Nippon Telegraph and Telephone Corporation. Annual Report 2013

Transcription

1 Nippon Telegraph and Telephone Corporation Annual Report 213 For the year ended March 31, 213

2 Who We Are Consolidated operating revenues: 1.7trillion (Fiscal year ended March 31, 213) NTT Group One of the world s largest telecommunications operators by revenues A corporate group that offers a wide range of services, from fiber-optic broadband and mobile communications to cloud services About 8% of the Fortune Global 1 companies are NTT customers Network coverage in 16 countries / regions Direct presence in 72 countries More than 22, employees around the world The NTT Group has high-quality networks in 16 countries and regions, data centers with a total floor space that is the second largest in the world, and a strong foundation as one of the world s leading security integrators. Leveraging these strengths, the NTT Group works as an information and communication technology (ICT) strategic partner, offering proposals ranging from advisory services that combine business analysis and ICT services to ICT management. In this way, the NTT Group supports the businesses of its customers around the world. Leveraging Strengths... 1

3 Where We Are Heading In November 212, the NTT Group released its new Medium-Term Management Strategy, Towards the Next Stage. Under this plan, the cornerstone of our business operations will be Global Cloud Services, and our strategic focus will be Comprehensively Strengthen Network Service Competitiveness. On that basis, we will work to become the Value Partner that customers continue to select. In addition, our medium-term financial target is growth of 6% or more in earnings per share (EPS), which we will strive to achieve by the fiscal year ending March 31, 216. In this way, we will work to increase corporate value.... to Achieve Global Leadership Global Cloud Services as the Cornerstone of NTT s Business Operations Our Medium-Term Financial Target Growth of 6% or more in EPS 212/3 by 216/3 2 3

4 Contents 6 Performance Highlights Index 6 Financial Data 8 Operational Data 1 To Our Shareholders and Investors 12 Interview with the President In this section, President and CEO Hiroo Unoura provides an overview of NTT s Medium-Term Management Strategy, Towards the Next Stage, as well as a review of the plan s progress to date and the Group s future outlook. Other Information Shareholders newsletter NTTis... Presentation materials Shareholders meeting materials Quick search Medium-Term Business Strategy Towards the Next Stage : Overview and Progress >> See pages Global Cloud Services: Key Points of Difference and Specific Initiatives >> See pages Initiatives to Increase Shareholder Value (Financial Targets) >> See pages Feature Global Cloud Services as the Cornerstone of NTT s Business Operations Financial results Results >> See pages The Extensive Coverage of the NTT Group 25 Our Strengths in Global Cloud Services 27 R&D Supporting Cloud Services 28 Base for the Development of Technology: NTT I 3 2-F CSR report Segment Results and Overview >> See pages Questions Frequently Asked by Shareholders and Investors >> See pages 37, 41, 45, 49 3 Operations in Review 63 Financial Section 32 NTT Group in Brief 64 1-Year Financial Summary 34 Regional Communications Business 38 Long Distance and International Communications Business 42 Mobile Communications Business 46 Data Communications Business 5 Other Businesses 52 CSR and Corporate Governance 54 CSR 56 Corporate Governance 6 Directors and Corporate Auditors 68 Operating and Financial Review and Prospects 84 Consolidated Balance Sheets 86 Consolidated Statements of Income and Consolidated Statements of Comprehensive Income 87 Consolidated Statements of Changes in Equity 88 Consolidated Statements of Cash Flows 89 Notes to Consolidated Financial Statements 13 Report of Independent Registered Public Accounting Firm 131 Reference Information 133 Consolidated Subsidiaries 136 Glossary of Terms 139 Stock Information Forward-Looking Statements The forward-looking statements and projected figures concerning the future performance of NTT and its subsidiaries and affiliates contained or referred to herein are based on a series of assumptions, projections, estimates, judgments, and beliefs of the management of NTT in light of information currently available to it regarding the economy, the telecommunications industry in Japan, and other factors. These projections and estimates may be affected by the future business operations of NTT and its subsidiaries and affiliates, the state of the economy in Japan and abroad, possible fluctuations in the securities markets, the pricing of services, the effects of competition, the performance of new products, services and new businesses, changes to laws and regulations affecting the telecommunications industry in Japan and elsewhere and other changes in circumstances that could cause actual results to differ materially from the forecasts contained or referred to herein. To help readers broaden their understanding Glossary of Terms To help readers broaden their understanding of the content of this report, this section provides explanations of general IT-related terms and terms related to NTT Group services that are used in the report and may be difficult to understand. >> See page 136 To analyze the Company s results Fact Sheet Fact sheets that provide an overview of financial and operating data are available on the Company s website. >> See website 4 5

5 Performance Highlights Financial Data Fiscal years ended March 31 Billions of yen 24/3 25/3 26/3 27/3 28/3 29/3 21/3 211/3 212/3 213/3 Operating revenues* 1 11,95.5 1,85.9 1, ,76.6 1,68.9 1, , ,35. 1,57.4 1,7.7 1 Operating expenses 9, , ,55.4 9, , ,36.6 9,63.7 9,9.1 9, ,498.8 Operating income 1,56.3 1, ,19.7 1,17. 1,34.6 1,19.8 1, , ,223. 1,22. 1 Net income attributable to NTT* Total assets* 1 19, ,64. 18, , , , , , , ,653.7 Shareholders equity* 1 6,38.5 6,74.3 6, ,12.8 7,41.8 7, , ,2.7 7, ,319. Interest-bearing debt 5, , , ,77.8 4, , , , ,274. 4,36. Debt ratio (%)* % 45.% 44.% 4.1% 38.7% 4.2% 36.6% 36.2% 35.2% 32.7% Capital investment* 3 2,13.6 2,57.4 2, , , , , ,87.1 1, ,97. 2 R&D expenses EBITDA* 3 3, , , ,34.5 3,67. 3, ,24.8 3, , ,27.4 EBITDA margin (%) 35.5% 32.8% 32.1% 31.% 33.8% 32.4% 31.8% 31.9% 3.6% 3.% Operating free cash flow* 3 1,92.2 1, ,25.7 1,13.7 1, , , , , ,237.5 ROE (%) 1.7% 1.9% 7.5% 6.9% 8.7% 7.3% 6.5% 6.4% 5.9% 6.5% ROCE (%) 7.3% 5.8% 5.8% 5.5% 6.4% 5.4% 5.4% 5.8% 5.8% 6.1% Capex to sales ratio* % 19.% 2.4% 2.8% 19.9% 2.6% 19.5% 18.1% 18.5% 18.4% Cash dividends, applicable to earnings for the year (Yen) Dividend payout ratio (%) 12.3% 13.% 17.1% 23.% 19.5% 27.5% 32.3% 31.2% 38.2% 37.% Net income attributable to NTT per share (Yen)* 1 * Operating Revenues / Operating Income Increase in operating revenues: billion Decrease in operating income: 21. billion Regional Communications: Decrease in voice-related revenues, decline in expenses, etc. Decrease in operating revenues: 16.6 billion Increase in operating income: 5.6 billion Long Distance and International Communications: Decrease in voice-related revenues, improved results at subsidiaries, etc. Decrease in operating revenues: 2.7 billion Increase in operating income: 4.6 billion Mobile Communications: Increase in smartphone sales, etc. Increase in operating revenues: 23.1 billion Decrease in operating income: 4. billion Data Communications: Increase in overseas sales, etc. Increase in operating revenues: 51.7 billion Increase in operating income: 14.3 billion 2 Capital Investment Up 23.4 billion YOY [Factors Contributing to Increase] Progress in development of LTE Xi coverage area Strengthening of disaster countermeasures [Factors Contributing to Decrease] Effective utilization of existing facilities 3 Dividends per Share Enhancement of shareholder returns Dividends up 2 YOY, to 16 Performance Highlights Operating Revenues Operating Income / Net Income Attributable to NTT Interest-Bearing Debt / Debt Ratio Capital Investment / Capex to Sales Ratio (Billions of yen) 12, 1,7.7 (Billions of yen) 1,8 (Billions of yen) (%) 7,5 6 (Billions of yen) (%) 2,4 3 1,97. 8, 1,2 1,22. 5, 4, , , , Fiscal year ended March 31 3, 2, 1, Fiscal year ended March 31 24/3 25/3 26/3 27/3 28/3 29/3 21/3 211/3 212/3 213/3 EBITDA / EBITDA Margin (Billions of yen) (%) 4, 5 3, /3 25/3 26/3 27/3 28/3 29/3 21/3 211/3 212/3 213/3 EBITDA (left scale) EBITDA margin (right scale) Fiscal year ended March 31 (Billions of yen) 2,5 Fiscal year ended March 31 24/3 25/3 26/3 27/3 28/3 29/3 21/3 211/3 212/3 213/3 Operating Free Cash Flow *1. In accordance with Accounting Principles Board ( APB ) Opinion No. 18, The Equity Method of Accounting for Investments in Common Stock, NTT has retroactively applied the equity method of accounting to prior years for an investment in an affiliate, following the acquisition by the NTT Group of additional shares of the affiliate during the fiscal year ended March 31, 28. Accordingly, figures for the fiscal year ended March 31, 27 have been retroactively adjusted from previously announced figures. *2. Debt ratio = Interest-bearing debt / (Interest-bearing debt + Shareholders equity) 1 *3. Please refer to Reconciliation of Operating free cash flows, EBITDA, Capital investment on page 131. Operating free cash flow = (Operating income + Depreciation and loss on disposal of property, plant and equipment) Capital investment EBITDA = Operating income + Depreciation and loss on disposal of property, plant and equipment Capital investment is on an accrual basis for the acquisition of property, plant and equipment. Operating income Net income attributable to NTT Interest-bearing debt (left scale) Debt ratio (right scale) 2, 1,5 1, 5 1, /3 25/3 26/3 27/3 28/3 29/3 21/3 211/3 212/3 213/3 Fiscal year ended March 31 Dividends per Share / Dividend Payout Ratio (Yen) (%) Fiscal year ended March 31 24/3 25/3 26/3 27/3 28/3 29/3 21/3 211/3 212/3 213/3 24/3 25/3 26/3 27/3 28/3 29/3 21/3 211/3 212/3 213/ Fiscal year ended March 31 Aa1/AA+ Aa2/AA Aa3/AA A1/A+ A2/A A3/A Baa1/BBB+ Baa2/BBB Baa3/BBB Fiscal year ended March 31 Dividends per share (left scale) Dividend payout ratio (right scale) Moody s S&P 24/3 25/3 26/3 27/3 28/3 29/3 21/3 211/3 212/3 213/3 Capital investment (left scale) Ratings Capex to sales ratio (right scale) 27/5/21 AA AA AA AA 26/1/3 Aa2 Aa1 Aa2 Aa1 211/9/1 Aa1 Aa2 Aa1 Aa2 *4. Capex to sales ratio = Capital investment / Operating revenues *5. With the application of the accounting pronouncement issued by the Financial Accounting Standards Board ( FASB ) in December 27, relating to noncontrolling interests in consolidated financial statements, starting from the fiscal year ended March 31, 21, the name of this line item was changed. Aa2 24/3 25/3 26/3 27/3 28/3 29/3 21/3 211/3 212/3 213/3 AA 7

6 Performance Highlights Operational Data End of year / month Thousands of subscriptions Number of subscriptions* 1, etc. 24/3 25/3 26/3 27/3 28/3 29/3 21/3 211/3 212/3 213/3 Fixed-line communications services Telephone subscriber line* 2 + INS-Net* 3 6,73 58,788 54,77 5,495 46,34 42,85 38,33 34,884 31,672 28,766 Fixed-line broadband services FLET S ADSL 4,89 5,28 5,682 5,323 4,656 3,992 3,381 2,858 2,322 1,848 FLET S Hikari * 4 (FTTH) 84 1,665 3,419 6,76 8,777 11,134 13,251 15,59 16,564 17,3 1 Hikari Denwa* ,174 5,725 8,11 1,142 12,113 13,9 15,169 Video services Hikari TV 552 1,9 1,413 2,4 2,453 2 FLET S TV ,3 2 d video 74 4,13 2 NOTTV Mobile communications services Xi (LTE) + FOMA (3G) + mova (2G) 46,328 48,825 51,144 52,621 53,388 54,61 56,82 58,1 6,129 61,536 FOMA (3G) 3,45 11,51 23,463 35,529 43,949 49,4 53,23 56,746 57,95 49,97 Xi (LTE) 26 2,225 11,566 3 ARPU* 6 ARPU of fixed-line (Telephone subscriber line + INS-Net subscriber line) NTT East 3,19 3,17 3,11 3,5 2,98 2,93 2,86 2,81 NTT West 3,5 3,2 2,96 2,9 2,85 2,8 2,76 2,72 ARPU of FLET S Hikari (FTTH) NTT East 4,65 5,5 5,31 5,58 5,74 5,88 5,9 5,84 NTT West 4,89 5,12 5,46 5,62 5,78 5,89 5,93 5,86 Mobile aggregate ARPU Mobile aggregate ARPU 7,89 7,2 6,91 6,7 6,36 5,71 5,35 5,7 5,14 4,84 Voice ARPU 5,92 5,33 5,3 4,69 4,16 3,33 2,9 2,53 2,2 1,73 Packet ARPU 1,97 1,87 1,88 2,1 2,2 2,38 2,45 2,54 2,59 2,69 Smart ARPU Yen 1 FLET S Hikari (FTTH) Net addition of 736 thousand subscriptions Uptake of discounts for continued use Had effect of limiting cancellations Mobile broadband uptake and intensified competition Weakening of net additions (increase in cancellations) Going forward, focus on generating new demand Strengthening of initiatives targeting small and mediumsized companies 2 Video Services Initiatives supporting use of multiple devices Expansion of services offered Aiming for additional subscribers 3 LTE Xi Net addition of million subscriptions Increased uptake of smartphones Aggressive LTE Xi coverage area expansion Fiscal year ending March 31, 214 Target of more than 25 million subscriptions Performance Highlights Fixed-Line Communications Services Subscriptions Fixed-Line Broadband Services Subscriptions Mobile Phone Subscriptions Video Services (Thousands of subscriptions) 8, (Thousands of subscriptions) 2, 1,848 (Thousands of subscriptions) 8, (Thousands of subscriptions) 1, 6, 4, 2, 28,766 15, 1, 5, 17,3 15,169 6, 4, 2, 11,566 49,97 8, 6, 4, 2, 4,814 3,456 8 End of year / month (Yen) 4, 3, 2, 1, Fiscal year ended March 31 24/3 25/3 26/3 27/3 28/3 29/3 21/3 211/3 212/3 213/3 2,81 2,72 24/3 25/3 26/3 27/3 28/3 29/3 21/3 211/3 212/3 213/3 *1. As of each fiscal year-end. *2. Number of Telephone subscriber line is the total of individual lines and central station lines (Subscriber Telephone Light Plan is included). *3. Number of INS-Net is the total of INS-Net 64 and INS-Net 15 (INS-Net 64 Lite Plan is included). In terms of number of channels, transmission rate, and line use rate (base rate), INS-Net 15 is in all cases roughly 1 times greater than INS-Net 64. For this reason, one INS-Net 15 subscription is calculated as 1 INS-Net 64 subscriptions. *4. Number of FLET S Hikari subscriptions includes B FLET S, FLET S Hikari Next, FLET S Hikari Light, and FLET S Hikari WiFi Access provided by NTT East, and B FLET S, FLET S Hikari Premium, FLET S Hikari Mytown, FLET S Hikari Next, FLET S Hikari Light, and FLET S Hikari WiFi Access provided by NTT West. *5. Number of Hikari Denwa subscriptions is calculated by number of channels in thousands. *6. Please see page 131 for the ARPU calculation method and other details. End of year / month (Yen) 8, 6, 4, 2, Fiscal year ended March 31 24/3 25/3 26/3 27/3 28/3 29/3 21/3 211/3 212/3 213/3 ARPU of FLET S Hikari (FTTH) 5,84 5,86 24/3 25/3 26/3 27/3 28/3 29/3 21/3 211/3 212/3 213/3 End of year / month (Yen) 9, 6, 3, Fiscal year ended March 31 24/3 25/3 26/3 27/3 28/3 29/3 21/3 211/3 212/3 213/3 24/3 25/3 26/3 27/3 28/3 29/3 21/3 211/3 212/3 213/3 42 2,69 1,73 End of year / month 24/3 25/3 26/3 27/3 28/3 29/3 21/3 211/3 212/3 213/3 Telephone subscriber line + INS-Net FLET S Hikari* 4 FLET S ADSL Hikari Denwa* 5 mova (2G) FOMA (3G) Xi (LTE) Hikari TV + FLET S TV d video + NOTTV ARPU of Fixed-Line (Telephone Subscriber Line + INS-Net Subscriber Line) Mobile Aggregate ARPU NTT East NTT West NTT East NTT West Voice ARPU Packet ARPU Smart ARPU For other financial data, segment data, and financial data for principal subsidiaries, please refer to the 1-Year Financial Summary starting on page 64. >> See page 64 9

