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NTT DoCoMo, Inc. (NYSE:DCM)

F3Q12 Earnings Call

January 30, 2013 3:00 am ET

Executives

Kazunori Yamamoto – Managing Director-Investor Relations

Kaoru Kato – President and Chief Executive Officer

Analysts

Tetsuro Tsusaka – Morgan Stanley

Yoshiyuki Kinoshita – Merrill Lynch

Hitoshi Hayakawa – Credit Suisse

Kei Takahashi – Mizuho Securities

Shinji Moriyuki – SMBC Nikko Securities

Oshida – JPMorgan

Kazunori Yamamoto

Thank you very much for waiting. And we thank you very much for attending this meeting despite your busy schedule. We will now like to commence NTT DOCOMO Analyst Meeting announcing the results for the first nine months of the fiscal year ending March 2013. I am Yamamoto, Head of IR. I will be presiding this meeting.

Please be advised that this session is broadcast live via the Internet and also on smartphones. Also, a recorded video of this meeting will be posted on DOCOMO's website for distribution on-demand. Please be advised of these.

Now I will like to introduce the participants from NTT DOCOMO. Here with us are Mr. Kaoru Kato, President and CEO; Senior Executive Vice President, Mr. Kazuto Tsubouchi; Senior Executive Vice President, Mr. Fumio Iwasaki; Executive Vice President, Responsible for Consumer Sales, Mr. Takashi Tanaka; Executive Vice President and Managing Director of Corporate Strategy & Planning Department, Mr. Yoshizawa; and Senior Vice President and Managing Director of Accounts & Finance Department, Mr. Sato.

We will be using three sets of documents for this meeting; one is the earnings release, the other one is the presentation slides for the financial results, and the other one is the press release entitled, NTT DOCOMO to Launch Public Tender Offer for MAGASeek.

For today's meeting, we will start off with a presentation by Mr. Kato announcing the results for the first nine months. Then we will like to move on to the Q&A session, and we’ll try to finish the meeting by 6 o'clock.

Also, there might be potential risk pertaining to the forward-looking statements. For more details please look at the last slide of the presentation.

Now, without further ado, I would like to call Mr. Kato to deliver our presentation. Please start the presentation.

Kaoru Kato

Good afternoon to you. I am Kato of NTT DOCOMO. Thank you very much for allowing us your precious time to attend this press conference – this meeting. And also, I would like to thank all of you watching this session over the Internet.

Now, I’d like to start the presentation Page 2. As you see on the index, there are three parts in Slide number 2. I’d like to talk about the results for the first nine months. Operating revenues was ¥3,379.8 billion up 6.2% or ¥196.6 billion year-on-year; operating income was ¥702.2 billion, down 5.6% year-on-year or ¥41.6 billion year-on-year. So we achieved an increase in revenues but a decrease in income.

Regarding the highlights of the results, due to the expanded uptick of smartphones and Xi and the expanded usage packet revenues increased 7.7% year-on-year to ¥1,476.9 billion. Total handset sales increased by 14% year-on-year and reached 17.57 million units. Number of smartphone sold was 9.69 million units, up 75.2% year-on-year. So, we steadily expanded the user base of smartphones.

Xi subscribers have been growing at pace faster than expected and in fact roughly quadrupled compared to the level of March 31 and reached 8.68 million subscribers.

Slide 3, the overview of the financial results. I have already mentioned the operating revenues and operating income in the previous slide. Regarding our net income for the quarter, actually we posted an increase of ¥21.9 billion year-on-year. This was due mainly to the impact of the reversal of the differed tax asset owing to the revision of the tax code. EBITDA margin decreased by 3 points due to the increase in revenues, but a decrease in income.

As far as free cash flow is concerned because of the increase of customers buying the handset is installments and also because of the additional CapEx for our Xi network, free cash flow decreased by ¥286.6 billion.

Now this shows the changes in operating income. The brownish part represents the revenues. First, about the revenue side. Our voice revenues decreased by ¥114.9 billion, because of the decrease in billable MOU. Packets revenues on the other hand increased by ¥142.3 billion because of the increase of Xi subscribers and smartphone sales and boosted usage. The monthly support discount had a negative impact –incremental negative impact of ¥128.6 billion compared to the same period of the previous fiscal year.

Other revenues increased by ¥69.1 billion due to the increase of revenues of some subsidiaries and the protection service, mobile phone protection service. Equipment sales revenues increased by ¥228.7 billion.

One the expenses side, the equipment sales expenses, which is the sum of the cost of equipment sold and the commission to agent retailers increased by ¥116.3 billion year-on-year because of the increase of the handset sales. Other expenses increased by ¥129.1 billion because of the increase of subsidiary related expenses of ¥51.8 billion and the increase of amortization and depreciation of ¥30.7 billion. As a consequence, operating income decreased by ¥41.6 billion year-on-year.

Slide number five, total handset sales. For the three months period over the third quarter, we sold 5.73 million units and for the total of nine months, we sold 17.57 million units making a steadfast progress towards our full-year target and we were able to increase the sales of smartphone due to the increase of models with the release of winter collection. Towards the fourth quarter, we will further increase and reinforce our smartphone sales, so that we can achieve our full-year target of 23.8 million units of total handset sales.

Net additions and number portability here, we have been announcing these numbers on a monthly basis and as you may very well know, the number of portals have been larger than expected for the months of October and November, especially November was a tough month and we posted a net decrease. However, after the release of the winter collection in December, also because of the effects of the promotional measures, the key products are reporting brisk sales, so we are seeing signs of recovery in our competitiveness.

Slide number seven. In order for us to increase our packet revenues and achieve an income growth over the medium-term, this fiscal year, we are attaching importance on the expansion of smartphone user base. So smarphone is top priority product for us, so we have been reinforcing our sales of smartphones. As a result, we saw 3.25 million units in the third quarter and a cumulative 9.69 million units for the nine months. And of course on January 6, we sold more than 10 million in units, so we are making a steadfast progress towards our prior target of 40 million for the full year.

