customers, such as network equipment, servers and other devices. Further, in December 2010, NTT acquired the remaining Dimension Data shares in respect of which the cash tender offer had not been accepted. As a result, NTT acquired one-hundred percent ownership of Dimension Data, making it a wholly-owned subsidiary of NTT.

This acquisition will increase the competitiveness of both companies by integrating NTT’s strength in providing managed network services and data centers with Dimension Data’s strength in the development, operation and maintenance of IT infrastructure. Dimension Data’s solutions business and breadth of expertise in networking, security, converged communications, data centers, customer interactive communications, Microsoft solutions and cloud computing create synergies with NTT’s connections and communications services. Together, the companies are working to improve management, from communications, to IT infrastructure. The acquisition of Dimension Data has been instrumental in advancing NTT’s globalization strategy. The acquisition of Dimension Data has significantly extended NTT’s reach and service beyond Japan, particularly in the southern hemisphere. Dimension Data brings a client base in excess of 6,000 companies and supports global and local level organizations. Its advanced project and program management expertise will enhance NTT’s ability to deliver projects on time and on budget, in the global market.

Other principal global investments of each NTT Group company for the last three fiscal years are as follows:

 

  (i) NTT Communications

In global business, NTT Communications responded to the needs of multinational companies by strengthening its provision of high value-added comprehensive ICT services, which combine network integration services with data center, security, server management and other services. In the global data center business, NTT Communications is focusing its efforts on the delivery of high-quality services by implementing procurement and quality control in an integrated fashion through its subsidiary, NTT International Communications.

 

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Integralis AG (“Integralis”)

In October 2009, through a takeover bid conducted by its German subsidiary, NTT Communications purchased 78.4% of the outstanding shares of Integralis (excluding treasury stock), an international managed security service provider based in Germany, at a cost of approximately 59.1 million Euros (approximately ¥7.68 billion). With the acquisition of Integralis, NTT Communications seeks to provide value-added one-stop solution services to its global business customers by integrating its network services and managed security services.

Emerio GlobeSoft Pte Ltd (“Emerio”)

In June 2010, NTT Communications acquired 70% of the outstanding shares of Emerio, which provides outsourcing services globally with a focus on Asia, including application and server operation and maintenance services and IT engineer dispatch. Going forward, NTT Communications will strengthen its framework for providing one-stop, comprehensive, high-quality ICT services globally and within Japan by combining NTT Communications’ networks and data center services with its operation and maintenance services.

Frontline Systems Australia Pty Ltd (“Frontline”)

In June 2011, NTT Communications acquired 70% of the outstanding shares of Frontline, which provides ICT services centered in Australia, including IT infrastructure development and sales, IT consulting, data centers and managed services. NTT Communications will increase the number of launches of its high-quality and diverse services, such as ICT services for corporate customers and cloud services, within Australia by improving collaboration within the NTT group companies.

 

  (ii) NTT DOCOMO

With the long-term aim of securing growth and strengthening its global competitiveness, NTT DOCOMO makes investments in and collaborates with overseas mobile service providers and overseas businesses providing mobile phone related services.

In regards to investments in mobile service providers, in order to capture growth in overseas markets, NTT DOCOMO supports the business of its investment partners with the goal of achieving financial returns. At the same time, NTT DOCOMO aims to achieve synergies with its investment partners, including joint development of handsets, joint procurement and service expansion.

Further, in addition to the existing investments in mobile service providers, going forward, NTT DOCOMO will also focus on building a platform for global business development as an integrated service company.

Tata Teleservices Limited (“TTSL”)

In March 2009, NTT DOCOMO acquired common shares of TTSL, an Indian communication carrier, that amounted to an approximate 26.5% stake in the company for 128.1 billion rupees (approximately ¥252.3 billion) in a move to expand its business areas in the Indian market, which is expected to achieve rapid economic growth in the coming years. In June 2009, TTSL began offering GSM services under the brand name “TATA DOCOMO,” and also launched a 3G service in November 2010, outpacing competitors to become the first private company to offer such a service. In March 2011, in order to strengthen the 3G network operations, NTT DOCOMO accepted the rights offering for approximately 8 billion rupees (approximately ¥14.4 billion) in proportion to NTT DOCOMO’s capital contribution. Currently, NTT DOCOMO holds approximately 26.5% of TTSL shares. In addition, in October 2011, all services were renamed under the “TATA DOCOMO” brand.

net mobile AG (“net mobile”)

In November 2009, in order to establish an international business platform, NTT DOCOMO acquired approximately 79.6% of the outstanding common shares of net mobile, a German mobile content distribution

 

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platform business provider, at a cost of approximately 38.9 million Euros (approximately ¥5.2 billion) by means of a tender offer carried out by its wholly-owned subsidiary, DOCOMO Deutschland GmbH. As a result of this tender offer, net mobile became NTT DOCOMO’s subsidiary. In December 2009, NTT DOCOMO subscribed to a private placement of new shares issued by net mobile at a cost of approximately 4.89 million Euros (approximately ¥0.6 billion) and in September 2011, NTT DOCOMO made an additional investment of approximately 26.7 million Euros (approximately ¥2.7 billion). Using these funds, net mobile invested in Bankverein Werther AG, a private German bank, becoming the bank’s largest shareholder. By utilizing Bankverein Werther’s service platform and backbone system, net mobile seeks to expand its service areas to the financial and settlement fields.

As of March 31, 2012, NTT DOCOMO held approximately 87.1% of net mobile’s shares.

PacketVideo Corporation (“PacketVideo”)

In July 2009, NTT DOCOMO acquired 35% of the outstanding shares of PacketVideo, a U.S. company, from NextWave Wireless Inc. (“NextWave”), also a U.S. company, for US$45.5 million (approximately ¥4.5 billion) to expand its music and video services. Then in October 2010, NTT DOCOMO acquired 65% of the outstanding shares of PacketVideo that had been held by NextWave, at US$111.6 million (approximately ¥9.3 billion). As a result of this transaction, PacketVideo became a wholly-owned subsidiary of NTT DOCOMO.

PacketVideo is a leading company in music and video content player software and content service platforms for mobile phones, and it also develops and provides its own cutting-edge solutions in the area of services that enable music and video content to be shared among home electronics devices, including televisions, digital photo frames, and audio equipment, as well as personal computers and mobile phones.

 

  (iii) NTT DATA

NTT DATA is increasing its capacity to respond to the needs of global corporations (including Japanese companies) as well as local businesses, and is bolstering its offshore development systems in Asia.

Extend Technologies Group Holdings Pty Ltd (“Extend Technologies”)

In September 2009, NTT DATA acquired 51% of the outstanding shares of Extend Technologies, an Australian system integration operator. Through this capital alliance with Extend Technology, NTT DATA expanded its SAP support system into the Asia Pacific region, and further strengthened its global support system for its customers.

Value Team S.p.A. (“Value Team”)

In June 2011, NTT DATA made Value Team, an Italian IT service provider, its wholly-owned subsidiary via a share acquisition through a European subsidiary. NTT DATA and Value Team will work to further enhance the value provided to their customers on a global scale by sharing and utilizing the know-how NTT DATA and Value Team have each developed in the telecommunications and other business fields and services, NTT DATA group’s customer base and global resources, and CRM solutions, an area of strength for Value Team.

NTT DATA Inc.

In December 2010, a U.S. subsidiary of NTT DATA merged with Keane Group, a U.S. IT service business. As a result, Keane Group became a wholly-owned subsidiary of NTT DATA. In addition to providing the global SAP service capabilities NTT DATA has built to date, this acquisition has enabled NTT DATA to provide comprehensive ICT services in the United States. NTT DATA further strengthened its support for corporate clients through collaborations with Keane Group and NTT Group.

 

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Starting in January 2012, NTT DATA has been consolidating and reorganizing by launching a new business structure centered around NTT DATA, Inc. (Keane, Inc. changed its name to NTT DATA, Inc. on January 31, 2012) for its group companies in North America, in order to build an operational framework to promote more integrated and efficient global operations and to create a mechanism for realizing the provision of services to local customers and the swift provision of services to global customers.

As part of its consolidation and reorganization efforts, in March 2012, NTT DATA, Inc. merged with NTT DATA’s U.S. subsidiaries, NTT DATA Enterprise Application Service, Inc. (Intelligroup, Inc. changed its name to NTT DATA Enterprise Application Service, Inc. on January 31, 2012), M.I.S.I. Co., Ltd., NTT DATA AgileNet L.L.C., The Revere Group, Limited and Vertex Software Inc., with NTT DATA, Inc. as the surviving company.

Competition

The implementation of the Telecommunications Business Law in April 1985 introduced competition to the telecommunications service industry in Japan. As a result of subsequent deregulation, NTT Group faces competition in virtually all of its business segments, including the fixed-line regional communications business, long distance and international communications business, mobile communications business and data communications business.

The information and telecommunications market is undergoing a structural change with the shift to broadband, globalization, and the spread of smartphones, tablet devices and other devices. Participants in this market are catering to increasingly sophisticated and diversified needs by, among other things, expanding cloud services and platform services, including video and music distribution. At the same time, new business lines have been introduced, which utilize information and communications technologies (ICT), that transcend existing business lines.

In the fixed-line broadband market, access lines are becoming more diverse, faster and less expensive. In addition to increasing facility and service competition among service providers, the market environment is undergoing major change as a result of the expansion of triple play service offerings, including video distribution and IP telephony, and the appearance of new services for information devices other than personal computers. In this market environment, fiber-optic services have expanded to account for over half of broadband services in Japan. However, NTT Group expects that competition with providers of other fiber-optic access, CATV and wireless broadband in conjunction with the increase in smartphones and tablet devices, will continue.

Competition in the market for conventional fixed-line telephone services continues to be intense as the market continues to shrink due to, among other factors, the proliferation of mobile telephones and the ongoing shift to optical and IP telephone services resulting from the expansion of optical access services. In addition, voice communication software that employs peer to peer (“P2P”) technology to allow members of the general public to carry out direct exchanges of information is being used.

There are presently four mobile phone operators in the market: NTT DOCOMO, the KDDI group, SOFTBANK MOBILE and EMOBILE. As of March 31, 2012, NTT DOCOMO had a market share of 46.9%, whereas the KDDI group, SOFTBANK MOBILE and EMOBILE had market shares of 27.4%, 22.6% and 3.1%, respectively. NTT Group believes that with the rising mobile device penetration rate, the Japanese mobile communications market has entered a mature phase, with the competitive environment growing increasingly difficult mainly due to competition for new customers and competition in the development of service improvements. The growth rates for mobile telephone subscriptions for the fiscal years ended March 31, 2010, 2011 and 2012 were 4.4%, 6.6% and 7.3%, respectively. While the increasing trend in new subscriptions is expected to temporarily slow, considering the rising penetration rate and the decreasing population trend, there has recently been an increase in subscribers due to the development of business lines, including smartphones, tablet devices, data cards, portable game consoles and embedded communication modules and new opportunities

 

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in the market for mobile device-oriented content and applications. In addition, in conjunction with the expansion of smartphones, competition between service providers has intensified from their efforts to provide integrated fixed-line communications and mobile telephone services. In the future, in conjunction with the speed of smartphones, and of integrated fixed-line and mobile telephone services, there is a possibility of increased demand for services that seamlessly link, and devices that enable the connection between, fixed-line communications networks and mobile communications networks.

Furthermore, with the appearance of global players such as Apple, Google, and Amazon, together with the transition from the traditional mobile phone business-led vertically integrated model to a horizontal divisional model that is underway, new vertically integrated models keyed on the terminal layer and content, application, platform and other upper layers are becoming more active.

The solutions business, which is the focus of NTT DATA’s major initiatives, is expected to be a major area of growth in the information services market, and hardware vendors and others are now shifting their main focus to this business. Furthermore, the growth in information service companies in rapidly developing nations, such as India and China, is bringing about global competition.

For risks associated with continued competition, please see “Item 3—Key Information—Risk Factors—Risks associated with the business environment and NTT Group’s corresponding business strategies—NTT Group’s market share and revenues may suffer from competition.”

Regulations

The MIC is the main regulatory body in Japan responsible for the information and telecommunications industry. The Telecommunications Business Law gives the Minister the authority to regulate telecommunications companies. The Telecommunications Business Law came into effect in 1985 at the same time that NTT was incorporated as a private company, and significant changes in the legislative and regulatory framework for telecommunications in Japan opened the Japanese information and telecommunications services industry to competition. Since then, the Government has taken various measures to promote competition in the Japanese telecommunications market. As a result, NTT Group faces increasing competition in many of its business sectors from a large number of companies which have entered or are about to enter the market.

NTT and certain of its subsidiaries are subject to regulations which affect their business based on the NTT Law, the Radio Act, and the Telecommunications Business Law. A summary of these regulations is provided below. References in parentheses are to the applicable article of the law described unless otherwise noted.

Telecommunications Business Law

Business Commencement/Termination

Regulations promulgated under the Telecommunications Business Law require start-up businesses that intend to provide telecommunications services to register with the Minister (Article 9). However, where the scale of and scope of area that the telecommunications circuit facilities which are to be installed do not exceed certain thresholds or fall within a certain category of radio facilities, only a notice to the Minister is required (Article 16).

In addition, regulations promulgated under the Telecommunications Business Law require businesses in the telecommunications sector to notify the Minister and service subscribers upon suspension or discontinuation of telecommunications businesses (Article 18).

 

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Setting of Subscriber Rates and Other Terms of Services

Regulations promulgated under the Telecommunications Business Law require businesses in the telecommunications sector to notify the Minister of the terms of the basic telecommunications services which they provide (Article 19). Telecommunications businesses providing basic telecommunications services are also required to establish the terms and conditions of their rates and other terms of services relating to their basic communications services, and submit them to the Minister.

In addition, businesses in the telecommunications sector are required to explain the terms and conditions of their services, including charges, when entering into a contract with a subscriber relating to the provision of services (Article 26) and to handle complaints and inquiries from subscribers (Article 27).

(Note) An Ordinance of the Ministry of Internal Affairs and Communications (the “MIC ordinance”) requires basic telecommunications services to be provided across Japan (“universal services”) because they are regarded as essential to the lives of people in Japan. These services include telephone subscriber lines (base rates) or optical IP telephones equivalent to telephone subscriber lines, Type 1 Public Telephones (public phones installed pursuant to the MIC standards) and emergency numbers (110, 118, 119). Pursuant to an amendment of the MIC ordinance on April 2011 which took into account the Information and Communications Council report of December 2010, the optical IP phones equivalent to telephone subscriber lines are also included in basic telecommunications services.

Interconnection

Regulations promulgated under the Telecommunications Business Law require businesses in the telecommunications sector to respond to the requests of other telecommunications carriers regarding the connection of telecommunications circuit facilities (Article 32).

Universal Services Fund (“USF”)

The USF is a system under which the costs and expenses necessary to provide universal services are provided by telecommunications carriers. In order to ensure the provision of universal services, a support organization was designated by the Minister to provide funds to cover a portion of the costs and expenses necessary to provide universal services (Article 107). Grants are made to eligible telecommunications carriers (Article 108) which provide universal services, including to unprofitable areas. In connection therewith, each telecommunications carrier is obligated to make the appropriate amount of payments to cover the costs and expenses requested by the support organization (Article 110). This funding requirement is referred to as the universal fund system. The services of the support organization started in June 2006.

Under the NTT Law, NTT East and NTT West became responsible for providing universal services and were designated as eligible telecommunications carriers by the Minister. In the fiscal year ended March 31, 2012, the aggregate amount of compensation to NTT East and NTT West was 15.2 billion yen, and in the fiscal year ending March 31, 2013, the aggregate amount of compensation to NTT East and NTT West is expected to be 11.1 billion yen.