7 To Our Shareholders and Investors Aiming to be the Value Partner that customers continue to select by accelerating transformation of customers business models I would like to take this opportunity to express my sincere appreciation for your continued understanding and support of the NTT Group. In the information and communication technology (ICT) market, the adoption of social media and cloud services is expanding, supported by wider bandwidth resulting from the deployment of fiber-optic and LTE services and the widespread market acceptance of smartphones, tablets, and other devices. There is a global trend of new entrants to the market in addition to telecommunications carriers and there is also rapid progress in the variety and sophistication of services. In this setting, in November 212 the NTT Group formulated a new Medium-Term Management Strategy, Towards the Next Stage. Under this new initiative, we will respond to the globalization of the market and the development of cloud services, which we believe will accelerate in the future. To establish Global Cloud Services as the cornerstone of our operations going forward, we will promote advanced R&D activities to create high-value-added services and formulate new business models. As we take action to evolve into a Value Partner so that we continue to be selected by customers, the NTT Group will strive to record further growth and development and to increase corporate value. In closing, I look forward to your ongoing understanding and support of the business activities of the NTT Group in the years ahead. August 213 Hiroo Unoura Representative Director and President, Chief Executive Officer To Our Shareholders and Investors 1 11

8 Interview with the President we are entering an age in which cloud services will play the central role, and accordingly, I believe that global markets and cloud services must be considered the growth pillars of the NTT Group. Accompanying the transition to a cloud services paradigm, users will be freed from the constraints of devices, operating systems, and uniform user interfaces. In With Global Cloud Services as our growth engine, we will implement our business transformation targeting the next stage. Under the Medium-Term Management Strategy, Towards the Next Stage, we will build a business model that will ensure that we continue to be selected. other words, in the next stage users themselves will decide what combinations of services to use, and from what providers. As a result, user choices will expand dramatically. While there will be many factors that lead customers to choose the NTT Group even when they have such a wide range of choices, I believe that one thing is certain. The true nature of our competitiveness will be found in our ability to continue to be selected. It will be possible for users to easily switch services, so we will need to make ongoing efforts to continue to be selected. We are reaching the end of the era in which providers unilaterally offered their services and users simply accepted them. However, it is not easy for corporate users to shift to the cloud all at once. First, they must carefully verify security issues and IT costs, specify which parts of existing systems will start the transition to the cloud, and then confirm their opera- Interview with the President Hiroo Unoura Representative Director and President, Chief Executive Officer tional status after the transition. Only then can they move ahead with the actual transition. In order to continue to be selected by customers during this process, it is essential that we develop close relationships with our customers so close that we could be called a cooperative partner and then work together to establish the In this section, President and CEO Hiroo Unoura explains NTT s Medium-Term Management Strategy, Towards the Next Stage. optimal cloud environment. These kinds of partnerships with customers, combined with such factors as service quality, technology, and security, will generate trust, and that trust will be the basis for the selection of the NTT Group. This is why, ever since I became president, I have repeatedly asked everyone at the NTT Group to aim to be a Value Partner. Q1 Would you explain the idea behind the formulation of the Medium-Term Management Strategy, Towards the Next Stage? We must implement reforms so that in the next stage we continue to be selected by customers. Since I was appointed president and CEO in June 212, I have felt that competition in the ICT market is entering into a major transition phase. The activities of individuals and corporate customers are increasingly taking place on a global stage, and as a result, ICT coverage needs to be globalized to ensure comprehensive connectivity among markets. Accordingly, the NTT Group must expand its operational foundation from a global perspective. The market is currently undergoing significant change. Information processing capabilities have undergone a cycle of concentration (from user devices to networks) and dispersion (from networks to user devices). That process of concentration and dispersion is now making further advances and is nearing its final form cloud services. Clearly, Next Stage Internet Present Obtain a great variety of information over the Internet Use of applications available on the Internet Dependent on device, operating system, and network Uniform user interfaces Big Data M2M, Internet of Things Virtualization Acceleration of the transformation Change Enabler HTML5, Web applications Natural language processing Secure dispersion / computation Inter-service Cloud forensics Edge computing, etc. Next Stage Compatibility among Internet-based services and convergence between real-world businesses and Internet-based services will lead to higher value-added services Open and seamless usage environment (device-free, OS-free) Personalized user interface and user experience (simple and user-friendly) 12 13

9 Interview with the President To succeed in the next stage, we must implement our business transformation Group already possesses all of those functions, including with an awareness that the NTT Group itself is just one player among many. On the ability to manage all of those layers. I believe that this that basis, we need to build a business model that will ensure that we are selected is also an extremely important competitive edge. In recent as a Value Partner for many years to come. Our Medium-Term Management years, we have further enhanced those strengths through Q2 In promoting Global Cloud Services, what are the strengths of the NTT Group? Strategy, Towards the Next Stage, incorporates these ideas. Our extensive coverage is one of the NTT Group s unique strengths. Going forward, cloud services will be the engine of growth and business transformation, and in this field we already have the tools that we will need to compete on the global stage. The NTT Group has overseas bases in 72 countries and regions and a customer base of more than 1, global companies. About 8% of the Fortune Global 1 companies are our customers. In addition, we operate more than 24 data centers with a combined server room floor space of about 38, square meters. This makes us the largest data center operator in Japan and the second largest in the world. It goes without saying that we offer the highest levels of reliability and quality in the world. Our data centers are connected by our largecapacity, low-latency global IP backbone, which is the second largest worldwide in terms of total traffic. In this way, our major strengths include proximity to our customers and our foundation for the provision of cloud services. These strengths have already been solidly established on a global scale. Telecommunications service layers can be broadly divided into applications and infrastructure, with the latter including data centers and networks. The NTT With strong capabilities in all layers, we have reinforced our competitive edge. M&A transactions, with a special focus on the cloud. Our acquisition in October 21 of Dimension Data, of South Africa, made a substantial contribution to the reinforcement of our strategic base. Dimension Data s ability to provide IT facility construction, operation, and maintenance services, and its area coverage, have been a strong complement to the business fields and area coverage of the NTT Group. Moreover, in December 21 we acquired Keane, of the United States. Keane brought to the NTT Group a customer base in the United States, the most advanced market in the cloud business, as well as a global operational base and know-how that support marketing, development, and maintenance. In Europe, since 27 we have been steadily strengthening our customer base and our system for the provision of services. I am confident that our extensive coverage is one of the NTT Group s unique strengths. On the other hand, there will also be customers who decide to move only specific functions to the cloud while making full use of their existing management resources. The NTT Group can work together with other companies to provide total services, and we can also provide services in a specific layer. In addition, we can assist customers with a specific part of the process of transitioning to the cloud. I think this ability to offer one-stop solutions, or to work together with competitors to meet customer needs, is another of our strengths. Interview with the President From a Provider to a Value Partner Changes in Earnings Structure Role of the NTT Group The Value Partner that customers continue to select Linking a wide range of services, connecting users and services Supporting business model transformation of our corporate customers (B2B2C business model) Supporting the enriched lifestyles of our individual customers Pursuing growth by self-transformation Suitable for customers needs Simple and convenient Secure and safe Flexible combination of infrastructure, platforms, and applications Appropriate service-matching support on behalf of customers Simple and user-friendly interface & user experience Meet customer demands at reasonable rates Protect customers from security threats with leading technology and operations Global Cloud Services as the Cornerstone of NTT s Business Operations Comprehensively Strengthen Network Service Competitiveness Solution + New business IP business Legacy business (fixed voice / mobile voice, etc.) Before Cloud Global Cloud Services Network Services Advisory Applications (Big Data, M2M, contents, etc.) SI, NI Cloud platforms (DC, IaaS, PaaS, etc.) Cloud access (Network for corporate users, etc.) Wi-Fi platform Fixed / mobile broadband, etc. Fixed / mobile voice, etc. After Cloud Next Stage 14 15

10 Interview with the President A major strength is our ability to provide total solutions to help customers implement a transition to the cloud, whether the entire transition or just a part of it. In the fiscal year ended March 31, 213, the NTT Group s R&D expenses were about 27. billion, and we currently have about 6, staff members working in R&D. This world-leading R&D program is also a powerful competitive tool for the NTT Group. For example, to meet needs for the effective use of Big Data, we have led the world in the development of technological platforms that enable the high-level analysis of large volumes of data in real time. In addition, using virtual network technologies, we have made it possible to flexibly and rapidly transition to cloud services and implement changes in system configuration. The critical factor in competing with other companies around the world is technical capabilities in the area of security. As a security integrator, the NTT Group provides services in more than 5 countries, and the Computer Security Incident Response Team (CSIRT) has capabilities that place it in the top ranks of telecommunications carriers. We have already established a position as one of the world s top security integrators. We will solidify our position in the field of security by constructing a common platform and accommodating systems in different countries and regions. and Secode AB, and NTT Secure Platform Laboratories, is now being rolled out globally. This type of common platform is merely a necessary condition for becoming a frontrunner. We also need to clear sufficient conditions, such as the establishment of a SIEM Engine that is compliant with legal systems and personal information protection systems that differ by country and region. By meeting both of these conditions, I believe that we can reinforce our position in the security field. Next, I would like to discuss the enhancement of our Wi-Fi platform as a means of strengthening our cloud business. The NTT Group has about 14, Wi-Fi access points throughout Japan, such as in train stations, airports, and convenience stores. These Wi-Fi spots are not simply positioned as access points or as tools for use in offloading mobile traffic. Rather, we position them as the Third Access, that is, as a combination of access point and service platform that differs from fixed-line and mobile. Accordingly, we will use these access points as a platform for cloud services. On that basis, we will leverage the distinctive features of Wi-Fi device free, OS free, and location free as we develop a new business model incorporating the use of this platform for the provision of information distribution services to end users. In the near future, our initiatives may center on the use of these access points as a tool in O2O marketing (Online to Offline: linking online information and services with real activities, such as purchases at real stores). We will also aim at the establishment of a new B2B2C business model (Business to Business to Consumer: operations that support the consumerfocused businesses of other companies) in the future through active involvement throughout the value chains that our customers operate. Interview with the President Q3 What specific direction will the NTT Group take in developing its global cloud operations? We will develop advanced technologies in the United States and introduce them around the world. In regard to the cloud, the United States is the most competitive and the most advanced market in the world. It offers a high degree of freedom in a variety of areas, and it is possible to develop cloud services and security services more quickly in the United States than anywhere else in the world. The NTT Group will center its development activities in this market the world s most advanced and develop world-leading services with the adoption of the latest technologies through an open innovation format. On that basis, we will modularize our business success experiences in the U.S. market in accordance with the needs of other markets. These modules will then be introduced to the NTT Group s cloud services, which will be launched in markets around the world. We may consider introducing U.S.- originated services in the Japanese market. In emerging countries, meanwhile, major opportunities are presented by the trend toward Skip to Cloud, which involves the use of the cloud from the initial stages of a system. Moving forward, we will resolutely continue to take on challenges. A central role in these initiatives will be played by NTT Innovation Institute, Inc. (NTT I 3 ), which we established in Silicon Valley in April 213. The CEO of NTT I 3 is highly knowledgeable about the field of technology, and has technical skills that encompass both the supplier and user sides. In May, we launched a unified brand for the NTT Group s cloud services NTT clouds. By commencing full-fledged initiatives on a Groupwide basis while raising recognition of our brand overseas, we have taken a major step Towards the Next Stage. The field of security will be a special emphasis in our R&D initiatives. Our first priority will be the development of a global security platform, which will function as a common platform. We have already developed the Security Information and Event Management (SIEM) Engine, which features enhanced security risk detection and analysis functions. This engine, which was jointly developed by NTT Communications, its subsidiaries NTT Com Security AG (formerly Integralis AG) We have made a full-fledged start with Groupwide initiatives. Strengthen the Wi-Fi Platform Designating and strengthening Wi-Fi platforms already available in train stations, airports, etc., as the Third Access Providing value chain support, such as production, distribution, and marketing, etc., for corporate customers Value Chain Support for Corporate Customers Market research Internet Carrier-free Free Internet R&D Production Distribution Data collection / analysis / attracting customers Marketing Activity support for individual customers Wi-Fi Platform No. of Reachable Handsets: Over 1 million* Maintenance / After-sales care * Number of wireless LAN-compatible mobile handsets sold from 29 to 212. (211 and 212 research results by ICT Research & Consulting Inc.) Area information Coupons Stamps, etc. Information distribution portals 16 17