Slide number eight, nine, Xi subscribers. Total Xi subscribers reached 8.68 million as of the end of December and topped 9 million on January 9. We made an upward revision as of the end of the second quarter to 11 million units for the full year and actually the pace of growth is faster than productions that’s due to the prosper popularity of Xi smartphones of the winter collection and also because of the stimulated demand by the various discount services.

Packet flat-rate services, we terminated the Xi Start Campaign 2 in the end of September, and from October, we launched the new plan called Xi Pake-hodai Light. As a result, now we have three different options of Pake-hodai Flat, Light and Double. So customers have a choice to choose between these three depending on their actual usage.

The subscription breakdown as of the end of December is represented on the pie-chart and Pake-hodai Flat is the most popular plan. In fact, also we compared the packet usage, our packet usage between the month of August and November and we have achieved the ¥700 increase which has contributed to the increase of packet ARPU. As more customers migrate to LTE, low usage customers migrating to LTE, we are seeing that the light package has become the most popular accounting for 60% of the total subscriptions in the recent months.

Packet revenues has been expanding steadily due the increase of Xi subscribers and the expanded usage and the aggressive sales of smartphones. The third quarter packet revenues increased by ¥36.1 billion year-on-year and for the first time exceeded the ¥500 billion on a quarterly basis. Going forward, we will continue to expand the user base of smartphones, so that we can further expand the revenues of packet service.

Slide number 11. This is about our Smart ARPU. Compared against the same period of last fiscal year, we achieved a ¥60 increase and reached ¥420. As you can see, the year-on-year changes has been expanding on a quarterly basis and this is due the effects of new services such as dmarket.

Slide 13, about the future business policies, our focus for the future. Basically, I would like to comment on the current status first. With respect to our core business, total handset sales, smartphone sales, and Xi subscribers are making a steadfast progress. However, the number of customers’ outflows using number portability system has been larger than expected, which deteriorated our churn rate.

As far as the new areas of business is concerned, dmarket and various other services have got off to a good start. Based on this recognition of our current status, for the future, we will try to brush up our competitiveness in comprehensive terms, brushing up our devices network, and services so that that we can reduce our churn rate. We will focus on reducing the number of smartphones and narrowing down the functionality, so that we can optimize our line-up and strengthen their appeal.

In the area of network, we will try to reinforce the competitiveness of our LTE service. In the area of services, we will like to improve the ease of use of our basic services such as mail and phonebook functionality. And also at the same time, we would like to steadily expand new services in new business areas.

From here let’s talk about more details in each element. Slide number 14 let me comment on the sales status of the winter collection. As I said earlier, for the month of October and November we struggled, but after the key products became available in December for the winter collection, the impact of customers waiting for the release of new products have weakened and in fact our market share of smartphones sold at mass retailers improved to 51% as you see on the left, especially Aquos Phone Zeta and Xperia AX, as you see on the right are enjoying great popularity. Both of them are equipped with various features that are popular among the Japanese users and Zeta is equipped with the IGZO LCD and XPERIA is popular for its stylish form factor. In two or maybe two and half months, both devices have sold more than 400,000 units.

Page 15 the expansion of smartphone user base is the focus of our business operation today and as the number of smartphone users increases we have seen a significant increase in the amount of packet usage among customers. According to a recent survey, when customer migrates from a feature phone to a smartphone, we have seen that the packet consumption has increased by 11 fold and that has translated into a increase of monthly bill of ¥2,100 and actually this boosting effect has been accelerating compared against the first half of this fiscal year. So we would like to continue stimulating the migration of middle and low-end customers to smartphones.

From here, I would like to talk about the new products as part of our winter collection. There are some overlaps with the last meeting in which we announced the winter collection, so I’d like to be brief here. We released a total of nine smartphones and we are going to release a total of nine models and a total of 12 models in the winter collection, featuring high resolution, high speed connection, high processing speed as well as large capacity battery.

The mainstream product that we would like to promote is XPERIA Z. As you here, it’s very slim and this comes with another tablet model that is designed based on the same concept and various linkage capabilities are provided between the two devices.

And after the announcement of the new product, this MediasW here has been covered by a lot of media reports that comes with two different screens and when it’s unfolded the screen size expands to 5.6 inch and it can be used as a integrated screen and/or you can use the two different screens for two different purposes. So it’s a very innovative, challenging model, I hope that we can deliver good results with this product.

Page 19, about DOCOMO Smart Home concept, this is about providing seamless services over multiple devices such as smartphones, TVs and tablets. The key products are dtab, which is a Wi-Fi dedicated tablet device and we will be offering this at a discounted price during the campaign, at only ¥ 9,975. So this is a very reasonable offer for customers, so customer can easily switch – pickup this product.

dstick is a conversion services and which allows customers to view Hikari-TV offered by NTT Plala.

Page 20 talks about the future devices development plans. I may have exhausted my talk on this point, but we want to pursue select and concentrate approach. To be more specific we will be focused on the four issues highlighted here aggressive promotion of key models, Xperia Z in the spring model. This is one of the key models and we want to very aggressively promote these key models and we’ll maximize the effect of their promotion. And we’ll also be narrowing down our product line up.

In other words, we will prioritize other models and we will also try to narrow down the models from the standpoint of customer requirements and marketing and procurement cost. The other is to really see attractive lineup of latest models ahead of competition. We will launch and release attractive lineup of the latest models ahead of competition and timely respond to customer requirements.

The other is, introducing devices with distinctive properties tailored to varying needs of each segment as was the case in the Spring model, we have the Juniors smartphone for Juniors or juniSma. And also in August we launched [Raku phone and Raku-Raku] smartphone. So these devices, we want to further improve going forward.

Page 21, this is already deployed since January 18. On top of the attractive devices, we want to launch marketing policies, which will support the new lives of the students. For example, Ouen Gakuwari, the student discount and also model discount for students and families who purchase handsets together. So we want to offer services that will make it easier not only for the students but also for families, also for long-term customers, we’re also offering discounts for Xi smartphone discount and therefore subscribers using DOCOMO for over 10 year, we hope that we’ll be able to retain these long terms customers.