Regulations imposed only on NTT East and NTT West

Rates

Regulations promulgated under the Telecommunications Business Law require NTT East and NTT West to notify to the Minister the terms and conditions of the Contracts on Insurance for designated telecommunications services (Article 20). These regulations also require that rates and other terms of services for designated telecommunications services provided by Category I designated telecommunications facilities be established and submitted to the Minister.

The Telecommunications Business Law also provides for the regulation of rates for specified telecommunications services (Article 21) and for price cap regulations. The regulations promulgated under the

 

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Telecommunications Business Law require that the Minister be notified whenever the service rates of a business are at or below the standard price index specified by the Minister, and approval of the Minister is required when a business proposes to increase rates above the standard price index.

 

  Notes: “Category I designated telecommunications facilities” are fixed terminal transmission line facilities installed by telecommunications carriers where the facilities that have been installed by the same telecommunications carrier in a prefecture represent one-half or more of the total number of such facilities in the prefecture and, together with these facilities, further ancillary facilities whose connection with other telecommunications carriers is essential for improving convenience to subscribers, and for the comprehensive and reasonable development of telecommunications services (designated by the Minister). The main telecommunications facilities of NTT East and NTT West have been designated Category I designated facilities.
       “Designated telecommunications services” are services that are provided by a telecommunications business using a Category I designated telecommunications facility established by such telecommunications business, and that have been designated as services for which “it is particularly necessary to protect the interests of customers by ensuring that the rates and other terms of service are fair and appropriate.” The determination of what constitutes a designated telecommunications service is based on a consideration of various factors, including whether alternative services are being adequately provided by other telecommunications carriers. Specifically, this refers to telephone subscriber line services, ISDN, public telephones, dedicated services, FLET’S Hikari, Hikari Denwa and other services, but excludes services providing supplementary functions that have minimal beneficial impact on subscribers.
       “Specified telecommunications services” are designated telecommunications services or services specified in the MIC Ordinance as having a significant beneficial impact on subscribers. Specifically, this refers to telephone subscriber services, ISDN and public telephone services provided by NTT East and NTT West.
       “Standard price index” refers to an index published by the Minister that shows the standard charges for each type of designated telecommunications service which considers the appropriate costs and commodity prices to support efficient management.
       “Price cap regulation” is a system that sets maximum limits on rates. It is expected that from October 1, 2012 and continuing for one year, the standard charge index will be unchanged. As the actual charge index for NTT East and NTT West will likely fall below the level of this standard charge index, there will be no need for price adjustments pursuant to the price cap regulation.

Interconnection

Regulations promulgated under the Telecommunications Business Law require NTT East and NTT West to obtain approval of all interconnection agreements from the Minister as to Category I designated telecommunications facilities (Article 33). The Minister’s approval is subject, among other things, to the condition that the interconnection rates be fair and proper according to the method stipulated in the MIC Ordinance for computing proper costs under efficient management. The articles of NTT East and NTT West’s interconnection agreements establish their interconnection rates and conditions for interconnection.

Telephone Line Interconnection Charges

In May 1998, in a joint status report on deregulation and competition policy issued by the governments of Japan and the United States, the Government stated its intention to introduce an LRIC Methodology. In May 2000, the Telecommunications Business Law was amended to include the introduction of an LRIC Methodology. Since then, the LRIC Methodology has brought about decreases in interconnection charges. As communication traffic declined significantly, in order to avoid an increase in communication rates through the increase of interconnection charges, it was decided that Non-Traffic Sensitive (“NTS”) costs (costs which do not vary according to communication traffic) would be removed from interconnection rate costs and be recovered instead through base rates (October 2004 report of the Telecommunications Council). In addition, with respect to a portion of NTS costs, when the USF was reviewed from the standpoint of restricting cost increases for users, it was decided that the cost burden resulting from narrowing the scope of USF subsidies would not be borne only by NTT East and NTT West, but would be recovered in a fair and equitable manner from other carriers, and that a portion of NTS costs would therefore be reintroduced as interconnection rate costs.

The interconnection charges for NTT East and NTT West for the fiscal year ended March 31, 2012 were set at GC interconnection charges of ¥5.26 (an increase of approximately 3.6% from the previous fiscal year) and IC interconnection charges of ¥6.79 (an increase of approximately 3.5% from the previous fiscal year) (in each case for three minutes).

 

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In preparation for the calculation of interconnection charges for the fiscal year ending March 31, 2014 and subsequent periods, a new cost model was reported by the Study Group on the Long Run Incremental Cost in March 2012, and new calculation methods will be considered. Accordingly, there may be a review of the calculation methodology of interconnection charges. The impact which such review would have on NTT Group is currently unknown.

Optical Fiber Line Interconnection Charges

NTT East and NTT West are obligated to lease their optical fiber to other carriers at regulated rates (referred to as “optical fiber interconnection charges”) because the optical fiber owned by NTT East and NTT West qualifies as Category I designated telecommunications facilities under the Telecommunications Business Law.

In order to maintain low barriers to entry by other carriers through the lowering of interconnection charges, NTT East and NTT West will employ a future cost method to calculate subscriber optical fiber interconnection charges with a calculation period of three years, from the fiscal year ended March 31, 2012 to the fiscal year ending March 31, 2014. The optical fiber interconnection charges are meant to gradually decrease every fiscal year, reflecting the year-on-year increase in demand and decrease in costs. For these interconnection charges, NTT Group has introduced a cost difference adjustment system under which adjustments are made by adding to interconnection charges for the following year and future years the difference between the actual revenue from interconnection charges and actual cost, which NTT believes will eliminate the risk of unrecoverable amounts.

The Information and Communications Council and Postal Services Council conducted an evaluation of the issue of setting per-unit interconnection charges for optical bifurcated lines in the passive optical network (Gigabit Ethernet-Passive Optical Network (“GE-PON”)) and determined that there remained issues that needed to be resolved. The councils concluded that rather than setting per-unit interconnection charges for optical bifurcated lines, as a measure that could be promptly implemented, NTT should expand optical cabling areas and implement an entry menu which provides low rates for the initial fiscal year with the uncollected portion recovered in later fiscal years) that could co-exist with existing interconnection charges, in limited areas (March 2012 report by the Information and Communications Council and Postal Services Council). The impact of such readjustment of optical cabling areas and the setting of an entry menu on NTT Group is not expected to be significant.

Regulations promulgated under the Telecommunications Business Law require NTT East and NTT West to notify the Minister of (i) plans related to the functions of Category I designated telecommunications facilities, including any changes or additions to such functions (Article 36), and (ii) any agreement on sharing Category I designated telecommunications facilities with other telecommunications carriers (Article 37).

Prohibited Activities

NTT East and NTT West, as dominant businesses in the fixed voice and IP/packet communications markets, are prohibited from using interconnection information for other than its intended purposes and from giving preferential treatment in an unfair manner to any particular telecommunications carrier (Article 30, paragraph 3). NTT East and NTT West are also prohibited from holding concurrent officer positions at NTT Communications, which was designated by the Minister as business operators with special relations with each other (Article 31). Accordingly, NTT Group’s ability to provide services exclusively in collaboration with telecommunications carriers within NTT Group is limited by these regulations. NTT intends to provide services in response to market needs while ensuring that all requirements for fair competition, including the regulations with respect to prohibited activities, are satisfied. However, these regulations may, for example, impede the timely provision of new services by NTT Group or have other adverse effects.

Under the June 2011 revisions to the Telecommunications Business Law, NTT East and NTT West are required to carry out necessary and proper monitoring of its subsidiaries to which they outsource services, to

 

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ensure that such subsidiaries do not participate in prohibited activities (Article 31, paragraph 3). At the same time, an obligation was imposed on NTT East and NTT West to appropriately manage the information relating to interconnection services and to establish an appropriate system to monitor the implementation status of interconnection services (Article 31, paragraphs 5 and 6).

Other Matters

Beginning in the fiscal year ending March 31, 2013, the MIC plans to commence the operation of a “Fair Competition Review System for Promotion of Broadband” to promote broadband use by ensuring an environment of fair competition in the telecommunications market. This system will enable the verification of the status of initiatives related to the promotion of broadband and NTT East and NTT West’s compliance with applicable regulations. As a result, certain reviews of our business may be initiated. The impact that such reviews would have on NTT Group is currently unknown.

Regulations imposed only on NTT DOCOMO

Interconnection

Regulations promulgated under the Telecommunications Business Law require NTT DOCOMO to submit to the Minister for approval any interconnection agreements relating to the connection with Category II designated telecommunications facilities (Article 34).

NTT DOCOMO’s main telecommunications facilities for mobile phones were designated by the Minister as Category II designated telecommunications facilities requiring a reliable connection with other telecommunications businesses be ensured. NTT DOCOMO is required to establish its interconnection rates and terms of interconnection in its interconnection agreements and to submit them to the Minister. The regulations for Category II designated telecommunications facilities are imposed on two other companies (KDDI Corporation and Okinawa Cellular Telephone Company) in addition to NTT DOCOMO. Due to a revision of the standards for designating Category II designated telecommunications facilities, the list of facilities subject to the regulations for Category II designated telecommunications facilities has been expanded.

Prohibited Activities

NTT DOCOMO, as a dominant business in the mobile communications market, is prohibited from using interconnection information for other than its intended purposes and from giving preferential treatment in an unfair manner to any particular telecommunications carrier (Article 30, paragraph 3).

 

  Note: “Category II designated telecommunications facilities” consist of transmission line facilities connected to mobile phones installed by telecommunications businesses which (i) are installed by the same telecommunications businesses, (ii) represent one-fourth or more of the total number of transmission line facilities in the entire service area, and (iii) were installed specifically to provide such telecommunications services for reliable connection with other telecommunications businesses designated by the Minister. Due to a revision of the standards for designating Category II designated telecommunications facilities, the list of facilities subject to the regulations for Category II designated telecommunications facilities has been expanded.

Regulatory Developments

In December 2010, the MIC adopted a basic policy in relation to the “Hikari no Michi” vision, which aims to have all households using ultra-high-speed broadband by around 2015. It has been determined that a comprehensive review will be carried out approximately three years after implementation to assess the effectiveness and appropriateness of the system development measures employed pursuant to amendments to the Telecommunications Business Law and other laws. If there has not been adequate progress towards the realization of “Hikari no Michi,” additional system development measures will be implemented. While there may be further reviews of the Telecommunications Business Law and other laws going forward, the impact which such revisions may have on NTT Group is currently unknown.

 

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Other (Evaluation of Competitive Conditions in Telecommunications)

Starting in the fiscal year ended March 31, 2004, the MIC, as a measure to promote fair competition in the telecommunications industry, has conducted inquiries on market trends in the areas of mobile telephones, fixed-line phones, Internet connections and network services for corporate customers, and evaluated the competition in the telecommunications market. In the fiscal year ended March 31, 2012, the MIC evaluated the three areas of voice communications (fixed and mobile communications), data communications (fixed, mobile and fixed-ISP communications), and network services for corporate customers, and made observations relating to trends in upper layer services (content and platforms), except the network layer, and in lower layer services (terminals). The results are expected to be made public in the summer of 2012.

NTT Law

The Law for Partial Amendments to the Nippon Telegraph and Telephone Company Act was promulgated in June 1997 and came into effect in July 1999. As a result, Nippon Telegraph and Telephone Company Act was re-titled the “Law Concerning Nippon Telegraph and Telephone Corporation, Etc.” and NTT was reorganized as a holding company. The law has been revised by the Law for Partial Amendments to the Law Concerning The Telecommunications Business Law, which was promulgated in June 2001 and took effect in November 2001.

Purpose

The NTT Law requires NTT to own all of the shares issued by NTT East and NTT West, to ensure appropriate and stable provision of telecommunications services by these companies, and to engage in research activities relating to telecommunications technologies that form the platform for telecommunications in Japan.

The NTT Law also requires NTT East and NTT West to manage regional telecommunications businesses as joint-stock companies.

Business Activities

The NTT Law requires NTT to engage in the following business activities: (i) accepting and holding the shares issued by NTT East and NTT West and exercising rights as shareholders of such shares; (ii) giving necessary advice, assistance and other related support to NTT East and NTT West; (iii) engaging in research activities relating to telecommunications technologies that form the platform for telecommunications; and (iv) engaging in business activities incidental to the business activities set forth in (i), (ii) and (iii) above.

In addition to these business activities, the NTT Law provides that NTT may engage in actions necessary to complete such business activities after notifying the Minister.

The NTT Law requires that NTT East and NTT West engage in regional telecommunications business activities in prefectures in the following regions (activities conducted by establishing telecommunications facilities without using the facilities of other telecommunications business carriers):

 

   

For NTT East, Hokkaido Prefecture, Aomori Prefecture, Iwate Prefecture, Miyagi Prefecture, Akita Prefecture, Yamagata Prefecture, Fukushima Prefecture, Ibaraki Prefecture, Tochigi Prefecture, Gunma Prefecture, Saitama Prefecture, Chiba Prefecture, Tokyo, Kanagawa Prefecture, Niigata Prefecture, Yamanashi Prefecture and Nagano Prefecture;

 

   

For NTT West, Kyoto Prefecture, Osaka Prefecture and all other prefectures not listed above.

The NTT Law also requires NTT East and NTT West to engage in business activities incidental to those set forth above.

Upon notification to the Minister, the NTT Law permits NTT East and NTT West to engage in business activities necessary to achieve their purpose and regional telecommunications business activities in any region or

 

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prefectures not otherwise designated. In addition, upon notification to the Minister, NTT East and NTT West may engage in telecommunications businesses and other business activities utilizing the equipment or technology they own or their employees to the extent that there is no interference with the smooth implementation of regional telecommunications business activities and the maintenance of fair competition in regional telecommunications business activities.

Responsibilities

Pursuant to the NTT Law and the regulations promulgated thereunder, the management of NTT, NTT East and NTT West are required to give consideration to each company’s contribution to securing appropriate, fair, and stable provision of telephone services throughout Japan that are indispensable to civil life, and to the innovative and advanced development of telecommunications in Japan through the promotion of research relating to telecommunications technologies and the dissemination of the results thereof. The NTT Law also requires that each company promote public welfare, in view of the important role of telecommunications services play in contributing to societal and economic development.

Other Matters

Matters Requiring the Approval of the Minister

The NTT Law requires that the Minister approve the following actions of NTT, NTT East or NTT West:

 

   

Issuing new shares or bonds with share acquisition rights (Articles 4 and 5).

 

   

Under the NTT Law, NTT may issue new shares upon notification to the Minister, and may continue to do so until the number of issued shares reaches a certain number specified in the applicable ministerial ordinance of the MIC, even if approval is not obtained (Supplementary Provisions, Article 14).

 

   

Adopting resolutions on the appointment or dismissal of corporate directors or corporate auditors of NTT (Article 10).

 

   

Note that under the NTT Law, non-Japanese citizens cannot be appointed as corporate directors or corporate auditors of NTT, NTT East or NTT West (Article 10).

 

   

Adopting resolutions to change the respective articles of incorporation of NTT, NTT East or NTT West, to merge or dissolve each company, or the appropriation of surplus (Article 11).

 

   

Changing the business operation plans of NTT, NTT East or NTT West (Article 12).

 

   

Transferring or mortgaging the important telecommunications facilities of NTT East and NTT West (Article 14).

