We would now like to start the briefing of NTT's fiscal year 2019 third quarter results. Thank you very much for attending today despite your busy schedules. I am Fujiki from the IR Office and will be facilitating today's session. First of all, I'd like to introduce the attendees for today's briefing. Mr. Shimada, Representative Director, Senior Executive Vice President. Mr. Hiroi, Member of the Board, Senior Vice President, Head of Finance and Accounting Department. Mr. Kitamura, Member of the Board, Senior Vice President, Head of Corporate Strategy Planning Department.
Moreover, persons from Corporate Strategy Planning, Finance and Accounting, NTT East, West, and NTT Communications are also attending today. Today's briefing will be based on the presentation material that is posted on our company IR website. On the first page of the presentation material, the disclaimer is stated, so please go through them. Today's briefing will be streamed real time on our company's website and later available through our website. Today's schedule. First of all, Senior Executive Vice President, Mr. Shimada, will explain the outline of the results, followed by taking questions from the floor. Mr. Shimada, please go ahead.
Thank you very much. Shimada here. I would like to share with you the financial results for the nine months ending December 31st, 2019. Please turn to page four of the material. Page four. Let me first start with the operating revenue and operating income. Operating revenue increased, but operating income declined. Operating revenue was JPY 8.862 billion, and this increased JPY 67.5 billion. We reached the record third-quarter levels. For three years in a row, both domestic and overseas revenue increased. As for operating income, it was JPY 1.450 trillion, of which represents JPY 76.7 billion decline year-on-year. On top of the drop in DOCOMO's income from decline in mobile communication service revenue, because of the cost reduction related to consolidation and reorganization of global business, operating income declined year-on-year. We are making efforts so that we can actually exceed the annual plan.
As far as net profit is concerned, it is JPY 706.9 billion, which represents JPY 4.8 billion increase year-on-year. As far as net profit is concerned, while operating income declined due to valuation gain from consolidation of an associated firm, we realized increase in net profit year-on-year. As for overseas sales, it was $14.7 billion, representing $0.7 billion increase year-on-year. As for overseas operating income margin, it was 2.5%, representing 0.6% point decline year-on-year. As far as operating income margin is concerned, overseas operating margin went down due to growth investment for digital offering, delaying shift towards high value added and high profit margin service and increased cost related to brand reinforcement. We see slight improvement compared to the second quarter. As far as the quarterly profit plan is concerned, we do not disclose this. Actually, we're exceeding the plan.
Please turn to page four. Please, page five. Page five. As far as operating revenue is concerned and operating income, I would like to explain, if I may. With regard to mobile communication segment, this was already announced by DOCOMO. There was decline in operating income with mobile communication service revenue, and cost reduction actually exceeds our plan. We're making efforts so that we can actually exceed the annual target. As far as regional communication business is concerned, the upside is that there is no longer the copper wire-related loss, which was recorded in fiscal 2018, and achieved increase in operating income year-on-year. This is in line with our initial target, and we're making efforts to achieve the annual plan, and exceed annual plan.
As far as long distance international communication business is concerned, while there is a robust growth in acquisition, there is drop in operating income from costs related to reorganization of global business. Achieving the target may be somewhat challenging, however, we want to bring forward the timeline for structural reform at NTT Ltd. As far as data communication business is concerned, while there is robust growth in the size of the business, both domestically and outside Japan, operating income was flat due to increase in growth investment as well as restructure-related expense for EMEA and Latin America. We're making efforts so that we can achieve the annual target. As for page six onwards, we talk about topics. Just one highlight that I would like to make. Please turn to page seven. Today, we announced the collaboration with Tokyo Century Corporation on leasing a new field.
This is covered in the press release. We are going to transfer leasing business to joint venture with Tokyo Century. That represents roughly JPY 1.3 trillion in assets and liabilities of JPY 1.2 trillion. This is going to be transferred to joint venture with TC, which means that we'll be able to strike JPY 1.2 trillion worth of liabilities from our balance sheet. At the same time, we're going to be acquiring 10% of Tokyo Century stock. That was already announced as well. That's all for my presentation. Thank you very much.