Page 23, now from this point onwards I’d like to talk about DOCOMO’S Xi LTE service from a technical standpoint. On the left hand side, green side, you’ll find that we’ve been involved in the development of LTE specifications from the initial phase. As a result we have the largest ownership of LTE essential patents among the world’s carriers, 204 patents. Now in that process we’ve been able to accumulate knowledge pertaining to technical specifications for LTE.

Also since we deployed LTE two years ago in terms of operational methods and also parameter optimization we have no harm. Also in relation to meticulous network construction, and efficient and stable network construction, for example, our PS handover, 6-sector LTE BTS Femto sales, and LTE-enabled Femto. So, we have accumulated meticulous know-how and this is something that we would like to utilize. Based on such technical powers, we’ve been able to expand Xi service to more than 9 million customers already, and going forward to create infrastructure capable of accommodating 50 million smartphones in the future. We will like to further improve the reliability and the quality of our network.

Page 24, here we talk about Xi expansion, Xi LTE expansion. We’ll be aiming for faster connections and broader coverage. Now part of the spring line-up already offers the Japan’s fastest 112.5 megabit per second by maximum downlink of connection and this will be expanding to 22 cities by March and also to 50 cities by June. Also, by 2013, we will realize further enhancement to 150 megabit per second.

As far as the area coverage for maximum downlink speed of 75 megabit per second is concerned, by March we’ll have expanded this to 4,000 base stations and to 10,000 base stations in June. Also we’ll be further expanding Xi LTE area.

On the bottom of the page, you will find facilities covered to top 50 airports in Japan, our all 97 Shinkansen stations and 9 major Japan railway routes. So we will in terms of coverage, expanding our LTE coverage and we will further improve the ease of convenience, if you will, for our customers through these expansions.

Let me now turn to Page 26. Here I would like to talk about our activities in relation to new business. Shabette Concier, I think this is very familiar to you in television commercials. This is very positively received. Already, there have been 28 million times of usage for the service and already installed into 7 million handsets.

Also starting from November, we have already seen 90,000 downloads for Shabette Chara characters, which was launched in November. You’ll find very popular characters. The most popular character is Himitsu Kessha Takanotsume Yoshida-kun and Chibi Maruko-chan, these were top two characters. And also, Naomi Watanabe is also another popular character that’s downloaded. Now Shabette Chara is a full fee service and together with other content providers, we want to create this content market by providing these new contents.

So Shabette Concier and Shabette Chara hopefully will service a lead wire, so that customers will find it very easy to use services available over the dmarket and eventually this will induce them to utilize other services, which I will talk about now.

Page 27, within dmarket dvideo is very popular. So let me talk about the dvideo service. As of January 14, already 3.7 million subscriptions have been gained, and the number of titles offered right now 7,000 and the number of content, 60,000.

Our target for the full year is 4 million, and we will continue to enrich our contents and we’ll work toward promotion, so that we could meet this target.

Now, Page 28, dgame and dshopping, what is the current status. This was launched in December last year. As for dgame, as of January 27, the number of registered users has exceeded 300,000. As far as contents are concerned, we’re also offering original titles 3 and we want to further expand the number of original titles and also release of items are also doing very well.

As for dshopping, the number of visitors, as of January 27 reached 1.5 million and average purchase price is about ¥3,600 per user. Right now, we are releasing 100,000 items.

Also, we want to further expand our activities in the fashion area in e-commerce. So therefore, what we have done is to seek a friendly tender offer for shares of MAGASeek Corporation, the operator of the MAGASeek fashions and goods shopping website. This was resolved today and you will find the details in the press release. Going forward, we will further expand the category of products that we handle and we hope to further enrich the services to our customers, so that we could be very close to our customers’ lifestyle.

Now Page 29, growth of dmarket revenues. In third quarter it was ¥6 billion. On a cumulative basis this is ¥14 billion. So therefore this is growing steadily as a revenue base. So therefore we want to further expand this to ¥20 billion, and we want to further expand the content and services in this area.

Page 30, this talks about the progress in new business area as a whole. As far as the first half is concerned, it was ¥220 billion. However, on a cumulative basis up until the third quarter it reached ¥370 billion. Going forward, on top of the organic growth through strategic alliance and also acquisitions, we hope to achieve our full year target of ¥520 billion, and also we want to reach ¥1 trillion by fiscal year 2015. We will continue to expand our new business area.

Page 31, this talks about service development for realizing Smart Life. In here, you will find the map that captures our strategy. Now, this has been evolving. Please bear with us. To expand the smartphone user base, we’ll further review and enrich our core business.

On top of that, we want to speedily deploy new services based on docomo cloud.

As for docomo cloud service, this includes services related to storage, intelligent and dmarket and also we are already offering five different digital contents and also other way for lifestyle services to commerce, so we will continue to offer services of products in different categories, which will enrich the life’s of our customers.

We are also realizing linkage with eight new business areas. For example, lifestyle, we want to be able to trust like this into bringing Smart Life into reality.

Page 32. Here we talk about the priority projects in our new business areas. One such area is Healthcare. Now DOCOMO, as you’re aware, have created a joint venture in DOCOMO Healthcare together with Omron Healthcare and we would like to offer services that will support the customers’ wellness.

And in the Healthcare, we want to actually propose new lifestyles through different measurement machines and based on the data collected, for example, we will be offering organic health food together with Radish Boya on the left hand side and also on the right hand side, together with Oak Lawn Marketing, we want to also sell health appliance and also insurance and medical care, all of this can be linked.

In order words, we want to totally support customers’ so called wellness and we want to recommend new lifestyles based on the healthcare data of our customers. We are preparing for the launch of this service and we hope that the services can be started starting from April.

Page 34. Here we talked about reinforcement of business foundation. As soon as possible, we want to realize cost reduction of ¥200 billion. This was already announced when we announced our first half financial results. This is in comparison with fiscal year 2011.

Now for this fiscal year, we have actually setup an internal structural reform project and we are carrying out, reviewing all business areas. I mean, for example, in network, seek overall efficiency improvement, optimization of shop counter and call center operations. We will also review service lineup and also we will narrow down on the R&D and also we will review handset strategy deliver procurement cost. So all of these are been studied, so we have structural reform.