In addition to the foregoing, the NTT Law imposes several additional duties on NTT, NTT East and NTT West, including: (i) a duty to submit balance sheets, profit and loss accounts and business reports to the Minister (Article 13); (ii) a duty abide by orders issued by the Minister (Article 16); and (iii) a duty to comply with requests to submit reports on the business activities (Article 17).

Regulatory Developments

As described above, in December 2010, the MIC adopted a basic policy in relation to the “Hikari no Michi” vision, which aims to have all households using ultra-high-speed broadband by around 2015. It has been determined that a comprehensive review will be carried out approximately three years after implementation to assess the effectiveness and appropriateness of the system development measures employed pursuant to amendments to the NTT Law and other laws. If there has not been adequate progress towards the realization of

 

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“Hikari no Michi,” additional system development measures will be implemented. While there may be further reviews of the NTT Law going forward, the impact that such revisions would have on NTT Group is currently unknown.

Radio Act

Under the Radio Act, any establishment of a radio station requires a license from the Minister (Article 4) and changes to the purpose of the radio station, intended audience, and topics of communication require approval from the Minister (Article 17).

Mobile communications businesses are required to have a license from the MIC to use the radio frequency spectrum. Allocation of the frequency spectrum is governed by the Radio Act and related statutes and regulations.

In June 2011, the Radio Act was amended to accelerate the restructuring process of frequencies. It is now possible for mobile phone businesses newly applying to the MIC for frequency allocation to bear the expenses relating to the frequency reorganization of existing radio stations, allowing services to be launched in the near term. Under this system, the allocation process for the 700MHz band frequency commenced in April 2012, and on June 28, NTT DOCOMO received from the MIC a 700MHz band frequency allocation.

In March 2011, the MIC held the “Discussion Meeting Regarding Frequency Auctions,” and began considering introducing frequency auctions to Japan. In December 2011, the MIC announced that it was appropriate to introduce such frequency auctions. Based on the announcement, an amendment to the Radio Act that would introduce auctions with respect to allocation of certain frequencies is being discussed in the Diet.

As a result, there is the possibility of future reviews with respect to the use and allocation of frequencies. The effect on NTT Group is currently unknown.

Matters Relating to NTT’s Shares

Restrictions on the Ratio of Foreign Ownership of the Voting Rights of NTT’s Shares (NTT Law, Article 6)

If the ratio of foreign ownership of voting rights to the total voting rights of NTT’s Shares equals or exceeds one third, NTT may not record the names and addresses on its list of investors and may not register foreign ownership above such threshold. For purposes of calculating the ratio of foreign ownership, Shares owned by the following are considered to be shares under foreign ownership: (1) any person who is not of Japanese nationality; (2) any foreign government or any of its representatives; (3) any foreign juridical person or association; or (4) any juridical person or association listed in (1) through (3) above which directly owns voting rights equal to or exceeding the ratio specified in the applicable ministerial ordinance of the MIC.

Government Ownership and Sales of NTT Shares

The Government is required, at all times, to own one-third or more of the total number of issued shares of NTT. The NTT Law sets forth special provisions regarding the method for calculating the total number of issued shares of NTT (NTT Law, Supplementary Provisions, Article 13) for this purpose, including: (i) if shares are issued through new share issuances, the exercise of stock acquisition rights, through the acquisition of or exchange of shares subject to call, the number of shares increased as a result thereof (“Shares Not to be Included in Calculation”) will not be included in the total number of issued shares; and (ii) if there is a stock split or combination of shares after the increase in shares described in (i), the number obtained by multiplying the ratio of the stock split or the combination of shares (if there is a stock split or combination of shares in two or more stages, the ratio is equal to the product of the ratios for all stages) with the Shares Not to be Included in Calculation will be the number of shares which would not be included in the total number of issued Shares.

 

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As of March 31, 2012, the total number of issued shares of NTT was 1,323,197,235, and as of the same date, the Government owned 431,232,572 shares or 32.59% of the issued shares (35.24% of outstanding shares excluding treasury stock).

Note: In December 2000, NTT issued 300,000 new shares (equal to 30 million shares after the share split) in a public offering. These shares are not included in the total number of issued shares when calculating the percentage of Government-owned shares. The total number of Government-owned shares includes shares unregistered because of failure to make title transfer and therefore not actually owned by the Government. These shares are nominally owned by the Government but excluded from the total number of shares owned by the Government when calculating the percentage of Government-owned shares. Taking these conditions into account, the percentage of Government-owned shares is 33.33%.

NTT Group’s transactions with the Government divisions and agencies are arm’s-length transactions with the relevant division or agency acting as an individual customer. In its capacity as a shareholder, the Government is entitled to exercise voting rights at NTT general shareholders meetings, and as the largest shareholder, theoretically has the power to have a material impact on a large majority of shareholder meeting resolutions. However, in the past the Government has not exercised this authority and has not been directly involved in NTT’s management.

Sale of NTT’s Shares owned by the Government

The NTT Law requires that any disposition of NTT’s Shares owned by the Government must be within the limits determined by the Diet in the relevant annual budget (NTT Law, Article 7).

Background to Sale and Sale Policy

NTT was established with 15.6 million issued Shares; of the 10.4 million Shares that the Government was allowed to sell (the numbers of Shares held less the 5.2 million Shares representing the one-third of issued Shares that the Government is obligated to hold), the Government sold 5.4 million Shares from 1986 to 1988.

In addition, on December 17, 1990, a sale policy was issued by then Minister of Finance under which, with respect to the 5.0 million Shares that remained unsold at that point: (a) 2.5 million shares would systematically be sold approximately at a rate of 500,000 Shares per year; (b) if in the later years the market environment allowed it, the sale would be carried out earlier than scheduled; and (c) sales of the remaining 2.5 million Shares would be frozen for a period of time. (However, for the fiscal year ended March 31, 1998, no sales were actually carried out, due to the market environment and other factors.)

For the fiscal year ended March 31, 1999, one million Shares were sold by the Government in December 1998.

For the fiscal year ended March 31, 2000, one million Shares were designated by the Government as the maximum number of Shares to be sold; of these, 48,000 Shares were repurchased by NTT as treasury stock, and the remaining 952,000 Shares were sold in November 1999. The above sale policy announced in December 1990 has expired.

For the fiscal year ended March 31, 2001, one million Shares were sold by the Government in November 2000.

For the fiscal year ended March 31, 2003, one million Shares were designated by the Government as the maximum number of Shares to be sold; of these, 91,800 Shares were repurchased by NTT as treasury stock on October 8, 2002.

For the fiscal year ended March 31, 2004, one million Shares were designated by the Government as the maximum number of Shares to be sold; of these, 85,157 shares were repurchased by NTT as treasury stock on October 15, 2003.

 

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For the fiscal year ended March 31, 2005, one million Shares were designated by the Government as the maximum number of Shares to be sold; of these, 800,000 Shares were repurchased by NTT as treasury stock on November 26, 2004.

For the fiscal year ended March 31, 2006, 1,123,043 Shares were designated by the Government as the maximum number of Shares to be sold; all 1,123,043 Shares were repurchased by NTT as treasury stock on September 6, 2005.

For the fiscal year ended March 31, 2012, 99,334,255 Shares were designated by the Government as the maximum number of Shares to be sold; of these, 57,513,600 Shares were repurchased by NTT as treasury stock on July 5, 2011. 41,820,600 additional Shares were repurchased by NTT as treasury stock on February 8, 2012.

Capital Investments

NTT Group’s capital investments for the fiscal years ended March 31, 2010, 2011 and 2012 are shown in the table below:

 

     Year ended March 31,  
     2010      2011      2012  
     (in millions of yen)      (in millions of yen)      (in millions of yen)  

Regional communications business

   ¥ 874,204       ¥ 806,953       ¥ 811,803   

Long distance and international communications business

     129,010         135,452         152,348   

Mobile communications business

     686,508         668,476         726,833   

Data communications business

     162,571         139,070         133,966   

Other

     134,831         120,155         121,660   
  

 

 

    

 

 

    

 

 

 

Total

   ¥ 1,987,124       ¥ 1,870,106       ¥ 1,946,610   
  

 

 

    

 

 

    

 

 

 

The capital investment amounts shown above are the amounts, determined on an accrual basis, used to acquire tangible and intangible fixed assets. Shown below is the differential between the amount of capital investments shown above and the amount presented on the consolidated cash-flow statement under “Payments for property, plant, and equipment” and “Payments for acquisition of intangible assets.”

 

     Year ended March 31,  
     2010     2011      2012  
     (in millions of yen)     (in millions of yen)      (in millions of yen)  

Payments for property, plant, and equipment

   ¥ 1,370,923      ¥ 1,410,827       ¥ 1,395,087   

Payments for acquisition of intangible assets

     545,397        484,159         458,176   

Total

     1,916,320        1,894,986         1,853,263   
  

 

 

   

 

 

    

 

 

 

Differential of capital investment amount

   ¥ (70,804   ¥ 24,880       ¥ (93,347
  

 

 

   

 

 

    

 

 

 

Capital investment for each segment in the fiscal year ended March 31, 2012 was as follows:

In the regional communications business segment, with emphasis placed on improving customer service and making reductions in costs, capital investments were directed to the further growth of fiber-optic services through, among other things, the expansion of the lineup of services provided and expansion of the FLET’S Hikari Next service area. In particular, NTT Group built facilities in response to fiber-optic services needs and built internal facilities and relay transmission lines for full-fledged recovery and restoration following the Great East Japan Earthquake. For fixed-line telephone services and other services, NTT Group made capital investments in the minimum amount necessary to ensure and maintain the provision of high quality, stable universal service and to make full use of existing facilities.

 

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In the long distance and international communications business segment, NTT Group made capital investments in a diverse range of services in line with the cloud epoch, commercial broadcasters television relay network service and the “Asia Submarine-cable Express,” a large-capacity submarine cable system.

In the mobile communications business segment, NTT Group continued to improve the service quality across the “FOMA” service area, strengthen facilities in response to the increase in data traffic volume resulting from the promotion and increased use of smartphones, invested in facility construction for “Xi” networks, and made investments in the restoration of telecommunications facilities damaged by the Great East Japan Earthquake and in new disaster countermeasures based on the lessons learned from the earthquake. NTT Group also made efforts to make capital expenditures more efficient and less costly by reducing procurement costs, introducing cost-effective equipment and employing innovative planning, designing and construction techniques.

In the data communications business segment, NTT Group made capital investments primarily in the public and financial sector.

NTT Group made capital investments related to the Great East Japan Earthquake in the amount of approximately ¥30.0 billion.

NTT Group records its physical plant assets as follows:

 

     As of March 31, 2012  
     Telecom
Facilities
     Land      Buildings      Other      Total  
     (in millions of yen)  

Regional communications business

   ¥ 3,675,942       ¥ 434,799       ¥ 916,571       ¥ 342,140       ¥ 5,369,452   

Long distance and international communications business

     212,231         50,350         160,679         489,066         912,326   

Mobile communications business

     1,592,011         199,000         391,768         1,334,587         3,517,366   

Data communications business

     116,605         50,760         94,942         480,892         743,199   

Other

     —           398,168         541,899         242,151         1,182,218   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   ¥ 5,596,789       ¥ 1,133,077       ¥ 2,105,859       ¥ 2,888,836       ¥ 11,724,561   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

NTT Group plans to, among other things, make efficient capital investments, build new facilities in response to demands for “FLET’S Hikari Next” services, expand “Xi” services and strengthen facilities in response to increasing communications traffic. NTT Group forecasts about ¥1,920.0 billion in capital investments for the fiscal year ending March 31, 2013. The following is a breakdown of major items by segment:

 

     Year ending March 31,  
     2013  
     (in millions of yen)  

Total

   ¥ 1,920,000   
  

 

 

 

Breakdown (major items)

  

Regional communications business

   ¥ 778,500   

Long distance and international communications business

     152,000   

Mobile communications business

     735,000   

Data communications business

     133,000   

 

Notes:

  (1)   Consumption tax is not included in the above figures.
  (2)   NTT Group plans to procure the required funds from cash on hand and the issuance of corporate bonds and long-term debt.

Property, Plant and Equipment

The properties of NTT Group are used to provide nationwide telecommunications services and are generally in good operating condition.

 

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As of March 31, 2012, the total balance sheet amount of NTT Group’s fixed assets was ¥38,488.8 billion. The composition ratio of these fixed assets is telecommunications equipment (primarily central office equipment including switching installations), 37.5%; telecommunications service lines, 38.5%; building and structures, 15.4%; equipment and machinery, transportation equipment and tools (vehicles, office equipment, fixtures, etc.), 4.7%; land, 2.9%; and buildings under construction, 0.9%.

NTT Group networks are continually being updated and are recognized as appropriate for present operations. To meet the requirements of the rapid expansion of broadband services, NTT Group is working to upgrade and expand IP services such as fiber-optic access services and mobile communications services such as “FOMA” and “Xi,” as well as to increase the efficiency of its capital investments in existing facilities.

Procurement

As part of its strategy to strengthen its corporate competitiveness and to meet the demands of today’s rapidly advancing information and communications markets, NTT Group is making every effort to increase management efficiency to provide superior services to its customers. To realize this goal, NTT Group, taking into account its business needs, conducts its procurement in an open and transparent manner, provides non-discriminatory and competitive opportunities to both domestic and foreign suppliers, and conducts global and market-driven procurement of competitive products.

NTT Group provides procurement information via its international procurement website (http://www.ntt.co.jp/ontime/index-e.html) and always welcomes access from competitive suppliers worldwide. The information on this website is not incorporated by reference into this document.

Research and Development

NTT has conducted research and development on basic technologies with the goal of contributing to the realization of an enriched society with broadband and ubiquitous service and solving societal issues, such as enhancing convenience of government, education and medical services, and environmental issues, based on the objectives set out in its Medium-Term Management Strategy, “Road to Service Creation Business Group” (the “Medium-Term Management Strategy”). Commercialization of the results of research and development has been conducted under the “General Produce System” through which research and development achievements have been integrated into marketing and planning activities for key lines of business, taking into account global developments and collaboration with other businesses. NTT was also engaged in research and development to develop disaster-resistant networks and services by utilizing lessons learned from the Great East Japan Earthquake and research on advanced technologies for the future.

Research and Development Contributing to Service Creation

Research and Development for Promotion of Broadband and Ubiquitous Services

NTT has conducted research and development designed to provide safe and secure cloud services as social infrastructure. For example, NTT has established security technology to improve user confidentiality, including an encryption method, and performed experiments to transfer functions between data centers without disconnecting services. NTT has further developed a technology that creates new value in information which has been collected from SNS and other sources, by enabling the immediate analysis of high volumes of data (big data), available in cloud networks.

NTT has developed a contents administration platform necessary for “NOTTV,” a dedicated broadcasting station for smartphones and tablet devices.

NTT has also provided technical support on “FLET’S Joint,” a home ICT service, and achieved its commercialization.

 

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In order to promote the expansion of optical broadband services, in areas where it is difficult to conduct wiring installation, such as multi-unit apartment complexes, NTT has developed an optical fiber that can be wired through spaces in doorways.

Research and Development Corresponding to Societal Challenges

NTT has developed and has begun to conduct field trials on a mutual platform for medical institutions and home-care patients which is designed to safely distribute medical and health information, permitting greater ICT use for home medical care services. NTT has also conducted an experiment of its “Secure Computation” which enables statistical processing while protecting the privacy of diagnostic information in clinical research.

With the goal of achieving efficient use of energy and contributing to community development, NTT has carried out technology development through smart communities (next generation energy, social systems) and worked towards the “visualization of energy consumption” and home appliance energy control.

In the field of education, in order to support communications at school with hearing-impaired students, NTT has conducted an experiment on a technology which converts the words spoken by teachers into readable text on devices.