Thank you very much. We now go to questions from the floor. As we have already indicated, we will take questions from those who have already registered beforehand and those who are connected to the phone conference system. I would like to invite the operator to explain to you how we can accept questions from now on.
I would like to start the question and answer session. For those of you who have questions, please press zero and one. If you'd like to cancel your questions, please press zero and two. Now, I would like to start the Q&A session. For those of you who have questions, please press zero and one. If you want to cancel your questions, please press zero and two.
From JPMorgan, Mr. Tanabe. The floor is yours, sir.
Thank you very much. Tanabe from JPMorgan. Thank you very much. Just one question. I would like to ask this question with regard to NTT Ltd. It's about the status of NTT Ltd. If we focus on the third quarter alone, it seems that you're in the positive territory. As you have pointed out consistently, I think they are actually trending toward the guidance which you have consistently set. If you could give us an update as to the status of NTT Ltd. against your internal plan. Also, there is a fourth quarter remains, and you have to achieve for JPY 8 billion in order to achieve the full-year target. What is the outlook for achieving the full-year target as you head toward the fourth quarter? I would appreciate your insight. If you could give us a qualitative assessment, how do you see the progress of the integration so far? Update on the status of integration.
Thank you very much. Shimada here, Senior Executive Vice President. I would like to respond to your question. Let me respond to the question cited by Mr. Tanabe. As you pointed out, Mr. Tanabe, compared to the second quarter, the third quarter is now in the positive territory. We are seeing profit. On a cumulative basis, we still have JPY 1.3 billion deficit. It seems as though the numbers indicate that in the third quarter we are seeing improvement. Having said all this, it does not mean that all the expenses are reflected evenly from quarter to quarter. Let me share with you the current situation for this quarter. Transition to NTT brand and also reorganization.
This is in line with the plan. Around the world, NTT brand mark is now going to be deployed. What we're tackling right now is this. Three things that we're tackling. The first and the biggest point is actually streamlining and rationalization. We want to make transition to higher margin business. We have to recruit talent, but at the same time, it's important that people with skills. We have to streamline people with outdated skills. Although at the same time, we have to address overhead as a result of integration, because we want to slim down overhead as a result of integration. In fiscal 2019 and 2020, over the two-year period, we have the plan to address the situation. I think 2,500 will be the subject, if you will, for streamlining. That is the plan.
For fiscal year 2019, we want to bring forward the delivery of this plan as much as possible. Our understanding is that this is something that we'll tackle in fourth quarter. We want to implement 75% of the plan by the end of the full year. Therefore, there's going to be temporary costs that will be reflected in the fourth quarter, it is likely. Up until the third quarter, I would say that JPY 11 billion costs was incurred up until the third quarter for reorganization purposes. During the fourth quarter, perhaps the same level of costs could possibly arise. At the same time, on top of this, the second point that I would like to share with you.
We want to make transition to high profitable business, high margin business, we're trying to structure an expert sales team that can handle such high profit and higher margin service. We are also carrying out educational programs, training programs, so that people can switch to these different set of skills. We are revisiting ways in which we actually measure the employee base. For SD-WAN, for example, network service is very well received by our customer base. We have such services, we want to reinforce that furthermore. The third point, data centers. It makes tremendous contribution to the profitability. We see very strong appetite for data center, so therefore that indicates we want to bring forward the timeline for CapEx in data centers so that we can reinforce this program this year. That indicates that the progress of CapEx is quite advanced.
Frankfurt, Berlin, Madrid, such places in Europe and also in the United States, Virginia, Phoenix, and also Mumbai in India. In these places, we want to reinforce our data center business. These three points, it's important that we implement this in a steadfast manner as we have planned, and by doing that, we believe that we'll be able to achieve a recovery. That is all. Thank you very much.
Thank you very much. If I could just clarify and confirm. It's about the cost. Cost required for reorganization purpose. You mentioned JPY 11 billion up until the third quarter. You mentioned that JPY 11 billion for the fourth quarter as well?