11 Interview with the President 18 Q4 How will you strengthen competitiveness in network services? We will review our policy of doing everything in-house and consider drawing on external facilities and services as necessary. We will review our business practice of doing everything in-house, and we will rigorously strengthen our competitiveness. We will position Global Cloud Services as a future growth driver. On the other hand, in domestic network services, where the market is intensely competitive, it is crucial to work to increase investment efficiency and administrative efficiency given the strategy to step up to the next stage in the future. under the cloud paradigm, customers will be able to freely select the services they use, and we expect network services to be sold in bundles with applications and platforms rather than on a single-item basis. However, this does not mean that the importance of networks will decline. On the contrary, the importance of the infrastructure supporting the cloud will increase further in the years ahead. We will not compromise on investment that is needed to provide high-quality services, but we will also emphasize facility efficiency and take steps to thoroughly increase our competitiveness in network services. One point of pride for the NTT Group is how we have led the world in the construction of fiber optic and LTE networks. On the other hand, even accounting for the upfront investment required for the construction of fiber-optic networks, we admit that our network-related capital investment is high in comparison with other telecommunications carriers around the world. Capital investment in fiber-optic networks has already peaked, and we will once again review our entire value chain and reevaluate our capital investment from the ground up. In particular, I am emphasizing to all NTT Group companies that we need to review the business practice of doing everything in-house. The NTT Group has traditionally constructed its networks on its own. In this way, we have been able to provide comprehensive, stable telecommunications services, but as I mentioned, in the future the trend will be toward users freely selecting services, including infrastructure. The pace at which facilities become obsolete is also likely to increase. I believe that we need to move beyond a rigid focus on doing everything ourselves, especially in the fields where products and services quickly become obsolete. In the next stage, it will be more effective for us to draw on external facilities and services when necessary. Accordingly, we will continually ask ourselves if building facilities in-house is really going to make a difference in our competitiveness, and if doing so will place a heavy burden on the NTT Group in the years ahead. On that basis, we will reconsider our traditional practice of doing everything in-house. Also, with a focus on future changes in the operating and labor environments, our approach will be to reform our personnel systems and thoroughly simplify all operational functions, from network service development and sales to operations and maintenance. We will take steps to comprehensively enhance the competitiveness of our network, including quality, reliability, and cost, and to succeed in the face of strong competition. In this way, we will put the NTT Group on a growth track in the years ahead. Q5 Would you discuss the background to the formulation of the mediumterm financial targets? I believe that EPS is an indicator that makes it comparatively easy to explain corporate value to shareholders and investors. Medium-Term Financial Targets The Path to Profit Recovery and Growth Global Cloud Services as the cornerstone of NTT s business operations Comprehensively strengthen network service competitiveness Cash Control and Effective Utilization Streamlining capital investment Increasing M&A with a focus on cloud-related businesses Enhancing shareholder returns in the medium term We will strive to achieve growth of more than 6% in EPS. In May 212, we announced that we would work toward an increase of 6% or more in EPS over the medium term as a financial target. Under our Medium-Term Management Strategy, we continue to position earnings per share (EPS) growth as our most important indicator. We have set a clear target for reaching that goal by the fiscal year ending March 31, 216. I understand that ROE is the focus of special attention among sales and financial targets, particularly in Europe and the United States. However, I have met and exchanged ideas with shareholders and investors, and in consideration of their opinions I concluded that setting EPS as a key target and working to increase it is more important for shareholders and investors to understand changes in corporate value. To clearly express our intention to grow over the medium term, we are using EPS not as a single-year target but as a medium-term target. EPS is calculated with a numerator (net income) and a denominator (number of shares issued), and we ultimately settled on growth of more than 6% after considering a variety factors, such as future profit trends and acquisitions of treasury stock. The business domains of the NTT Group can be broadly divided into fixed line, mobile, and, as a growth driver, the cloud. Each of these domains is changing at a different pace. For example, the fixed-line market is mature, and the mobile market is undergoing intense competition accompanying the transition to smartphones and LTE. These are businesses in which, to a certain extent, we can forecast the direction of the market a few years into the future. On the other hand, in the cloud field, it is in a preparation stage, and we expect to be able to get the results of seed planting in the latter half of the plan period. In the past, we set uniform periods for the achievement of our financial targets, but in the current Medium-Term Management Strategy our various financial targets are organized in different periods of three to five years, in accordance with the time span of each business. By the fiscal year ending March 31, 217: By the fiscal year ending March 31, 215: By the fiscal year ending March 31, 216: Proceeds from overseas sales: Proportion of corporate sales represented by overseas sales: At least 4. billion in cost reductions in fixed-line / mobile access networks (compared with the fiscal year ended March 31, 212) EPS growth of 6% or more by the fiscal year ending March 31, 216 (compared with the fiscal year ended March 31, 212) $2. billion 5% or more Capex to sales ratio 15% Interview with the President 19

12 Interview with the President We will consider M&A transactions, with a focus on whether they make a contribution to increasing our profit margins through the generation of synergies, centered on the cloud field. Q6 Please discuss progress with the Medium-Term Management Strategy. For overseas sales, our targets are to reach $2. billion by the fiscal year ending March 31, 217 and to increase the proportion of corporate sales represented by overseas sales to 5% or more. Our basic policy for sales will be to record organic growth, but will continue to utilize M&A transactions as we strive to achieve our sales targets. Of course, we will not consider M&A transactions simply for the purpose of increasing our sales. Centered on the cloud field, we will consider M&A transactions with a focus on whether they make a contribution to increasing our profit margins through the generation of synergies for the NTT Group as a whole. Next, by the fiscal year ending March 31, 215 we will work to reduce fixedline / mobile access network costs by 4. billion compared with the fiscal year ended March 31, 212. Also, our goal for reducing the Capex to sales ratio to 15% has been carried over from the previous management strategy, and we will strive to achieve this objective by the fiscal year ending March 31, 216. Further, the NTT Group will advance the effective use of cash, such as focusing M&A activities on cloud-related businesses and taking steps to further enhance shareholder returns in the medium term. We have gotten off to a solid start in implementing the Medium-Term Management Strategy. In the fiscal year ended March 31, 213, our overseas sales were $12. billion, an increase of $.6 billion year on year, and the proportion of corporate sales represented by overseas sales was 32%. Looking ahead, we are planning overseas sales of $13. billion in the fiscal year ending March 31, 214, with the proportion of corporate sales represented by overseas sales at 37%. In the fiscal year ended March 31, 213, we reduced our access network costs by 125. billion compared with the previous fiscal year. For the fiscal year Reductions in access network costs are progressing at a faster than expected pace. ending March 31, 214, we are planning a two-year cumulative total of 33. billion in cost reductions. We are advancing at a faster pace than we originally expected toward our target of 4. billion. Accompanying the expansion of the LTE Xi service area, our capital investment in the fiscal year ended March 31, 213, was 1,97. billion, an increase of 23.4 billion year on year, and our Capex to sales ratio was 18.4%. Targeting LTE area enhancement, we will continue to implement capital investment in the fiscal year ending March 31, 214. However, we will make progress in increasing efficiency by simplifying our networks in the fixed-line field, and in the mobile field, the dispersion of important facilities as a disaster countermeasure has basically been completed. Consequently, we are planning capital investment of 1,87. billion, down by 1. billion year on year. Considering the increase in operating revenues, we are aiming for a Capex to sales ratio of 17.%, a record low level. Looking at shareholder returns, dividends in the fiscal year ended March 31, 213, were 16 per share, an increase of 2 year on year. There has been no change to our basic policy of enhancing dividends over the medium term. In regard to purchases of treasury stock, in the fiscal year ended March 31, 213, we implemented 15. billion in acquisitions, and we have substantially increased our planned purchase amount for the fiscal year ending March 31, 214, to 25. billion. EPS in the fiscal year ended March 31, 213, was 432, an increase of 18% year on year, and for the fiscal year ending March 31, 214, we are planning an increase of 37%, to 53, compared with the fiscal year ended March 31, 212. Excluding a special factor 6. billion in other income accompanying the redevelopment of Otemachi 2-chome this EPS figure would be 471, an increase of 29%. Moving forward, the NTT Group will do its utmost to implement its initiatives in accordance with its Medium-Term Management Strategy. Interview with the President Overseas Sales Amount of Cost Reductions Capital Investment Repurchases of Treasury Stock EPS (earnings per share) Plan (Billions of US$) Fiscal year ended / ending March /3 3.6% % (Billions of yen) 1,2. 1, /3 214/3 (Forecast) 36.9% 8 4 (Billions of yen) Fiscal year ended / ending March /3 Overseas sales (US$ basis) (left scale) Overseas sales (Yen basis) (right scale) Proportion of corporate sales represented by overseas sales Overseas Sales: $2. billion by fiscal year ending March 31, 217 Proportion of corporate sales represented by overseas sales: 5% or more by fiscal year ending March 31, /3 214/3 (Forecast) Access Network Cost Reduction: More than 4. billion by fiscal year ending March 31, 215 (Billions of yen) (%) 2,4 3 1,6 8 Fiscal year ended / ending March 31 1, /3 18.5% 1,97. Capital investment (left scale) Capex to sales ratio: 18.4% 1, /3 214/3 (Forecast) 17.% 15% by fiscal year ending March 31, Capex to sales ratio (right scale) (Billions of yen) Fiscal year ended / ending March / /3 214/3 (Forecast) Amount of Repurchases of Treasury Stock: 15. billion during fiscal year ended March 31, billion in fiscal year ending March 31, 214* (Yen) Fiscal year ended / ending March %* +37%* 212/ /3 214/3 (Forecast) * Compared with fiscal year ended March 31, 212 EPS: Growth of 6% or more by fiscal year ending March 31, * Board of Directors resolution on acquisition of treasury stock, with upper limits of 5 million shares and 25. billion in May

13 Feature Global Cloud Services as the Cornerstone of NTT s Business Operations Feature The NTT Group s new Medium-Term Management Strategy: Towards the Next Stage, includes the key concept of being the Value Partner that continues to be selected by customers. The two key pillars of the strategy are Global Cloud Services as the Cornerstone of NTT s Business Operations and Comprehensively Strengthen Network Service Competitiveness. The management strategy positions Global Cloud Services as the future growth driver of the NTT Group and spells out two objectives for overseas sales. Specifically, we aim to reach $2. billion in overseas sales by the fiscal year ending March 31, 217, and to increase the proportion of corporate sales represented by overseas sales to 5% or more. Feature: Contents The Extensive Coverage of the NTT Group 24 Our Strengths in Global Cloud Services 25 R&D Supporting Cloud Services 27 Base for the Development of Technology: NTT I

14 Feature: Global Cloud Services as the Cornerstone of NTT s Business Operations Position The Extensive Coverage of the NTT Group Initiatives Our Strengths in Global Cloud Services The NTT Group s Global Services Recent Initiatives to Strengthen Cloud Services The NTT Group offers a wide range of services in markets around the world, including network / data center, managed ICT, and solution / application services. The ability to provide this comprehensive range of services is one of the NTT Group s key strengths. (1) Network / Data center services Currently, the NTT Group provides more than 1, global companies in 16 countries and regions with IP-VPN and other data network services as well as Internet access and other global network services. The NTT Group operates the world s second largest global IP backbone. As infrastructure that stores customer information, data centers in combination with networks are an important business platform for the provision of ICT services to customers. The NTT Group operates more than 24 data centers around the world. We offer colocation services, in which we provide data center space, and hosting services, where we provide bundles of equipment and data center space. The NTT Group is number two in the world in terms of server room floor space. Direct Presence in 72 Countries, Service Provision in 16 Countries / Regions World s second-largest data center operator World s second-largest IP backbone provider The Americas EMEA APAC Japan TOTAL Number of countries with offices Number of data centers Number of employees 11, 17, 23, 176, 227, (2) Managed ICT services The NTT Group provides end-to-end ICT services, such as network integration and IT outsourcing. (3) Solution / Application services (including systems integration) The NTT Group has about 29, IT consultants and system engineers in 136 cities in 34 overseas countries. These employees provide IT consulting, systems integration services, outsourcing services, such as Application Management Outsourcing (AMO) and Business Process Outsourcing (BPO), and application services that utilize management systems such as SAP and Oracle. The NTT Group has built a system that can provide a full-service lineup, from networks and data centers to managed ICT services and systems integration. In markets characterized by competition among large numbers of global companies, the NTT Group has a unique position. Leveraging this strength, the NTT Group is aiming to achieve growth through progress in Global Cloud Services. NTT Group companies overseas are generating synergies by leveraging the service provision capabilities and customer bases of other NTT Group companies. Global Cloud Business Promotion System Client companies Advisory services Migration services R&D Operational services Management services Application services Managed ICT Data center network To strengthen cloud services, in November 212 we acquired Centerstance Inc., of the United States, a consulting company that specializes in corporate business process analysis and support for the migration of existing systems to the cloud. Centerstance Inc., is also one of a limited number of Salesforce.com Platinum Partners. Through this acquisition, the NTT Group has strengthened its cloud advisory and application migration capabilities. In addition, in June 213 we agreed to acquire all of the shares of Solutionary, Inc., which is based in the United States and offers managed security services. With this acquisition, we are further advancing our business in North America through the reinforcement of our security services, which will play a key role in the maintenance and expansion of our ICT business, centered on the cloud. Specifically, Group Global Business Development Existing IT systems Applications PF Infrastructure Global data centers Global networks Wi-Fi Mobile networks Focus on value for customers Business analysis Advisory services Cloud Security Mobility Big Data M2M Proposals combining business analysis and ICT services ICT services Industrially developed countries On-premises Solutionary, Inc., has the ability to provide security platforms and security operations as well as security consulting resources, while the NTT Group has established a total ICT business, from infrastructure and networks to solutions. Moving forward, we will work to establish a new business model that leverages these strengths. We believe that the source of our competitiveness is our ability to continue to be selected by customers. Overall, the NTT Group s business is defined by a phrase that uses the letters N, T, and T : Next Value Partner for Transformation by Total Solutions. In other words, through differentiation in services and technologies, we will help our customers to implement business model transformations, and thereby earn their trust. Off-premises Migration of business applications to the cloud Industry platform Wi-Fi Cloud platform Global data centers Global networks Emerging countries Standardized cloud, etc. Security Mobile networks Provision of flexible, high-quality ICT services, even incorporating the services of other companies ICT management Total system visualization, from applications to devices Security management Provision of end-to-end, secure ICT management Support for the business model transformations of customers as an ICT strategy partner Feature 24 (As of March 31, 213) 25

15 Feature: Global Cloud Services as the Cornerstone of NTT s Business Operations Initiatives NTT Group Cloud Services: Key Points of Difference As the only truly global partner that supports customers with an integrated perspective that extends across applications, infrastructure, and networks, the NTT Group will provide comprehensive cloud services that accommodate the diverse business environments of its clients. The key points of difference for our products and services are as follows. Advisory services Migration services Operational services Management services Technological Advantages R&D Supporting Cloud Services Increasing User Convenience through Cloud / Virtual Network Comprehensive Management Technologies Hardware / Software / vendor and architecture neutral No legacy / incumbent bias Cross layer optimized advisory experience and capability Any to any capability Any legacy to any cloud infrastructure migration Leading Salesforce.com migration capability Combines deep understanding of legacy architecture and leading cloud technology Application aware infrastructure Seamless federation between NTT public / private clouds and customer clouds globally Optimized cost / performance (by workload, location) Best in class network security & integration expertise Pre-configured & tuned environments for highly productized applications Integrated monitoring and management across network, infrastructure and applications 24x7 global coverage with service operation centers that leverage onsite, offshore & near-shore resources NTT Laboratories are working to add further value to the NTT Group s cloud services. To that end, we are advancing open innovation, which does not rely solely on in-house technologies, and moving ahead with R&D in network virtualization technologies to provide high added value to customers through cloud network cooperation. In this way, through the Web portal customers can arrange on-demand deployment of needed virtual equipment and network resources, and we can support a smooth migration from legacy systems to the cloud. Furthermore, we can increase robustness by flexibly changing network configuration and moving virtual equipment used to another data center when there is a service interruption. Web portal Cloud migration Customer base Virtual network Network controller Cloud Virtual network Cooperation Interruption response Virtual network Physical network Cloud controller Cloud Virtual network Feature 26 Case Study: Introduction of Cloud Services by Global Companies We helped a North American financial services company with more than $1. billion in sales migrate their legacy IT environments to the cloud. The NTT Group also provided managed services after the migration. We planned and built the optimal cloud environment considering the client s previous environments and provided support for the migration of its applications and data. Since the move to the cloud was completed, we have provided 24/7 infrastructure / application monitoring and managed services, including disaster recovery. Through the introduction of managed services, we achieved a reduction of 25% to 4% in the client s operating costs. Application and Data Migration Support Cloud Infrastructure Construction and Operation ERP Database server Database server Private cloud Integrated application Storage Applications Database Infrastructure Provision of 24/7 infrastructure / application monitoring and managed services, including disaster recovery Results of Introduction 25% to 4% reduction in operating costs with managed services Achievement of robust business continuity plan, with a limited effect on system performance even during disaster recovery Reinforcing the Security Platform When information is entrusted to the cloud, there are still many concerns about such issues as security threats, including unauthorized access, and the loss of data if a server crashes. At NTT Laboratories, we have drawn on world-class malware countermeasure technologies, security management technologies, and encryption technologies to develop strong defenses against cyber attacks and other security threats, and we are working to leverage these technologies to differentiate our cloud services. With secure dispersion technology, the important information of customers is encrypted and split into multiple files, Entrusted information (data files, etc.) Secret sharing technology Safe data storage With secret sharing technology, data is encrypted and split into multiple files, which are stored on separate servers. which are stored on the cloud. This strengthens the protection against unauthorized access and server crashes. Moreover, with secure computation technology, information that has been split up through secret sharing technology can be statistically processed at the world s highest level without returning the information to its original form and without anyone seeing the information. In this way, the important information of customers can be both stored and utilized. By further bolstering these and other security technologies, we will offer cloud services that can be used with peace of mind. Secure computation technology Safe data usage Cloud Calculations can be performed while the secret data is still split into separate files, with only the results output. Data utilization (statistical processing, etc.) * Realization of world No. 1 capabilities 27