Research and Development to Provide Disaster Resistant Network Services

In preparation for any disruption of communication services resulting from a disaster, NTT has built transportable “Small Satellite Earth Stations for Disaster Recovery Operations” capable of immediately securing temporary telecommunications circuits, and developed an automatic measurement technology which eliminates distorted ultrafast optical signals, enabling the quick setup of temporary routes.

NTT has implemented measures to provide network control technology that will allow large numbers of customers to access important communications during disasters, by re-establishing flexible communication lines throughout the entire network.

In order to improve the convenience of the “Disaster Emergency Broadband Message Board,” NTT has developed a notification function for registration information through e-mail and voice messages and dedicated research efforts towards developing an easy-to-use user interface.

Advanced Research

NTT has worked towards the drastic reduction of energy consumption in the ICT field, and has succeeded in building a laser operated by ultra-low electricity current and manufacturing the world’s first optical random access memory chip which allows storage of information without converting data into an electric signal.

NTT has worked to produce innovative quantum computers in the field of information processing technology and has discovered an electron state that leads to a new method of inputting and reading quantum information.

In order to provide natural communication, NTT has focused research on the mechanics of signal control and processing within the human brain.

ITEM 4A—UNRESOLVED STAFF COMMENTS

Not applicable.

 

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ITEM 5—OPERATING AND FINANCIAL REVIEW AND PROSPECTS

Overview of Business Results

During the fiscal year ended March 31, 2012, NTT Group worked to expand broadband and ubiquitous services pursuant to its Medium-Term Strategy, adopted in May 2008, entitled “Road to Service Creation Business Group.”

Broadband Services

In the fixed-line communications field, NTT Group continued to expand FLET’S Hikari services and improve its customer support services. In order to expand the number of FLET’S Hikari subscribers, NTT Group launched the two-tier fixed rate service, “FLET’S Hikari Light,” with lower basic monthly charges for customers who are just starting to use the Internet or have few opportunities to use the Internet.

In the mobile communications field, NTT Group worked to expand the lineup of smartphones, whose popularity is rapidly growing. In addition, the main services of i-mode were made compatible with smartphones and NTT Group started offering new services and functions such as “dmenu” for smartphones, which enables users to search various content. With respect to “Xi” (pronounced “crossy”), an LTE service with high-speed, large capacity and low latency features, NTT Group launched new voice services, added to data communications services, improved rate plans and expanded its service areas.

In order to increase Hikari use scenarios and to improve user convenience with respect to data communications by smartphones, NTT Group worked to expand the Wi-Fi environment. NTT Group actively developed and promoted the use of “FLET’S Hikari + Wi-Fi” at homes and the use of public wireless LAN outdoors by increasing the installation of public access points at public and retail facilities and by utilizing mobile Wi-Fi routers such as the “Hikari Portable.”

Upper Layer Services—Solutions Businesses

Group-wide efforts were directed towards the creation of services that use broadband networks. With respect to “Hikari TV,” in addition to the existing service enabling the viewing of videos on TV through FLET’S Hikari, NTT Group launched “Hikari TV Dokodemo” for viewing “Hikari TV” videos on smartphones and tablet devices.

With respect to cloud services, NTT Group expanded its service menus for services such as “BizCity” and “BizXaaS,” and promoted the building and provision of customer systems using these services and otherwise endeavored to provide solutions tailored to the industries and categories of its customers. In addition, NTT launched “Mobile Groupware” and other services that provide web-based email and schedule functions that enable customer use without regard to differences in devices between smartphones and PCs.

Global Businesses

NTT Group acquired foreign companies with the aim of expanding the lineup of its services and gaining personnel with the expertise and know-how of business operations. In particular, with respect to global expansion of cloud services, Dimension Data Holdings plc, one of NTT’s overseas subsidiaries, worked to reinforce its ability to provide implementation consulting and formulation by acquiring OpSource, Inc., which has the technology to provide automatic cloud implementation, operation and restoration.

NTT Group established new overseas offices to strengthen ICT service support to Japanese businesses operating abroad and to local businesses. NTT Group also worked to enhance its service platforms by, among other things, increasing the connection speed of the IP backbone between Japan and the U.S., where a high volume of data is exchanged, to 600Gbps.

 

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NTT Group worked to strengthen its global strategy development framework through the maximization of synergies and promotion of cross-selling between its group companies, including overseas subsidiaries, and established committees formed from each group company on global strategy and personnel administration for the entire NTT Group.

Research and Development

As part of its efforts to create new services, NTT Group engaged in research and development directed at the advancement of cloud services, video services, Home ICT and mobile services, on network platforms that support these services, and on the fourth-generation mobile communications systems that will succeed LTE. In addition, NTT Group also conducted research and development on optical device technology, which enables low-power information telecommunications and quantum information processing, as initiatives to develop advanced technologies for the future, while continuing research and development to develop new markets and services through the integration of industries and ICT, solutions for societal issues and disaster-resistant network services.

Corporate Social Responsibility (“CSR”)

NTT Group took group-wide CSR initiatives to contribute to the continuous development of society. Especially with respect to the vision of “creating a low-carbon society,” one of the themes of NTT Group’s environmental vision, “The Green Vision 2020,” NTT Group as a whole adopted the “Green NTT” measure as a means of promoting natural energy. In the fiscal year ended March 31, 2012, NTT Group commenced the operation of three new solar power facilities and the total size of installed solar capacity reached approximately 4.4 megawatts. NTT expects to reach its initial target of 5.0 megawatts before the end of the fiscal year ending March 31, 2013.

Restoration and Disaster Countermeasures Commenced at the Beginning of the Fiscal Year (ended March 31, 2012)

The Great East Japan Earthquake, which occurred in March 2011, caused service outages to approximately 1.5 million fixed-line related services, approximately 4,900 mobile base stations, and approximately 15,000 data communications services. As a result of NTT Group committing a total of 10,000 members to the restoration efforts, at the end of May 2011, NTT Group restored the functionality of all damaged exchange offices and base stations, except for certain areas where restoration work is difficult, such as areas surrounding the Fukushima Daiichi Nuclear Power Plant.

In terms of facility-related countermeasures against disasters, in addition to the existing efforts to enhance the durability of exchange offices and increasing the number of transmissions lines, NTT Group carried out further measures to install emergency power generators and make available batteries that last up to 24 hours, secure fuel and prepare for potentially long and geographically dispersed blackouts. Moreover, NTT Group installed large-zone base stations (mobile base stations which cover 360-degrees with a radius of about 7 km) to widely and efficiently ensure communications in densely populated areas and increased the number of deployed disaster countermeasure equipment, including satellite mobile base stations.

With respect to the provision of services, specifically in times when it is difficult to connect to voice-message services due to a disaster, NTT Group launched the “Disaster Voice Messaging Service,” a service through which voice messages are sent as data files, and expanded its “Area Mail” function, which is used with emergency earthquake information, for example, by adding a new compatibility enhancement to provide tsunami information. Also, to ensure communication for disaster victims, including those who are stranded, NTT Group launched initiatives for convenience stores to be used as “information stations” by, among other things, installing special public telephones and making public wireless LAN spots free-of-charge during disasters.

 

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As a result, NTT Group’s consolidated operating revenues for the fiscal year ended March 31, 2012 were 10,507.4 billion yen (an increase of 2.0% from the previous fiscal year). Consolidated operating expenses were 9,284.4 billion yen (an increase of 2.1% from the previous fiscal year). As a result, consolidated operating income was 1,223.0 billion yen (an increase of 0.7% from the previous fiscal year), consolidated income before income taxes was 1,239.3 billion yen (an increase of 5.4% from the previous fiscal year), and consolidated net income attributable to NTT was 467.7 billion yen (a decrease of 8.2% from the previous fiscal year).

In addition, in response to the Great East Japan Earthquake that occurred on March 11, 2011, NTT Group recorded ¥19.5 billion as consolidated operating expenses and approximately ¥30.0 billion as capital investments for the fiscal year ended March 31, 2012. Further, consolidated operating revenues also decreased from, among other things, customers affected from the earthquake unable to continue using NTT Group’s services.

Business Outlook

Development of Business Pursuant to the Medium-Term Management Strategy

Pursuant to NTT Group’s Medium-Term Management Strategy, “Road to Service Creation Business Group,” adopted in May 2008, NTT Group has been promoting the transformation of its business structure with a focus on revenues from IP businesses and solutions businesses. The fiscal year ending March 31, 2013 is the last year of this medium-term management strategy.

NTT Group’s Medium-Term Management Strategy set a goal of achieving revenues from NTT Group’s IP businesses and solutions businesses equal to 75% of its consolidated operating revenues by the fiscal year ending March 31, 2013. NTT Group has succeeded at raising this percentage to 70% during the fiscal year ended March 31, 2012. Further, while NTT Group had historically experienced deficits in connection with its Hikari services, such as “FLET’S Hikari,” due to build-out investments, it expects solid year-over-year improvements and made a profit from these services for the fiscal year ended March 31, 2012.

Regarding sales in global businesses, which have been rapidly expanding in recent years, NTT Group achieved its target one year ahead of schedule in the fiscal year ended March 31, 2012.

As a result of the need for NTT Group to strengthen its networks in the aftermath of the Great East Japan Earthquake and the expansion of smartphones, it will be extremely difficult for NTT Group to reach its previously announced 15% target ratio of capital expenditures to operating revenues (“Capex Ratio”) during the fiscal year ending March 31, 2013. NTT Group’s Capex Ratio for the fiscal year ended March 31, 2012 was 18.5%. NTT Group aims to make significant improvements in its Capex Ratio by enhancing the efficiency of its capital expenditures. With respect to operating income, NTT Group achieved ¥1,223 billion for the fiscal year ended March 31, 2012, while its target for the fiscal year ending March 31, 2013 is ¥1,300 billion. NTT Group plans to continue to increase operating income by working to further reduce costs and implementing the measures described below.

Enhancement of ICT Services for Corporations and Government

To respond to the increasing diversification of customer needs, NTT will promote the development of integrated cloud services which combine the strengths of NTT Group for its applications, platforms, networks and terminals.

NTT Group will offer a service platform which can create new added value by organizing and collecting large-scale data, known as “big data,” and by processing and analyzing the collected data through introducing M2M technology into cloud services. M2M technology will allow various devices, including smartphones, automobiles and home appliances, to autonomously communicate with each other.

 

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NTT Group is responding to the needs of business continuity plans by expanding cloud services. Business continuity plans have been a focus of businesses since the Great East Japan Earthquake. Cloud services allow data centers around the world to function as if they were a single data center by enabling the flexible transfer of data within and between data centers.

To respond to such societal issues as the enhancement of convenience in government, education and medical services, environmental protection, the aging population and the declining birthrate, NTT Group is promoting the widespread use of ICT. For example, with respect to “Education Square x ICT” in the education field, under which field trials are held in collaboration with local governments, NTT Group is enhancing the accumulation of knowledge by connecting schools to homes and schools to the world through educational cloud services. NTT will continue to work to expand ICT use scenarios.

Enhancement of Consumer Services

NTT Group will work to enhance ICT services that utilize fixed and mobile broadband by promoting the further use of mobile broadband services through increasing the number of “Xi”-compatible terminals being offered, expanding service areas and adding to the availability of optical services by providing the two-tier fixed rate “FLET’S Hikari Light.”

In response to the diversification and expansion of handsets that can connect to networks, such as smartphones and tablets, NTT Group will make efforts to create and provide new services, such as by enhancing “dmenu,” “dmarket” and other platform functions, by providing “Hikari TV Dokodemo” for viewing videos on a smartphone or tablet, and by launching services such as the “NOTTV” broadcast station for smartphones and tablets.

In response to an increase in the amount of mobile communications data, NTT Group has been developing initiatives, such as expanding “Xi,” which is characterized by the highly efficient use of radio frequencies, promoting the use of “FLET’S Hikari + Wi-Fi” in homes utilizing the Hikari Portable and decentralizing the network burden by increasing the installation of public wireless LAN access points at public and retail facilities.

In addition to NTT Group’s goal of acquiring new customers, NTT Group is also promoting long-term use by existing customers. In this connection, NTT Group is working to create a system that retains customers for the long-term, such as through long-term user discounts and membership programs.

Strengthening of the Framework for Promotion of Global Businesses and the Enhancement of Services

NTT Group’s global business grew during the fiscal year ended March 31, 2012 with the acquisition of Dimension Data. NTT Group will seek to strengthen its efforts to develop new global business customers by utilizing group company synergies and cross-selling efforts. Further, NTT Group will seek to accelerate the growth of its global businesses through adopting appropriate strategies and efficient personnel administration.

NTT Group will make efforts to provide comprehensive cloud services from applications to terminals, and in particular will work to strengthen its ability to provide applications and managed services.

Responding to Environmental Issues

In recognition of the global concerns relating to environmental issues, NTT Group will bolster its efforts to reduce its environmental burden through the following initiatives:

 

   

“Green of ICT”—This initiative is aimed at reducing the environmental burden resulting from ICT through measures such as energy conservation at NTT Group’s data centers and communication facilities and promoting natural energy generation.

 

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“Green by ICT”—This initiative promotes the use of ICT, such as telecommuting and teleconferencing, to help reduce the environmental burden on society as a whole.

 

   

“Green with Team NTT”—Under this initiative, each NTT Group employee’s action will help reduce the environmental burden at the workplace, at home and in the community.

Through innovative uses of ICT, NTT will contribute to the realization of environmentally friendly and smart communities by promoting a power visualization service for customers’ power consumption in office buildings and condominium complexes to support the reduction of electric power consumption and energy saving.

Initiatives for Secure and Safe Networks

With respect to disaster countermeasures, NTT Group will continue to work on initiatives in the areas of facilities and services. These initiatives were launched during the fiscal year ended March 31, 2012. Further, in anticipation of the possibility of earthquakes with an epicenter in Tokyo, NTT Group has been working to establish alternate base stations for its disaster countermeasure headquarters. In addition, with respect to support services such as the Disaster Emergency Message Dial (171), in cooperation with local governments, NTT Group will provide opportunities for periodic trial use and participate in drills aimed at helping individuals who are stranded after a disaster, hosted by local governments.

With respect to improving networks in response to the increase in smartphone use, NTT Group will continue to work to improve the reliability and expandability of its networks and to prevent the recurrence of network failures.

 

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Results of Operations

The fiscal year ended March 31, 2012 compared with the fiscal year ended March 31, 2011

Telecommunications Circuit Facilities, etc.

