Operations in Review. Contents. NTT Group in Brief 042. Regional Communications Business 044

Transcription

1 Operations in Review Contents NTT Group in Brief 42 Regional 44 Long Distance and International 48 Mobile 52 Operations in Review Data 56 Other es 6 4 NIPPON TELEGRAPH AND TELEPHONE CORPORATION ANNUAL REPORT

2 NTT Group in Brief, 214 / As of, 214 NTT Group Total Assets: 2,284.9 billion Regional See page 44 Consolidated Operating Revenues: 1,925.2 billion Number of Employees: 239,75 Consolidated Subsidiaries: 946 Principal Subsidiaries 1% 1% Operating Revenues: 3,572.3 billion Operating Income: Capital Investment: R&D Expenses: billion billion 17.9 billion Number of Employees: 75,838 Consolidated Subsidiaries: 67 Activities: Regional telecommunications operations in Japan and related businesses Competitors: Regional telecommunications companies, electric power company-related telecommunications companies, etc. Competitive Advantages: In the fi eld of regional telecommunications, comprehensive strengths (reliability / stability of services and area coverage), large market share, and extensive customer base Nippon Telegraph and Telephone Corporation (Holding Company) Total Assets: 7,32.1 billion Long Distance and International See page 48 Operating Revenues: 43.8 billion Number of Employees: 2,85 Common Stock: billion Main es: For the NTT Group as a whole, formulation of management strategies and promotion of basic research Principal Subsidiaries 1% 1% Operating Revenues: 1,89.9 billion Operating Income: Capital Investment: R&D Expenses: billion billion 16.1 billion Number of Employees: 38,69 Consolidated Subsidiaries: 339 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 fi elds of long-distance and international telecommunications, comprehensive strengths (reliability / stability of services and area coverage), extensive service lineup, including application services and cloud services, large market share, and extensive customer base Composition of Operating Revenues Percentage of simple sum of all segments (including intersegment transactions) Other es 1.6% Data 1.7% Mobile 35.6% 12,515.8 billion Composition of Operating Income Regional 28.5% Long Distance and International 14.5% Mobile Principal Subsidiary 66.6% Data Operating Revenues: 4,461.2 billion Operating Income: Capital Investment: R&D Expenses: billion 73.1 billion 12. billion Number of Employees: 24,86 Consolidated Subsidiaries: 195 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, large market share, and extensive customer base See page 52 NTT DOCOMO Annual Report 214 See page 56 NTT Group in Brief Percentage of simple sum of all segments (including intersegment transactions) Other es 4.7% Data 5.7% Mobile 68.3% 1,196. billion Regional 1.6% Long Distance and International 1.7% Principal Subsidiary 54.2% Operating Revenues: 1,343.9 billion Operating Income: Capital Investment: R&D Expenses: 67.9 billion billion 12.8 billion Number of Employees: 75,2 Consolidated Subsidiaries: 263 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, reliability, and foresight, as well as results and know-how in large-scale systems that leverage these capabilities in such fi elds as the public sector and fi nance NTT DATA CORPORATION Annual Report 214 Composition of Capital Investment Other es 8.% Data 7.8% Mobile 37.1% 1,892.8 billion Regional 38.2% Long Distance and International 8.9% Other es Operating Revenues: 1,328.5 billion Operating Income: 56.1 billion Capital Investment: 15.7 billion R&D Expenses: 125. billion Number of Employees: 25,969 Consolidated Subsidiaries: 82 Activities: Real estate, fi nance, construction / electric power, system development, advanced technology development, etc. See page 6 42 NIPPON TELEGRAPH AND TELEPHONE CORPORATION ANNUAL REPORT

3 Regional Financial Results for the Fiscal Year Ended, 214 IP / packet communications service revenues increased due to growth in subscriptions for FLET S Hikari and Hikari Denwa. However, this increase was not enough to offset a decline in fi xed voice-related revenues stemming from a decrease in the number of fi xed-line telephone subscriptions. As a result, operating revenues were down 2.4% from the previous fi scal year, to 3,572.3 billion. Operating expenses decreased 3.4%, to 3,445.1 billion, due in part to lower personnel expenses as a result of a smaller workforce, to lower depreciation and amortization expenses as a result of increased investment effi ciency, and to increased effi ciency in selling, general and administrative expenses. Consequently, operating income was billion, an increase of 36.9% from the previous fi scal year. Operating Revenues 5, 4, 3, 2, 1, 3, , /3 214/3 2.4% Operating Income /3 214/ % Capital Investment 1, /3 214/3 8.% Number of Subscriptions for Major Services The number of FLET S Hikari subscriptions reached 18.5 million as of, 214, an increase of.75 million from a year earlier. The number of Hikari Denwa channels reached million, an increase of 1.9 million, and the number of FLET S TV subscriptions was 1.16 million, an increase of.16 million. In addition, the number of subscriptions for Remote Support Service, which offers remote support over the customer s phone to provide responses to a broad range of customer inquiries concerning all aspects of broadband services, reached 4.6 million, an increase of 7 thousand from a year earlier. FLET S Hikari (FTTH) Hikari Denwa FLET S TV Remote Support Service Environment and Basic Policy The information and communications technology (ICT) market is undergoing structural changes that transcend the conventional market framework. These changes include the advance of broadband, the uptake of fi xed-mobile convergence services, progress in cloud computing and smart TV development, and the market uptake of smartphones and tablets compatible with high-speed wireless and Wi-Fi technologies. The regional communications market is also undergoing signifi cant change. In broadband services, including fi beraccess and CATV services, competition among telecommunications operators is intensifying. In addition, an expanding variety of new services are utilizing a broad range of Wi-Ficompatible handsets, and as a result, customers are using diversifying services in new ways. There is also an increased need for the offl oading of mobile traffi c to fi xed networks due to growing mobile data traffi c. Telecommunications operators are taking steps to differentiate themselves from competitors by developing a variety of billing plans and expanding FTTH usage through such initiatives as alliances with other companies. In this challenging, rapidly changing business environment, NTT East and NTT West are working to expand their lineups of fi ber-access service billing plans that are easy to use and support customer retention. Key steps include the Number of Fixed-Line Broadband Services Subscriptions in Japan (%) FTTH DSL CATV (left scale) FTTH market share: NTT East and NTT West (right scale) Source: MIC /3 211/3 212/3 213/3 214/3 promotion of fi ber-access and IP-related services, such as offering a wider range of opportunities to use Hikari (FTTH) through Wi-Fi. In addition, NTT East and NTT West are working to advance alliance