16 Feature: Global Cloud Services as the Cornerstone of NTT s Business Operations Strategic Base Base for the Development of Technology: NTT I 3 Establishment of R&D Base in North America In accordance with the Medium-Term Management Strategy announced in November 212, Towards the Next Stage, the NTT Group is working to achieve the rapid development and market roll out of world class security and cloud technologies. To that end, in the North American market, where competition is most intense, we established NTT Innovation Institute, Inc. (NTT I 3 ), in Silicon Valley in April 213. NTT I 3 will work from the perspectives of developing innovative services and providing superior operations, taking into account the needs of NTT Group clients more than 1, global companies around the world. On that basis, NTT I 3 will develop intellectual property (IP), centered on security technologies in the cloud, mobile, and operations fields. For the time being, cloud computing and security technologies will play the central role in NTT I 3 s activities, and through close cooperation with the basic R&D initiatives of NTT Laboratories in Japan, NTT I 3 will advance applied research Establishment of NTT I 3 for the NTT Group as a whole while avoiding overlapping development initiatives. There are four key points to the activities of NTT I 3. (1) Market driven North America is a leader in many ICT areas, such as security and cloud computing. Accordingly, NTT I 3 will advance market-driven development activities suitable for rapid application in business settings, leading to business development initiatives in areas where the NTT Group needs to enhance its market presence as well as to the reinforcement of its competitiveness. (2) Leveraging the Silicon Valley ecosystem Silicon Valley boasts a concentration of leading-edge information in the area of technology as well as companies that possess advanced technologies. As NTT I 3 works to develop Advancing development of services originated in North America through R&D centered on security and cloud computing. NTT I 3 will be a global hub for NTT Group companies, R&D, and the creation of new services, and will support growth in the global business of the NTT Group. New R&D center in North America NTT Innovation Institute, Inc. (NTT I 3 ) new services, it will strengthen its partnerships with these companies and take steps to accumulate the latest information. (3) Development of IP for global corporate business As rapidly as possible, NTT I 3 will develop IP in the form of technologies that meet the needs of NTT Group businesses in the North American market, where these new technologies will be rolled out. Plans call for this IP to be modularized and introduced globally, including in Japan and emerging countries. Role of NTT I 3 Large companies Industrially developed countries Small and medium-sized companies Emerging market Supply of newly developed IP Supply of standardized services NTT clouds: The Unified Brand for NTT Cloud Services More than 1, global companies worldwide User needs Innovative services Cloud Mobile Operations Security Operational excellence NTT Innovation Institute, Inc. Cooperation To further establish a unique position for the NTT Group in the global market, we have established NTT clouds as a unified brand. The NTT clouds brand will be used to represent the various cloud services provided by Group companies when comprehensive proposals are made to corporate customers overseas. With North America as a starting point, we will launch comprehensive proposals of cloud services to corporate customers and aggressively reinforce the appeal of the NTT Group brand. NTT NTT R&D (4) Source of differentiation for the NTT Group By advancing applied research in accordance with market needs, NTT I 3 will further strengthen the NTT Group s R&D and generate results that become a source of differentiation for the NTT Group. Through those results, NTT I 3 is expected to make a substantial contribution to NTT Group companies. NTT I 3 will be a global hub for the R&D activities of NTT Group companies, and support the creation of new services. It will contribute to growth in the global business of the NTT Group. Cooperation inside and outside the Group NTT Global customers Partners Analysts Feature 28 NTT clouds overview 29

17 Operations in Review Operations in Review: Contents NTT Group in Brief 32 Regional Communications Business 34 Operations in Review Long Distance and International Communications Business 38 Mobile Communications Business 42 Data Communications Business 46 Other Businesses

18 NTT DATA Corporation NTT Group in Brief Fiscal year ended March 31, 213 / As of March 31, 213 NTT Group Regional Communications Business >> See page 34 Total Assets: Consolidated Operating Revenues: 19,653.7 billion 1,7.7 billion Number of Employees: 227,15 Consolidated Subsidiaries: 827 Principal Subsidiaries Voting rights 1% Voting rights 1% Operating Revenues: 3,658.2 billion Operating Income: Capital Investment: R&D Expenses: 92.5 billion billion billion Number of Employees: 81,3 Consolidated Subsidiaries: 8 Business Activities: Regional telecommunications operations in Japan and related businesses Competitors: Regional telecommunications companies, electric power company-related telecommunications companies, etc. Competitive Advantages: In the field of regional telecommunications, comprehensive strengths (reliability / stability of services and area coverage), high market share, and extensive customer base Nippon Telegraph and Telephone Corporation (Holding Company) Long Distance and International Communications Business >> See page 38 Total Assets: 7,467.9 billion Operating Revenues: billion Number of Employees: 2,9 Common Stock: billion Main Businesses: For the NTT Group as a whole, formulation of management strategies and promotion of basic research Principal Subsidiaries Voting rights 1% Voting rights 1% Mobile Communications Business Operating Revenues: 1,657.9 billion Operating Income: Capital Investment: R&D Expenses: billion billion 15.6 billion Number of Employees: 33,45 Consolidated Subsidiaries: 27 Business Activities: Long-distance telecommunications operations in Japan, international telecommunications operations, solutions business, related businesses, etc. Competitors: Long-distance telecommunications companies, ISP companies, domestic and overseas IT services companies, etc. Competitive Advantages: In the fields of long-distance and international telecommunications, comprehensive strengths (reliability / stability of services and area coverage), extensive service lineup, including application services and cloud services, high market share, and extensive customer base >> See page 42 NTT Group in Brief Composition of Operating Revenues Percentage of simple sum of all segments (including inter-segment transactions) 12,347.4 billion Regional Communications Business 29.6% Long Distance and International Communications Business 13.4% Mobile Communications Business 36.2% Data Communications Business 1.6% Other Businesses 1.2% Principal Subsidiary Voting rights 66.6% Operating Revenues: 4,47.1 billion Operating Income: Capital Investment: R&D Expenses: billion billion billion Number of Employees: 23,9 Consolidated Subsidiaries: 181 Business Activities: Mobile phone business in Japan and overseas, related businesses, etc. Competitors: Mobile telecommunications companies, etc. Competitive Advantages: In the mobile telecommunications market, technical and R&D capabilities, as demonstrated by the LTE Xi service, network quality, service development capabilities, including partnerships with related companies, high market share, and extensive customer base NTT DOCOMO Annual Report 213 Data Communications Business >> See page Composition of Operating Income Percentage of simple sum of all segments (including inter-segment transactions) 1,189.6 billion Composition of Capital Investment 1,967. billion Regional Communications Business 7.8% Long Distance and International Communications Business 1.2% Mobile Communications Business 7.3% Data Communications Business 7.2% Other Businesses 4.5% Regional Communications Business 39.9% Long Distance and International Communications Business 7.5% Mobile Communications Business 38.3% Data Communications Business 6.2% Other Businesses 8.1% Principal Subsidiary Other Businesses Voting rights 54.2% Operating Revenues: 1,33.5 billion Operating Income: Capital Investment: R&D Expenses: 85.8 billion billion 12.1 billion Number of Employees: 61,35 Consolidated Subsidiaries: 217 Operating Revenues: 1,257.6 billion Operating Income: Capital Investment: R&D Expenses: 53.6 billion 16.8 billion billion Number of Employees: 27,15 Consolidated Subsidiaries: 79 Business Activities: Systems integration, network system services, etc., in Japan and overseas Competitors: IT services companies, etc., in Japan and overseas Competitive Advantages: In the IT services market, neutrality, technical capabilities and reliability, and foresight, as well as results and know-how in large-scale systems that leverage these capabilities in such fields as the public sector and finance Business Activities: Real estate, finance, construction / electric power, system development, advanced technology development, etc. NTT DATA CORPORATION ANNUAL REPORT 213 ANNUAL REPORT 213 Fiscal Year Ended March 31, 213 NTT DATA Annual Report 213 >> See page 5 33

19 Regional Communications Business Financial Results for the Fiscal Year Ended March 31, 213 IP / packet communications service revenues increased due to growth in subscriptions for FLET s Hikari, a fiber-optic access service, and Hikari Denwa, a fiber-optic IP telephone service. However, this increase was not enough to offset a decline in fixed voice-related revenues stemming from a decrease in the number of fixed-line telephone subscriptions. Consequently, operating revenues were down 2.8% from the previous fiscal year, to 3,658.2 billion. Operating expenses decreased 3.%, to 3,565.7 billion, due in part to lower personnel expenses as a result of a smaller workforce, and to cost of services and equipment sold, and selling, general and administrative expenses. As a result, operating income was 92.5 billion, an increase of 6.5% from the previous fiscal year. Operating Revenues (Billions of yen) 5, 4, 3, , , 2, 1, Fiscal year ended March /3 213/3 2.8% Operating Income (Billions of yen) Fiscal year ended March /3 213/3 +6.5% Capital Investment (Billions of yen) 1, Fiscal year ended March /3 213/3 3.2% Number of Subscriptions for Major Services Business Environment The regional communications market is undergoing substantial changes. In broadband services, competition among carriers is intensifying, including services using fiber-optic access and those utilizing CATV. In addition, a growing range of new services leverage the capabilities of smartphones, tablets, and other mobile devices. As a result, customers are using diversifying services in new ways and there is an increased need for the offloading of mobile traffic to fixed networks due to growing mobile data traffic. Basic Business Policy NTT East and NTT West are working to enhance the broadband environment and expand customer use of fiber-optic services by providing services and products that utilize nextgeneration networks (NGN) and by offering billing plans that foster customer retention. In addition, NTT East and NTT West endeavor to provide high-quality, stable universal Number of Fixed-Line Broadband Service Subscriptions in Japan (Millions of subscriptions) (%) End of year / month 29/3 21/3 211/3 212/3 213/3 FTTH DSL CATV FTTH market share: NTT East and NTT West (right scale) Sources: MIC, TCA services while taking steps to further increase the stability and strength of their management foundations. NTT East and NTT West strive to assure the reliability of their networks as social infrastructure through such activities as the rapid restoration of service in the event of a large-scale natural disaster or other emergency The number of FLET s Hikari subscriptions reached 17.3 million as of March 31, 213, an increase of.74 million from a year earlier. In the fiscal year ending March 31, 214, we are targeting an increase of 1. million subscriptions, to 18.3 million at year-end. The number of Hikari Denwa channels reached million, and the number of FLET S TV subscriptions was 1. million. In addition, the number of subscriptions for Remote Support Service, which provides remote responses to a broad range of customer inquiries concerning all aspects of broadband services, reached 4.53 million, an increase of.23 million from a year earlier. FLET S Hikari (FTTH) +.74 million (Millions of subscriptions) subscriptions End of year / month Trend in FLET S Hikari ARPU Basic monthly charges declined due to the uptake of economical billing plans and discount services. Consequently, FLET S Hikari ARPU declined 6 at NTT East, to 5,84, and 7 at NTT West, to 5,86. On the other hand, the ARPU from value-added services increased due to the growth of Hikari Denwa, Remote Support Service, and other services. Moving forward, NTT East and NTT West will continue working to maintain and expand ARPU through growth in value-added services. NTT East (Yen) 8, 6, 4, 2, Fiscal year ended / ending March /3 212/3 213/3 214/3 (Forecast) 5,58 1,32 4,26 5,74 1,45 4,29 5,88 5,9 5,84 1,57 4,31 Hikari Denwa (Millions of channels) 1,62 4,28 1,7 4,14 5,7 29/3 21/3 211/3 212/3 213/3 214/3 (Forecast) 2 1 End of year / month million channels 8% 84% 88% 9% /3 212/3 213/3 214/3 (Forecast) 1,79 3, Number of channels Percentage of FLET S Hikari users * Number of Hikari Denwa channels divided by number of FLET S Hikari subscriptions multiplied by 1. FLET S TV (Millions of subscriptions) End of year / month (Yen) 8, 6, 4, 2, Fiscal year ended / ending March NTT West 5, /3 212/3 213/3 214/3 (Forecast) 1,33 4, ,78 1,46 4, ,89 5,93 5,86 1,58 4,31 Remote Support Service (Millions of subscriptions) 1,65 4,28 1,71 4,15 5,77 29/3 21/3 211/3 212/3 213/3 214/3 (Forecast) End of year / month /3 212/3 213/3 214/3 (Forecast) 1,72 4,5 Regional Communications Business 34 Basic monthly charges Value-added services * Please see page 131 for the ARPU calculation method and other details. Basic monthly charges Value-added services 35