In order to provide high quality telecommunication services, NTT Group owns and operates a wide range of telecommunications circuit facilities. The recent status of circuit facilities for our major services is as follows:

(Thousands, except for Public Telephones)

 

     As of Mar. 31,
2011
     As of Mar. 31,
2012
     Change     Percent Change  

Telephone Subscriber Lines

     30,271         27,521         (2,750     (9.1 )% 

NTT East

     14,929         13,554         (1,375     (9.2 )% 

NTT West

     15,342         13,968         (1,374     (9.0 )% 

INS-Net

     4,613         4,150         (462     (10.0 )% 

NTT East

     2,390         2,142         (248     (10.4 )% 

NTT West

     2,222         2,008         (214     (9.6 )% 

Telephone Subscriber Lines + INS-NET

     34,884         31,672         (3,212     (9.2 )% 

NTT East

     17,319         15,695         (1,624     (9.4 )% 

NTT West

     17,564         15,976         (1,588     (9.0 )% 

Public Telephones

     252,775         231,038         (21,737     (8.6 )% 

NTT East

     121,508         110,242         (11,266     (9.3 )% 

NTT West

     131,267         120,796         (10,471     (8.0 )% 

FLET’S ISDN

     193         152         (41     (21.3 )% 

NTT East

     94         71         (23     (24.2 )% 

NTT West

     99         81         (18     (18.4 )% 

FLET’S ADSL

     2,858         2,322         (536     (18.8 )% 

NTT East

     1,418         1,135         (284     (20.0 )% 

NTT West

     1,439         1,187         (252     (17.5 )% 

FLET’S Hikari

     15,059         16,564         1,506        10.0

NTT East

     8,511         9,353         842        9.9

NTT West

     6,547         7,211         664        10.1

FLET’S Hikari Next*

     4,596         7,106         2,510        54.6

NTT East

     2,963         4,275         1,312        44.3

NTT West

     1,633         2,831         1,198        73.4

FLET’S Hikari Light*

     —           297         297        —     

NTT East

     —           261         261        —     

NTT West

     —           36         36        —     

Hikari Denwa

     12,113         13,900         1,788        14.8

NTT East

     6,446         7,402         956        14.8

NTT West

     5,667         6,498         831        14.7

Conventional Leased Circuit Services

     281         269         (12     (4.3 )% 

NTT East

     139         134         (5     (3.5 )% 

NTT West

     142         135         (7     (5.1 )% 

High Speed Digital Services

     171         158         (12     (7.2 )% 

NTT East

     91         84         (7     (7.5 )% 

NTT West

     80         74         (5     (6.9 )% 

NTT Group Major ISPs

     11,662         11,882         220        1.9

OCN*

     8,234         8,437         203        2.5

Plala*

     3,101         3,122         21        0.7

 

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     As of Mar. 31,
2011
     As of Mar. 31,
2012
     Change     Percent Change  

Video Services

     —           —           —          —     

Hikari TV

     1,413         2,004         591        41.8

FLET’S TV Transmission Services

     592         861         269        45.5

NTT East

     475         642         167        35.1

NTT West

     117         219         102        87.5

Mobile

     58,010         60,129         2,120        3.7

FOMA*

     56,746         57,905         1,159        2.0

Xi*

     26         2,225         2,199        —     

i-mode

     48,141         42,321         (5,819     (12.1 )% 

sp-mode

     2,095         9,586         7,492        357.7

 

* Partial listing only

 

(1) Number of Telephone Subscriber Lines is the total of individual lines and central station lines (Subscriber Telephone Light Plan is included).

 

(2) INS-Net includes INS-Net 64 and INS-Net 1500. In terms of number of channels, transmission rate, and line use rate (base rate), INS-Net 1500 is in all cases roughly ten times greater than INS-Net 64. For this reason, one INS-Net 1500 subscription is calculated as ten INS-Net 64 subscriptions (INS-Net 64 Lite Plan is included).

 

(3) Number of FLET’S Hikari subscribers includes subscribers to “B FLET’S,” “FLET’S Hikari Next” and “FLET’S Hikari Light” provided by NTT East, and subscribers to “B FLET’S,” “FLET’S Hikari Premium,” “FLET’S Hikari Mytown,” “FLET’S Hikari Next” and “FLET’S Hikari Light” provided by NTT West.

 

(4) NTT Group Major ISPs includes WAKWAK and InfoSphere, in addition to OCN and Plala.

 

(5) Number of communication module service subscribers is included in the number of mobile subscribers.

 

(6) FOMA services subscriptions are mandatory for subscription to “2in1” services. Such FOMA services subscriptions to “2in1” services are included in the above numbers of Mobile phone service subscriptions and FOMA* service subscriptions.

Operating Results

 

     Year Ended March 31,              
     2011     2012     Change     Percent Change  
     (in billions of yen)  

Operating revenues:

     10,305.0        10,507.4        202.4        2.0

Fixed voice related services

     2,180.8        1,949.6        (231.2     (10.6 )% 

Mobile voice related services

     2,021.6        1,870.1        (151.5     (7.5 )% 

IP/Packet communications services

     3,341.1        3,602.5        261.4        7.8

Sales of telecommunications equipment

     565.9        580.9        15.0        2.7

System integration

     1,382.2        1,776.9        394.7        28.6

Other

     813.5        727.4        (86.1     (10.6 )% 

Operating expenses

     9,090.1        9,284.4        194.3        2.1

Operating income

     1,214.9        1,223.0        8.1        0.7

Other income (expenses)

     (39.1     16.4        55.5        —     

Income before income taxes and equity in earnings (losses) of affiliated companies

     1,175.8        1,239.3        63.5        5.4

Income tax expense (benefit)

     475.6        587.8        112.2        23.6

Equity in earnings (losses) of affiliated companies

     1.7        (3.0     (4.7     —     

Net income

     701.9        648.6        (53.3     (7.6 )% 

Less—net income attributable to noncontrolling interests

     192.2        180.9        (11.4     (5.9 )% 

Net income attributable to NTT

     509.6        467.7        (41.9     (8.2 )% 

 

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Operating Revenues

NTT Group’s operating revenues are divided into the six service categories comprised of fixed voice related services, mobile voice related services, IP/packet communications services, sales of telecommunications equipment, system integration and other services.

Operating revenues in the fiscal year ended March 31, 2012 increased 2.0% from the previous fiscal year to ¥10,507.4 billion. While voice related revenues continued to decline, this increase was due to such factors as an increase in IP/packet communications service revenues attributable to increases in FLET’S Hikari and value-added service subscriptions, an increase in mobile business packet ARPU resulting from an increase in the number of smartphone subscriptions, and a large increase in overseas sales.

Operating revenues for each service category for the fiscal year ended March 31, 2012 are summarized as follows:

Fixed Voice Related Services

NTT Group’s fixed voice related services include a portion of the services in the regional communications business segment and long distance and international communications business segment, such as telephone subscriber lines, ISDN, conventional leased circuits and high speed digital.

Fixed voice related revenues for the fiscal year ended March 31, 2012 decreased 10.6% from the previous fiscal year to ¥1,949.6 billion, accounting for 18.6% of total operating revenues. This was due to a continued decline in the number of subscriptions for telephone subscriber lines and ISDN caused by the increasing popularity of mobile phones and the development of competition with optical IP telephones and fixed line services provided by other businesses, and competition with direct subscriber telephone services of other companies using dry copper lines and telephone services provided by cable television operators.

Mobile Voice Related Services

Mobile voice related services include a portion of services from the mobile communications business segment, such as Xi, FOMA and mova voice communications services. mova services were terminated as of March 31, 2012.

Mobile voice related revenues for the fiscal year ended March 31, 2012 decreased 7.5% from the previous fiscal year to ¥1,870.1 billion, accounting for 17.8% of total operating revenues. This was due to a decrease in voice ARPU arising from the expansion of the “Value Plan” and the penetration of the “Monthly Support” discount programs in conjunction with the expansion of smartphone sales, despite an increase in revenues resulting from an increase in Mobile Phone Protection & Delivery Service subscriptions. For details of voice ARPU, please see “—Segment Information—The fiscal year ended March 31, 2012 compared with the fiscal year ended March 31, 2011—Mobile Communications Business Segment.”

IP/Packet Communications Services

NTT Group’s IP/packet communications services include a portion of the services in the regional communications business segment such as FLET’S Hikari and FLET’S ADSL, and a portion of the services in the long distance and international communications business segment such as IP-VPN, wide area Ethernet and OCN, as well as a portion of the services in the mobile communications business segment such as the packet communications services of Xi, FOMA and mova.

In the fiscal year ended March 31, 2012, revenues from IP/packet communications services increased 7.8% from the previous fiscal year to ¥3,602.5 billion, accounting for 34.3% of total operating revenues. This was due

 

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to an increase in subscriptions for FLET’S Hikari and Hikari Denwa in the regional communications business, and an increase in smartphone sales in the mobile communications business.

Sales of Telecommunications Equipment

This category includes a portion of the services in the regional communications business segment and the mobile communications business segment.

In the fiscal year ended March 31, 2012, revenues from telecommunications equipment sales increased 2.7% from the previous fiscal year to ¥580.9 billion, accounting for 5.5% of total operating revenues. This increase was due to robust sales of handset mobile devices such as smartphones in the mobile communications business, which more than offset a decrease in revenues from telecommunications equipment sales in the regional communications business.

System Integration

NTT Group’s system integration services include the data communications business segment and a portion of the services in the long distance and international communications business segment and the regional communications business segment.

In the fiscal year ended March 31, 2012, revenues from system integration increased 28.6% from the previous fiscal year to ¥1,776.9 billion, accounting for 16.9% of total operating revenues. This was due to the effect of the consolidation of Dimension Data for the entire fiscal year ended March 31, 2012 in the long distance and international communications business (compared to its consolidation for a period of three months during the fiscal year ended March 31, 2011), as well as an increase in the number of consolidated subsidiaries in the data communications business.

Other Businesses

The other businesses segment principally comprises the real estate business, financing business, construction and electricity business, system development business and advanced technology development business.

In the fiscal year ended March 31, 2012, revenues from other businesses decreased 10.6% from the previous fiscal year to ¥727.4 billion, accounting for 6.9% of total operating revenues. This was due mainly to a decrease in revenues from the real estate business.

Operating Expenses

Operating expenses in the fiscal year ended March 31, 2012 increased 2.1% from the previous fiscal year to ¥9,284.4 billion. The reasons for the increase are discussed below. In addition, with respect to expenses incurred in relation to countermeasures in response to the Great East Japan Earthquake, which occurred on March 11, 2011, consolidated operating expenses of ¥19.5 billion were recorded for the year ended March 31, 2012.

Personnel Expenses

Personnel expenses in the fiscal year ended March 31, 2012 increased 4.9% from the previous fiscal year to ¥2,126.5 billion. Although the number of employees in the regional communications business segment continued to decline, personnel expenses increased compared with the previous fiscal year due to the consolidation of Dimension Data for the entire fiscal year ended March 31, 2012 and the increase in the total number of employees as a result of the increase in the number of consolidated subsidiaries in the data communications business segment.

 

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Expenses for Purchase of Goods and Services and Other Expenses

In the fiscal year ended March 31, 2012, cost of services and equipment sold, and selling, general and administrative expenses increased 3.4% from the previous fiscal year to ¥4,868.6 billion. In the fiscal year ended March 31, 2012, there was a decrease in revenue-linked expenses, such as expenses associated with the construction of fiber-optic facilities commissioned by local governments, which were recorded in the regional communications business segment for the previous fiscal year. Furthermore, in the mobile communications business segment, telecommunications facilities usage fees decreased due to a reduction in access charges. Although expenses were reduced by improving business efficiency, overall expenses increased compared with the previous fiscal year as a result of Dimension Data having been consolidated for the entire fiscal year, an increase in wholesale unit prices of handsets and distributor commissions resulting from the expansion of smartphone sales in the mobile communications business segment and an increase in revenue-linked expenses and selling and administrative expenses resulting from the increase in the number of consolidated subsidiaries in the data communication business.

Depreciation and Amortization Expenses

Depreciation and amortization expenses in the fiscal year ended March 31, 2012 decreased 2.6% from the previous fiscal year to ¥1,910.7 billion. This was due to a reduction in the total investment amount from recent improvements in capital investment efficiency, despite the increase in capital investments for the year ended March 31, 2012.

 

Note:

  Personnel expenses and expenses for purchase of goods and services and other expenses above are included in cost of services, cost of equipment sold, cost of system integration, and selling, general and administrative expenses in the consolidated statements of income.

Operating Income

As a result of the foregoing, operating income for the fiscal year ended March 31, 2012 was ¥1,223.0 billion, an increase of 0.7% over the previous fiscal year.

Other Operating Revenues and Expenses

Other Income (Expenses)

Other income for the fiscal year ended March 31, 2012 was ¥16.4 billion, compared to other expenses of ¥39.1 billion in the previous year. One of the contributing factors was the increase in gains on sales of property, plant and equipment. Other factors include the decrease in foreign exchange losses, which were ¥1.5 billion and ¥17.4 billion for the fiscal years ended March 31, 2012 and 2011, respectively. Foreign exchange loss in the fiscal year ended March 31, 2011 stemmed from the use of derivatives entered into to hedge foreign exchange fluctuation risks associated with major overseas investments. Hedge accounting was not applied because those derivatives are investments associated with business consolidation.

Net Income before Income Taxes

Net income before income taxes in the fiscal year ended March 31, 2012 increased 5.4% from the previous fiscal year to ¥1,239.3 billion for the reasons discussed above.

Income Tax Expense (Benefit)

In the fiscal year ended March 31, 2012, income tax expense increased 23.6% from the previous fiscal year to ¥587.8 billion. The actual effective tax rate increased from 40.5% for the year ended March 31, 2011 to 47.4% for the year ended March 31, 2012. The increase in the actual effective tax rate was primarily due to the

 

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re-measurement of the existing net deferred tax assets using the lower statutory tax rates that were enacted in Japan in November 2011, which resulted in the recognition of additional income tax expense of ¥89.9 billion as income tax expense.

Net Income Attributable to NTT

As a result, net income for the fiscal year ended March 31, 2012 was ¥648.6 billion, a decrease of 7.6% from the previous fiscal year. Net income attributable to NTT (excluding the portion attributable to noncontrolling interests) for the fiscal year ended March 31, 2012 was ¥467.7 billion, a decrease of 8.2% from the previous fiscal year.

Segment Information

NTT Group has five operating segments: regional communications business, long distance and international communications business, mobile communications business, data communications business and other businesses. (For further details, please see Note 15 to the Consolidated Financial Statements.)

The regional communications business segment comprises fixed voice related services, IP/packet communications services, sales of telecommunications equipment, system integration services and other services.

The long distance and international communications business segment comprises mainly fixed voice related services, IP/packet communications services, system integration services and other services.

The mobile communications business segment comprises mobile voice related services, IP/packet communications services and sales of telecommunications equipment.

The data communications business segment comprises system integration services.

The other businesses segment principally comprises other services such as real estate, financing, construction and electricity, system development and advanced technology development.

 

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Overviews of operational results for each segment are as follows:

The fiscal year ended March 31, 2012 compared with the fiscal year ended March 31, 2011

 

      Fiscal Year Ended March 31, 2012  

Service Types

   Sales and
Operating
Revenue
Amounts
(¥ million)
     Comparison
with Previous
Year (%)
 

Regional communications business

   Fixed voice related services      1,848,389         (10.0 )% 
   IP/packet communications services      1,396,106         7.9
   System integration services      133,594         (33.0 )% 
   Other services      386,682         (19.7 )% 
  

Subtotal

     3,764,771         (6.5 )% 
  

Internal sales

     458,115         (7.9 )% 
  

Total for regional communications business

     3,306,656         (6.3 )% 

Long distance and international communications business

   Fixed voice related services      452,840         (11.6 )% 
   IP/packet communications services      384,120         2.5
   System integration services      575,682         201.9
   Other services      266,014         4.4
  

Subtotal

     1,678,656         26.0
  

Internal sales

     105,506         (3.4 )% 
  

Total for long distance and international communications business

     1,573,150         28.6

Mobile communications business

   Mobile voice related services      1,896,467         (7.5 )% 
   IP/packet communications services      1,844,647         8.8
   Other services      498,889         4.5
  

Subtotal

     4,240,003         0.4
  

Internal sales

     28,904         (11.0 )% 
  

Total for mobile communications business

     4,211,099         0.5

Data communications business

   System integration services      1,251,810         7.6
   Internal sales      143,598         8.7
  

Total for data communications business

     1,108,212         7.5

Other businesses

   Other services      1,089,039         (2.8 )% 
  

Subtotal

     780,794         (1.3 )% 
  

Total for other businesses

     308,245         (6.3 )% 

Consolidated Sales and Operating Revenue Amounts Total

     10,507,362         2.0

 

Note: The above figures do not include consumption or other taxes.