And page 35, here we talk about return to shareholders. We have consistently mentioned that we want to continue on with stable dividend payment and also we want to maintain the highest level of payout ratio in Japan as far as that policy is concerned, it has not changed and I think this is consistent with the policy that we have talked about since the past.

As far as the dividend for this fiscal year is concerned, we would like to offer ¥6,000 per share, dividend for this fiscal year as was planned.

Page 36, this is the final slide. I have explained to you the results of the third quarter financial results for fiscal year 2012. As far as operating income is concerned, the target is ¥120 million toward that target we able to expand smartphone user base and we have seen progress in relation to cost of reduction, financial risk. However the competitive landscape still remains very tough. And we want to continue on with our management with a sense of urgency.

Now some of the priorities, if we are to restore our competitiveness in earnest are as follows. First, accelerate migration to smartphones and Xi LTE services and further expand the smartphone user base. We also want to enhance our core ability, stimulation of device network and services, and we will also work to steadfast execution of structural reform in relations to these challenges and hoping operating income which was the initial target for this fiscal year as soon as possible.

So that is all from my presentation. Thank you very much.

Question-and-Answer Session

Operator

Thank you. Now we will like to entertain your questions. Please identify your name and affiliation before you start your question. Please if you have any questions. The person sitting in the front row please.

Unidentified Analyst

After the release of winter collection and also on the 17 of January I think all the previous campaigns were terminated and from the 18 of January, I think you launched the new campaigns. With the campaigns, the previous campaign that expired on the 17, I think you’ve done the family discounts and also the family and student bundle discounts, so have you seen any changes in the basic trends after the new campaigns were launched on the 18th of January, are you seeing improvement, are you seeing a slowdown, are you accelerating the sales? So can you comment on the most recent performance trends and Xperia Z when is expected to go on sale on the 9th of February, so I think you are receiving orders. So can you also comment on the prospects for the winter – for the spring sales, so can you comment on your recent trends?

Unidentified Company Representative

Okay, I think this is a question about the January performance. Yes, on the 17 of January all the previous campaigns were terminated. So we saw a temporary improvement in number portability trends, so if you compare our January performance vis-à-vis December, actually we announced the new product in January. So we are seeing some signs of customers waiting for the release of the new Xperia products because we said this is a strongly recommended product. We are seeing orders placement. So, if you talk about the month of January, the improvement slowed, but then from February onwards to March, we are seeing certain signs of improvement as part of our prospects for the future.

Unidentified Analyst

Then I believe March would be the busiest season in terms of the volume of quantity, so you are seeing prospects for improvement?

Unidentified Company Representative

If we will have high expectations for March.

Unidentified Analyst

Now further down the line, from next fiscal year onwards, there might be some factors that will affect your operating income level. On Page 4, you see the cumulative numbers – you have presented the cumulative numbers for the last nine months. It seems that your communication revenues posted a decline, including the impact of monthly support discounts. Then if you calculate the gross margin, which is subtracting cost of equipment, then that is boosting your total operating income. So if you consider next fiscal year, the contribution from devices will become smaller next fiscal year onwards. And I believe the monthly support negative discount impact will become larger next fiscal year. So in order to offset that, I think you will have to improve your ARPU, otherwise I don’t think it will be possible for you to offset the decline of communication revenues and that is the reason why you have hammered out this ¥200 billion additional cost reduction project, which I think is very important for you to achieve.

So if you can comment on the equipment sales revenues, then communication service revenues and I think it will be difficult for you to make a prediction for the future, because there are many varying factors behind all these elements, but can you comment on the prospects of these three things equipment sales, communication network revenues and also the cost reduction. How will that look like in one year time from now?

Unidentified Company Representative

Well, it’s very difficult to give us the forecast for next fiscal year, because as far as the fourth quarter of this fiscal year, this is the biggest season, the sale season for us. So we will like to see the results for the fourth quarter first before commenting on the next things. But all the three elements, as you mentioned are very big factors for next fiscal year’s business. We’ve already launched the cost reduction program from this fiscal year and we are seeing results already and that has been reflected in our third quarter results, and we will continue to work on these things without unreluctantly in the fourth quarter as well.

So cost reduction and also how we can boost the packet revenues is another factor which will be key, and that will determine the fourth quarter results.

Unidentified Analyst

Then the ¥200 billion cost reduction program that is inclusive of this fiscal year, but how big will that be for next fiscal year, can you comment on that?

Unidentified Company Representative

It’s not. I don’t think it is appropriate to comment on this one. We will move ahead with the structure reform project team and the cost reduction project team, are also working in parallel. So we will have to see the progress. But in the third quarter, we’ve already achieved ¥10 billion cost reduction in addition to the previous reduction. So, we believe we are well-positioned to achieve this cost reduction target.

In terms of size, ¥200 billion of course what is the comparison level that’s difficult to comment, but as far as this fiscal year, we have a great ambition to reduce our cost by ¥200 billion and we believe for the total of this fiscal year, we’ll be able to achieve ¥50 billion or so. And we might be able to add another ¥50 billion next fiscal year as well.

So for the single one year of – next year we will have to achieve ¥100 billion already. That’s our current immediate target, but, thus all three points that you mentioned are appropriate. So cost reduction is only about ¥200 billion or so, at maximum. So this cannot be sufficient to offset the decline in revenue. So we will have to boost our ARPU and we also have to improve our net addition, so that we can increase the total subscriber base, so that we can achieve the operating income target in totality. So we will continue to accelerate the cost reduction efforts. That I can promise.

Kazunori Yamamoto

Other questions? Yes please.

Tetsuro Tsusaka – Morgan Stanley

Thank you very much. Tsusaka with Morgan Stanley. I believe that this is a very rare opportunity to have exchange of views with the management of this company. Now, I would like to ask the three representative directors on the podium to share with us your thoughts about how you see the objectives as executive team and how you intend to take accountability for the results?