business using ICT services in a wide range of fi elds and are striving to enhance the broadband and ubiquitous service environment while expanding the range of customers using fi ber-access services Trend in FLET S Hikari ARPU* ARPU from basic ly charge declined due to the uptake of discount services for long-term users. However, ARPU from value-added services increased, due largely to growth in the number of subscriptions for Hikari Denwa and Remote Support Service. Consequently, FLET S Hikari ARPU was 5,66 at NTT East and 5,83 at NTT West. * Please see page 123 for the ARPU calculation method and other details. (Yen) 8, 6, 4, 2, Fiscal year ended / ending NTT East 212/3 213/3 214/3 215/3 5, ,45 4, million subscriptions ,88 1,57 4, ,92 5,86 5,66 1,64 4,28 (Millions of channels) 212/3 213/3 214/3 215/3 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 1,72 4,14 1,77 3,89 5,5 1,8 21/3 211/3 212/3 213/3 214/3 215/ % % million channels 9% 91% , /3 213/3 214/3 215/3 (Yen) 8, 6, 4, 2, Fiscal year ended / ending.86 NTT West 5, ,46 4, million subscriptions ,89 1,58 4, ,94 5,88 5,83 1,65 4,29 212/3 213/3 214/3 215/3 1,73 4,15 1,8 4,3 5,74 1,84 21/3 211/3 212/3 213/3 214/3 215/ million subscriptions ,9 Regional Basic ly charges Value-added services Basic ly charges Value-added services 44 NIPPON TELEGRAPH AND TELEPHONE CORPORATION ANNUAL REPORT

4 Regional Initiatives and Overview Initiatives to Advance Fiber-Access and IP-Related Services Solutions Initiatives Expansion of Service Menus NTT East began to offer FLET S Hikari Next Prio, a fi beraccess service for corporate customers. This service features a maximum communication speed of 1 Gbps and priority bandwidth that ensures stable communications even when traffi c is congested. NTT East also launched FLET S Azukeru for customers that use FLET S Hikari. This service enables customers to use Internet online storage to save and share data on their smartphone or tablet, such as photos and video. FLET S Azukeru increases convenience for users, such as by enabling them to view stored data from a mobile device when they are away from their PC. NTT West took steps to enhance its services that use FLET S Hikari, such as the launch of FLET S Smart Pay, a simple and easy-to-install payment service that will help support stores. Driving Growth in Subscriptions through Billing Plan Initiatives NTT East began to offer the Single & Family Support Discount service, which promotes communication among in DEPTH In collaboration with T-MEDIA HOLDINGS Co., Ltd., NTT East began to offer TSUTAYA Stick, a smart TV device that enables customers to view TSUTAYA TV, a video distribution service, via FLET S Hikari. As a result, customers can now easily view their favorite movies and dramas on their home TV using the Internet. NTT West introduced FLET S de ALSOK, a security service that it co-developed with SOHGO SECURITY SERVICES CO., LTD. (ALSOK). This residential service utilizes cameras equipped with sensors and devices such as PCs or smartphones. When the camera installed in the house detects an intruder, notifi cation is automatically sent to the smartphone or other device. In these ways, NTT East and NTT West are working to expand the use of FLET S Hikari among a wider range of customers through alliances with a variety of other companies. families that include single-person households. This service is for households that already use FLET S Hikari and have a family member living alone, such as a student or someone living apart from their family for work-related reasons, who starts to use FLET S Hikari. The service offers discounts on ly usage fees for customers who pay for two FLET S Hikari Next lines on a single bill. In this way, NTT East is working to expand the number of subscriptions by making it easier for people living alone to use FLET S Hikari. To secure new subscriptions for FLET S Hikari, NTT West launched Donto Wari, a billing plan that offers a discount on FLET S Hikari ly charges for up to two years after the start of the subscription. In addition, NTT West began to offer Web Hikari Motto 2 Wari, which offers additional benefi ts for new applications made over NTT West s website. NTT West has already received a large number of applications for these services, which are expected to have the effect of increasing net additions in the future. Expanding the Use of FLET S Hikari through Collaboration with Other Operators TSUTAYA Stick in use FLET S de ALSOK in use Residence Wi-Fi (wireless LAN can also be used) In-room surveillance Camera equipped with dedicated FLET S de Alsok sensor Purchase / video replay Wi-Fi router Confirm the status of the room prior to returning home If motion is detected in the room, an image of the room is automatically sent to the smartphone or other device TSUTAYA TV distribution server Wi-Fi router Wi-Fi environment supporting greater than 8 Mbps (recommended) Content server Remote control Smartphone Center server Optical fiber In-room surveillance Outside location Internet Smartphone or other device 3G circuit / Wi-Fi NTT East and NTT West provided a variety of solutions to assist large companies, small and medium-sized companies, and municipalities to resolve their management issues. These solutions are centered on Biz Hikari Cloud services. Initiatives for Companies and Municipalities As a new service in the Biz Hikari Cloud lineup, NTT East introduced Biz Hikari Cloud Anpi Kakunin Service, which enables customers to confi rm the safety of employees and others in the event of a large-scale disaster. This service is provided from a cloud platform installed in data centers that can withstand a very severe earthquake registering 6-plus on the Japanese seismic scale. As a result, even in the event of a large-scale disaster, customers do not have to worry about being able to confi rm safety and make emergency contact. NTT West commenced fi eld trials of the Community Participation Hazard Map Creation Service as one facet of the Smart Hikari Town Kumamoto project, which NTT West is implementing in collaboration with the prefecture and city of Kumamoto. NTT West added Community Disaster Prevention Hazard Maps to the Biz Hikari Cloud service lineup. Through the use of the cloud, this service facilitates the simple creation and sharing of disaster prevention maps from consumers homes. In addition, NTT West took steps to contribute to the realization of worryfree, safe, and convenient lifestyles through the use of ICT. In collaboration with municipalities and companies, NTT West began to offer the Senior Citizen Life Support Service, which offers telephone-based services for senior citizens, such as services that provide FAQ How are NTT East and NTT West using their real estate holdings? What specific initiatives are being implemented to reduce costs and capital investment? Questions frequently asked by shareholders and investors consultation, keep watch over senior citizens, and introduces and acts as an agent for services that resolve daily issues. Initiatives in Medicine In the provision of integrated patient care by multiple hospitals and clinics, collaboration among a region s medical institutions has become increasingly important. Accordingly, NTT