Well, I cannot give you the accurate numbers w ith regard to streamlining and rationalization, to what extent are we going to be able to implement by the end of this full year. This will dictate the cost. It could be that some of that program will actually take place in the following year, but we hope that we'll be able to do as much this fiscal year so that we'll be able to contribute to a turnaround in the next fiscal year. There is a possibility that there could be one-off large expenses during the fourth quarter. If things progress in a smooth manner, it is likely that similar level of cost for it could be reflected and recorded in the fourth quarter.
Thank you very much for that.
Thank you very much. I'd like to take the next question. Citigroup Securities, Mr. Tsuruo, please go ahead.
Thank you very much for the question opportunity. My name is Tsuruo from Citigroup Securities. First question is that, let me confirm. The progress up to the third quarter against the internal plan, the progress on a company-wide basis, how is it as one division? As you have explained, NTT Ltd., NTT Communications division seems like they're slightly struggling. Overall progress, how is it? The reason why I ask this is because looking at the operating income up to the third quarter, it was 5% decline. Full year, it's close to be 9% decline. That's the guidance. It seems that the progress, even though there is a reduction in the profit, how is it right now?
This is Shimada speaking. As you, Mr. Tsuruo, pointed out, the progress is going at a satisfactory level. DOCOMO, the current new rate shift, as DOCOMO has already announced, overall, it is progressing satisfactorily. Actually, it's slightly behind than the initial expectations, and due to that, we are having a positive profit or upside. Regarding NTT East and West, the cost reduction is progressing as planned, and we are expecting a further increase in profit. As you have pointed out, of course, this is a plan, but regarding NTT Ltd., through rationalization, we like to front-load it, and there are some costs related to that. For NTT DATA, as they have already announced, fiscal year 2021, EBIT margin, they're aiming for 7%, and they're strengthening their businesses. Therefore, they would like to put importance on the midterm.
This fiscal year's cost related to measures to be implemented, they would like to implement that to respond to the new businesses and also replace the personnel, and they want to strengthen the foundation. Thinking about that, it is a tough situation, hopefully, we like them to bring it up to their planned numbers. At this point, they are progressing at a satisfactory level.
Thank you very much. My second question, regarding this year, we have already passed 10 months plus. Regarding the next fiscal year, put aside the numbers. Well, having said that, you have a midterm target already set. Looking at the various results, positive and negative factors, if you can, summarize that for me?
Well, the business plans are going to be established moving forward from now, it's hard to share with you details. Regarding NTT DOCOMO, this year is the bottom. From now on, they're planning to increase. Regarding NTT East and West, they are aiming for a further increase in profit. These areas are quite stable. As for the global business for NTT Ltd., well, as I have mentioned before, this year, they would like to accelerate the pace of the rationalization.
Next fiscal year, the burden they have to bear is going to be reduced, is what I think. In order to roll out a new business, they will have to have an appropriate hiring of new talent. Still, there are some risks that exist. Regarding NTT DATA, if they're able to fully prepare this year, I believe that next fiscal year onwards, they'll be able to have a stable growth. In the overall picture, I believe we'll be able to be on the growing path.
Thank you very much. Well understood.
Thank you very much. We'd like to take the next question now. Next from Daiwa Securities, Mr. Ando, the floor is yours.
Thank you very much. Ando here. Thank you for taking my question. I would also like to ask two questions. My first question is this. Well, with regard to the fourth quarter. Well, correction, the progress of profit up until the third quarter. When it comes to regional communication business, seems to be quite high, so progress to plan is quite strong. You have not revised your projection for the full year. Do you believe that you'll be able to end the full year on such a strong note for the regional communication business? If that is the case, what are the factors and what do you actually envision for the results in terms of the end of the full year?