Unidentified Company Representative

Yes, I think this is a very unique question in a forum of this kind, but if I were to speak on this matter, I have aspirations, I also believe that there are missions, which I must meet. Now the mobile telecommunication business is now undergoing transformation primarily based on smartphones. To put it bluntly, the smartphone user base must be established.

I believe that is one management goal for us and on top of this platform I have a sense of mission if you will being able to deploy services on top of this foundation, so that part I believe is part of my aspiration. So therefore we want to achieve this and through such activities, I hope that the sustainability of this company can be well established. That I believe is my mission and that is my management goal.

Well, it’s very difficult to talk about this in just one word, but yes, there are three representative directors here. I believe my mission is how to enrich the core part of the business and how to realize cost reduction and at the same time be able to secure profit, how can I create such a foundation, I believe that is my primary obligation and mission for us. But then we should not do this just for the sake of cost reduction. We must have strong network based on which we can actually prepare for introduction of the next layer if you will.

Hopefully we’ll be able to create something – we hope that we’ll be able to make something flourish on top of the network. But for the time being we must place our efforts on solidifying rather our core business.

Fumio Iwasaki

Thank you. Iwasaki is my name. You asked about our management goal. What goal do we have? I think we have good understanding. We share good understanding about the goals ahead for this company. So but it’s my role in pursuing such goal, yes. I’m one of the Representative Director, but having said that, which only just define if you will our scope of responsibility. But if I look back on my past carrier in terms of asset network and services, I think we have always tried to address these three issues. That’s more or less as long being involved on the network side of the business.

So, therefore as the company grows further, it’s important that we have a very strong and high quality network. So that’s something that I would like to emphasize as in my own capacity.

Now turning to handsets. Well, handsets are actually part of the two wheels together with network. Handsets and networks goes hand side by side. So therefore, there are some areas that we must broadly challenge, and we’ll certainly do so. And I also certainly like to make active contribution toward that.

Tetsuro Tsusaka – Morgan Stanley

Thank you very much for your response. My second question, this relates to the previous question. Communication network charges and revenues are actually faced with challenges ahead. Then of course, it depends on how you predict the projections, but it’s likely that the service revenue will decline in the order of ¥100 billion next fiscal year. And your revenue, a correction, your profit is only ¥800 billion meaning that, we have to expect for substantial loss in the revenue in the next fiscal year considering these elements?

Now, of course, it’s difficult to identify how much profit or increase in profit you can realize. But should you face with a decline in profit for the next fiscal year. You talked about structural reform in your presentation, but inclusive of the executives, I think structural reforms – substantial structural reform will be required. To be blunt, I think you need optimal allocation of human resources at the top. So this type of structural reform will have to be implemented. Are you prepared to make such a reform? Now, if you are confident that, yes, we can make recovery, we’ll definitely realize increase in profits, then that’s not a problem. However considering the possibility of very difficult challenges ahead for you, do you believe that the current executive team is appropriate to face these challenges? That’s my second question.

Unidentified Company Representative

Well, as far as my currently understanding is concerned. As I try to explain in my presentation, yes, we are aware that the current situation is quite tough and I do agree with some of the elements you cited Mr. Tsusaka.

At the same time, as far as our structural reform efforts are concerned, we are going to be covering all aspects of our business and also it relates to how we carry out our business. We are doing our business and also our structure if you will, our organizational structure and also allocation of human resources. That’s also part of our studying. So therefore bearing this in mind, we’ll try to grade the most optimal situation for the company and that’s the study that we are carrying out.

Tetsuro Tsusaka – Morgan Stanley

Thank you. My last question then. I would like to ask about some numbers in relation to your operation. It seems that the smartphone sales are expanding and that has translated into packet revenue. Now, your smartphone handset sales and also the actual utilization of smartphones?

Unidentified Company Representative

I think it is not very efficient because in terms of the active usage is only about 60% of your smartphone handset sales. So that the presentation of active smartphones sold are very low. So you have a lot of idle smartphone handsets that’s not being activated. So that’s a waste.

Tetsuro Tsusaka – Morgan Stanley

So out flow of customers that’s why you want to sell smartphones as much as possible, but because you want to sell your smartphones, you’re actually spending a lot of money, especially marketing expenses. So, when do you believe that you’ll be able to more efficiently improve your packet revenue? When will you be able to introduce more efficient marketing? When will you be able to put a stop to this idle smartphone handsets, because this as comparison with your competitors, that’s the impression that I have.

Unidentified Company Representative

Yes, I should maybe take a note of your question as a comment. As you mentioned, the month of October and November were very tough for DOCOMO and we very seriously accept that situation and we have a sense of urgency about this issue. And in terms of total number of handset sales and also in terms of new subscriptions, we’re seeing signs of recovery. And also on a full year basis, we’re actually quite competitive, but at the same time in terms of the mobile number portability there is continuous outflow from DoCoMo.

Device network and services, we talked about the importance of these three elements. In particular, perhaps device or handsets, maybe it’s in this aspect that we could actually further strengthen our competitiveness. So in the fourth quarter, inclusive of Xperia Z, it’s not just about one single product, but inclusive of Xperia Z, we want to actually focus our resources so that we could compete in the marketplace and we’re taking a look at the details for this strategy as we speak.

Tetsuro Tsusaka – Morgan Stanley

As far as device and handsets are concerned, so you have no silver bullet right? Is my understanding correct, you have no silver bullet?

Unidentified Company Representative

Well, are we going to out of the blue create something that will wipe out all the competition as far as smartphones are concerned? That may not be the case. However, other vendors are strengthening the attractiveness of their models, and I think their competitiveness is being strengthened and please look forward to our handsets sales going forward.

You talked about the inefficient marketing of smartphones in your question. Well, in terms of net adds, I suppose if you take a look at the cost to acquire one net add, that may be the key – that maybe the case. However, when we sell smartphones, our focus is to improve the ARPU as a result of people migrating to smartphones.

Tetsuro Tsusaka – Morgan Stanley

Yes, of course, how much active usage? It really is a multiplication between the two.