East began to offer Biz Hikari Cloud Future Clinic 21 Warp, an electronic medical records service for medical institutions. This service, which facilitates the simple use of electronic medical records, has limited initial introduction costs and offers free operability that maintains the sensation of handwriting. In addition, the data in the electronic medical records is centrally managed at data centers, which means that it is also protected in the event of disasters and crisis management. In these ways, the Biz Hikari Cloud Future Clinic 21 Warp service contributes to increasing convenience for medical institutions. Initiatives in Education NTT East and NTT West are providing cloud-based school administration support systems that reduce the administrative burden for school personnel and boards of education at elementary and junior high schools. NTT East started to provide Biz Hikari Cloud School Administration Support System, an administration support system for elementary and junior high schools. NTT West is providing Biz Hikari Cloud Community School Administration Support. The provision of administration support services through the cloud has resulted in economical initial introduction cost and shorter times for system delivery, making the services easy to use. These services are also contributing to the reduction of TCO and the activation of communications. Due to workforce reductions, streamlining of telecommunications facilities, and other measures, NTT East and NTT West have a growing number of idle buildings. NTT East and NTT West are taking steps to make full use of their real estate holdings, such as leasing them to companies inside and outside the NTT Group for use as offi ce space or stores. In the future, NTT East and NTT West will develop these activities by stepping up leasing outside of the NTT Group. We are taking steps to reduce costs, such as increasing productivity in each area of operations through visualization initiatives, advancing IT systems, bringing work that had been outsourced back within the Group, and reevaluating the outsourcing process. In addition, we are also working to increase efficiency in capital investment. To that end, we are cutting the cost of laying optical transmission lines by increasing construction projects that do not require the dispatch of NTT employees and consolidating redundant network-related equipment. Regional 46 NIPPON TELEGRAPH AND TELEPHONE CORPORATION ANNUAL REPORT

5 Long Distance and International Financial Results for the Fiscal Year Ended, 214 For the fi scal year ended, 214, operating revenues in the Long Distance and International segment were 1,89.9 billion, an increase of 9.2% from the previous fi scal year. A decline in voice-related revenues was offset by higher systems integration revenues, the acquisition of data center operators, and other factors. On the other hand, operating expenses were 1,682.4 billion, a rise of 9.5% from the previous fi scal year, due to higher revenue-linked expenses, an increase in the number of consolidated subsidiaries, and foreign exchange rate fl uctuations, which offset a reduction in costs resulting largely from an increase in administrative effi ciency. Consequently, operating income was billion, an increase of 5.1% from the previous fi scal year. Operating Revenues Operating Income Capital Investment 2, 1, ,5 1, , % % % 213/3 214/3 213/3 214/3 213/3 214/3 Number of Subscriptions for Major Corporate Services NTT Communication is stepping up its initiatives for growth businesses in the global and cloud areas. Under the Global Cloud Vision announced in October 211, NTT is striving to contribute to the management reforms of its corporate clients through the provision of seamless ICT outsourcing services. Consequently, the number of customers using cloud services has nearly doubled from 2,4 to 4,7 in just one year. Environment and Basic Policy The global economy is following an overall recovery trend, with the U.S. market posting a solid recovery and business conditions in Europe bottomed out. In this economic environment, many companies around the world are taking steps to further strengthen their competitiveness and advancing aggressive management initiatives, such as entering new markets and investing in new growth fi elds, and there is a need for fl exible yet strong ICT platforms to support those management initiatives. In addition to industrially developed countries, growth in the ICT market is also expected in emerging countries, centered on the Asia-Pacifi c region. With average annual growth projected at 3.2% from 213 to 218, increased investment is anticipated. In consideration of this operating environment, NTT is implementing a variety of initiatives to become a truly leading player (Global ICT Partner) that customers around the world select as their optimal business partner. In the corporate market, NTT works to provide seamless, total ICT outsourcing services on a global basis. When customers move their ICT systems to the cloud / data centers, NTT offers these global-standard services that leverage the unique strengths of a telecommunications operator to provide optimal Global ICT Market (Based on End-User Spending) (Billions of US$) 5, 4, 3, 2, 1, Year : Average annual growth rate Worldwide: +3.2% Asia-Pacific +5.% Japan +.6% Japan Asia-Pacific United States Canada Latin America Western Europe Central-Eastern Europe Middle East, Africa Source: Gartner, Gartner Market Databook, 2Q14 Update Ken Newbury, et al. 23 June 214 Chart created by NTT based on Gartner data. combinations of networks, voice and other applications, and security. In addition, Dimension Data provides a wide range of services to customers, such as ICT infrastructure solutions that can be used worldwide, systems integration, IT outsourcing, and ITaaS services. In the consumer market, NTT is working to propose new lifestyle offerings for its customers by providing highly convenient applications and abundant content. Number of Customers Using Cloud Services (Biz Hosting Enterprise Cloud / Cloud n ) 6, 4, 2, 2,4 4,7 213/3 214/3 Number of Subscriptions to Networking Services (VPN) (Arcstar Universal One) /3 214/3 Number of Subscription Devices for Managed Security Services (WideAngle) 1, 7,5 5, 2,5 7,3 8,5 213/3 214/3 Number of Subscriptions for Major Consumer Services Due in part to intensifi ed competition with other operators, the total number of subscriptions to OCN and Plala fi xed-line ISP services was million, a year-on-year decline of 16 thousand subscriptions. In the fi scal year ending, 215, we will aim to achieve an increase of 42 thousand subscriptions through strengthened sales initiatives. The number of subscriptions to Hikari TV, a video distribution service, reached 2.82 million, an increase of 37 thousand subscriptions. Moving forward, NTT will work to further expand its customer base through enhanced content and the advance of smart TVs. OCN Plala Hikari TV Long Distance and International 212/3 213/3 214/3 215/3 212/3 213/3 214/3 215/3 212/3 213/3 214/3 215/3 48 NIPPON TELEGRAPH AND TELEPHONE CORPORATION ANNUAL REPORT