 

  (1) Regional Communications Business Segment

Despite an increase in IP/packet communications revenues attributable to the increase in “FLET’S Hikari” and “Hikari Denwa” subscriptions, operating revenues in the regional communications business segment for the fiscal year ended March 31, 2012 decreased to ¥3,764.8 billion (a decrease of 6.5% from the previous fiscal year) due to a decrease in fixed voice related revenues resulting from the decline in fixed-line telephone subscriptions in the fiscal year ended March 31, 2012 and an increase in revenues from the construction of fiber-optic facilities commissioned by local governments, recorded in system integration revenues during the previous fiscal year. On the other hand, due to a decrease in expenses in conjunction with the decline in revenues from the construction of commissioned facilities, as well as a decrease in personnel expenses and depreciation and amortization expenses, operating expenses were ¥3,677.9 billion in the fiscal year ended March 31, 2012 (a decrease of 5.7% from the previous fiscal year).

 

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As a result, segment operating income in the fiscal year ended March 31, 2012 decreased 31.7% to ¥86.9 billion.

Operations for each service in the regional communications segment were as follows:

 

  (Fixed Voice Related Services)

With respect to telephone subscriber services, in conjunction with the shift in customer needs from subscriber line telephones and ISDN to mobile telephones, IP phones, and similar devices, the number of subscriptions to telephone subscriber services fell to 27,521 thousand as of March 31, 2012, a decrease of 2,750 thousand subscribers from the previous fiscal year.

With respect to ISDN services, as a result of the continued contraction in demand due to the spread of broadband access services, the number of ISDN subscribers as of March 31, 2012 fell to 4,150 thousand, a decrease of 462 thousand ISDN subscribers from the previous fiscal year.

The numbers of fixed-line telephone and ISDN subscriptions were as follows:

 

     As of March 31,               
     2011      2012      Change     Percent Change  
     (in thousands)  

NTT East:

          

Telephone subscriptions

     14,929         13,554         (1,375     (9.2 )% 

ISDN subscriptions

     2,390         2,142         (248     (10.4 )% 

NTT West:

          

Telephone subscriptions

     15,342         13,968         (1,374     (9.0 )% 

ISDN subscriptions

     2,222         2,008         (214     (9.6 )% 

Telephone subscriber line ARPU in the fiscal year ended March 31, 2012 was ¥2,500 for NTT East and ¥2,450 for NTT West, a decrease of ¥70 (2.7%) and ¥40 (1.6%), respectively, from the corresponding figures in the previous fiscal year. INS-Net subscriber line ARPU in the fiscal year ended March 31, 2012 was ¥5,080 for NTT East and ¥4,920 for NTT West, a decrease of ¥90 (1.7%) and ¥50 (1.0%), respectively, from the previous fiscal year. As a result, aggregate fixed-line ARPU (telephone subscriber lines plus INS-Net subscriber lines) was ¥2,860 for NTT East and ¥2,760 for NTT West, a decrease of ¥70 (2.4%) and ¥40 (1.4%), respectively, from the previous fiscal year. This decline was due to the shift by high-volume users to IP telephone services and the migration of users from fixed-line services to mobile phones.

Please see “—Segment Information—The fiscal year ended March 31, 2012 compared with the fiscal year ended March 31, 2011—Footnote 2, ‘ARPU: Average monthly revenue per unit’” and “—Segment Information—The fiscal year ended March 31, 2012 compared with the fiscal year ended March 31, 2011—Footnote 3, ‘Method of calculating ARPU—(a) NTT East, NTT West’” for a description of how ARPU is calculated for telephone subscriber and ISDN services.

NTT East’s and NTT West’s market shares for MYLINE registrations continued to shrink in the fiscal year ended March 31, 2012.

 

       As of March 31,          
     2011     2012     Change  

Intra-city:

      

NTT East

     54.3     54.1     (0.2 )% 

NTT West

     51.7     51.3     (0.4 )% 

NTT Communications

     34.1     34.7     0.6

Intra-prefectural and inter-city:

      

NTT East

     50.4     50.3     (0.1 )% 

NTT West

     48.1     47.9     (0.2 )% 

NTT Communications

     35.0     35.6     0.6

 

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Access charges for functions subject to calculation under the LRIC Methodology (which is applied to the majority of public network usage) for the fiscal year ended March 31, 2012 were ¥5.08 per three minutes for GC interconnection charges and ¥6.57 per three minutes for IC interconnection charges. Revenues from these access charges for the fiscal year ended March 31, 2012 decreased by ¥18.1 billion from the previous fiscal year to ¥81.9 billion for NTT East and by ¥18.5 billion from the previous fiscal year to ¥90.4 billion for NTT West (including subsidies to NTT East and NTT West).

Dedicated services are offered as fixed-rate, high-quality access services for business users. However, with the provision of services such as “Business Ether WIDE,” which utilizes the NGN, and other Ethernet services suited to low-cost and highly reliable LAN communications, the shift in demand to IP system services such as “FLET’S VPN WIDE” has led to the continuation of the decreasing trend in the number of subscribers to dedicated services.

Furthermore, a result of the shift of customer needs to data transmission services, such as high-volume, low-cost IP and Ethernet services, the number of leased circuit service subscriptions has continued to decline.

The number of leased circuit service subscriptions in the regional communications business segment was as follows:

 

     As of March 31,               
     2011      2012      Change     Percent Change  
     (in thousands)  

NTT East:

          

Conventional leased circuits

     139         134         (5     (3.5 )% 

High-speed digital circuits

     91         84         (7     (7.5 )% 

NTT West:

          

Conventional leased circuits

     142         135         (7     (5.1 )% 

High-speed digital circuits

     80         74         (5     (6.9 )% 

(IP/Packet Communications Services)

In the regional communications business segment, NTT Group has worked to build solid revenue structures by enhancing and expanding FLET’S Hikari and other broadband services. Specifically, with the goal of promoting the expansion and encouraging the use of FLET’S Hikari, NTT Group launched the two-tiered fixed rate service, FLET’S Hikari Light, which enables users to start using the Internet at a low basic rate. With respect to FLET’S Hikari Next and B-FLET’S for single-unit family type services, NTT East began offering “Ninen Wari,” a new rate plan with affordable monthly rates conditioned on the user maintaining their subscription for a period of 2 years. NTT West continued to provide rate plan services, including for services such as “FLET’S Hikari Next,” “Hikari Gutto Discount” and “FLET’S@Discount,” a monthly charge discount service conditioned on the users staying subscribed for a period of 2 years.

Also, in collaboration with local governments, NTT Group expanded the service areas for “FLET’S Hikari,” and made efforts to expand convenient, high value-added services that meet the diverse needs of customers. In addition, NTT Group implemented various discount measures for monthly rates and installation costs, and otherwise took measures to strengthen sales. As a result, the number of subscriptions to “FLET’S Hikari” as of March 31, 2012 was 16,564 thousand, an increase of 1,506 thousand subscriptions over the previous fiscal year, of which 7,106 thousand was accounted for by FLET’S Hikari Next subscriptions.

In addition, the number of Hikari Denwa subscriptions increased by 1,788 thousand channels from the previous fiscal year to 13,900 thousand channels, and the number of FLET’S TV subscriptions increased by 269 thousand over the previous fiscal year to 861 thousand subscriptions.

 

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The numbers of subscriptions for flat-rate IP services, the IP telephone service, “Hikari Denwa,” and “FLET’S TV Transmission Service” were as follows:

 

     As of March 31,               
     2011      2012      Change     Percent Change  
     (in thousands)  

NTT East:

          

FLET’S Hikari*

     8,511         9,353         842        9.9

FLET’S ADSL

     1,418         1,135         (284     (20.0 )% 

Hikari Denwa (channels)

     6,446         7,402         956        14.8

FLET’S TV Transmission Service

     475         642         167        35.1

NTT West:

          

FLET’S Hikari*

     6,547         7,211         664        10.1

FLET’S ADSL

     1,439         1,187         (252     (17.5 )% 

Hikari Denwa (channels)

     5,667         6,498         831        14.7

FLET’S TV Transmission Service

     117         219         102        87.5

 

(*) FLET’S Hikari includes B FLET’S, FLET’S Hikari Next and FLET’S Hikari Light provided by NTT East, and B FLET’S, FLET’S Hikari Premium, FLET’S Hikari Mytown, FLET’S Hikari Next and FLET’S Hikari Light provided by NTT West.

FLET’S Hikari ARPU in the fiscal year ended March 31, 2012 was ¥5,900 for NTT East and ¥5,930 for NTT West, ¥20 (0.3%) and ¥40 (0.7%) higher, respectively, than in the previous fiscal year. The main reason for these increases was higher sales of value-added services, such as Hikari Denwa and Remote Support Service.

Please see “—Segment Information—The fiscal year ended March 31, 2012 compared with the fiscal year ended March 31, 2011—Footnote 3, ‘Method of calculating ARPU—(a) NTT East, NTT West’” for a description of how FLET’S Hikari ARPU is calculated.

(System Integration Services)

NTT Group has effectively conducted business activities with local governments, medical institutions and educational institutions to enable regional customers to utilize ICT, primarily through solutions tailored to specific businesses based on industry characteristics and trends.

With respect to services for local governments, through restoration support activities related to the Great East Japan Earthquake, NTT Group received numerous requests from local governments for the backup of important data at remote locations. Going forward, NTT Group is working to develop solutions for the safe storage of customer data to mitigate data loss risk in the event of a disaster.

In the area of medicine, given the increasing needs for health guidance utilizing ICT to link remote locations, NTT Group began offering a cloud-based remote health consultation service that enables health consultations for persons in remote areas using video-conferencing.

In the area of education, for school board members and school administrators of elementary and junior high schools, NTT Group began offering cloud-based school administration support services enabling school administration to be carried out over a network, without the need to own servers or other IT assets.

Efforts directed towards corporations included the expansion of the VPN service menu and the construction of a system of mutual cooperation aimed at providing one-stop customer support for office ICT equipment (for breakdowns and other troubleshooting), through collaboration with businesses in a wide range of fields.

 

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(Sales of Telecommunications Equipment)

With respect to telecommunications equipment, NTT Group worked to expand its product lines for home telecommunications, business telephones for corporate customers, digital multi-function devices and business fax machines, and to develop and provide attractive products.

In the fiscal year ended March 31, 2012, NTT East launched the information distribution service “FLET’S Market” and the “Hikari iFrame 2” with improved usability and other new functions. NTT West also launched “Hikari LINK Hikari BOX+,” which enables the browsing of various Internet content by connecting to FLET’S TV and the use of broadband video services.

(2) Long Distance and International Communications Business Segment

Despite a decline in fixed voice related revenues, operating revenues in the long-distance and international communications business segment for the fiscal year ended March 31, 2012 were ¥1,678.7 billion (an increase of 26.0% from the previous fiscal year) due to, among other things, an increase in system integration revenues resulting from the consolidation of Dimension Data for the entire fiscal year ended March 31, 2012. On the other hand, despite a decrease in operating expenses as a result of improvements to operating efficiency, operating expenses for the fiscal year ended March 31, 2012 were ¥1,562.0 billion (an increase of 26.4% from the previous fiscal year) due in part to an increase in operating expenses resulting from the consolidation of Dimension Data for the entire fiscal year ended March 31, 2012 (compared to its consolidation for a period of three months during the fiscal year ended March 31, 2011).

As a result, segment operating income for the fiscal year ended March 31, 2012 was ¥116.7 billion (an increase of 20.2% from the previous fiscal year).

Operations for each service in the long distance and international communications business segment were as follows:

(Fixed Voice Related Services)

With respect to telephone services, NTT Group continued to respond to a variety of customer needs through national and international telephone services such as “PL@TINUM LINE.”

The following table shows the market share of MYLINE registrations in the long distance and international communications business segment:

 

     As of March 31,  
     2011     2012     Change  

Inter-prefectural

     81.2     81.8     0.6

International

     79.8     80.4     0.6

(IP/Packet Communications Services)

In the long distance and international communications business segment, NTT Group worked to expand IP services.

For individual customers, total subscriptions for the Internet connection services “OCN” and “Plala” were 11.56 million through proactive marketing centered around fiber-optic services and by providing a variety of new services. For NTT Plala “Hikari TV,” subscriptions reached two million as of March 31, 2012, and a service that enables videos to be viewed not just on television but also on smartphones and tablet devices was launched. Further, in order to meet the rapidly expanding needs of mobile services users, NTT Group launched “OCN Mobile Entry d,” a mobile data communications service, and also launched a new 050 IP telephone service to address the spread of smartphones and tablet devices.

 

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For corporate customers, NTT Group began offering “Arcstar Universal One,” a new network service for businesses in the cloud era to respond to the increasing needs of cloud networks and globalization. In order to meet the communication needs of customers in multi-national companies operating businesses globally, NTT Group expanded its “Arcstar Unified Communications Services,” a voice communications service that seamlessly integrates domestic and overseas communications, and began offering the “UCaaS Plan,” which provides cloud-based communications. NTT Group also expanded the service areas for the “SIP Trunking Plan,” which enables external dialing service from overseas locations.

The following table shows the number of subscriptions to IP/packet communications-related services in the long distance and international communications business segment:

 

     As of March 31               
     2011      2012      Change     Percent change  
     (in thousands)  

IP-VPN

     108         107         (1     (1.0 )% 

OCN (ISP)

     8,234         8,437         203        2.5

Plala (ISP)*

     3,101         3,122         21        0.7

Hikari TV*

     1,413         2,004         591        41.8

 

*Revenues from Plala and Hikari TV are included in “Operating Revenues—Other.”

(System Integration Services)

NTT Group provided total ICT outsourcing services to address ICT market trends and changes in business models, revamp global networks linking customer bases all over the world, and, after transitioning customer systems to cloud services, achieve global seamless one-stop operations and otherwise improve customer productivity and efficiency.

With respect to global businesses, NTT Group endeavored to respond to the needs of multinational companies by enhancing its total, high value-added ICT services that combine network integration with data center, security and server management services. Specifically, NTT Group provided global one-stop, comprehensive ICT services centered on Dimension Data, which has offices in more than 50 countries around the world. In 2011, Dimension Data, in order to better show its role in providing solutions focusing on a variety of technologies and services across multiple regions, revamped its corporate brand identity in line with the brand change of its affiliate Datacraft in Asia to Dimension Data. Dimension Data also acquired OpSource, which offers cloud services and managed hosting services in the U.S., forming a cloud solutions operation unit to provide cloud services in the global market. These services include building private clouds, utilizing public clouds and developing hybrid cloud models, which combine both private and public clouds. Dimension Data is making investments in order to broaden the scope and scale of managed services and to advance managed services in the core areas of networks, communication and security.

(3) Mobile Communications Business Segment

Despite a decline in voice revenues due to, among other things, the impact of the expansion of the “Value Plan” and the penetration of the “Monthly Support” discount programs in conjunction with the expansion of smartphone sales, operating revenues for the mobile communications business segment for the fiscal year ended March 31, 2012 were ¥4,240.0 billion (an increase of 0.4% from the previous fiscal year) due to an increase in IP/packet communications revenues and communications handset sales revenues as a result of NTT DOCOMO’s efforts to strengthen sales of smartphones. On the other hand, despite an increase in distributor commissions resulting from the increase in smartphone sales and an increase in wholesale unit prices of handsets, operating expenses for the fiscal year ended March 31, 2012 were ¥3,363.6 billion (a decrease of 0.6% from the previous fiscal year) as a result of a decrease in handset repair fees and telecommunications facilities usage fees.