20 Regional Communications Business Business Development Initiatives to Advance Fiber-Optic and IP-Related Services Solutions Business Initiatives Expansion of Service Menus NTT East and NTT West worked to disseminate and expand convenient, high-value added services that meet diverse customer needs, as well as to enhance and strengthen billing plans. To promote new subscriptions for FLET S Hikari, NTT East began the Omoikkiri Wari discount campaign for new customers. This campaign, which is designed to promote new subscriptions, featured the largest discounts ever offered by NTT East on monthly service charges. In addition, NTT East began to offer Ninen-wari, a discount plan that is conditional upon 24 consecutive months of use, for multipledwelling units in addition to single-dwelling units. NTT West began to offer FLET S Hikari Next Super High-Speed Type Hayabusa, a fiber-optic broadband service with a maximum transmission speed of 1 Gbp. NTT West also began to offer Hikari Motto Motto Wari, a billing plan that provides discounts on monthly charges for FLET S Hikari Next depending on the number of years of subscription, under the condition of continuous use within the applicable discount period. These initiatives had a certain degree of results in attracting new customers and limiting cancellations. Expanding Opportunities to Use Hikari (FTTH) through Wi-Fi In response to the growing use of smartphones and tablets, NTT East and NTT West began to offer FLET S Hikari Wi-Fi Access, an Internet connection service for small multipledwelling units, such as apartment buildings. With this service, multiple customers can access the Internet by sharing a wireless LAN that is connected to the fiber-optic network. In addition, NTT East worked in cooperation with the shopping district association in Jiyugaoka, Tokyo, to establish a Wi-Fi area in front of the station and in the shopping district, enabling shopping district information to be sent to smartphones and other devices. Furthermore, working in conjunction with local governments and tourism associations in Yamanashi Prefecture, Miyagi Prefecture, and other areas, NTT East established Wi-Fi environments that enable the growing number of tourists from overseas to access tourismrelated information on their smartphones. NTT West, in conjunction with Fukuoka City, is taking steps to contribute to increased convenience and bolstered information provision capabilities, such as establishing free Wi-Fi environments at train stations, airports, and tourist information centers. Going forward, NTT East and NTT West will further expand their links with local communities, distribute coupons through Wi-Fi, and enhance support for store owners who distribute coupons. In this way, NTT East and NTT West will strive to increase usage value for both users and store owners and to encourage the regular use of Wi-Fi. NTT East and NTT West conducted efficient and effective marketing activities to meet the needs of regional customers through the use of ICT. These initiatives were implemented in such fields as municipal services, medicine, and education, with a focus on industry-specific solutions that have been developed based on each industry s unique characteristics and trends. Initiatives for Municipalities After the Great East Japan Earthquake, many municipalities expressed a need to back up their important data in remote locations. In response, NTT East and the NTT West Group are leveraging their data centers in all 47 prefectures to offer new services that address these growing needs for Business Continuity Planning (BCP). These include a service to backup customer data and a service to lease virtual servers on the cloud to customers. NTT East and the NTT West Group are increasing sales of these kinds of cloud services, which are useful in BCP to companies and municipalities that want to ensure that their important systems are operated in a secure and safe manner. Initiatives in Medicine In consideration of the growing interest in the use of ICT to share information among medical institutions, NTT East launched a medical information sharing system that gathers the electronic medical records of different medical institutions in chronological order. This system uses ICT to contribute to seamless cooperation among regional medical institutions. The NTT West Group is providing networks, data centers, and cloud services to medical institutions and the health care industry. These initiatives address the pressure on hospital management from the increasing sophistication and complexity of medical information systems and the need to protect patient information from a variety of risks, such as natural disasters. Initiatives in Education NTT East and the NTT West Group are working with information solutions for educational institutions at all levels, such as boards of education and universities. For elementary schools and junior high schools, NTT East and the NTT West Group are offering a school administration support system that reduces the administrative burden on teachers and is building an ICT environment for education that realizes new styles of learning. For universities, NTT East and the NTT West Group are taking steps to establish an environment for the use of ICT on campuses, such as providing academic systems using the cloud. Moving forward, NTT East and the NTT West Group will aggressively take steps to further expand usage, such as offering solutions to meet growing needs for cloud-based services. Regional Communications Business 36 in Dep th One reason for the lack of progress in the use of ICT in business, especially by small and medium-sized businesses, is that many customers do not have full-time IT specialists. NTT East offers Office Marugoto Support, which provides centralized support for customers from installation to operation, so that even customers that do not have any IT staff can use these services in a worry-free manner. In addition, in February 213 NTT East announced a collaborative project with Microsoft Japan and Dell Japan. This project will offer one-stop solutions under which the latest operating systems, applications, and cloud services from Microsoft Japan and the fiber-optic broadband services and support services from NTT East are to be provided together through Dell Japan s newest PCs and tablets. In this way, NTT East expects to be able to expand sales of FLET S Hikari to businesses and to generate stable revenues through maintenance and operations. Enhancement of Support Services for Corporate Customers OS / Applications / Cloud Devices Questions frequently asked by shareholders and investors With mobile broadband expanding and becoming faster, what is the outlook for the fixed-line business? Operating revenues continue to decline, due in part to lower fixed-line voice revenues. What are the results forecasts? The uptake of smartphones is a factor, and the pace of net additions in fixed-line broadband has tapered off from previous levels. Nonetheless, fixed-line broadband is superior in terms of communications quality and capacity, and in the future we expect fixed-line to be used for the 4K ultra high-definition video service and to handle the offloading of mobile traffic, which is growing rapidly. In addition, by uncovering demand among small and medium-sized businesses, we will continue working to expand our user base. Looking ahead in the domestic market, where competition is intense, we believe that it will be possible to secure profits by increasing efficiency in investments and operations. Specifically, we will work to increase facility efficiency by simplifying networks and thereby reducing construction and operating costs. Also, through such measures as consolidating operations, we will aim for more-efficient operational administration with a smaller workforce. In addition, we will reevaluate sales methods with a focus on cost-effectiveness. 37

21 Long Distance and International Communications Business Financial Results for the Fiscal Year Ended March 31, 213 For the fiscal year ended March 31, 213, operating revenues in the Long Distance and International Communications Business segment were 1,657.9 billion, a decrease of 1.2% from the previous fiscal year. This decline was due in part to a decrease in fixed voice-related revenues, which offset growth in revenues stemming from an increase in the number of consolidated subsidiaries and expansion in the number of subscriptions for video services. Operating expenses were 1,536.7 billion, a decrease of 1.6% from the previous fiscal year, due to a reduction in costs resulting largely from an increase in administrative efficiency. Consequently, operating income was billion, an increase of 4.% from the previous fiscal year. Operating Revenues Operating Income Capital Investment (Billions of yen) 2, 1, ,5 1,657.9 (Billions of yen) (Billions of yen) , 5 1.2% 5 +4.% 6 3.2% Fiscal year ended March /3 213/3 Fiscal year ended March /3 213/3 Fiscal year ended March /3 213/3 Number of Subscriptions for Major Services Due to the uptake of mobile broadband and other factors, the total number of subscriptions to OCN and Plala fixed-line ISP services declined 28 thousand from the previous fiscal year, to million. However, Hikari TV, a video distribution service, registered favorable growth in the number of subscriptions, which were up 45 thousand, to 2.45 million. In the fiscal year ending March 31, 214, NTT Communications will work to further expand sales of Hikari TV and promote customer retention programs, targeting the achievement of three million subscriptions. OCN Plala Hikari TV Long Distance and International Communications Business 38 Business Environment In the global ICT market, growth in past years has been led by the United States, and in the future the United States is expected to continue to record a high rate of growth. In addition, substantial growth is also expected in emerging countries, such as in the Asia-Pacific region. To capture ICT growth potential, market players are implementing a range of strategic initiatives in countries and regions around the world, centered on measures to enhance broadband platforms and promote the use of ICT. Against this backdrop, competition is intensifying on a global level. Basic Business Policy By optimizing the allocation of functions and responsibilities at the global level, NTT Communications is working to develop service, sales, and operational capabilities that are competitive in global markets. In the corporate market, NTT Communications is providing total ICT outsourcing services on a global basis. These services are a combination Global ICT Market (Billions of US$) 5, 4, 3, 2, : Average Annual Growth Rate Worldwide: +3.6% U.S. +4.% Asia Pacific 1, +6.9% Japan 1.8% Year Japan Asia Pacific United States Canada Latin America Western Europe Central-Eastern Europe Middle East, Africa Source: Gartner, Gartner Market Databook, 2Q13 Update Ken Newbury et al. 28 June 213 The Gartner Report(s) described herein, (the Gartner Report(s) ) represent(s) data, research opinion, or viewpoints published, as part of a syndicated subscription service, by Gartner, Inc. ( Gartner ), and are not representations of fact. Each Gartner Report speaks as of its original publication date (and not as of the date of this annual report) and opinions expressed in the Gartner Report(s) are subject to change without notice. of cloud services, networks, data centers, applications, security, and other services. In the consumer market, NTT Communications is working to enable new lifestyle offerings for its customers by providing highly convenient applications and content. (Millions of subscriptions) End of year / month Awards Received /3 212/3 213/3 214/3 (Forecast) NTT Communications initiatives in the fields of cloud and network services have been highly evaluated in Japan and overseas, resulting in the receipt of many awards, including those outlined below. Dimension Data has also been widely recognized and has received more than 3 awards, including Enterprise Partner of the Year and Private Cloud Partner of the Year from Microsoft Corporation. 6th Cloud Ranking Award (Nikkei Computer, March 7, 213 issue) NTT Communications selected as one of the Best Brands (6th consecutive selection since the 1st Cloud Ranking). Five services were selected as Best Services in five divisions, including Biz Hosting in the Cloud Platform Service (Iaas / PaaS) Division. (Millions of subscriptions) End of year / month /3 212/3 213/3 214/3 (Forecast) (Millions of subscriptions) End of year / month 1st Business Cloud Comprehensive Evaluation (MM Research Institute, announced February 19, 213) NTT Communications Biz Hosting was ranked No. 1, with an overall rating of AAA. Out of a total of six categories, the highest evaluation was received in five: basic functions, service functions, network, reliability, and operational support /3 212/3 213/3 214/3 (Forecast) Telecom Asia Awards 213 (Telecom Asia Group, received April 17, 213) NTT Communications was selected for Best Cloud-Based Service as a result of high marks earned for innovativeness for the world s first enterprise cloud service deploying network virtualization technology. NTT Communications was selected as Best Asian Telecom Carrier based on high evaluations of its innovation, financial performance, and market leadership, and other factors as a telecommunications carrier. 39

22 Long Distance and International Communications Business Business Development Initiatives Implemented by the NTT Communications Group Dimension Data Group Initiatives 4 Enhancing the Cloud Platform NTT Communications has worked to enhance the cloud platform in accordance with its Global Cloud Vision, which was formulated in October 211. For example, in June 212 NTT Communications began the global provision of Biz Hosting Enterprise Cloud. This service for corporate customers can be used even for enterprise management systems, which require the highest degree of security and reliability, and it is the world s first cloud service that utilizes network virtualization technology not only within data centers but also on networks between data centers. The benefits of using network virtualization technology include the ability to configure network equipment as needed on the same day the request is made via the customer portal, in comparison with the several days that were required under previous systems. This service was available at 1 bases in eight countries as of July 213, and plans call for it to be expanded to 11 bases in nine countries by the end of 213. NTT Communications is also providing Biz Hosting Cloud n, a simple, low cost public cloud service that is suitable for web applications. Plans call for the number of overseas bases offering this service to be steadily expanded while new functions are added. Moreover, NTT Communications continues to expand its data centers in Japan and overseas. New data centers have been launched in Singapore and Malaysia, and in Japan construction work has been completed on one of the largest data centers in the Tokyo metropolitan area. The number of data centers had surpassed 14 as of July 213. These new facilities are demonstrating favorable sales trends, with many data centers sold out during the reservation stage. Going forward, NTT Communications will further expand its core data centers, which are the cornerstone of its cloud platforms. For example, in May 213 new data centers were opened in Hong Kong and the United Kingdom. Expansion of Global Network Services NTT Communications began operating the Asia Submarinecable Express (ASE), a submarine cable with the lowest latency level in the industry. ASE links major Asian cities, such as Japan, Singapore, and Hong Kong. Moreover, NTT Communications obtained a license necessary for providing telecommunications services in Vietnam, and launched a data network service for corporate customers to provide inter-office connections within Vietnam. In these ways, NTT Communications worked to enhance its highly reliable global network platform. Highly Reliable, Low Latency, Large Capacity Submarine Cable ASE* Hong Kong route began operating in February 213 Hong Kong Malaysia Singapore Japan The Philippines PC-1 To the U.S. ASE began operating in August 212 * ASE: Asia Submarine-cable Express Development of IP-Related Services Through Hikari TV, a video distribution service, NTT Communications began to provide Hikari TV Book, a service that enables e-books to be enjoyed on a TV, and Hikari TV Music, a music distribution service that allows unlimited listening at a flat rate. Also, Hikari TV Game, Japan s first cloud game service for TVs, was launched in June 213. Through these services, NTT Communications has worked to enhance content, expand new sales, and promote customer retention. In addition, for corporate customers, the Arcstar IP Voice service, which provides corporate customers with inexpensive and stable quality voice communications service, was launched in August 212. With this service, voice communications are converted to IP and integrated into data communication circuits, lowering communication network cost and operational burden. Dimension Data worked to reinforce its cloud business, centered on the Cloud Solution Business Unit, which was established in 211. Leveraging the technologies and know-how of OpSource, which became a subsidiary in June 211, Dimension Data is implementing global development of a comprehensive managed cloud platform. Dimension Data s in Dep th Questions frequently asked by shareholders and investors On a non-consolidated basis, NTT Communications continues to record declining revenues. What is the future outlook? How are you implementing operational cooperation between NTT Communications and Dimension Data? Hong Kong Financial Data Centre cloud revenues doubled in the year to December 212, and its cloud business customer base grew to more than 2, companies. In the future, leveraging the global customer base cultivated through the system integration business, Dimension Data will aggressively advance its cloud services in this growing market. In May 213, NTT Communications opened the Hong Kong Financial Data Centre in the Tseung Kwan O Industrial Estate in Eastern Kowloon. With a total gross floor area of more than 7, square meters, this data center is one of the Group s largest. The design includes redundancy for all facilities, including power source, air conditioning, and electricity supply route, making the center resistant to natural disasters. In this way, the Hong Kong Financial Data Centre offers the industry s highest level of reliability. In addition, the Asia Submarine-cable Express (ASE) is linked directly to the server room. Accordingly, customers can use a low latency, low cost dedicated line service linking the center with major cities in Asia. The center is located near the Hong Kong stock exchange, and inquiries have been received from many companies, centered on financial institutions that conduct high-frequency financial product transactions and other operations where microseconds make a difference. In the future, the Hong Kong Financial Data Centre will be used as an important base for cloud services. NTT Communications non-consolidated operating revenues are expected to continue to decline due to decreasing voice revenues. NTT Communications Group companies, however, are active in growth fields, such as global, cloud, and video services. In the future, the NTT Communications Group will strive to increase revenues as a whole by steering these growth businesses onto the right course and increasing the revenues of subsidiaries. The two companies are making joint proposals in regard to network construction and the procurement and installation of related equipment. In Dimension Data s IT outsourcing services, a cooperative sales system has been established to engage in a range of activities, such as reselling NTT Communications networks and data centers. Also, when there are issues in customer service, we respond quickly by sharing, in real time, the operational status of the services and equipment provided by each company. In these ways, we have reinforced our cooperation at the operational level as well. Long Distance and International Communications Business 41

23 Mobile Communications Business Financial Results for the Fiscal Year Ended March 31, 213 Voice revenues declined, due in part to the influence of the Monthly Support discount program. However, packet communications revenues and equipment sales revenues increased, and growth was recorded in new business fields. As a result, operating revenues in the Mobile Communications Business segment were 4,47.1 billion, an increase of 5.4% from the previous fiscal year. As a result of costs involved in the expansion of new businesses as well as an increase in the cost of equipment sold due to growth in sales of smartphones, operating expenses were 3,633.7 billion, a rise of 8.% from the previous fiscal year. As a result, operating income was billion, a decline of 4.6% from the previous fiscal year. Operating Revenues (Billions of yen) 5, 4,24. 4,47.1 4, 3, 2, 1, Fiscal year ended March /3 213/3 +5.4% Operating Income (Billions of yen) 1, Fiscal year ended March /3 213/3 4.6% Capital Investment (Billions of yen) 1, Fiscal year ended March /3 213/3 +3.7% Number of Subscriptions for Major Services Mobile phone subscriptions at year-end were million, an increase of 1.41 million from the previous fiscal year-end. We will strive to achieve 63.4 million subscriptions at the end of March 214. The number of LTE Xi subscriptions grew rapidly, rising to million at year-end, 5.2 times the year-earlier level. Accordingly, LTE Xi subscribers accounted for about 6% of all smartphone users. NTT DOCOMO s smartphone sales campaigns were successful, and the number of units sold rose 5.7%, to million. Mobile Phone Subscriptions Net Additions and Churn Rate Smartphone Sales Mobile Communications Business Xi achieved 1 million subscriptions 42 Business Environment Japan s mobile telecommunications market is undergoing dramatic change, due in part to the rapid adoption of smartphones and the growth of social networking services (SNS). With the smartphone market continuing to expand, the competition among mobile phone carriers remains intense, and consumers are actively utilizing the mobile number portability (MNP) system. On the other hand, the uptake of smartphones and data communications devices has led to rapid growth in data traffic. As a result, the carriers continue working to reinforce their high-speed mobile network infrastructure technologies, such as LTE, while increasing public wireless LAN access points to facilitate data offloading. Basic Business Policy To help provide consumers and businesses with safety and security, as well as convenience and efficiency, NTT DOCOMO worked to further increase the speed of Xi (pronounced crossy ), an LTE service that facilitates high-speed, large-capacity communications, and to expand the Xi service areas. We also worked to enhance our Xi-compatible handset lineup. In these ways, we endeavored to increase smartphone Number of Mobile Phone Subscriptions in Japan (Millions of subscriptions) (%) End of year / month /3 21/3 211/3 212/3 213/3 Subscriptions (left scale) NTT DOCOMO s market share (right scale) Source: TCA research (Number of subscriptions for certain companies are from financial results presentation materials) 48.5 convenience. In addition, NTT DOCOMO introduced a range of billing plans and improved after-sales services in order to provide its customers with a customer-friendly environment for the use of smartphones and LTE services. We also took steps to create new value and to expand business in new fields through cooperative ventures with alliance partners and industry / service convergence initiatives (Millions of subscriptions) End of year / month Mobile Communications Service Revenues and Aggregate ARPU* 1 While voice revenues decreased by billion from the previous fiscal year, due mainly to the influence of the Monthly Support discount program, packet revenues* 2 increased by 19.3 billion. The mobile phone aggregate ARPU was 4,84, a decline of 3. This decline was attributable to a decrease of 47 in voice ARPU. On the other hand, packet ARPU increased by 1 due to growth in the number of smartphone users. Smart ARPU rose by 7, due in part to growth in d market revenues. (Billions of yen) 4, 3, , 2, 1, , , , ,546. 1,91.5 3, , , , , , , , , ,99. 29/3 21/3 211/3 212/3 213/3 214/3 (Forecast) Fiscal year ended / ending March 31 Voice revenues /3 212/3 213/3 214/3 (Forecast) mova (2G) Xi (LTE) FOMA (3G) Packet revenues (Millions of subscriptions) (%) 1,956. 1,34. *2 From the fiscal year ended March 31, 213, the definition of items comprising packet communications has been changed. Packet revenues for the fiscal year ended March 31, 29 and thereafter have been restated to reflect this change End of year / month % % % 211/3 212/3 213/3 214/3 (Forecast) Net additions (left scale) Churn rate (right scale) Mobile Communications Service Revenues (Millions of units) End of year / month (Yen) 8, 6, 4, 2, /3 212/3 213/3 214/3 (Forecast) 5, Aggregate ARPU 2,38 3, ,35 2,45 2, ,7 5, ,54 2,53 2,59 2,2 4, ,69 1,73 4, /3 21/3 211/3 212/3 213/3 214/3 (Forecast) Fiscal year ended / ending March 31 Voice ARPU Packet ARPU Smart ARPU 2,72 1,34 *1 Please see page 132 for the ARPU calculation method and other details. Packet ARPU from the fiscal year ended March 31, 29 to the fiscal year ended March 31, 211 includes amounts corresponding to smart ARPU. 43