6 Long Distance and International Initiatives and Overview Initiatives Implemented by the NTT Group Dimension Data Group Initiatives Enhancing the Cloud Platform For Biz Hosting Enterprise Cloud, a private cloud service for corporations, NTT began to offer On-Premises Connection Option, the world s fi rst cloud migration service that uses network virtualization technologies. This service offers customers a smooth migration from on-premises environments to the cloud. In addition, NTT added two new bases in Australia and Germany to expand its service provision area to 11 bases in 9 countries and regions around the world. In data center services, aiming to standardize quality at a global level and to further enhance the level of services, NTT established the Nexcenter brand. Under this brand, NTT began to offer services at four data centers in the fi scal year ended, 214 the Tokyo No. 6 Data Center, the Hong Kong Financial Data Center, the U.K. Slough 2 Data Center, and the India Bangalore 2 Data Center. In April 214, we began to offer services at the Cyberjaya 4 Data Center in Malaysia. In addition, in January 214 NTT made RagingWire, of the United States, a subsidiary. In these ways, NTT is addressing demand for cloud services by substantially expanding its data centers in Japan and overseas. Expansion of Network Services To meet the demand for high-quality, highly reliable IP backbones, NTT expanded its Global IP network, a global ISP service, with the establishment of new connection points in six cities across four countries, including Jakarta. In addition, NTT expanded the service area for Arcstar Universal One, a network service for corporate clients, from 16 countries and regions to 196 countries and regions. Global IP Network Europe Asia Europe 18G Asia Developing Applications and Content Services To enhance cloud services that support reforms in working styles, NTT expanded Biz Mail, a cloudbased mail service. The additions included an environment that enables the secure use of mail from a mobile device when out of the offi ce and the capability for scheduler cooperation. In addition, NTT began to offer Biz Group Work, an SNS for corporate clients that is optimized to activate internal and external communications and increase effi ciency in project management. Hikari TV, a video distribution service, has also been highly evaluated as a comprehensive entertainment service that enables customers to enjoy multi-channel broadcasts, VOD and other video services, Japan s fi rst cloud game service, music distribution, e-books, and shopping. Development of Voice Communication Services NTT took steps to improve the quality and enhance the functionality of 5 plus, which enables customers to easily make IP telephone calls by installing a specialized application on their smartphone. Users can now exchange text messages with one another and outgoing voice calls are automatically adjusted. For corporate clients, NTT introduced a new platform for Arcstar UCaaS, a cloud-based communication service, in Europe and the United States. In this way, NTT has established a foundation for the global, speedy provision of low-latency, high-reliability communications services. In addition, NTT began to offer Web Telephone Book, which enables business telephone books to be managed on the cloud, for 5 plus for Biz and Arcstar UCaaS. Asia US 835G North America US Europe 33G Dimension Data, which has bases in 58 countries and regions, offers a wide range of services that can be used worldwide, including ICT infrastructure solutions and network communications, end user computing, security, and data centers. In 213, Dimension Data reformed its marketing system and advanced effi cient, effective proposal activities. In addition, to address customer needs related to the change in DEPTH NTT offers Biz Hosting Enterprise Cloud, a cloud service for corporate customers that can be used even for enterprise management systems, and Biz Hosting Cloud n, a low-cost, highly expandable public cloud service. Biz Hosting Enterprise Cloud is the world s fi rst cloud service to utilize network virtualization technology. As a result, it offers advanced selfmanagement capabilities, including not only server resources but also network resources. With this service, global ICT resources integrated into the cloud can be managed in an integrated manner through the customer portal. In addition, Biz Hosting Enterprise Cloud FAQ What are the medium-term objectives of the Dimension Data Group? Global Cloud Services that Address Diverse Needs Questions frequently asked by shareholders and investors from system investment (on premises) to system usage (cloud), Dimension Data is strengthening its skills in the provision of comprehensive cloud services. Dimension Data is also working to maintain and enhance its profi tability by conducting upfront investment in growth fi elds, such as the cloud and ICT outsourcing, and taking aggressive steps to increase effi ciency and reduce costs in non-core businesses. Customer Portal Possible to add / change ICT resources on-demand offers an abundant menu of security and other options and is also compatible with hybrid use involving on-premises servers. Biz Hosting Cloud n can be used at a low cost with an upper limit on ly charges. Offering more than 3 APIs, this service facilitates the instant setup of virtual servers on an as-needed basis while simultaneously reducing customer application utilization. By offering a lineup of two types of cloud services that leverage the distinctive strengths of a highly reliable telecommunications carrier, NTT is meeting the diverse needs of customers. Germany England Thailand Customers basees United States Biz Hosting Enterprise Cloud Global Rollout Malaysia Customers basees Virtual network Australia Singapore In 213, Dimension Data announced a fi ve-year medium-term management plan, which included the objective of doubling Group sales in fi ve years. In February 214, Dimension Data acquired NextiraOne, a provider of unifi ed communications and network infrastructure. As a result, Dimension Data acquired more than 1, ICT engineers and further expanded its customer base in Europe. Through organic growth and strategic acquisitions, Dimension Data will implement aggressive business development, centered on the growth fi eld of cloud services, to achieve the goal of doubling its sales. Japan Hong Kong Customers basees Customers basees Long Distance and International Oceania Asia Oceania 86G South America What business initiatives are being implemented by NTT to meet the needs of customers shifting operations overseas? NTT began to offer Global Management One, a one-stop ICT management service providing integrated operation of the global ICT environments of customers. This service was launched in April 214. The service, which covers the entire ICT environment, including applications, cloud services, on-premises environments, and networks, has the distinctive feature of also being compatible with the services of other companies. Global Management One is compliant with ITIL, a best-practice approach to IT service management and offers total operations services, including monitoring and troubleshooting, determination of causes, and consideration of countermeasures. 5 NIPPON TELEGRAPH AND TELEPHONE CORPORATION ANNUAL REPORT