Thank you. Shimada here. Yes. With regards to regional communication business, primarily NTT East and West, as far as this segment is concerned. In principle, we believe that the current trend will continue as we head toward the end of the year. At the same time, there are several expenses that are being incurred reflecting our policy. For example, in relation to urban solutions, we have to actually take down certain buildings in order to spur urban solutions. Inclusive of that, we have to consider the outlook. I think we have to take on what is needed so that we can drive and create the base for future growth. As far as the overall general trend is concerned, we believe that the current trend will continue. I have responded to your question, hopefully.
Thank you. You talked about the current trend. Do you believe that the strong trend will continue? Is that what you mean?
Yes. I think the positive trend, the positive situation will continue. That is what I meant.
Thank you very much for that. My second question is about the global business. I know that through reorganization of the internal structure, you're trying to reorganize the situation. When you consider your strength is in the managed services and also data centers. The perspective of competitiveness of your strength, has that perspective really changed? Do you believe that competitiveness has actually strengthened? Can you talk about how do you intend to respond to the changing situation, being mindful of the state of your competitiveness in these areas? Thank you.
Thank you very much. First, with regards to network-related services, SD-WAN will be the core of our global business going forward. The differentiation of our technology in this segment and also the operational capability in this area, these are very highly received by our customer base. That being the case, I believe that we are indeed more than sufficiently competitive in this area. In terms of managed services, we have high expectation for potential growth.
In order to realize scalability, we need talent that can support that. We need to recruit such talent. We need to secure human resources. That, I believe, will be the key factor from now. As things stand, we are very much in line with our plan. As far as the competitiveness of our data center business is concerned, well, Equinix, we are competing with them globally with players such Equinix and so forth. That being the case, we are carrying our capital investment at a very brisk pace. Well, they're carrying a capital investment at a brisk pace, so we need to catch up with them.
This year, we have indeed increased our investment in this area. At the same time, while we need to expand our footprint, at the same time, we need to improve the capital investment efficiency to facilities. For example, translating some of the buildings into REITs, inclusive of possible sell-offs. We also need to transition to a different model. Thank you very much. That is all.
Thank you very much for that.
Thank you very much. I'd like to take the next question. Are there anyone who have questions? For those of you who have questions, please press zero one. For those of you who have questions, please press zero one. Nomura Securities. Mr. Masuno, please go ahead.
Hello, this is Masuno speaking. Can you hear me?
Yes, we can hear you.
I have several questions. First of all, I'd like to ask from NTT East and NTT West. NTT East, looking at their actuals, the system integration business is doing quite strongly, performing quite strongly. If we go into the fourth quarter like this, and if they can come out with a profit level as they did last fourth quarter, I think it's a satisfactory performance. For the fourth quarter, there's always some measures to be implemented. Is there something unique about NTT East, or is it all right to just think that it is going to go as planned? Please comment about NTT East first.
This is Shimada speaking. First of all, regarding NTT East, we're not thinking anything unique or special. However, as I have mentioned before, the removing the real estate property this year is the Olympic and Paralympic Games. There will be some costs related to responding to these games. Of course, this is not going to be a large increase in cost. That is our understanding. Next, about NTT West. Looking at cumulative nine months of profit, it has already reached a high level. In the fourth quarter, they made a loss last year. Based on the company's plan, if they don't make a large loss, I think that they are performing in a satisfactory level.
Any comments on NTT West?
NTT West, they have a disposal of the real estate or property, is what I have heard. Other than that, I understand that there's nothing else.
Understood. Regarding NTT East and West, next year, they will continue cost reduction and you will be expecting a satisfactory level of profit. Are there any drivers for the two for the next fiscal year?
This is Shimada speaking. Basically regarding NTT East and NTT West, for the fixed line communications business, it's going to continue to decline. We need to work on further promotion of improving efficiency. We are working on the digital transformation projects now. Responding to the improving efficiency of the personnel side, by surely implementing automation, we'll be able to reduce the cost. Of course, the new agriculture or forestry or e-sports businesses are something we are taking on a new challenge. However, these are not immediately going to provide us with a large profit. The initial years are not going to be like that. First is to steadily progress in cost reduction.