24 Mobile Communications Business Business Development Initiatives to Reinforce the Smartphone User Base Activities for New Value Creation 44 Boosting Handset Competitiveness / Enhancing Handset Lineup Accompanying growth in the number of LTE Xi users, NTT DOCOMO shifted the focus of its handset lineup to Xi-compatible smartphones and took steps to help users make the most of services that leverage the distinctive capabilities of smartphones. These included the development of high-capacity batteries that can accommodate high levels of power consumption and the introduction of quad-core CPUs that facilitate high-speed processing. In addition, we followed a sales strategy of thoroughly focusing on the appeal of highly competitive, advanced handsets, which we introduced as our recommended devices. We also developed a lineup of handsets that are easy to use, even for people who are using a smartphone for the first time. In this way, we worked to expand the portfolio of smartphone users. Accelerating LTE Xi Service Development NTT DOCOMO is working to enhance the network environment to ensure customers can enjoy its services comfortably. For example, NTT DOCOMO expanded the Xi service area, centered on major cities throughout Japan, and achieved population coverage of approximately 77% at the end of March 213. Moving forward, NTT DOCOMO will continue taking steps to meet customer needs and expand the Xi service area. The communications speed of the Xi service was further increased in 13 cities around Japan (as of the end of June 213), and ultra-high-speed communications services were launched. These services offer a maximum downlink transmission speed of Mbps, the highest in Japan. During the fiscal year ending March 31, in Dep th Enhancing Billing Plans To respond to the diverse needs of users, NTT DOCOMO introduced new flat-rate billing plans and discount promotions. The key drivers of the increase in Xi subscriptions were the NTT DOCOMO Family Set Discount, which offers discounts when multiple family members purchase handsets at the same time, and a campaign of limited-time discounts on the basic monthly charges for customers who purchase a smartphone compatible with LTE Xi. Other plans also contributed to the growth in Xi subscriptions. These included a flatrate voice plan offering 24-hour unlimited domestic voice calls to other NTT DOCOMO subscribers and a low-cost flat-rate packet communications plan for customers who do not use video and other rich content on a daily basis. Moving forward, NTT DOCOMO will continue working to establish a framework that offers ease-of-use for customers without adversely affecting profitability, while at the same time maintaining a balance between handset sales prices and communications charges. 214, NTT DOCOMO plans to achieve a maximum downlink transmission speed of 15 Mbps. LTE Xi Service Area Development Prefectural capital-size cities Maximum throughput Fiscal year ended / ending March 31 End of March 213 Number of base stations: about 24,4 213/3 Approx. 77% 212/3 Approx. 3% Major cities Population coverage Local cities 75 Mbps Mbps 15 Mbps 212/3 213/3 214/3 (Forecast) Advancing New Development in Cloud Service Hanashite Hon yaku is a cloud service that uses mobile phones to provide instant translation of a conversation between two people speaking different languages. Its accuracy and speed have been highly evaluated in international venues, and it won the GrandPrix in the U.S. Media Panel Innovation Awards at CEATEC JAPAN 212. Shabette Concier is a free voice interface that makes it possible to operate handsets, as well as search for content, by simply speaking into a smartphone. This service also leverages NTT DOCOMO s original, leading-edge voice-recognition technologies. Shabette Concier has recorded more than 34 million uses and is contributing to growth in revenues by serving as a pathway that guides customers to a variety of fee-based services, such as d shopping. End of March 214 Number of base stations: about 5, 215/3 (Forecast) All municipalities 216/3 (Forecast) GrandPrix in the U.S. Media Panel Innovation Awards 212 at CEATEC JAPAN 212 Development of NTT DOCOMO Cloud NTT DOCOMO promoted docomo cloud, which allows customers to use their smartphones or tablets to receive convenient services that are uniquely offered by NTT DOCOMO through access to its servers on the network. On the cloud, d market offers a rich suite of digital content, such as videos, music, and e-books, as well as a variety of physical merchandise, such as groceries and daily necessities. d market recorded favorable growth, with sales increasing to 23. billion, 11.5 times the level of a year earlier. d shopping d video d music d book Efforts in New Fields NTT DOCOMO worked to create new value through cooperative ventures with other companies and through industry / Results remain sluggish in sales of mobile phone subscriptions. What are NTT DOCOMO s countermeasures for this situation? With mobile traffic increasing rapidly, will it really be possible to reduce capital investment? Questions frequently asked by shareholders and investors service convergence. For example, several companies were brought into the NTT DOCOMO Group as subsidiaries. These include Radishbo-ya, which is a pioneer in membershipbased organic vegetable home delivery operations; Tower Records Japan Inc., which has substantial brand strength in music sales; and MAGASeek Corporation, which operates one of Japan s leading e-commerce sites for fashion items. In this way, NTT DOCOMO is providing high-value-added services that leverage synergies with mobile communications. Moreover, to reinforce our service development capabilities in new business fields, we launched an incubation program, Docomo Innovation Village, to support startups and ventures. Through this program, NTT DOCOMO is supporting entrepreneurs in both tangible and intangible ways, such as the provision of office space as well as advice from specialists on management and development. This program helps to advance the development of services and business models that will expand the ways in which the mobile Internet is used. NTT DOCOMO plans to further expand its business, aiming for revenue of 1 trillion in new fields in the fiscal year ending March 31, 216. With the mobile phone market shifting from feature phones to smartphones, competition among companies to acquire customers is intensifying. In the past, NTT DOCOMO focused on offering a broad lineup of handsets to meet diverse customer needs, but from January 213 strategic models were selected from the new releases and introduced as DOCOMO s recommended handsets. With the summer models, which were announced in May 213, we streamlined our lineup and focused our efforts on two highly competitive handsets, which we presented as our Top Two models. Moving forward, in addition to changing our handset sales strategy, we will thoroughly enhance our networks and services, which are the basic elements of the communications business. Top Two models for summer 213 GALAXY S4 Xperia A Network-related capital investment will be maintained to support a steady response to the increase in data traffic resulting from growth in the number of smartphone users. Investment in 3G networks has run its course, and in the future the focus will be on LTErelated investment. In addition, NTT DOCOMO will focus on increasing efficiency in such fields as information systems and R&D. NTT DOCOMO believes it is possible to reduce overall capital investment while simultaneously increasing convenience for customers and securing a competitive edge over other companies. Mobile Communications Business 45

25 Data Communications Business Financial Results for the Fiscal Year Ended March 31, 213 Operating revenues in the fiscal year ended March 31, 213, increased 4.1% from the previous fiscal year, to 1,33.5 billion. This gain was due in part to the receipt of orders for large-scale projects and to an increase in the number of consolidated subsidiaries. On the other hand, despite efforts to reduce selling expenses, operating expenses increased 3.2% from the previous fiscal year, to 1,217.7 billion. This rise was partly due to higher expenses resulting from the increase in the number of consolidated subsidiaries. As a result, operating income was 85.8 billion, an increase of 2.% from the previous fiscal year. Operating Revenues Operating Income Capital Investment (Billions of yen) 1,5 1, , 1,33.5 (Billions of yen) (Billions of yen) % % 5 8.8% Fiscal year ended March /3 213/3 Fiscal year ended March /3 213/3 Fiscal year ended March /3 213/3 The NTT DATA Group s Composition of Sales (by segment) Global Business Provision of high-value-added IT services in overseas markets billion billion Public & Financial IT Services Provision of high-value-added IT services that support social infrastructure, including public administration, healthcare, finance, and settlement Data Communications Business 167. billion Business Environment In the domestic IT services market, the needs of customers and society are becoming increasingly diverse and sophisticated, and there is growing demand for services that enable customers to use IT assets when necessary without owning them, as well as for services that offer IT assets at lower prices and with shorter delivery periods. The number of projects in such areas as IT infrastructure integration is following a growth trend, while there is also continued demand for lower maintenance and operating costs. In addition, Japanese companies are accelerating their expansion into global markets, and IT technologies themselves have also been advanced at an overwhelming speed to match market needs. Business Domains of NTT DATA Description of Business System Integration Strategic Planning System Planning System Design and Installation System Maintenance and Facility Management Companies Engaged in Similar Types of Business NTT DATA s Strengths Accenture CSC Fujitsu HP IBM NEC Unisys Basic Business Policy In response to the aforementioned changes in the marketplace, NTT Data is working to expand its business in global markets and taking steps to provide a stable supply of diverse IT services that accommodate market changes. We continue to support the systems that comprise key infrastructure for the Japanese economy, which has been our core business. At the same time, with a worldwide perspective and operational scale, we will strive to become a true global business partner that helps customers to implement business reforms through the use of IT. Capability to construct social infrastructure systems and standard systems shared within an industry, based on the NTT Group s neutrality Track record in the construction of large-scale systems, including national projects Project management capabilities enabling the leadership of multiple vendors as the main contractor Capability to construct multi-vendor systems that can accommodate any hardware brand Provision of a full line of services, from consulting to operations and maintenance Global support capabilities, with overseas bases in 34 countries and regions Network System for Settlement (Settlement) None Considerable competitive edge in network systems for payment settlement Ability to address diversified customer needs, including needs for public clouds and (Cloud) community clouds Cloud Computing Google salesforce.com Full line of services, including ASP security, and data centers Consulting Accenture Capgemini IBM PwC System consultation capabilities based on system construction capabilities, and strategic IT planning know-how Solutions & Technologies Provision of platforms and solutions that support cutting-edge IT services From the fiscal year ended March 31, 213, NTT DATA transitioned to a system of four segments through the addition of a new segment Global Business to the three existing segments: Public & Financial IT Services, Enterprise IT Services, and Solutions & Technologies. Ranking of the World s IT Service Vendors The NTT DATA Group aims to be a Global Top 5 player in the IT services market by the fiscal year ending March 31, 216. Ranking Vendor 211 Net Sales ($ millions) 1 IBM 6,33 2 Hewlett-Packard 35,72 3 Accenture 25,394 4 Fujitsu 23,56 5 CSC 16,29 6 NTT DATA 13,749 7 Capgemini 13,481 8 Lockheed Martin 13,55 9 Xerox 12,687 1 Oracle 12,65 Ranking Vendor 31.1 billion Enterprise IT Services Provision of high-value-added global IT services that support manufacturing, distribution, services, media, communications, and other business activities 212 Net Sales ($ millions) Growth (%) ( ) 1 IBM 58, Hewlett-Packard 34, Accenture 26, Fujitsu 23, CSC 15, NTT DATA 13, Xerox 13, Capgemini 13, Oracle 12, Hitachi 12, System Support Various IT service vendors Operation and maintenance know-how accumulated through the provision of large-scale systems More than 2 support bases throughout Japan Source: Gartner Market Share IT Services, 212, 29 March

26 Data Communications Business Business Development Management Policies Status of Business Activity Expansion of New Fields and Reinforcement of Product Competitiveness The NTT DATA Group worked to expand its business in the provision of solutions for the reduction of IT costs, such as cloud computing and Application Management Outsourcing (AMO). In addition, the NTT DATA Group worked to advance and diversify its services for customers requiring the application of IT to operations that are more sophisticated and complex. These include Big Data utilization, business analytics, and Business Process Outsourcing (BPO) of core operations. In addition, the NTT DATA Group is aggressively investing to expand new fields of business and strengthen its products, including the improvement of software production technologies, such as the automation of software development, and R&D into advanced technologies in cooperation with research institutions that are in the top class worldwide. Streamlining through the Introduction of the Global SSC Pursuit of Overall Optimization To standardize, streamline, and consolidate operations on a global level, the NTT DATA Group is taking steps to increase management efficiency through the restructuring and consolidation of the NTT DATA Group companies and organizations. Specifically, in the domestic market we have consolidated finance, human resources, procurement, and other operations, and made a full-scale launch of a Group Shared Service Center (SSC) that will facilitate the leveraging of offshore bases. Plans call for this Group SSC to be introduced by 71 companies, and 33 companies have already introduced it in the fiscal year ended March 31, 213. In addition, the roll out of the global SSC for overseas subsidiaries has commenced in Europe and North America, and steady progress is being made with consolidation into the integrated system and the use of bases in India for BPO in such areas as finance and human resources. Through these initiatives, we expect to achieve substantial cost reductions in the future, and currently progress is being made with the introduction of the Global SSC at other NTT DATA Group companies. Increase in the Number of Companies Introducing the Group SSC Public & Financial IT Services As one facet of Japan s export of infrastructure solutions, NTT DATA contracted with the Vietnamese government to develop systems for which NTT DATA will draw on its extensive knowledge of Japan s trade procedures and customs clearance systems. NTT DATA will also procure hardware for these systems. Enterprise IT Services NTT DATA established a capital tie-up with Kirin Business System Company, Limited, a subsidiary of Kirin Holdings Company, Limited. Consequently, as a reform partner we have contributed to strengthening the business competitiveness of the Kirin Group using IT and to helping the Kirin Group to enhance its competitive advantage in the food and beverage industry. Questions frequently asked by shareholders and investors Solutions & Technologies Progress was made with a service to support customer information analysis utilizing Big Data. For example, we began to provide BIZXAAS BA, a total service that extends from support for the installation of Big Data analysis platforms to consulting on analysis and utilization. Global Business We took steps to integrate and restructure overseas the NTT DATA Group companies and to unify the NTT DATA brand. We are aiming to provide local customers with meticulous services and global customers with timely services, as well as to enhance the presence of the NTT DATA brand overseas. Data Communications Business 48 in Consolidation of operations Consolidation of systems Dep th Use of the integrated system and BPO operations in the U.K. started in April 213. Plans call for the roll out to European countries, such as Italy and Germany, and to North America during the fiscal year ending March 31, 214. At the end of December 212, we launched a service for the provision of high-precision, high-value-added data based on the acquisition and accumulation of all tweet data in Japanese and all tweet data posted in Japan. The data is acquired from Twitter, of the United States. By adding original information to the tweet data, the service facilitates not only analysis of tweet data topics but also more complex analysis. Through this service, we provide the day s key topics for NHK s NEWS WEB TV program through high-speed processing and analysis of all Japanese-language tweet data for that day. Moving forward, we plan to offer consulting related to the use of tweet data and to implement individual development in line with the ways in which individual companies use the data. A high level of interest has been shown by various industries, including advertising, logistics, and finance, and the use of these services is growing. Launch of Value-Added Service Based on Twitter Data Engagement Fiscal year ended / ending March 31 Number of companies planning to introduce the Global SSC: User companies Analytics Service provision partners Data reseller 5 213/3 214/3 (Plan) Individual development / services Tweet data /3 (Plan) A number of overseas companies have been made subsidiaries. How are these companies being managed? What initiatives is the Company implementing in the automation of software development? Under the NTT DATA brand, overseas subsidiaries have been integrated and restructured based on four regions and solutions. Through the Global One Team initiative, we are sharing know-how in areas where we have special skills, such as SAP-related SI and telecommunications services. In July 212, we gathered about 3 global business leaders from 17 countries for discussions. In this way, we are engaging in activities as Global One NTT DATA, including companies that have been acquired and their human resources. Japan United States EMEA APAC China NTT DATA NTT DATA, Inc. NTT DATA EMEA Ltd. NTT DATA Asia Pacific Pte. Ltd. NTT DATA (China) Co., Ltd. NTT DATA Business Solutions Providing SAP-related and other solutions globally The previous model of software development was labor intensive, with processes extending from specification and design to programming and testing. However, progress is being made with efforts to automate these processes using computers. With many projects, we have already achieved results with the use of this development automation, such as improved quality, reduced time to completion, and lower development costs. We have already commenced trial of the actual application in customer projects, not only in Japan but also in North America. Moving forward, we will take steps to utilize this automation as a tool for business expansion in the global market. 49