Unidentified Company Representative

Yes, we don’t have net adds. That’s true that the active users are not maybe increasing and spending expenses, you say it’s a waste. I take your point. However, this I believe is a cost that is necessary. Then what about ARPU? As you saw on the slide, when people migrate to smartphones you find that there is boost to the packet ARPU and also that benefit is much larger compared against other competitors. We have noticed we are efficient as our competitors and also smart ARPU is steadily gaining.

Video market, for example, is contributing and this is boosting that. So, therefore, as far as ARPU boost is concerned, I believe our efforts have translated into specific results. So

it’s a matter of gaining new subscribers. Of course, we should capture net adds without making wasteful marketing expenses. That is true. I take your point.

Kazunori Yamamoto

Any other questions? Yes, I see a hand on that side of the room.

Yoshiyuki Kinoshita – Merrill Lynch

Merrill Lynch. My name is Kinoshita. I have three questions. First, you didn’t comment on this one, but regarding your equity method affiliates, I think you have seen a significant deterioration. Are there any special factors behind the deterioration of the profit level of the affiliates accounted for by the equity method?

Unidentified Company Representative

Yes, I would like to respond to your question. The PL by the equity method, actually we have seen an increase in the deficits. This is due to the fact that Robi Axiata in Bangladesh that we have invested in, they have incurred impairment losses of ¥12 billion or so and due to this impact, we have seen a deterioration compared against that previous fiscal.

Yoshiyuki Kinoshita – Merrill Lynch

My second question. About Pake-hodai Light package, I think I might be able to come to the answer if I calculate afterwards, but I will love to have your comments. You said that 60% or so of the customers recently are choosing the Pake-hodai Light and on a cumulative basis, one quarter of your user base have joined Pake-hodai Light package. Does it mean that there are customers migrating downwards from the more expensive packages to, for example, Pake-hodai Flat joining the Pake-hodai Light package? How many of your customers are doing this kind of migration and how did this impact your revenues or income? Has this been larger than expected, so can you comment on the subscription rate of the Pake-hodai Light package and the downward migration?

Unidentified Company Representative

Well this was launched on the first of October. So we had been worrying about how many customers will migrate from Pake-hodai flat to Pake-hodai light. But as it turned out, only hundreds of thousands of subscribers migrated downwards from Pake-hodai flat to Pake-hodai light, which was in fact lower than expected. When customers joined this service newly in the month of October, perhaps in the latter half of October, 45% or so of customers, choose the Pake-hodai Light package, we had anticipated that a greater number of customers will migrate, will just choose this. But in fact for the month of December, January 60% or so of the customers joining they are light package. So if the current trend continues, I think that will be a fast business, that perhaps the current level is at the optimal balance. I think this is going to be, I think distribution going forward.

Are there any customers upgrading from Pake-hodai Light to Pake-hodai Flat. I don’t have the numbers available with me right now. But the light package has a threshold set, that’s 3 gigabytes per month. So will they buy an additional 2 gigabyte? I don’t think there are many customers who are willing to pay for additional 2 gigabyte. So I think there are some customers migrating upwards to the flat package, but those customers after all may not be that significant in terms of numbers.

Yoshiyuki Kinoshita – Merrill Lynch

Now the third question about the full year results. You are achieving gross ads, your sales are favorable, but in order for you achieve full year subscriber target, you will have to immediately improve your churn rate or you may have to increase the number of new sales. Otherwise you won’t be able to meet your full year subscription target, but I don’t think that churn rate can improve significantly over a short period of time. So given that I would say that you will have to prioritize sales, but if you do that, that will have a downside pressure on your income? So how would you balance that, will you prioritize income, I think is it correct to assume that you will prioritize the income over the number of subscribers?

Unidentified Company Representative

There are many variance that will have to be taken into consideration, but we will like to secure operating income for this fiscal term. Although there may be elements that will affect the results, but because this is the biggest season, sales season on a year, but with XPERIA and we will like to promote these new products, but we would definitely secure the operating income target that we have promised to you.

Kazunori Yamamoto

Next question please.

Hitoshi Hayakawa – Credit Suisse

Thank you. Hayakawa from Credit Suisse. I just have one question. I forgot which page it was, my apologies. I think it is page 13. You talked about core business and your business and you have separated your business into two categories, but I suppose this is certain way of saying that and administer whether or not or our word is right. But it’s actually between the pipe and the OT team. So the core business, which is like the pipe if you will in other words this relates to network charge revenue?

Unidentified Company Representative

It seems that in this particular area, the competitiveness and DOCOMO’s brand value is becoming somewhat unclear.

Hitoshi Hayakawa – Credit Suisse

So from the user perspective you see very famous actresses are setting youth phones and also you see this little white dots, soft bank brand phones, but what about DOCOMO’s brand value? Your brand value positioning in the marketplace is becoming very unclear. You talked about focus and selection and I was actually confident to see that you want to focus and concentrate going forward, but going forward as far as your core business is concerned, what are your thoughts of behind recreating and rebuilding your brand value?

Hitoshi Hayakawa – Credit Suisse

As a consumer, we are actually choosing phones which are very narrow level of standard deviations. Of course, when the iPhone first came out, there was a big element, but I think at the very basic fundamentals, your brand value, what’s happening to that? People who might be – brand value which enables customers to buy into DOCOMO with a sense of security? I think you are using 8KB in your commercial net, but how do you intend to strengthen your brand campaign for the next fiscal year? Should you not try from the basics once again and strengthen your brand value? What about such strategy when you actually review your medium term vision. I was hoping to ask this question. So could you share your thoughts at this moment, but in relation to your core business, how do you intend to address your brand, I would appreciate it, Mr. Kato.

Kaoru Kato

Thank you very much for that input. Yeah, it’s true that our brand has been underlined, that’s true. We have focus on increasing customer satisfactions, my predecessor has been long involved in improving customer satisfaction and surely be – so the powers, market ranking, certainly have shown that we have our shift number one, customer satisfactory high report for this fiscal year; we were ranked number two, meaning that we were not able to be number one in terms of customer satisfaction three years in a row.