7 Mobile Financial Results for the Fiscal Year Ended, 214 Revenues from sales of smartphone handsets rose and revenues from new business areas also increased. However, mobile communications service revenues declined, due in part to the infl uence of the Monthly Support discount program, under which the cost of the handset is deducted from the ly charges. As a result, operating revenues were 4,461.2 billion, a decrease of.2% from the previous fi scal year. Operating expenses were 3,644. billion, a rise of.3% from the previous fi scal year. Consequently, operating income was billion, a decline of 2.3% from the previous fi scal year. Capital investment was down 6.7%, to 73.1 billion, due to focused investment on expansion of the LTE network and increased investment effi ciency in other fi elds. Operating Revenues 5, 4,47.1 4, , 3, 2, 1, 213/3 214/3.2% Operating Income 1, /3 214/3 2.3% Capital Investment 1, /3 214/3 6.7% Number of Subscriptions for Major Services Mobile phone subscriptions at year-end were million, an increase of 1.57 million from the previous fi scal year-end. The number of LTE Xi (pronounced crossy ) subscriptions increased 89.9%, to million at year-end. Accordingly, LTE Xi subscribers accounted for about 8% of all smartphone users. As a result of the addition of the iphone to our lineup in September 213, the number of net additions improved 12% year on year, to 1.57 million. On the other hand, the churn rate increased to.87% due to intensifi ed competition with other companies. Mobile Phone Subscriptions Net Additions and Churn Rate Smartphone Sales Environment and Basic Policy The mobile communications market is the focus of new competition, not only among telecommunications operators but also among providers of services over the Internet, such as SNS companies. The mobile phone market is nearing saturation, and mobile telecommunications operators have competed fi ercely in all areas, including services, service areas, billing plans, and devices, and the operating environment remains intensely competitive due in part to advances in the number of smartphone users and the adoption of LTE. In addition, new players in the mobile telecommunications market include mobile virtual network operators (MVNOs). These companies, which are renting wireless communications infrastructure from mobile telecommunications operators and offering a wide variety of services at low cost, are recording rapid growth. Due to competition with these new types of companies, the industry structure is expected to continue to undergo signifi cant change. In this new competitive stage, NTT DOCOMO is working to help make the lifestyles of customers more convenient and comfortable. To that end, NTT DOCOMO is strengthening its competitiveness in conventional mobile fi elds and providing appealing services in new business areas. In the Number of Mobile Phone Subscriptions in Japan (%) Subscriptions (left scale) NTT DOCOMO s market share (right scale) Source: MIC /3 211/3 212/3 213/3 214/3 year under review, NTT DOCOMO made comprehensive efforts to strengthen its mobile operations from four perspectives devices, networks, services, and billing plans / channels. In addition, NTT DOCOMO expanded its operations in new business areas by leveraging cooperative ventures and alliances in a variety of fi elds, such as health and education. Moreover, to accelerate these initiatives, we are taking steps to bolster our management constitution, such as shifting management resources to new areas and implementing cost reductions Mobile Service Revenues and Aggregate ARPU* 1 Mobile communications service revenues declined billion year on year, due to the influence of the Monthly Support discount program. Voice ARPU declined 36, to 1,37, as a result of the Monthly Support discount program. Packet ARPU decreased 5, to 2,64, on account of the Monthly Support discount program, which offset gains in smartphone and data plan subscriptions. Smart ARPU increased, due in part to growth in new business areas. Nonetheless, Aggregate ARPU was down 34, to 4,5. *1 Please see page 123 for the ARPU calculation method and other details. Packet ARPU from the fiscal year ended, 21, to the fiscal year ended, 211, includes amounts corresponding to smart ARPU. 4, 3, 2, , , , , /3 213/3 214/3 215/3 FOMA (3G) Xi (LTE) Xi achieved 2 million subscriptions 3, Mobile Service Revenues 1, , , , ,89.6 2,881. 1,931. 1, 1,91.5 1, , , , Fiscal year ended / ending 21/3 211/3 212/3 213/3 214/3 215/3 Voice revenues Packet revenues* 2 *2 From the fiscal year ended, 213, the definition of items comprising packet communications has been changed. Packet revenues for the fiscal year ended, 21, and thereafter have been restated to reflect this change. (%) %.82%.87% /3 213/3 214/3 215/3 Net additions (left scale) Churn rate (right scale) Aggregate ARPU (Yen) 8, (Millions of units) , 4, 5,35 5,7 5,14 4, ,5 42 4,39 2, ,54 2,59 2,69 2, 2,64 2,62 2,9 2,53 2,2 1,73 1,37 1,24 Fiscal year ended / ending 21/3 211/3 212/3 213/3 214/3 215/3 Voice ARPU Packet ARPU Smart ARPU /3 213/3 214/3 215/3 Mobile 52 NIPPON TELEGRAPH AND TELEPHONE CORPORATION ANNUAL REPORT

8 Mobile Initiatives and Overview Initiatives to Bolster Competitiveness in the Mobile Field in DEPTH Initiatives to Expand New Areas Enhancing the Handset Lineup To address a wide range of customer needs, in September 213 NTT DOCOMO added the iphone to its handset lineup and thereby began to offer a lineup featuring both Android and ios models. Due to the introduction of the iphone, we recorded improvement in net additions and MNP port-ins and port-outs. In particular, we registered growth in MNP port-ins among younger customers between 1 and 3 years old. In comparison with other age groups, younger customers make greater use of dmarket and of such rich content as video and music. Consequently, the introduction of new handsets is expected to increase our share of subscriptions and to support growth in new business areas in the years ahead. iphone 5s Expanding the LTE Network To realize a communications environment that enables the smooth use of cloud services and rich content, NTT DOCOMO is accelerating the build out of the LTE Xi network. In the fi scal year ended, 214, we took steps to expand the network, centered on stations, commercial facilities, and schools, and increased the number of LTE base stations nationwide to 55,3. NTT DOCOMO has also installed base stations compatible with downlink transmission speeds of 1 Mbps or higher in all prefectures in Japan. In the fi scal year ending, 215, we plan to increase the number of these base stations to 4,, more than 1 times the number at, 214. In addition, NTT DOCOMO began to operate Quad-band LTE, which effi ciently uses four frequency bands to realize a comfortable communications environment that features high speed and large capacity. In June 214, Growth in Number of LTE Base Stations LTE base stations: 1.7 times iphone 5c TM and 214 Apple Inc. All rights reserved. iphone is a trademark of Apple Inc. The iphone trademark is used under license from AiPhone Co., Ltd. 95,3 NTT DOCOMO began to offer VoLTE, which enables high-quality, stable voice calls to be