27 Other Businesses Financial Results for the Fiscal Year Ended March 31, 213 Operating revenues in the fiscal year ended March 31, 213, were 1,257.6 billion, an increase of 15.5% from the previous fiscal year. This gain was due in part to an increase in the number of condominium units delivered in the real estate business and to higher revenues in the finance business. On the other hand, operating expenses were 1,24. billion, an increase of 16.6% from the previous fiscal year, due in part to an increase in expenses associated with the higher revenues and to a rise in expenses in the advanced technology development business. Consequently, operating income was 53.6 billion, a decline of 5.8% from the previous fiscal year. Operating Revenues Operating Income Capital Investment (Billions of yen) 1,5 1,89. 1, 5 1, % (Billions of yen) % (Billions of yen) % Real Estate Business Finance Business Fiscal year ended March /3 213/3 Fiscal year ended March /3 213/3 Fiscal year ended March /3 213/3 5 NTT Urban Development, which is the Group s only comprehensive real estate company, conducts real estate leasing operations, centered on office buildings and commercial facilities, and condominium operations, principally through the WELLITH brand. Leveraging the know-how acquired through these operations, NTT Urban Development is expanding into new fields of business, such as the overseas, real estate fund, and real estate solutions businesses. Construction and Electric Power Business NTT FACILITIES provides one-stop services for buildings and structures, ranging from planning, design, and construction to maintenance, operation, and upkeep. In energy operations, NTT FACILITIES helps to build optimal energy environments from a comprehensive perspective, extending from consulting to monitoring, maintenance, and improvement proposals. In construction, NTT FACILITIES combines the technical capabilities acquired as a first-class registered architect office with IT and energy technologies to contribute to increases in the asset values of buildings and structures and to stronger management foundations for customers. Advanced Technology Development Business NTT Group companies in this business segment offer design, development, maintenance, and operation as well as the provision of services backed by the advanced technologies of NTT Laboratories. These services include technology consulting backed by combinations of the latest technologies, such as network technologies, media interface processing technologies, and other advanced technologies from Japan and overseas; development, production, and sales of custom LSIs for communications use and optical devices that are indispensable in the realization of highcapacity communications networks; and total solutions related to software design / development and information / communications networks. NTT FINANCE, which is the core finance company of the NTT Group, contributes to the reinforcement of financial and operating foundations for the NTT Group through lease finance and Group finance operations. NTT FINANCE is developing leading-edge financial services in Japan and overseas, from leasing and installment sales to asset finance and project finance. From July 212, NTT FINANCE began billing and receipt operations for service and other charges for NTT East, NTT West, NTT Communications, and NTT DOCOMO. In this way, NTT FINANCE took a step forward as a Financial Solution Partner providing billing and other settlement services. System Development Business NTT COMWARE, which has core competencies in network technologies, systems and applications, and support and maintenance, is taking steps to build full IP networks which will be the foundation of broadband and ubiquitous services and to develop operation systems and application services for use in traffic control to ensure communications quality in NGNs. Through these initiatives, NTT COMWARE, is promoting the expansion and the spread of NGNs together with NTT Laboratories and other Group companies. Others etc. Business Development NTT Urban Development Corporation Advancing and Expanding Overseas Operations NTT Urban Development Corporation is advancing overseas operations as a new growth driver. In September 212, we acquired 2 Finsbury Circus, in London, and in April 213 we acquired 265 Strand, also in London. In the future, we will work to expand our stable earnings foundation by acquiring and managing investment properties in Europe and the United States, as well as by achieving increases in value through renovation and other measures. Moreover, through cooperation with local NTT Group companies in Southeast NTT FACILITIES, INC. Building Solar Power Generation Systems / Advancing the Environment Creation Business NTT FACILITIES provides large-scale solar power system solutions that combine energy operations and construction operations. We have an installation track record that is among the most extensive in Japan. As of the end of March 213, NTT FACILITIES had installed solar power generation systems in about 94 locations with a total generating capacity of more than 75 megawatts. NTT FACILITIES also offers a condominium electricity provision service. We have received high evaluations for our support for the electricity / energy conservation efforts of residents of condominium buildings in which this service has been installed. Given this performance, NTT FACILITIES received the Minister s Award from the Ministry of Economy, Trade and Industry at the Energy Conservation Grand Prize event and at the 22nd Asia and other growth markets, we will work to find business partners and to generate business opportunities through cooperative alliances with them. We will continue to implement investment targeting the generation of stable profits, and we will strive to achieve steady growth in overseas operations. 2 Finsbury Circus Grand Prize for the Global Environment Award event in February 213. In the future, NTT FACILITIES will advance the environment creation business in accordance with the keywords smart and safe towns, so that a sustainable society can be handed down to the next generation. F Sakura Solar Power Generation Facility Other Businesses 51

28 CSR and Corporate Governance CSR and Corporate Governance: Contents CSR 54 Corporate Governance 56 Directors and Corporate Auditors 6 CSR and Corporate Governance 52 53

29 CSR Guided by the NTT Group CSR Charter, NTT is committed to promoting CSR activities across the Group that meet the expectations and interests of its stakeholders. NTT Group CSR The NTT Group is advancing CSR activities to meet the expectations of the many stakeholders that are involved with the Group s business operations and to contribute to the sustainable growth of society. NTT drew up the NTT Group CSR Charter in June 26 as a basic guideline for the more active implementation of CSR activities by Group companies. We revised the Charter in June 211 to bring it in line with the ISO 26 international standard for social responsibility, which was published in November 21. The NTT Group CSR Charter comprises Our Commitment to CSR and four CSR Goals that outline specific priority aspects of our CSR activities. Safe and secure communication Communication between people and their communities Creation of a safe, secure and prosperous society through communications that serve people, communities, and the global environment Team NTT communication Communication between people and the global environment CSR Management Structure In June 25, NTT created the CSR Committee, which is chaired by a Senior Executive Vice President, to ensure the sustained and appropriate implementation of NTT Group CSR activities. The CSR Committee has two internal committees the Global Environment Protection Promotion Committee and the Social Contribution Promotion Committees Board of Directors President (Executive Officers Meeting) CSR Committee Global Environment Protection Promotion Committee Social Contribution Promotion Committee Corporate Ethics Committee Business Risk Management Committee Committee. In this way, the CSR Committee is advancing CSR in a systematic, ongoing manner. To coordinate CSR activities across the whole Group, Group CSR Liaison Meetings are also held periodically for the discussion of common issues and the sharing of information on successful initiatives. Group CSR Liaison Meetings CSR promotion working groups Listed on Socially Responsible Investment (SRI) Index NTT has been highly rated by SRI evaluation organizations. As of April 1, 213, we were listed on the Ethibel Sustainability Index (ESI) EXCELLENCE Global (Belgium), an international SRI index. 54 NTT Group CSR Charter Our Commitment As a leader of the information and telecommunications industry, the NTT Group is committed to providing reliable, high-quality services that contribute to the creation of a safe, secure and prosperous society through communications that serve people, communities, and the global environment. NTT Group CSR Priority Activities Our CSR Goals CSR Priority Activities Quantitative indicators (Fiscal year ending March 31, 214)* 1 Communication between people and their communities Communication between people and the global environment Safe and secure communication Team NTT communication 1. We shall strive to create a richer and more convenient communications environment, and utilize our technology to contribute to the resolution of the various issues faced by societies with aging and declining populations. 2. We shall strive both to reduce our own environmental impacts and build environment-friendly forms of communications, and to provide information and communications services that help to reduce the impact of society as a whole on the global environment. 3. While striving earnestly to ensure information security and resolve telecommunications-related social issues, we shall do our utmost to provide a safe and secure user environment and contribute to the creation and future development of communication culture. 4. Fully recognizing the role that telecommunications plays as critical infrastructure supporting society and protecting our livelihoods, we shall strive to offer secure and reliable telecommunications services fortified to withstand disasters and capable of connecting people irrespective of time, location, and other circumstances. 5. As Team NTT, we pledge to apply the highest ethical standards and awareness of human rights to our business duties, striving to fulfill our mission to society by working for the creation of pleasant workplaces, personal growth, and respect for diversity, and for the further development of a flourishing and vibrant community. * Team NTT comprises all NTT Group employees, including temporary employees, contract employees, employees of our corporate partners, and also former employees who endorse the NTT Group s CSR activities. In accordance with the NTT Group CSR Charter, we are working to make a unified contribution to addressing social issues both within Japan and overseas. To that end, in November 28 we established the eight NTT Group CSR Priority Activities, which are implemented in common by Group companies. Since that time, each Group company has set annual targets in line with the CSR Priority Activities. The Group companies have achieved steady progress by implementing PDCA cycle management to reach these targets while mutually confirming each other s progress. Furthermore, from the fiscal year ended March 31, 212, we began to establish quantitative indicators for each customers Contributing to a sustainable society Number of launches of products or services that through the provision of value to contribute to a sustainable society* 2 priority activity in order to further facilitate links between CSR initiatives and business Creating a low carbon society Reduction of CO 2 emissions* 3 operations and to clarify links between the priority activities with business planning indicators. In the fiscal year ended Implementing closed loop recycling Waste product reduction* 3 Paper resource reduction* 3 March 31, 213, we completed the Conserving biodiversity Common qualitative initiatives for ecosystem preservation and forest improvement activities* 3 establishment of the quantitative indicators for all eight of the priority activities. Ensuring information security Number of employees receiving information security training In the future, we will advance integrated Ensuring stable and reliable services as critical infrastructure Stable service provision ratio* 2 Number of major accidents* 2 Group initiatives by contributing to the resolution of social issues through the use of ICT, our core business. Activities that contribute to respect for Ratio (number) of women in managerial positions diversity and equal opportunity Corporate citizenship activities Number of participants in Operation Clean Environment (local community cleanup) Number of PET bottle caps collected *1 Plans call for actual results of quantitative indicators in the fiscal year ended March 31, 213, to be reported in the NTT Group CSR Report 213, which is scheduled for publication in fall 213. *2 Items for which the establishment of quantitative indicators commenced in the fiscal year ending March 31, 214. *3 Initiatives targeting the fiscal year ending March 31, 221. CSR 55

30 Corporate Governance Basic Philosophy Ensuring Sound Management / Conducting Appropriate Decision-Making and Business Activities As the holding company of the NTT Group, NTT believes that raising the effectiveness of corporate governance is an important management issue for meeting the expectations of various stakeholders, including shareholders and other investors, as well as customers, business partners, and employees, and Overview of Corporate Governance Structure for maximizing corporate value. Accordingly, NTT is working to strengthen corporate governance based on its fundamental policies of ensuring sound management, conducting appropriate decision-making and business activities, clarifying accountability, and maintaining thorough compliance. Board of Directors NTT maintains a Board of Directors with 12 members, including two outside directors. In principle, the Board of Directors meets once per month to make decisions and report on important management issues. In addition, extraordinary meetings are held as needed. The Board of Directors makes decisions on matters stipulated by law and, as the holding company that supervises and coordinates the NTT Group, on important matters related to company management and Group management. Moreover, through such means as periodic reports from directors on the status of business execution, the Board of Directors supervises the business execution of directors. Form Company with board of corporate auditors Number of directors 12 Of which, number of outside directors 2 Of which, independent directors 2 Term of office for directors 2 years Number of corporate auditors 5 Of which, number of outside corporate auditors 3 Functions of the Board of Directors The Board of Directors makes decisions on matters stipulated by law and, as the holding company that supervises and coordinates the NTT Group, on important matters related to company management and Group management. In addition, the Board of Directors supervises the business execution of directors. Decisions on important matters The important corporate matters to be decided are, in principle and in advance, discussed by the Executive Officers Meeting, which includes the President, Senior Executive Vice Presidents, Executive Vice Presidents, and relevant directors. Frequency of meetings of the Executive In principle, meetings of the Executive Officers Meeting are held about once a week. Officers Meeting Framework for increasing transparency One corporate auditor also participates in the Executive Officers Meeting. of decision-making Discussions regarding the management strategies of NTT Group companies Audit firm Names of Certified Public Accountants conducting auditing in the fiscal year ended March 31, 213 Status and details of non-audit services Committees have been created under the Executive Officers Meeting to discuss specific issues related to the management strategies of NTT Group companies. These committees, which are held as necessary throughout the year, are in principle chaired by the President or a Senior Executive Vice President, and are attended by relevant directors. KPMG AZSA LLC Toshiharu Kawai, Hiroto Kaneko, and Atsuji Maeno Executive Officers Meeting and Committees The important corporate matters to be decided are, in principle and in advance, discussed by NTT s Executive Officers Meeting. In principle, meetings of the Executive Officers Meeting are held about once a week. To improve the transparency of management decision-making, one corporate auditor participates in the Executive Officers Meeting. In Board of Corporate Auditors NTT uses the Board of Corporate Auditors system of corporate governance. The Company believes that an auditing system based on the establishment of a Board of Corporate Auditors and the conduct of audits by the members of that board, including outside members, is an effective means of supervising management. Accordingly, NTT chose the Board of Corporate Auditors system. The Board of Corporate Auditors, has a total of five members (two internal members and three outside members, one of whom is a woman). The corporate auditors attend important meetings, such as addition, committees have been created under the Executive Officers Meeting to discuss specific issues related to the management strategies of NTT Group companies. These committees, which are held as necessary throughout the year, are in principle chaired by the President or a Senior Executive Vice President, and are attended by relevant directors. meetings of the Board of Directors, and conduct appropriate audits regarding the status of business execution by the directors. They work closely with the Independent Auditor, such as periodically exchanging information on audit plans and audit results, to bolster the audit system. Furthermore, the Board of Corporate Auditors members exchange information with the Internal Control Office, such as receiving reports on the results of internal audits. The Board of Corporate Auditors also conducts audits in partnership with the Board of Corporate Auditors members of NTT Group companies. Corporate Governance 56 Corporate Governance Structure (Including an Outline of the Internal Control System) NTT (Holding company) Election / removal Appointment and Board of Directors Compensation Committee Election / removal and supervision President Instruction, reporting 取締役会 (Executive Officers Meeting) Instruction, reporting, etc. Committees Business sections The Company asks KPMG AZSA LLC to perform non-audit services. (Provision of guidance and advice in relation to International Financial Reporting Standards (IFRS)) General Meeting of Shareholders CSR Committee Corporate Ethics Committee Technology Strategy Committee Investment Strategy Committee Finance Strategy Committee Business Risk Management Committee U.S. Sarbanes-Oxley Act Internal Control Committee, etc. Internal Audit Audit Election / removal Cooperation Accounting Audit Election / removal Board of Corporate Auditors Independent Auditor Internal Control Office Group companies Outside Directors and Outside Corporate Auditors NTT has elected two outside directors to strengthen the function of supervising the fairness of business execution. Each of the outside directors has a wealth of experience, either as operational director of an educational institution or as a corporate manager, and a high level of integrity and insight. NTT believes that the outside directors will help strengthen the Outside Directors Outside Corporate Auditors Company s supervisory function in business execution and expects to incorporate the advice they provide from their wide-ranging managerial perspective. In addition, the Company expects that the three outside corporate auditors will conduct future audits based on the specialized experience and insight that they have gained through their careers. Name Reason for Selection Mr. Katsuhiko Shirai has a wealth of experience as operational director of an educational institution and a high level of Katsuhiko Shirai integrity and insight. The Company believes that he will help strengthen its supervisory function in business execution and expects to incorporate the advice he provides from his wide-ranging experience and his managerial perspective. Mr. Sadayuki Sakakibara has a wealth of experience as a corporate manager, and a high level of integrity and insight. Sadayuki Sakakibara The Company believes that he will help strengthen its supervisory function in business execution and expects to incorporate the advice he provides from his wide-ranging experience and his managerial perspective. Mr. Toru Motobayashi has worked for many years in law-related occupations, and the Company expects that he will Toru Motobayashi conduct future audits based on the knowledge and insight that he has gained through his career. Ms. Michiko Tomonaga has worked for many years as a Certified Public Accountant, and the Company expects that she Michiko Tomonaga will conduct future audits based on the knowledge and insight that she has gained through her career. Mr. Seiichi Ochiai has been serving for many years as a university professor specializing in the study of law, and the Seiichi Ochiai Company expects that he will conduct future audits based on the knowledge and insight that he has gained through his career. 57