I talked about the structural reform, and as the second wheel we really have to improve customer satisfaction. So the fact that we are no longer number one in terms of brand in relation to customer satisfaction, what does that tell us? It seems that the confidence of the people toward our network has been underlined, we cannot deny that. As you aware, in December 20 of 2011 onwards we have seen network malfunctions and service interruptions, I think that already had an impact.

The other is our ability to actually communicate our messages; that has also weakened. Internally, we say as follows, we want to be able to communicate certain information that is written there, so there in terms of services and in terms of systems, we have to create something that allow us to provide information at the timing that we like in other words.

What about promotion, what about delivery of information, what about appealing to our customers? We were not able to do this in a systematic fashion, so we need to create a structure, so therefore in general, we want to once again improve and strengthen our brand value, so for next fiscal year, we will carry out a lot of rather carry out a massive internal study on this, so we will review this, and we will place this at the core of the new building term vision.

Operator

Now we will have to move onto the next questioner. The person on the far right.

Kei Takahashi – Mizuho Securities

My name is Takahashi from Mizuho Securities, I have got only one question. If you look at the third quarter results, if you look at the gross margin of products, you were have been able to secure high level of gross margin, but then how were you able to control the massive support discounts? Can you comment on the average price, track record, and going forward from fourth quarter onwards, how are you going to control the impact of massive support discount? Can you comment on that?

Unidentified Company Representative

The impact of massive support discounts. For the third quarter, three months period, they had an impact of ¥68 billion approximately; on a cumulative basis approximately ¥150 billion.

Kei Takahashi – Mizuho Securities

Can you comment on the per device impact? Per device, the average set price

Unidentified Company Representative

I will try to reconfirm the numbers sorry the numbers will be provided to you afterwards. For the third quarter compared against the second quarter, the massive support discount has been raised slightly, but by migrating customers to smartphones, we can expect the ARPU boost of ¥2100, so we control the market support this country then that range and that is going to continue in the fourth quarter as well. I have got the numbers here. I am sorry.

Kei Takahashi – Mizuho Securities

Increasing the price of shipment and trying to secure a gross margin is one kind of philosophy, but if the actual massive support discounts increases, then that will have a overall toll on your after next fiscal year onwards, so shipment prices increasing by controlling. I think there will be a timing that you will be able to control the discounts, when will that happen can you comment on the prospects of when you’ll start to more skillfully manage that discount level?

Unidentified Company Representative

Well, ultimately if you are able to secure a greater number of net additions, of course the wholesale price increases, and then providing hefty discounts and we said about deferring the costs, we do understand your point. So during that grace period of two years and how to collect the number of customers, and then if you are able to secure number a number of net additions, we will be having easier time going forward, so if you are able to secure net additions by reducing the churn rate, that’s okay. It’s about the sales is good, so it’s about trying, it’s about reducing the number of churn and so that’s the point, so we are trying to control the discounts. Looking into the churns, okay, I’ve got the point numbers here. It’s about ¥2000, slightly over ¥2000 per month, ¥2000 and several tenths of yen.

Operator

Next question please.

Shinji Moriyuki – SMBC Nikko Securities

Moriyuki from SMBC Nikko Securities. Thank you. I would like to ask several questions. On page 36 and Mr. Kato, you’ve talked about some of the actions that you would like to take in the future. Now first of all, most important to in relation to cost reduction is to narrow down on the handsets and models, I suppose what you have said in the past year to actually put into words. Plenty of belief that you will be able to realize that. When you take a look at the recently announced model lineup, you still have a very large number of models, so once you are able to narrow down on the models, then this is going to lead into cost reduction, and also the fact that you have over spend so much on development of handsets but not leading to profitability, maybe you will be able to eliminate that situation, so that’s my first question.

My second question; I believe, you have explained that your competitiveness in relation to product has improved you are seeing the same thing once again in this presentation. You also talked about your weakness in terms of communicating to the market. So if you are able to actually strengthen your ability to communicate, maybe you will be able to compete with iPhone, and of course if you are able to incorporate iPhone as part of (inaudible), this will also strengthen your position. However it seems that nothing has changed in your ability to communicate, but will this change? I suppose it can’t be done overnight, but when do you believe, that these new actions will actually be seeing, so that is my question

And my third question, again it relates to page 36, you have talked about reinforcing competitiveness, aside from handsets, when do you believe that elements highlighted on this page, aside from handsets can be achieved. Can you give us a timeline? Thank you very much.

Unidentified Company Representative

So I would like to talk about narrowing down on the models, in the past we have 22 new models in a given season, now in the spring season we add a winter and spring, it’s still substantial although the number has come down. But the devices took a lot of time after they have developed until they can actually be put into the market place. I think you will see the full fledged effect of this new policy not so much from some are from the winter model.

So how many models, how much reduction? This is something that we will plan in relation to our product planning, of course we have they are partners involved such as franchise involved and we have to cope with this new plant bearing based on our dialog with our partners. But starting from the summer model, we will be able to narrow down all the models to a certain extent and we will further expand that in the winter model.

Now our ability to communicate to the market place; yes, suppose, we are actually, we are very humbled, at the same time though, we are not actually communicating what we should really communicate, so we need to create a structure, a system whereby we will be able to communicate what we want at the right timing.

Now, in the product announcement recently I mentioned that there was a certain model that we really wanted to prioritize. It has happened until now, we have never really put emphasis on single model but we did that, so we took that stuff this time around, so in terms of product planning and product development we will make sure that we will be able to produce models that we can actually promote, because we know that this will be very popular in the market place and this will generate sales. So this is something that we want to further enhance.

Shinji Moriyuki – SMBC Nikko Securities

Now, Page 36, reinforcing competitiveness, what about the timeline?

Unidentified Company Representative

First of all, some of these activities already have already begun rather, and we’re actually bringing forward some of our plans, especially in relation to the network. For example, we have heard that the throughput for LTE and Xi has been falling down, has actually declined, but we’ve been obviously improved this and we have the know-how pretending to tuning of the network. So we’ll continue to accelerate migration to LTE network and also revamping core business, directory, e-mails. We are now carrying out – we’re actually now in the process of the final testing for the mail. So we are making steadfast progress and I’m sure that a given timing will be able to show you the results.