made over the LTE network, a fi rst in the domestic market. This service has been highly evaluated. Enhancing Services NTT DOCOMO took steps to enhance content so that dmarket could be enjoyed by a wide range of customers. In the fi scal year ended, 214, we began to offer dcreators, for the exhibition or purchase of a variety of handmade items; dfashion, a specialized fashion sales site; dkids, which offers educational content for children, such as picture books and illustrated reference books; and dtravel, which provides comprehensive support for travel, from the planning stage to support provided during the trip. Targeting 1. billion in revenues from dmarket in the fi scal year ending, 216, NTT DOCOMO will take steps to develop content that matches customer tastes and lifestyles and strive to offer more-convenient services that customers can readily use every day. In addition, NTT DOCOMO worked to provide easier-to-use mail services for smartphones. We began to offer DOCOMO Mail, which features enhanced operability. DOCOMO Mail allows to be stored in the cloud, and enables the use of a single address on multiple devices. Introducing a New Billing Plan In June 214, NTT DOCOMO introduced a new billing plan that fundamentally reformed the conventional billing plan system. The new plan has four key elements: packet quotas that can be shared among family members or multiple handsets; fl at ly rates for domestic voice calls; special benefi ts for long-term, continuous customers; and discounts for customers age 25 or younger. This is an industry-leading initiative that addresses changes in the way customers are now using their devices, such as higher data communications usage, increased needs for inexpensive voice calls through VOIP, and the use of multiple devices. The plan puts a stop to the market environment marked by excessive competition to secure customers through cash-back incentives, and we expect it to lead to a reduction in the churn rate. In addition, NTT DOCOMO will work to foster growth in packet communications revenues by encouraging existing customers to migrate to smartphones and use multiple devices. In April 214, NTT DOCOMO and NTT Knowledge Square Inc. established gacco, Japan s fi rst Massive Open Online Course (MOOC) platform. MOOCs are large-scale online lectures in which anyone can participate over the Internet. In 212, a leading U.S. university sparked a major global trend when it made some of its lectures available online. gacco, which is an offi cial website of the Japan Open Online Education Promotion Council (JMOOC), provides online lectures in Japanese. By the middle of August 214, about 7, people, principally between the ages of 3 and 6, had registered for lectures. The establishment of gacco will increase interest in online learning, thereby promoting the use of mobile communications. Another benefi t will be increased awareness of the DOCOMO brand among younger and middle-aged customers. In the future, NTT DOCOMO will work to provide a platform for corporate training and take steps to develop educational services into a revenue-generating business area. FAQ Results are sluggish, with operating income declining for three consecutive years. What are the prospects for a recovery? What is your aim in the expansion of new business areas? gacco website: Questions frequently asked by shareholders and investors With consumers migrating to smartphones, competition among companies has been intense, and in this environment MNP port-outs have been a major factor in the worsening of results over the past several years. To encourage customers to once again choose NTT DOCOMO, we will make new proposals in the areas of handsets, billing plans, networks, and services, and will strive to realize new growth in the mobile business. In regard to profi ts, we will work to control the impact of the Monthly Support discount program and selling expenses, and return to a course of growth in the fi scal year ending, 216, and thereafter. We are aiming to strengthen our competitiveness in the mobile fi eld and expand revenue by positioning new business areas as growth drivers. Specifi cally, to make customers lifestyles and business more secure, safe, and convenient, we are leveraging collaboration with partner companies in a wide range of fi elds to advance a diverse range of services and content that can be used through smartphones and other handsets. In the fi scal year ended, 214, revenues from new business areas reached 632. billion. We will strive to increase revenues from new business areas to 1 trillion in the fi scal year ending, 216. Mobile 24,4 213/3 55,3 LTE base stations compatible with a downlink transmission speed of 1 Mbps or higher: 1 times 214/3 3,5 215/3 LTE base stations compatible with a downlink transmission speed of 1 Mbps or higher: 4, base stations Flat ly rates for domestic calls Special benefits for long-term customers Packet quotas that can be shared among family Discounts for customers age 25 or younger 54 NIPPON TELEGRAPH AND TELEPHONE CORPORATION ANNUAL REPORT

9 Data Financial Results for the Fiscal Year Ended, 214 Operating revenues in the fiscal year ended, 214, increased 3.1% from the previous fiscal year, to 1,343.9 billion. This gain was due to an increase in revenues from overseas subsidiaries and to foreign exchange rate fluctuations. On the other hand, operating expenses increased 4.8% from the previous fiscal year, to 1,275.9 billion. This rise was due in part to an increase in unprofitable transactions and foreign exchange rate fluctuations. As a result, operating income was 67.9 billion, a decrease of 2.9% from the previous fiscal year. Operating Revenues Operating Income Capital Investment 1,5 1,33.5 1, 1, % % % 213/3 214/3 213/3 214/3 213/3 214/3 The NTT DATA Group s Composition of Sales (by segment) Global Public & Financial IT Services Provision of high-value-added IT services in overseas markets billion 21.% billion 48.3% Provision of high-value-added IT services that support social infrastructure, including public administration, health care, fi nance, and settlement Environment and Basic Policy In Japan, the economy is recovering at a moderate pace, with corporate profi ts continuing to improve and capital investment recovering. In the fi nancial, manufacturing, distribution, and service industries, companies are advancing IT investment, including investment to address IT system renewal projects, which had been limited, and to support global business development initiatives. The information services market is showing signs of a moderate recovery. On the other hand, NTT DATA expects ongoing demand for lower maintenance and operating costs and continued intense price competition. 