Okay. I think you're going to stack up the cost reduction by the shared procurement or the integration of the system of NTT East and West. As the government council is discussing the universal service, being able to partially provide that wireless or mobile, what is going to happen in the future?
For the system side, the NTT East and West, by integrating them and having it shared, we'll be able to achieve digital transformation, and that is going to surely provide us with certain outcomes. Utilizing wireless system for the fixed-line service. For disaster measures, if we can use this as a disaster measure, it is going to contribute to quite a large cost reduction. However, the discussions regarding that relates to the revision of the law itself. It is going to take a certain amount of time. This year, let's say there is a revision of the law, and after that, there are some government ordinances that still need to be revised also or established. Therefore, to see the actual result of this, we believe that it's going to take several years still.
Is it the shared procurement? Regarding that?
Of course, we'll see some benefits generated from this. It seems that there are some criticism towards this. However, to begin with, when the regulations were established initially, the environment has been totally changing. For the wholesale provision of the service, they'll be able to reduce the cost. We would like to be able to surely that to be used.
Okay, thank you very much. Regarding the global business, you have some integration costs that appeared, and it's about 75% would be completed this year. Next year, there's about 25%. There's JPY 11 billion and JPY 11 billion, total of JPY 22 billion of structural reform costs. There's JPY 22 billion in total, but this cost part, next fiscal year, is going to be quite reduced, is how I think. I just wanted to confirm that with you.
Shimada again speaking. You are right. This fiscal year's structural reforms, it's not just streamlining or rationalization, but we'll be able to surely expect the benefit from rationalization. Whether that's going to go into fiscal year 2022, this is something we need to look into the details to the year-end. For sure, just the personnel side, fiscal year 2021, it's about JPY 250 million worth of benefit. For the other cost reductions, we already have a plan of JPY 100 million. What we see for the near future is that as for fiscal year 2021, will be $350 million worth of cost reductions will be surely completed.
Can I confirm? The $350 million, that's including that the JPY 22 billion that you're spending this year is going to be removed from that. Okay. In net terms, there is about JPY 120 million worth of a cost reduction that we can expect.
Yes, you are right.
Okay. Understood. Last question regarding investment towards a growth area. You were talking about the data center business previously, and it seems that the demand is quite strong. Turning that into a REIT. Around when are you going to start to do that?
First of all, I'd like to ask about this point. Putting the data centers into the REIT or selling the data centers is something we are thinking of. In order to further grow, not just using our own capital, but also use a third-party capital. That we'll be able to accelerate this business than originally planned. These are the measures that we can think of. It's either structured into a REIT or sell them.
Constructing the data centers, and when we have a full data center with customers, turning that into a REIT or selling it is where we'll gain the most profit for the development cost that we have spent. We already have such a property.
At what timing this will be done?
Well, we cannot lose against our competitors, we need to think of our positioning in terms of the competitiveness and think of the appropriate party to sell or structuring it into a REIT. In these terms, we are already in a situation to be able to do that next year, but we would like to cautiously consider this.
Okay. Lastly, the improvement of ROIC or securitization of assets. At NTT DOCOMO, starting from next fiscal year, in full scale, you will be securitizing the receivables. Also the lease liabilities, you'll be working on off-balancing it. Are there any other assets that will come under the scope? Well, NTT DOCOMO's receivables, finances, leasing business. Anything other than those two? The data center turning into a REIT, I think that could be considered. Are there any cluster of assets that will fall under this scheme?
Well, just speaking of what we hold now, as you, Mr. Masuno, have pointed out, data centers and real estate. Especially the real estate business overseas, we have been selling them and are gaining development profit. That type of real estate business will become one of the candidates.
Sorry. This is Hiroi speaking. If I may add, within our company, there are some unnecessary expansion of the working capital and there are assets that we're not using. Those types of assets, if we sell them, and it's not that we are gaining a lot of revenue from them, they're just pressuring the cash flow. We'd like to sell them off quickly. The credit card receivables of DOCOMO.