Shinji Moriyuki – SMBC Nikko Securities

I’m afraid this was a very big question. I wanted to ask about your handset, there were 20 models compared against the other competitors, that’s double the number of models, you say that even if you’re able to partially reduce the number of models in summer, what about winter, we’ll able to really have the number of new models then. Is that the image that I should have?

Unidentified Company Representative

Again, how many models, how much reduction, I really can’t talk about that right now, but we are now in the course of making much consideration, we’d like to narrow down as much as possible, reduce cost by providing models that will enjoy very large sales. So that’s what we want to do.

Shinji Moriyuki – SMBC Nikko Securities

Now, your ability to communicate, I’d like to go back to that in separate question with the [White Dunk], this very famous letter promoting AU products, but I’m not talking about this very limited forum such as product announcement, I think you like ability to appeal your products in a broad sense? What about your ability to appeal that – your commercial you see, your advertising. Are you not going to change your advertising?

Unidentified Company Representative

That something again that we are considering and selling right now, have a structure to that, we want to change that as much as possible through various studies. Of course, it is not that we have something concrete at the moment. We cannot do this suddenly, but I think we need to communicate about DOCOMO’s universe, how we hope that we’ll be able to communicate the attractiveness of DOCOMO as the universe. That’s what we want to do. When we’ll, we do not.

Shinji Moriyuki – SMBC Nikko Securities

What about the specific timeline?

Unidentified Company Representative

Well, let me see, timeline. I cannot believe – I don’t have that information. I cannot comment on that. My apologies.

Operator

Any other questions? Yes. That side of the room please.

Oshida – JPMorgan

My name is Oshida with JPMorgan. Just as a reconfirmation I have a question. On Page 44, the ARPU excluding the impact of Monthly Support discounts are illustrated here and I think this is the first time on a quarterly basis that you bottomed out or stayed flat. As a consequence, aggregate ARPU exclusive of the impact of Monthly Support has been expanding. The Monthly Support discount has been increasing from JPY290 to JPY390, JPY100 up every quarter. So of course we do understand your point that you are trying to limit this within a JPY2000 range, but the Monthly Support discount itself by strategically decreasing the amount of discount, you might be able to curb the impact of Monthly Support. Is that included in your plan?

If you are able to do that, then the service revenues might start bottoming out and start climbing again. Unless you do that even though you are able to succeed in increasing the data ARPU and halting the decline of voice ARPU, it will be difficult for you to increase the total aggregate ARPU. So can you comment on your thinking behind that? That’s my first question.

The second question is another confirmation for Page 34. You are going to reduce your cost by JPY200 billion in order to achieve your operating income target. If you are going to do the structural reform and if you’re going to single out the [element] from the JPY200 billion, can you comment on the breakdown of budget for the network category, sales services and R&D and devices? Can you comment on the breakdown of the cost reduction allocation for each category? That’s all I have for a question.

Unidentified Company Representative

The Monthly Support, that we will deliver Monthly Support and how deep do are we going to provide discounts, I think that was the question, but on the other hand, if you look at the actual market price of our product, the Monthly Support discount will have a direct impact on the retail price of our products. So, in that regard, we will have to question whether the way of selling smartphones is adequate or not. We are looking into rationalizing the sales practice, but on the other hand, the other smartphone in the market is sold at that price. So we will have to take into consideration the competitive environment.

So it may be difficult for us to make an immediate change, but then if you compare the second quarter with the third quarter, the Monthly Support discount remain flat or depending on the model, we’ve reduced, in fact, the amount of discount offered by the Monthly Support. I cannot comment on which product, but this kind of practices will be increased going forward, because we don’t want to sell our handsets effectively for free and compete on cheap prices. So, we’ll have to use our wisdom to control the discount level.

Oshida – JPMorgan

So does it mean that so long as you are selling smartphones, you are not going to be able to easily reduce the discounts?

Unidentified Company Representative

Well, that maybe the case, because this depends on the competitive landscape, because we are the weakest in the number portability game. So it’s very difficult to predict how far do we have to provide the discounts, but we will like to consider seriously what will be adequate level of discounts.

Kazuhiro Yoshizawa

I am Yoshizawa. I’ll talk about the cost. Regarding the breakdown of the cost allocation, actually we are currently studying and working on it. So if you could divide between among these four different categories, it’s difficult for me to comment on the breakdown immediately, but as far as the devices are concerned, we are going to narrow down the product variety and we are still working on it right now as we speak.

Well, I don’t think there is a huge distribution to only one category and a very small cap distribution to another category. But we are still working on it. I am responsible for structural reform. So in that capacity, I would like to say this comment that it’s not about making a distribution of JPY200 billion and that’s it. We will try to seek upside, even further from the JPY200 billion level, so we have avoided the departments to maximize the cost reduction. It’s about reducing our cost of product and also the repair cost as well.

We are also looking into the final destination of the products, i.e., the recycling, so we are trying to reduce the overall cost and I believe that devices will have the biggest impact on cost reduction among these different categories. Also, we don’t want to sacrifice the services offered to customer in order to maintain the satisfaction and that’s going to be the next step in this journey.

Oshida – JPMorgan

Thank you.

Operator

We are fast running out of time. We will take one final question. Would anybody like to ask a question? Listen, this will be the final question.

Unidentified Analyst

(Inaudible) from ASK Research Institute. One question, Page 28, you talked about dgame on Page 28, the 15 titles and 300,000 registered games. So if that is the case? Well, I think the numbers are quite small for social network service, so how do you assess or evaluate the number of registered games?

Unidentified Company Representative

Yes, I agree. The number of games are still small, but we are still at the inception phase. So inclusive of items, we want to further enrich the attractiveness, but please bear with us, as we try to do this going forward. Thank you very much.

Operator

Thank you very much, ladies and gentlemen. We’d like to conclude the session at this juncture. Thank you for joining us despite your busy schedule. Thank you very much.

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