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 NTT DATA s Medium-Term Management Plan Provision of a wide range of IT services Dependency on large-scale SI Past Previous medium-term management plan Phase 1 Through fiscal year ended, 212 Individual optimization Dependency on the domestic market Focus area 1 Current On the way to evolution that offer IT assets at lower prices and with shorter delivery periods. Overseas IT investment is expected to be strong, centered on emerging markets, and the advances of customers in global markets continue to accelerate. In this operating environment, the NTT DATA Group is working to evolve into a corporate group that provides a wide range of IT services effectively on a global scale. Under its medium-term management plan, NTT DATA is taking steps to achieve the goals of Global Top 5 (revenue over 1,5 billion) and earnings per share (EPS) of 2. To that end, NTT DATA is focusing on three areas: Expansion of new fi elds and reinforcement of product competitiveness, Expansion, enhancement, and reinforcement of global business, and Pursuit of overall optimization. Expansion of new fields and reinforcement of product competitiveness Medium-term management plan Phase 2 Through fiscal year ending, 216 Focus area 3 Focus area 2 Pursuit of overall optimization Global Top 5 (revenue over 1,5 billion) EPS 2 Expansion, enhancement, and reinforcement of global business Entry into the global market Solutions & Technologies Provision of platforms and solutions that support cutting-edge IT services billion Expanding the NTT DATA Group s Global Platform (As of, 214) Provide seamless support in Japan and abroad Choose suitable resources from all over the world Achieve best practices and gain new insights EMEA EMEA Bases: 78 cities Employees: Approx. 13,5 APAC 12.% China APAC Bases: 24 cities Employees: Approx. 1,5 China billion 18.7% Bases: 13 cities Employees: Approx. 4, Enterprise IT Services Provision of high-value-added IT services that support manufacturing, distribution, services, media, communications, and other business activities In the fi scal year ended, 214, approximately 42, employees deployed in 175 cities in 41 countries and regions outside of Japan. Americas Americas Bases: 6 cities Employees: Approx. 14, Data 56 NIPPON TELEGRAPH AND TELEPHONE CORPORATION ANNUAL REPORT

10 Data Overview Progress of the Management Policies Status of Activity Expansion of New Fields and Reinforcement of Product Competitiveness To address customer needs for cost reductions, the NTT DATA Group is working 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 is working to advance and diversify its services for customers requiring the application of IT to operations that are more sophisticated and complex. These include business analytics and business process outsourcing (BPO) of core operations. We are aiming to achieve sustained business growth through the development of new businesses, such as M2M cloud and robotics operations, and the allocation of resources to fi elds in which we can expect existing businesses to achieve growth and higher market shares. In addition, the NTT DATA Group is aggressively investing to expand new fi elds 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 academic institutions. Expansion, Enhancement, and Reinforcement of Global The NTT DATA Group is expanding its coverage to new areas in order to support customers entries into the global market and provide services to overseas markets with growth potential. Moreover, in areas with existing bases, we are taking steps to expand, enhance, and reinforce business by leveraging synergies with NTT Group companies. In the fi scal year ended March in DEPTH On March 2, 214, NTT DATA and the Vatican Apostolic Library concluded an initial agreement for a project involving the digital archiving and long-term preservation of handwritten documents that are historic treasures of humankind. These documents, about 8, volumes with about 4 million pages, are from the 2nd to the 2th centuries and are 31, 214, everis became a subsidiary, and as a result our business expanded to more than 4 countries around the world and the overseas sales ratio surpassed 25%. Moving forward, we will reinforce our presence in each region and business fi eld. In addition, in overseas markets we will leverage the strengths that we cultivated in domestic operations, such as quality, project management capabilities, and production technologies. With the objective of raising the overseas sales ratio to 5% we will strive to achieve growth in global business. Pursuit of Overall Optimization The NTT DATA Group is taking steps to leverage its scale by standardizing, streamlining, and consolidating operations on a global level and by restructuring and consolidating group companies and organizations. In addition, we introduced the Group Management Core System, an in-house system to allocate resources in line with our rapidly changing business portfolio and to increase the effi ciency of Group management. We are working to increase management effi ciency, with the objective of reducing Group administration expenses by 1%. Digitally Archiving Historic Handwritten Documents in the Vatican Apostolic Library Vatican Apostolic Library Provision of service Fund Overseas Revenues 5 held by the Vatican Apostolic Library. The initial agreement between the Vatican Apostolic Library and NTT DATA, which is worth approximately 2.3 billion, will cover the digital archiving of about 3, documents over a four-year period. In participating in this project, NTT DATA will leverage the track record and know-how that it acquired through the construction of a digital archiving systems at Japan s National Diet Library and through the provision of the AMLAD TM digital archive service. In the future, NTT DATA will promote business operations related to digital archiving not only in Japan but worldwide I. Digitization and storage: Contribution to preservation of historic treasures of humankind Digitization /3 214/3 215/3 216/3 Promotion / Image browsing of the archive Support Individuals Researchers & institutions II. Release of promotional portal: PR for business Digital archive service System integration Portal site Companies / Corporations Public & Financial IT Services As one facet of Japan s export of infrastructure solutions, NTT DATA has launched a service in Vietnam that has increased the effi ciency of administrative procedures related to trade procedures and customs clearance, such as import / export declarations and port departure and entry procedures. For this project, NTT DATA drew on its extensive knowledge of these procedures in Japan. In Myanmar, as one facet of the Japanese government s ODA in infrastructure exports, NTT DATA received an order to develop account system software for the Central Bank of Myanmar. Enterprise IT Services As a partner of the Tokyo Electric Power Company, NTT DATA is advancing a project to construct a smart meter data management system. In addition, since the start of a service for the provision of Twitter data, NTT DATA has advanced activities for the utilization and promotion of social media. These activities have included the use of Twitter data on news programs, research into purchasing behavior using data analysis, and collaboration with Oracle Corporation Japan in big data analysis. FAQ How will you avoid and manage unprofitable projects? Questions frequently asked by shareholders and investors You are devoting resources to overseas business, but what initiatives will you implement in the future for domestic business? Solutions & Technologies To address the rapid uptake of smartphones, we began to offer BizXaasS CRM, which