 

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As a result, segment operating income in the fiscal year ended March 31, 2012 increased 4.4% from the previous fiscal year to ¥876.4 billion.

Operations for each service in the mobile communications business segment were as follows:

(Mobile Voice Related Services / IP/Packet Communications Services)

In the fiscal year ended March 31, 2012, with the goals of evolving into an “integrated service company centered on mobility” and of the further evolution of smartphones and other handsets and services, to enable the realization of safer, more stable, convenient and efficient living and business, NTT Group took measures to create new added value through the convergence of various industries and services.

As of March 31, 2012, the number of subscriptions to NTT DOCOMO mobile telephone services topped 60 million, with an increase of 2.12 million subscriptions (3.7%) in one year, from 58.01 million at the end of the previous fiscal year to 60.13 million subscriptions. In mobile telephone services, the number of FOMA service subscriptions increased by 1.16 million subscriptions (2.0%) to 57.90 million subscriptions from 56.75 million subscriptions as of the end of the previous fiscal year, and the number of “Xi” service subscriptions increased from 26 thousand subscriptions as of the end of the previous fiscal year to 2.22 million subscriptions as of March 31, 2012, an increase of 2.20 million subscriptions. mova services, which contributed greatly to the spread of mobile phones with their launch in March 1993, were terminated as of March 31, 2012.

NTT DOCOMO is aiming to expand the use of smartphones; as a result of efforts in launching new services and new rate services and enhancing terminal lineups, it saw a large growth in the sales of smartphones, approximately 3.5 times the figures from the previous fiscal year, with 8.82 million units sold, and the number of sp-mode subscribers was 9.59 million as of the end of the fiscal year ended March 31, 2012.

The following table shows the number of mobile communications subscriptions and estimated market share:

 

     As of March 31,              
     2011     2012     Change     Percent Change  
     (in thousands)  

Mobile phone services(1)

     58,010        60,129        2,120        3.7

Mobile phone services (FOMA)(1)

     56,746        57,905        1,159        2.0

Mobile phone services (Xi)

     26        2,225        2,199        —     

Estimated mobile phone market share(1)(2)

     48.5     46.9     (1.6 )%      —     

i-mode services(3)

     48,141        42,321        (5,819     (12.1 )% 

sp-mode services

     2,095        9,586        7,492        357.7   

 

(1) Includes communications module service subscriptions. Effective March 3, 2008, use of the “2in1” service (a multiple number service that makes more than one phone number available for use on one mobile phone) is conditioned on conclusion of an additional FOMA agreement, and the number of mobile phone service subscriptions and FOMA subscriptions includes such additional FOMA contracts.
(2) Market share data is based on number of subscriptions of other carriers which is computed based on figures released by the Telecommunications Carriers Association and each carrier.
(3) Number of i-mode service subscriptions is the total of Mobile phone services (FOMA) and Mobile phone services (mova) subscriptions.

MOU of mobile (Xi + FOMA + mova) service decreased from 134 minutes as of March 31, 2011 to 126 minutes as of March 31, 2012. In MOU, billable MOU (Xi+FOMA+mova), indicating the number of call minutes per bill, decreased from 114 minutes in the fiscal year ended March 31, 2011 to 104 minutes in the fiscal year ended March 31, 2012 due to the provision of free calling between family members and alternative methods for voice communications, such as VoIP services and SNS.

Aggregate ARPU of mobile (Xi + FOMA + mova) services decreased by ¥200 (3.9%) to ¥4,870 in the fiscal year ended March 31, 2012 from ¥5,070 in the fiscal year ended March 31, 2011. This was due to a decrease in voice ARPU (Xi + FOMA + mova), which decreased by ¥330 (13%) to ¥2,200 in the fiscal year ended March 31,

 

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2012 from ¥2,530 in the previous fiscal year, as a result of the spread of the “Value Plan,” the impact from the “Monthly Support” discount plan in conjunction with stronger sales of smartphones, and a decrease in billable MOU. Packet ARPU (Xi + FOMA + mova) increased, however, by ¥130 (5.1%) to ¥2,670 in the fiscal year ended March 31, 2012, from ¥2,540 in the fiscal year ended March 31, 2011, due to the expansion of “Packet Flat-Rate” services.

Please see “—Segment Information—The fiscal year ended March 31, 2012 compared with the fiscal year ended March 31, 2011—Footnote 1, ‘MOU (average monthly minutes of use per unit): Average communication time per subscription’” at the end of this item for a description of how MOU is calculated. Please see “—Segment Information—The fiscal year ended March 31, 2012 compared with the fiscal year ended March 31, 2011—Footnote 3, ‘Method of calculating ARPU—(b) NTT DOCOMO’” at the end of this item for a description of how ARPU is calculated for mobile services.

The following table shows data regarding MOU and ARPU of mobile services:

 

     As of March 31,               
     2011      2012      Change     Percent Change  

MOU (Xi + FOMA + mova) (minutes)

     134         126         (8     (6.0 )% 

Billable MOU (Xi + FOMA + mova) (minutes)

     114         104         (10     (8.8 )% 

Aggregate ARPU (Xi + FOMA + mova)

   ¥ 5,070       ¥ 4,870       ¥ (200     (3.9 )% 

Voice ARPU (Xi + FOMA + mova)

     2,530         2,200         (330     (13.0 )% 

Packet ARPU (Xi + FOMA + mova)

     2,540         2,670         130        5.1

The following table shows data regarding MOU and ARPU of FOMA:

 

     As of March 31,               
     2011      2012      Change     Percent Change  

MOU (FOMA) (minutes)

     137         127         (10     (7.3 )% 

Aggregate ARPU (FOMA)

   ¥ 5,120       ¥ 4,890       ¥ (230     (4.5 )% 

Voice ARPU (FOMA)

     2,520         2,210         (310     (12.3 )% 

Packet ARPU (FOMA)

     2,600         2,680         80        3.1

The following table shows data regarding MOU and ARPU of mova:

 

     As of March 31,               
     2011      2012      Change     Percent Change  

MOU (mova) (minutes)

     44         38         (6     (13.6 )% 

Aggregate ARPU (mova)

   ¥ 3,280       ¥ 3,320       ¥ 40        1.2

Voice ARPU (mova)

     2,720         2,760         40        1.5

Packet ARPU (mova)

     560         560         —          —     

The portion of the mova and FOMA revenues attributable to IP/packet related services is recorded under IP/packet communications service revenues.

(Sales of Telecommunications Equipment)

NTT DOCOMO further enhanced its rich terminal lineup to meet the diverse needs of a broad range of customers. In addition, NTT DOCOMO launched two series of “docomo smartphones,” the “docomo with series” and “docomo NEXT series,” to make it easier for customers to select a smartphone.

Revenues from sales of telecommunications equipment increased 4.5% from the previous fiscal year to ¥498.9 billion in the fiscal year ended March 31, 2012, due to a significant increase in smartphone handset device sales.

 

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(4) Data Communications Business Segment

In the data communications business segment, operating revenues in the fiscal year ended March 31, 2012 increased 7.6% from the previous fiscal year to ¥1,251.8 billion. On the other hand, consolidated operating expenses were ¥1,180.3 billion (an increase of 8.7% from the previous fiscal year) due to an increase in revenue-linked expenses and selling and administrative expenses resulting from the increase in the number of consolidated subsidiaries.

As a result, segment operating income in the fiscal year ended March 31, 2012 decreased 7.1% from the previous fiscal year to ¥71.5 billion.

Operations for each service in the data communications segment were as follows:

In regards to the Public & Financial IT Services Company, which provides IT services with high added value that support government, medicine, finance, settlement and other social infrastructure, there was an impact from the acquisition of consolidated subsidiaries and from unprofitable transactions. In regards to the Global IT Services Company, which provides IT services with high added value to support such business activities as manufacturing, logistics, services, media, and communications, there were impacts from the expansion of consolidated subsidiaries due to the consolidation of Value Team S.p.A. and other subsidiaries, and from NTT Group’s improvement of cost ratios.

(5) Other Businesses Segment

In the other businesses segment, due to the decrease in the number of apartments sold in the real estate business, consolidated operating revenues for the fiscal year ended March 31, 2012 were ¥1,089.0 billion (a decrease of 2.8% from the previous fiscal year). On the other hand, due to a significant decrease in loan loss expenses within the financing business, consolidated operating expenses for the fiscal year ended March 31, 2012 were ¥1,032.2 billion (a decrease of 4.0% from the previous fiscal year).

As a result, segment operating income for the fiscal year ended March 31, 2012 was ¥56.9 billion, an increase of 26.8% from the previous fiscal year.

 

  1. MOU (average monthly minutes of use per unit): Average communication time per subscription

 

       The method of calculation for the number of active subscribers when calculating MOU for NTT DOCOMO is as follows:

 

       FY Results: Sum of number of active subscribers for each month from April to March

 

       Active subscribers = (number of subscribers at end of previous month + number of subscribers at end of current month)/2

 

  2. ARPU: Average monthly revenue per unit

 

       Average monthly revenue per unit, or ARPU, is used to measure average monthly operating revenues attributable to each designated service on a per user basis. In the case of our fixed-line business, ARPU is calculated by dividing revenue items included in the operating revenues of our regional communications business segment, that is, telephone subscriber lines, INS-NET and FLET’S Hikari, by the number of active subscribers to the relevant services. In the case of mobile communications business, ARPU is calculated by dividing revenue items included in operating revenues from our mobile communications business segment, such as revenues from FOMA mobile phone services, mova mobile phone services and Xi mobile phone services, that are incurred consistently each month (i.e., basic monthly charges and voice/packet transmission charges), by the number of active subscribers to the relevant services. The calculation of these figures excludes revenues that are not representative of monthly average usage, such as telecommunications equipment sales, activation fees and universal service charges.

 

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       We believe that our ARPU figures calculated in this way provide useful information regarding the monthly average usage of our subscribers. The revenue items included in the numerators of our ARPU figures are based on our financial results comprising our U.S. GAAP results of operations.

 

  3. Method of calculating ARPU

 

  (a) NTT East, NTT West

 

       We separately compute the following four categories of ARPU for the fixed-line business conducted by each of NTT East and NTT West, using the following measures:

 

   

Aggregate Fixed-line ARPU (Telephone Subscriber Lines + INS-NET Subscriber Lines): Calculated based on revenues from monthly charges and call charges for Telephone Subscriber Lines and INS-NET Subscriber Lines, which are included in operating revenues from Voice Transmission Services (excluding IP Services), and revenues from FLET’S ADSL and FLET’S ISDN, which are included in operating revenues from IP Services.

 

   

Telephone Subscriber Lines ARPU: Calculated based on revenues from monthly charges and call charges for Telephone Subscriber Lines and revenues from FLET’S ADSL.

 

   

INS-NET Subscriber Lines ARPU: Calculated based on revenues from monthly charges and call charges for INS-NET Subscriber Lines and revenues from FLET’S ISDN.

 

   

FLET’S Hikari ARPU: Calculated based on revenues from FLET’S Hikari (including FLET’S Hikari optional services), which are included in operating revenues from IP Services and Supplementary Business, and revenues from monthly charges, call charges and device connection charges for Hikari Denwa, which are included in operating revenues from IP Services.

*1 FLET’S Hikari includes B FLET’S, FLET’S Hikari Next and FLET’S Hikari Light provided by NTT East, and B FLET’S, FLET’S Hikari Premium, FLET’S Hikari Mytown, FLET’S Hikari Next, and FLET’S Hikari Light provided by NTT West.

*2 Starting from the fiscal year ended March 31, 2011, FLET’S Hikari ARPU for NTT East and NTT West includes revenues from Remote Support Service, which is a FLET’S Hikari optional service included in Supplementary Business revenues.

*3 Revenues from interconnection charges are excluded from the calculation of Aggregate Fixed-line ARPU (Telephone Subscriber Lines + INS-NET Subscriber Lines), Telephone Subscriber Lines ARPU, INS-NET Subscriber Lines ARPU, and FLET’S Hikari ARPU.

*4 For purposes of calculating Aggregate Fixed-line ARPU (Telephone Subscriber Lines + INS-NET Subscriber Lines), Telephone Subscriber Lines ARPU and INS-NET Subscriber Lines ARPU, the number of subscribers is determined using the number of lines for each service.

*5 In terms of number of channels, transmission rate, and line use rate (base rate), INS-Net 1500 is in all cases roughly ten times greater than INS-Net 64. For this reason, one INS-Net 1500 subscription is calculated as ten INS-Net 64 subscriptions.

*6 For purposes of calculating FLET’S Hikari ARPU, number of subscribers is determined based on number of FLET’S Hikari subscribers (including B FLET’S, FLET’S Hikari Next and FLET’S Hikari Light provided by NTT East and B FLET’S, FLET’S Hikari Premium, FLET’S Hikari Mytown, FLET’S Hikari Next and FLET’S Hikari Light provided by NTT West).

*7 Number of active subscribers used in the ARPU calculation of NTT East and NTT West are as below: FY Results: Sum of number of active subscribers for each month from April to March Active subscribers = (number of subscribers at end of previous month + number of subscribers at end of current month)/2

 

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(b) NTT DOCOMO

We compute ARPU for NTT DOCOMO using three aggregate measures.

Mobile Aggregate ARPU (FOMA+mova+Xi) = Voice ARPU (FOMA+mova+Xi) + Packet ARPU (FOMA+mova+Xi).

Mobile Aggregate ARPU (FOMA) = Voice ARPU (FOMA) + Packet ARPU (FOMA).

Mobile Aggregate ARPU (mova) = Mobile Voice ARPU (mova) + Packet ARPU (mova).

*1 Our Voice ARPU (FOMA+mova+Xi) is based on operating revenues related to voice services, such as basic monthly charges and voice communication charges, and our Packet ARPU (FOMA+mova+Xi) is based on operating revenues related to packet services, such as basic monthly charges and packet communication charges.

*2 Our Voice ARPU (FOMA) is based on operating revenues related to voice services, such as basic monthly charges and voice transmission charges, and our Packet ARPU (FOMA) is based on operating revenues related to packet communication services, such as basic monthly charges and packet transmission charges, in each case attributable to our third generation FOMA services.

*3 Our Voice ARPU (mova) is based on operating revenues related to voice services, such as basic monthly charges and voice communication charges, and our Packet ARPU (mova) is based on operating revenues related to packet services, such as basic monthly charges and packet communication charges, in each case attributable to our mova services. mova services were terminated as of March 31, 2012.

*4 Communications module service subscribers, “Phone Number Storage” and “Mail Address Storage” services, and the revenues therefrom are not included in the calculations of mobile ARPU.

*5 Number of active subscribers used in the ARPU calculation of NTT DOCOMO are as below. FY Results: Sum of number of active subscribers for each month from April to March

Active subscribers = (number of subscribers at end of previous month + number of subscribers at end of current month)/2

 

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The fiscal year ended March 31, 2011 compared with the fiscal year ended March 31, 2010

Telecommunications Circuit Facilities, etc.