31 Corporate Governance Policies Concerning the Compensation of Directors and Corporate Auditors Defining Accountability In regard to matters concerning the compensation of directors, in order to improve objectivity and transparency, NTT established the Appointment and Compensation Committee, comprised of four directors, including two outside directors, and such matters are decided by the Board of Directors after deliberation by this committee. Compensation of directors (excluding outside directors) consists of a base salary and a bonus. The base salary is paid monthly on the basis of the scope of each director s roles and responsibilities. The bonus is paid taking into account NTT s business results for the current term. Also, directors make monthly contributions of at least a certain amount for the purchase of NTT shares through the Director Shareholders Association, to reflect NTT s medium-and long-term business results in compensation. Purchased shares are owned by the directors during their terms of office. In order to maintain a high level of independence, compensation of outside directors consists of a base salary only, and is not linked to NTT s business results. Compensation of corporate auditors is determined by resolution of the Board of Corporate Auditors and consists of a base salary only, for the same reasons as those cited above with respect to outside directors. Total Compensation of Directors and Corporate Auditors Position Number of persons Monthly compensation Bonuses Total compensation Directors (Excluding outside million 9 million 54 million directors) Corporate Auditors (Excluding outside 3 74 million 74 million corporate auditors) Total million 9 million 579 million (Notes) 1. Compensation amounts shown above include compensation paid to five directors and one corporate auditor who retired as of the end of the 27th Ordinary General Meeting of Shareholders held on June 22, upper limits on total compensation of directors and corporate auditors were set at 75 million annually for directors and 2 million annually for corporate auditors at the 21st Ordinary General Meeting of Shareholders held on June 28, In addition to the above, 15 million is to be paid as executive bonuses to eight directors who also hold executive management positions. NTT strives to maintain appropriate, timely, and fair information disclosure and is aware that obtaining proper corporate valuations in the market through such disclosure is essential. Accordingly, NTT conducts presentations on financial results and promptly discloses information on the NTT website to clarify the NTT Group s accountability to stakeholders. NTT s IR activities are outlined below: Regular Presentations Held for Analysts and Institutional Investors NTT conducts financial results presentations every quarter. At the presentations, the President or a Senior Executive Vice President explains business results and other matters. In addition to the live streaming of presentations over the Internet, NTT conducts various activities, including individual meetings with analysts and institutional investors worldwide. Presentation for analysts and institutional investors Presentations Held for Individual Investors In the fiscal year ended March 31, 213, NTT held presentations for individual investors in nine locations, including Tokyo, Osaka, and Nagoya. In the fiscal year ending March 31, 214, NTT plans to further increase the number and scope of these presentations. IR Materials Posted on Website NTT posts various IR-related materials on its website. Examples of these materials include annual financial results and other financial information, press releases, Yuho (marketable securities reports), quarterly reports, notices of convocation for Ordinary General Meetings of Shareholders, financial data, presentation materials (including video streaming), stock information, and Q&As. 58 Establishment and Promotion of Risk Management Framework The NTT Group faces a rapidly changing business environment, including intensified competition in the information and telecommunications sector. In this context, NTT Group companies are exposed to an increasing amount of business risk. The NTT Group strives to minimize the impact of losses that could result from the materialization of risk by anticipating and preventing the occurrence of potential risks. As part Internal Control Systems NTT has established a basic policy on the maintenance of an internal control system for the NTT Group through a resolution of the Board of Directors to put in place a structure for ensuring the appropriate execution of duties within each Group company, while continuing efforts to establish further rules and systems related to internal controls based on the abovementioned basic policy. In terms of ensuring the reliability of internal control over financial reporting based on the U.S. Sarbanes-Oxley Act and Japan s Financial Instruments and Exchange Law, the NTT of these efforts, NTT has formulated a standard manual and distributed it to all Group companies so that the entire Group can work together to conduct risk management. In addition, each Group company has formulated its own manuals and other guidelines, which reflect its specific business operations, business environment, and other factors. These materials are used to control business risks. Group is working to document business processes and conduct repeated tests to provide reasonable assurance as to the effectiveness of internal control over financial reporting. NTT s Internal Control Office plays a primary role in monitoring the status and verifying the effectiveness of internal controls across the Group as a whole through such measures as conducting standardized audits that target all Group companies and checking the status of progress of internal audits in each Group company, as well as leading efforts to improve the Group s internal control systems. Basic Policy on the Maintenance of an Internal Control System for the NTT Group (Board of Directors Resolution) 1. NTT maintains a system of internal controls, including measures for the prevention and minimization of losses, to ensure compliance with applicable laws, appropriate risk management, and proper and efficient business operations. 2. To maintain the internal control system outlined above, NTT has established an Internal Control Office to oversee the establishment and maintenance of rules and structures. This body also evaluates the effectiveness of the internal control system and makes necessary system revisions by conducting audit reviews and coordinating audits of high-risk matters common to Group companies. 3. NTT also takes appropriate measures to ensure the reliability of its internal control system based on the U.S. Sarbanes-Oxley Act Sections 32 (disclosure controls) and 44 (internal control relating to financial reporting). 4. As the Chief Executive Officer, the President is responsible for ensuring the establishment, maintenance, and operation of the system of internal controls. Regular Presentations Held for Overseas Investors NTT explains its business results and other matters by conducting overseas road shows several times a year, wherein the President or a Senior Executive Vice President participates. Ensuring Compliance NTT Group Corporate Ethics Charter Recognizing that it is imperative to conduct business in compliance with laws and regulations, and maintain high ethical standards in order to promote sound corporate activities, NTT drew up the NTT Group Corporate Ethics Charter in November 22. The Charter, which applies to all officers and employees of the NTT Group, lays out the basic principles of corporate ethics and provides specific guidelines for ethical behavior. Ethics Education and Awareness Surveys To ensure the effectiveness of the NTT Group Corporate Ethics Charter, NTT Group companies offer training sessions on corporate ethics and CSR to employees, and conduct surveys to monitor employee awareness. By conducting Help Line To prevent dishonesty and misconduct, each company has in place a system for employees to file reports on ethical issues. The NTT Group has also established a Groupwide Corporate Ethics Help Line to enable employees to file reports outside their company if required. NTT Group IR website Shareholders Newsletter NTTis... The stipulations in the guidelines are intended to remind everyone of their duty as members of an information and telecommunications group which bears significant responsibility to society in terms of preventing dishonesty, misconduct, and the disclosure of corporate secrets, as well as refraining from exchanging excessive favors with customers and suppliers, and ensuring that they conduct themselves according to the highest ethical standards in both private and public activities. surveys of regular employees, as well as temporary and contract staff, every year, the NTT Group is working to raise awareness of corporate ethics and CSR among its workforce. In line with Japan s Whistleblower Protection Act, which came into force in April 26, and other laws, the NTT Group also accepts reports from companies outside the Group that do business with the NTT Group. Corporate Governance 59

32 Directors and Corporate Auditors As of June 3, 213 Directors Director and Chairman of Board of Directors Satoshi Miura Representative Director and President, Chief Executive Officer Hiroo Unoura Representative Directors and Senior Executive Vice Presidents Yasuyoshi Katayama In charge of technical strategy; in charge of risk management; Chief Technology Officer; and Chief Information Officer Hiroki Watanabe In charge of business strategy; Chief Financial Officer; and Chief Compliance Officer Director and Executive Vice President Hiromichi Shinohara Director of Research and Development Planning Department; and in charge of international standardization Directors and Senior Vice Presidents Yoshikiyo Sakai Director of Finance and Accounting Department Mitsuyoshi Kobayashi Director of Technology Planning Department; and Director of Strategic Business Development Division Akira Shimada Director of General Affairs Department; and Director of Internal Control Office, General Affairs Department Hiroshi Tsujigami Director of Corporate Strategy Planning Department Tsunehisa Okuno Director of Global Business Office Outside Directors Katsuhiko Shirai Sadayuki Sakakibara Back row Front row Tsunehisa Okuno Director and Senior Vice President Akira Shimada Director and Senior Vice President Hiroki Watanabe Representative Director and Senior Executive Vice President Yoshikiyo Sakai Director and Senior Vice President Hiroo Unoura Representative Director and President, Chief Executive Officer Hiromichi Shinohara Director and Executive Vice President Satoshi Miura Director and Chairman of Board of Directors Mitsuyoshi Kobayashi Director and Senior Vice President Yasuyoshi Katayama Representative Director and Senior Executive Vice President Hiroshi Tsujigami Director and Senior Vice President Outside Directors Katsuhiko Shirai E xecutive Advisor for Academic Affairs of Waseda University C hairperson of the Foundation for the Open University of Japan Director of Japan Display, Inc. Sadayuki Sakakibara C hairman of the Board, Chief Executive Officer and Representative Member of the Board of Toray Industries, Inc. Director of Mitsui O.S.K. Lines, Ltd. Director of Hitachi, Ltd. Directors and Corporate Auditors 6 61

33 Directors and Corporate Auditors Corporate Auditors Michiko Tomonaga Corporate Auditor Financial SectionFinancial Section Kiyoshi Kosaka Corporate Auditor Toru Motobayashi Corporate Auditor Yoshitaka Makitani Corporate Auditor Seiichi Ochiai Corporate Auditor Background of Outside Corporate Auditors (As of June 3, 213) Toru Motobayashi Lawyer Outside Director of Hitachi, Ltd. O utside Corporate Auditor of Sumitomo Life Insurance Company Michiko Tomonaga Certified Public Accountant Outside Corporate Auditor of Keikyu Corporation O utside Corporate Auditor of the Corporation for Revitalizing Earthquake-Affected Business Seiichi Ochiai Professor of Chuo Law School Emeritus Professor of the University of Tokyo O utside Director of Meiji Yasuda Life Insurance Company Outside Auditor of Ube Industries, Ltd. Directors and Corporate Auditors Financial Section: Contents 62 Message from the Board of Corporate Auditors NTT s Board of Corporate Auditors comprises three outside corporate auditors, who have experience and knowledge in a range of fields as a lawyer, CPA, and university professor and two inside corporate auditors. In addition, two of the corporate auditors have extensive knowledge concerning finance and accounting matters. Each corporate auditor attends meetings of the Board of Directors and other important meetings. In addition, corporate auditors meet periodically with the representative directors to exchange ideas and opinions and hold discussions on various topics with the directors, etc. In this way, the corporate auditors grasp the status of the performance of directors duties and provide their opinions as needed. Moreover, separate from meetings of the Board of Corporate Auditors, meetings of the Corporate Auditors Preliminary Deliberation Meetings are held, in principle, each week. These meetings, which are attended by all corporate auditors, provide a venue for the sharing of information. For example, at these meetings the corporate auditors listen to explanations from corporate officers of matters to be discussed at the Executive Officers Meeting. In regard to on-site audits, the corporate auditors receive information from the presidents of major subsidiaries in Japan and overseas regarding the status of internal control and initiatives to maintain and enhance corporate governance, and discussions are conducted on those matters. The corporate auditors of NTT work in cooperation with the corporate auditors of principal subsidiaries. NTT s corporate auditors receive annual reports regarding audit results from the corporate auditors of principal subsidiaries and exchange opinions with them. In addition, the corporate auditors have opportunities to listen to talks given from a specialist viewpoint by outside experts and by in-house executives. In this way, NTT is implementing initiatives that contribute to enhancing the auditing activities of each corporate auditor. In addition, the corporate auditors periodically exchange opinions with the Independent Auditor and the Internal Control Office. The corporate auditors also receive explanations of audit plans and reports on the status of internal control systems and provide opinions and advice as needed. To support the corporate auditors, the Company has established the Auditor s Office, which has four staff members who work full time in assisting the corporate auditors in the performance of their duties. In this way, the Company has established a flexible system for the support of the corporate auditors. Through these types of activities, the corporate auditors support the sound, sustained growth of the Company and its subsidiaries in Japan and overseas, from an independent perspective that differs from that of executives. In addition, the corporate auditors strive to maintain and enhance corporate governance by strengthening the corporate governance system on a Groupwide basis, which has become increasingly important in recent years, and by fostering a thorough awareness of compliance matters. 1-Year Financial Summary 64 Operating and Financial Review and Prospects 68 Consolidated Balance Sheets 84 Consolidated Statements of Income and Consolidated Statements of Comprehensive Income 86 Consolidated Statements of Changes in Equity 87 Consolidated Statements of Cash Flows 88 Notes to Consolidated Financial Statements 89 Report of Independent Registered Public Accounting Firm 13 Reference Information 131 Consolidated Subsidiaries 133 NIPPON TELEGRAPH AND TELEPHONE CORPORATION Annual ANNuAL REPORT Report