Of course, I don't know how this receivables securitization program is going to become, but that is expanding. These things will become a candidate. In the business, there's long-term fixed assets, but generating revenue. If we remove them, there are some assets that have a negative impact on the profit side. The assets that have liquidity is something that we would like to determine and sell off the ones that have a low level of revenue. That is the precondition or the assumption that we make for this.
Okay. Urban development from four or five years ago, Boston, London, cities in overseas like Australia, they're doing something like that?
They have assets. If you can make a profit out of that, those are properties. If it matches the conditions that you have just shared with, that you might be working on that. Well, already the property in London, we have sold that off, and we have gained capital gains from that. We have been doing such a thing up till now, and we would like to further accelerate these type of efforts going forward.
Thank you very much. It was long, but thank you.
Thank you very much. Next question, please. Are there any other questions? If you wish to ask a question, please push zero followed by one. If you wish to ask a question, please push zero followed by one. Next question from UBS Securities. Mr. Takahashi, you have the floor.
Thank you very much. Takahashi from UBS. I would like to ask one question, if I may. It's about NTT Ltd. You talked about streamlining and rationalization cost. You said we talked about the costing involved. On the other hand, though, what about the progress of your sales? How do you see the current sales figures? Also, as you head toward the full-year target, what is the current situation? If you could please share with us your update and your thoughts. Thank you.
Thank you. Shimada here. As far as sales is concerned, well, as far as this fiscal year is concerned, there has been significant impact from the foreign exchange. Our overseas sales volume has increased by JPY 39.2 billion. However, there's the impact of foreign currency in the order of JPY 61.5 billion. If you exclude that impact, the operating revenue should have increased by JPY 100 billion. As far as sales are concerned, it's very robust and very strong. That is how we see it.
Has there been any, if you will, gap, if you will, in terms of how you forecasted the competitive landscape?
Well, as far as the competitive landscape is concerned, well, how can I put it? Have we made any, if you miss projections, if you will, in terms of how the competition played out. As I mentioned earlier, with regard to the data center business, we have seen even greater appetite. There has been greater inquiries with regard to data center. The competition, against that backdrop, is responding to those increase in interest. It's important that we match our delivery in line with the demand out there. With regard to sales and with regard to order taking is concerned, I think we still have a very positive environment.
Thank you very much. Appreciate it.
Thank you very much. Would you like to take the next question, please? Next question from Daiwa Securities. Mr. Ando. Mr. Ando, you have the floor.
Thank you very much. I know that this is my second round. Just one question, if I may. It's about equal work, equal pay that is going to be introduced. In your company, how are you responding to the introduction of this new system, and how do you see the potential impact on the cost? If you could just share with us some thoughts about this, I would appreciate it. Thank you.
Thank you very much. Shimada here. Let me respond. Equal work, equal pay, as far as how we respond to this matter is concerned, actually, as far as two years ago, already at that stage, we have had significant discussions with our labor union. For example, every fiscal year, for each fiscal year, with regard to welfare and benefits, we've actually tried to equalize those that are offered to regular workers and non-regular workers.
When it comes to the end of the year, with regard to benefits, we are trying to discuss and revisit these issues together with members of our labor union. Actually, when it comes to the core matters, the core section, for example, housing and such, right now, there have been discrepancies in the court precedents and the court decisions. It seems that there's a gap, if you will, in terms of the court decisions up until now.
Once the government issues its direction, then we need to reorganize. We can prevent a sudden increase in cost as a result of the introduction of equal work and equal pay, it's important that we try to absorb the cost. In line with the reduction in the personnel, we try to absorb any relevant costs. It's important we make efforts to absorb such increase. Just because equal work, equal pay is introduced, we don't expect significant surge in cost out of the blue.
Thank you very much.
Thank you very much. We'd like to take the next question. Are there any more questions? For those of you who have questions, please press zero and one. For those of you who have questions, please press zero and one. It seems that there are no more questions. With this, I would like to conclude the briefing session of the fiscal year 2019 third quarter results. Thank you very much.