(Thousands, except for Public Telephones)

 

     As of Mar. 31,
2010
     As of Mar. 31,
2011
     Change     Percent Change  

Telephone Subscriber Lines

     33,238         30,271         (2,967     (8.9 )% 

NTT East

     16,394         14,929         (1,465     (8.9 )% 

NTT West

     16,844         15,342         (1,502     (8.9 )% 

INS-Net

     5,092         4,613         (479     (9.4 )% 

NTT East

     2,646         2,390         (256     (9.7 )% 

NTT West

     2,446         2,222         (223     (9.1 )% 

Telephone Subscriber Lines + INS-NET

     38,330         34,884         (3,446     (9.0 )% 

NTT East

     19,040         17,319         (1,721     (9.0 )% 

NTT West

     19,290         17,564         (1,725     (8.9 )% 

Public Telephones

     283,161         252,775         (30,386     (10.7 )% 

NTT East

     137,992         121,508         (16,484     (11.9 )% 

NTT West

     145,169         131,267         (13,902     (9.6 )% 

FLET’S ISDN

     241         193         (48     (19.9 )% 

NTT East

     119         94         (25     (20.9 )% 

NTT West

     122         99         (23     (18.9 )% 

FLET’S ADSL

     3,381         2,858         (524     (15.5 )% 

NTT East

     1,700         1,418         (282     (16.6 )% 

NTT West

     1,681         1,439         (242     (14.4 )% 

FLET’S Hikari

     13,251         15,059         1,808        13.6

NTT East

     7,533         8,511         978        13.0

NTT West

     5,718         6,547         830        14.5

FLET’S Hikari Next*

     2,210         4,596         2,386        108.0

NTT East

     1,642         2,963         1,321        80.5

NTT West

     568         1,633         1,064        187.3

Hikari Denwa

     10,142         12,113         1,971        19.4

NTT East

     5,420         6,446         1,026        18.9

NTT West

     4,722         5,667         945        20.0

Conventional Leased Circuit Services

     297         281         (16     (5.5 )% 

NTT East

     148         139         (9     (6.2 )% 

NTT West

     149         142         (7     (4.9 )% 

High Speed Digital Services

     188         171         (17     (9.2 )% 

NTT East

     100         91         (9     (8.9 )% 

NTT West

     88         80         (8     (9.6 )% 

NTT Group Major ISPs

     11,280         11,662         382        3.4

OCN*

     7,892         8,234         342        4.3

Plala*

     3,050         3,101         51        1.7

Video Services

          

Hikari TV

     1,009         1,413         404        40.0

FLET’S TV Transmission Services

     270         592         322        119.0

NTT East

     240         475         235        97.8

NTT West

     30         117         87        288.9

Mobile

     56,082         58,010         1,928        3.4

FOMA*

     53,203         56,746         3,542        6.7

Xi*

     —           26         26        —     

i-mode

     48,992         48,141         (851     (1.7 )% 

sp-mode

     —           2,095         2,095        —     

 

* Partial listing only

 

(1) Number of Telephone Subscriber Lines is the total of individual lines and central station lines (Subscriber Telephone Light Plan is included).

 

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(2) INS-Net includes INS-Net 64 and INS-Net 1500. In terms of number of channels, transmission rate, and line use rate (base rate), INS-Net 1500 is in all cases roughly ten times greater than INS-Net 64. For this reason, one INS-Net 1500 subscription is calculated as ten INS-Net 64 subscriptions (INS-Net 64 Lite Plan is included).

 

(3) Number of “FLET’S Hikari” subscribers includes subscribers to “B FLET’S” and “FLET’S Hikari Next” provided by NTT East, and subscribers to “B FLET’S,” “FLET’S Hikari Premium,” “FLET’S Hikari Mytown” and “FLET’S Hikari Next” provided by NTT West.

 

(4) NTT Group Major ISPs includes WAKWAK and InfoSphere, in addition to OCN and Plala.

 

(5) Number of communication module service subscribers is included in the number of mobile subscribers.

 

(6) FOMA services subscriptions are mandatory for subscription to “2in1” services. Such FOMA services subscriptions to “2in1” services are included in the above numbers of Mobile phone service subscriptions and FOMA* service subscriptions.

Operating Results

 

     Year Ended March 31,              
     2010      2011     Change     Percent Change  
     (in billions of yen)  

Operating revenues:

     10,181.4         10,305.0        123.6        1.2

Fixed voice related services

     2,355.6         2,180.8        (174.8     (7.4 )% 

Mobile voice related services

     2,150.7         2,021.6        (129.2     (6.0 )% 

IP/Packet communications services

     3,113.4         3,341.1        227.7        7.3

Sales of telecommunications equipment

     598.3         565.9        (32.4     (5.4 )% 

System integration

     1,242.7         1,382.2        139.5        11.2

Other

     720.6         813.5        92.9        12.9

Operating expenses

     9,063.7         9,090.1        26.4        0.3

Operating income

     1,117.7         1,214.9        97.2        8.7

Other income (expenses)

     2.4         (39.1     (41.5     —     

Income before income taxes and equity in earnings (losses) of affiliated companies

     1,120.1         1,175.8        55.7        5.0

Income tax expense (benefit)

     447.0         475.6        28.6        6.4

Equity in earnings (losses) of affiliated companies

     8.8         1.7        (7.1     (81.0 )% 

Net income

     681.9         701.9        20.0        2.9

Less—net income attributable to noncontrolling interests

     189.6         192.2        2.6        1.4

Net income attributable to NTT

     492.3         509.6        17.4        3.5

Operating Revenues

Operating revenues in the fiscal year ended March 31, 2011 increased 1.2% from the previous fiscal year to ¥10,305.0 billion. While voice related revenues continued to decline, this increase was due to such factors as an increase in IP/packet communications service revenues attributable to increases in FLET’S Hikari and value-added service subscriptions, an increase in NTT DOCOMO’s packet ARPU, and an increase in system integration revenues resulting from mergers and acquisitions, including the acquisition of Dimension Data and NTT DATA’s acquisition of Keane International. For further details regarding the financial impact of the Dimension Data acquisition, please see Note 23 to the Consolidated Financial Statements.

Operating revenues for each service category for the fiscal year ended March 31, 2011 are summarized as follows:

Fixed Voice Related Services

Fixed voice related revenues for the fiscal year ended March 31, 2011 decreased 7.4% from the previous fiscal year to ¥2,180.8 billion, accounting for 21.2% of total operating revenues. This was due to a continued decline in the number of subscriptions for telephone subscriber lines and ISDN caused by the increasing

 

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popularity of mobile phones and the development of competition with optical IP telephones and fixed line services provided by other businesses, and competition with direct subscriber telephone services of other companies using dry copper lines and telephone services provided by cable television operators.

Mobile Voice Related Services

Mobile voice related revenues for the fiscal year ended March 31, 2011 decreased 6.0% from the previous fiscal year to ¥2,021.6 billion, accounting for 19.6% of total operating revenues. This was due to a decrease in voice ARPU arising from the penetration of discount plans, such as the Value Plan, despite an increase in revenues resulting from an increase in Mobile Phone Protection & Delivery Service subscriptions. For details of voice ARPU, please see “—Segment Information—The fiscal year ended March 31, 2011 compared with the fiscal year ended March 31, 2010—Mobile Communications Business Segment.”

IP/Packet Communications Services

In the fiscal year ended March 31, 2011, revenues from IP/packet communications services increased 7.3% from the previous fiscal year to ¥3,341.1 billion, accounting for 32.4% of total operating revenues. This was due to an increase in subscriptions for FLET’S Hikari and Hikari Denwa in the regional communications business, and an increase in packet ARPU arising from the increase in subscriptions for Packet Flat-Rate in the mobile communications business. For details of packet ARPU, please see “—Segment Information—The fiscal year ended March 31, 2011 compared with the fiscal year ended March 31, 2010—Mobile Communications Business Segment.”

Sales of Telecommunications Equipment

In the fiscal year ended March 31, 2011, revenues from telecommunications equipment sales decreased 5.4% from the previous fiscal year to ¥565.9 billion, accounting for 5.5% of total operating revenues. In the mobile communications business, despite handset mobile devices selling well, this decrease was due to a decrease in the prices for mobile handset devices.

System Integration

In the fiscal year ended March 31, 2011, revenues from system integration increased 11.2% from the previous fiscal year to ¥1,382.2 billion, accounting for 13.4% of total operating revenues. This was due to the acquisition of Dimension Data, in the long distance and international communications business, IRU* contracts for fiber-optic facility installations with local governments in the regional communications business, as well as an increase in the number of consolidated subsidiaries, including Keane International, in the data communications business.

 

* Indefeasible Right of User. In order to improve the broadband infrastructure, NTT Group participates in the construction of fiber-optic facilities for local governments in areas where private businesses are reluctant to do business for such reasons as lack of profitability. NTT Group companies lease these fiber-optic facilities under IRU contracts and provide broadband services.

Other Businesses

In the fiscal year ended March 31, 2011, revenues from other businesses increased 12.9% from the previous fiscal year to ¥813.5 billion, accounting for 7.9% of total operating revenues. This was due to an increase in revenues from construction and other businesses.

Operating Expenses

Operating expenses in the fiscal year ended March 31, 2011 increased 0.3% from the previous fiscal year to ¥9,090.1 billion. This was principally due to the factors discussed below. As a result of the Great East Japan Earthquake, which occurred on March 11, 2011, NTT Group’s telecommunications facilities and buildings, among other things, suffered damage. For the fiscal year ended March 31, 2011, ¥28.2 billion was recorded in operating expenses as a loss on retirement of damaged facilities, expenses incurred for restoration work and other expenses which resulted from the earthquake. Expenses incurred in relation to the earthquake by segment are as

 

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follows: the regional communications business segment, ¥15.7 billion; the long distance and international communications business segment, ¥1.0 billion; the mobile communications business segment, ¥5.8 billion; the data communications business segment, ¥0.3 billion; and other businesses segment, ¥5.3 billion.

Personnel Expenses

Personnel expenses in the fiscal year ended March 31, 2011 increased 0.9% from the previous fiscal year to ¥2,026.6 billion. This was a result of such factors as an increase in the number of employees as a result of the expansion of consolidated subsidiaries, which was partially offset by a decrease in the amortization amount for actuarial differences in the management of pension assets.

Expenses for Purchase of Goods and Services and Other Expenses

In the fiscal year ended March 31, 2011, cost of services and equipment sold, and selling, general and administrative expenses increased 1.3% from the previous fiscal year to ¥4,707.9 billion. One of the contributing factors to the increase was an increase in revenue-driven expenses resulting from an increase in system integration revenues. In the regional communications business segment, service costs for IRU contracts for fiber-optic facility construction work increased in conjunction with such arrangements. In addition, expenses also increased due to the increase in the number of consolidated subsidiaries, including Dimension Data.

Depreciation and Amortization Expenses

Depreciation and amortization expenses in the fiscal year ended March 31, 2011 decreased 2.5% from the previous fiscal year to ¥1,962.5 billion. This was due to increased capital investment efficiency, among other factors.

Operating Income

As a result of the foregoing, operating income for the fiscal year ended March 31, 2011 was ¥1,214.9 billion, an increase of 8.7% over the previous fiscal year.

Other Operating Revenues and Expenses

Other Income (Expenses)

Other expenses for the fiscal year ended March 31, 2011 were ¥39.1 billion, compared to other income of ¥2.4 billion in the previous year. One of the contributing factors was the increase in foreign exchange losses, which were ¥17.4 billion and ¥0.6 billion for the fiscal years ended March 31, 2011 and 2010, respectively. Foreign exchange loss in the fiscal year ended March 31, 2011 stemmed from the use of derivatives entered into to hedge foreign exchange fluctuation risks associated with major overseas investments. Hedge accounting was not applied because those derivatives are investments associated with business consolidation. Interest income declined to ¥21.6 billion from ¥24.0 billion for the fiscal years ended March 31, 2011 and 2010, respectively.

Net Income before Income Taxes

Net income before income taxes in the fiscal year ended March 31, 2011 increased 5.0% from the previous fiscal year to ¥1,175.8 billion for the reasons discussed above.

Income Tax Expense (Benefit)

In the fiscal year ended March 31, 2011, income tax expense increased 6.4% from the previous fiscal year to ¥475.6 billion. This was due to an increase in net income before income taxes compared to the previous fiscal year.

 

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Net Income Attributable to NTT

As a result, net income for the fiscal year ended March 31, 2011 was ¥701.9 billion, an increase of 2.9% from the previous fiscal year. Net income attributable to NTT (excluding the portion attributable to noncontrolling interests) for the fiscal year ended March 31, 2011 was ¥509.6 billion, an increase of 3.5% from the previous fiscal year.

Segment Information

The fiscal year ended March 31, 2011 compared with the fiscal year ended March 31, 2010

 

Service Types

     Fiscal Year Ended March 31, 2011    
   Sales and
Operating
Revenue
Amounts
(¥ million)
     Comparison
with Previous
Year (%)
 

Regional communications business

   Fixed voice related services      2,052,688         (6.8 )% 
   IP/packet communications services      1,293,389         11.5
   System integration services      199,481         18.8
   Other services      481,650         11.3
  

Subtotal

     4,027,208         1.6
  

Internal sales

     497,657         (3.3 )% 
  

Total for regional communications business

     3,529,551         2.3

Long distance and international communications business

   Fixed voice related services      512,359         (5.9 )% 
   IP/packet communications services      374,866         (2.3 )% 
   System integration services      190,676         68.4
   Other services      254,751         16.7
  

Subtotal

     1,332,652         5.8
  

Internal sales

     109,223         (3.9 )% 
  

Total for long distance and international communications business

     1,223,429         6.8

Mobile communications business

   Mobile voice related services      2,050,964         (6.2 )% 
   IP/packet communications services      1,695,905         6.7
   Other services      477,404         (5.9 )% 
  

Subtotal

     4,224,273         (1.4 )% 
  

Internal sales

     32,478         (20.7 )% 
  

Total for mobile communications business

     4,191,795         (1.2 )% 

Data communications business

   System integration services      1,163,188         2.7
   Internal sales      132,081         5.5
  

Total for data communications business

     1,031,107         2.4

Other businesses

   Other services      1,120,267         (1.1 )% 
  

Subtotal

     791,146         (0.8 )% 
  

Total for other businesses

     329,121         (1.8 )% 

Total consolidated sales and operating revenue

     10,305,003         1.2

 

Note: The above figures do not include consumption or other taxes.

(1) Regional Communications Business Segment

Operating revenues in the fiscal year ended March 31, 2011 increased 1.6% from the previous fiscal year to ¥4,027.2 billion. Fixed voice related revenue fell as a result of a decline in fixed-line telephone subscriptions.

 

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However, this decrease was more than offset by the increase in IP/packet communications revenues associated with the increase in the number of subscriptions to FLET’S Hikari and value-added services and the increase in system integration revenue from the construction of fiber-optic facilities commissioned by local governments.

Operating expenses in the fiscal year ended March 31, 2011 increased 0.5% from the previous fiscal year to ¥3,900.0 billion. While personnel and depreciation costs fell, this was more than offset by, among other things, an increase in expenses associated with an increase in commissioned revenues.

As a result, segment operating income in the fiscal year ended March 31, 2011 increased 55.0% to ¥127.3 billion.

Operations for each service in the regional communications segment were as follows:

(Fixed Voice Related Services)

With respect to telephone subscriber services, demand continued to contract due to the increasing use of mobile phones and the intensifying competition with optical IP telephones and with fixed-line telephone services offered by other companies. As a result, fixed-line telephone subscriptions decreased by 2,967 thousand from the previous fiscal year, falling to 30,271 thousand subscriptions as of March 31, 2011.

With respect to ISDN services, as a result of the continued contraction in demand due to the spread of broadband access services, the number of ISDN subscribers as of March 31, 2011 fell to 4,613 thousand, a decrease of 479 thousand ISDN subscribers from the previous fiscal year.

The numbers of fixed-line telephone and ISDN subscriptions were as follows:

 

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