enhances the capabilities of smart devices. In this way, we realized the integrated provision of smart device handsets and software to control as well as supported the operation and control of those devices. In addition, we began to offer the Multi-Cloud Infrastructure Service, which allows for the selection and provision of the cloud service that best meets the diverse needs of the customer, and the Multi-Cloud Control Service, which allows for integrated control of multiple cloud services. Global In cooperation with NTT Group companies, our U.S. subsidiary NTT DATA, Inc., concluded multiple-year, large-scale agreements with the Texas Department of Transportation and Yum! Brands, Inc., for a wide range of administrative and IT support. In addition, an India-based unit of NTT DATA, Inc., achieved Maturity Level 5, the highest level, for version 1.3 of Capability Maturity Model Integration (CMMI). CMMI is a model for assessing the maturity of a system development organization. Our India-based unit earned Level 5 in both development and service. In the fi scal year ended, 214, we recorded a loss of about 31.5 billion due to the emergence of a number of unprofi table projects. The principal reasons were aspects of new projects, and of projects that required new technologies, to which we did not pay suffi cient attention at the time when the order was received. To prevent a recurrence of this type of problem, in addition to screening at each company, in October 213 we established the Project Screening Committee, which is supervised by the president. This committee will screen projects that involve new customers, operations, or technological functions and exceed a certain scale. Moving forward, we will work to limit unprofi table projects by appropriately utilizing this committee and ensuring appropriate project implementation plans. NTT DATA is conducting systematic marketing. For example, we categorize our business fi elds into growth fi elds, stable fi elds, and fi elds from which we will withdraw. Even for fi elds in which we were unable to make a market entry in the past, the situation changes from moment to moment, and the application of new technologies will be possible in some cases. In these ways, we use the term re-marketing to refer to test runs for the creation of markets without being limited by preconceived ideas. Through re-marketing initiatives we are working to expand our market share, centered on such fi elds as manufacturing, distribution, broadcasting, and utilities. Data 58 NIPPON TELEGRAPH AND TELEPHONE CORPORATION ANNUAL REPORT

11 Other es Financial Results for the Fiscal Year Ended, 214 Operating revenues in the fi scal year ended, 214, were 1,328.5 billion, an increase of 6.1% from the previous fi scal year. This gain was due to higher revenues in the fi - nance business, higher revenues in the real estate business as a result of an increase in the number of condominium units delivered, and higher revenues in the construction and electric power business. On the other hand, operating expenses were 1,272.4 billion, an increase of 6.2% from the previous fi scal year, due in part to an increase in expenses associated with the higher revenues. Consequently, operating income was 56.1 billion, an increase of 5.3% from the previous fi scal year. Operating Revenues Operating Income Capital Investment 1,5 1, , 1, % % % 213/3 214/3 213/3 214/3 213/3 214/3 Real Estate Finance NTT Urban Development, which is the Group s only comprehensive real estate company, conducts real estate leasing operations, centered on offi ce 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 fi elds of business, such as global, real estate fund and real estate solutions businesses. Construction and Electric Power 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 fi rst-class registered architect offi ce 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 As the core fi nance company of the NTT Group, NTT FINANCE conducts leading-edge fi nance, settlement, and billing services. Through lease fi nance, credit cards, billing, and other services, NTT FINANCE meets a wide range of customer needs. As a Financial Solution Partner, from July 212 NTT FINANCE began billing and receipt operations for communications service and other charges for NTT East, NTT West, NTT, and NTT DOCOMO. NTT FINANCE now provides billing and other settlement services. System Development 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 traffi c control to ensure communications quality. In these initiatives, NTT COMWARE is working together with NTT Laboratories and other Group companies. Others Initiatives and Overview NTT Urban Development Co. Developing Global To diversify its asset portfolio, NTT Urban Development is advancing into Europe and the United States, where the markets have high levels of liquidity, and Asia, where the markets are recording growth. In the fi scal year ended March 31, 214, in the United States NTT Urban Development established a local subsidiary in Delaware and participated in a NTT FACILITIES, INC. Building Solar Power Generation Systems / Data Center Solutions NTT FACILITIES provides large-scale solar power generation system solutions that combine energy operations and construction operations. As of the end of March 214, NTT FACILITIES had installed solar power generation systems in about 1,155 locations redevelopment project in New York. In Asia, NTT Urban Development has opened an offi ce in Singapore. Moving forward, NTT Urban Development will take steps to secure future growth opportunities, such as considering business proposals leveraging synergies with the NTT Group, which has a presence in 46 cities in 17 countries in Asia. with a total generating capacity of megawatts, one of the largest capacities in Japan. NTT FACILITIES offers a wide range of data center solutions that meet customer needs and facilitate continued increases in data center value. These include solutions to reduce electric power costs, solutions to address aging facilities and buildings, and solutions to reduce workforce levels. Other es NTT Broadband Platform, Inc. 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 high-capacity communications networks; and total solutions related to software design / development and information / communications networks. etc. Expanding Public Wireless LAN Services NTT Broadband Platform constructs and operates access points for public wireless LAN services provided by the NTT Group and others. It also constructs and operates information provision platforms through collaborative ventures with municipalities and companies. In November 213, NTT Broadband Platform began to offer Japan Connected-free Wi-Fi, an application for smartphones and tablets. Through the use of this application, foreign visitors to Japan can search for free Wi-Fi areas and complete the authentication procedures needed for each area all at once. This application has been well-received for its resolution of problems related to the Wi-Fi environment faced by foreign visitors to Japan. In July 214, NTT Broadband Platform received the top prize at MM Research Institute Awards NIPPON TELEGRAPH AND TELEPHONE CORPORATION ANNUAL REPORT