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NTT DoCoMo, Inc. (NYSE:DCM)

F3Q10 (Qtr End 12/31/09) Earnings Call Transcript

January 29, 2010 3:00 am ET

Executives

Hiro Okado – Head, IR

Ryuji Yamada – President and CEO

Kazuto Tsubouchi – EVP, CFO, Managing Director of Accounts and Finance Department, Responsible for Business Alliance Department

Bunya Kumagai – EVP, Responsible for Consumer Sales

Analysts

Hironobu Sawake – JPMorgan

Tetsuro Tsusaka – Barclays Capital

Hitoshi Hayakawa – Credit Suisse

Daisaku Masuno – The Nomura Securities

Atsuo Takahashi – Mizuho Securities

Hiro Okado

Thank you very much for waiting. We appreciate your presence today despite your busy schedule. Now we would like to start the analyst meeting announcing the results for the first nine months of the fiscal year ending March 2010. I am the Head of IR, Hiro Okado, and I will be presenting this meeting. Please be aware that this session is broadcast live via FOMA and also over the Internet. In addition, the recorded video of this meeting will be distributed through DoCoMo’s IR site on a later date.

Now let me introduce the participants to this meeting. Mr. Yamada -- Ryuji Yamada, President and CEO. We also have Mr. Kiyoyuki Tsujimura, Senior Executive Vice President; Masatoshi Suzuki, Senior Executive Vice President; Executive Vice President responsible for consumer marketing Mr. Bunya Kumagai; Executive Vice President and CFO, Mr. Kazuto Tsubouchi; Executive Vice President and Managing Director of Corporate Strategy & Planning Department, Mr. Kaoru Kato.

For today’s meeting we will be using two sets of documents. One is the presentation and the other is the earning release. Please confirm that you have the two complete set of documents. For today, in the beginning, we will have a presentation from Mr. Yamada and followed by a Q&A session. We would like to finish this meeting by 6 o’ clock. Please also be aware that this meeting may contain forward-looking statements. And for those potential risks, please see slide number two or Form 20-F with the US SEC.

Now without further ado, we would like to have the presentation from Mr. Yamada.

Ryuji Yamada

Good afternoon to you. I am Yamada of NTT DoCoMo, and thank you very much for your continued patronage. We would like appreciate your time today. Now without ado, I would like to present -- begin the presentation regarding the results for the first nine months of the fiscal year ending March 2010. In the interest of time, I would like to speed up.

For the first nine months of the fiscal year ending March 2010, these are the results that we have achieved. As you can see, operating revenues declined by 4% year-on-year to 3,242.4 billion yen. Operating income decreased by 5.9% year-on-year to 702.7 billion yen. We posted a decline in both revenues and income. The reason for this decline in operating income is mainly due to the fact that last year we had an income boosting impact due to the introduction of the new handset purchase method in the prior year. So there was a huge generation of profit in the first half of last fiscal year. The progress of operating income vis-à-vis our full year target is about 84.7% as of the end of December, which was almost in line with our predictions.

Slide number three, these are the highlights of the results. Cellular services revenues and the cost reduction measures and other factors affecting the results. First, the cellular services revenues. Because of the continued popularity of Value Plan, in fact 95% of customers are using the Value Plan today, and that has resulted in a decline in voice revenues. And in order to offset that decline, we believe it is very important for us to increase packet revenues. Packet revenues have been growing steadily due to the expanded uptick of our flat rate plans and also the extended usage of video and other content services.

Second is about our cost reduction efforts in order to cope with the decline in aggregate ARPU. We’ve been taking strategic measures such as the improved efficiency of capital expenditures in order to reduce our costs. Other factors -- these other factors are now accounting for a larger bulk than before, and that is why we have added this item in this slide. The Mobile Phone Protection & Delivery service is one factor that has affected both the results in the revenues and expenses. So it’s the Oak Lawn Marketing inclusion into the consolidated accounts.

Number four. This is about the factors affecting the year-on-year changes in operating income. The first item is the decline in voice revenues, which declined by 187.5 billion yen. In terms of voice ARPU, we posted a decline of 450 yen year-on-year. And this is mainly due to the expanded uptick of Value Plan and the reduction of billable MOU. On the other hand, packet revenues increased by 59.2 billion yen. This is because packet ARPU increased by 70 yen year-on-year from 2,370 yen last year to 2,440 yen for the first nine months of this fiscal year.

Total handset sales decreased by 1.77 million units year-on-year. Accordingly, the handset sales revenues declined by 84.8 billion, and also the cost of handsets sold decreased by 99.6 billion yen. With respect to network-related costs, we have posted a decline of 19.6 billion yen in network-related costs. As I said, Oak Lawn Marketing is now included in our consolidated accounts, and therefore that has affected the ups and downs of other revenues. So accordingly, in total, the operating income for the first nine months was 702.7 billion yen.

Now in particular, I would like to explain more details about the packet revenue increase, the cost reduction, and other factors. If you can flip to the next page, this is about the increase in packet revenues. As you can see towards the very left hand side of the page, the red bar, this is the negative impact due to subscribers migration from Pake-hodai, Packet Pack to Pake-hodai double package. This accounted for a negative impact of 20 billion yen approximately. And quite a large number of subscribers have already joined the two-tier flat-rate Pake-hodai double package.

So this impact is expected to level off going forward. On the other hand, towards the right hand side, we have seen a 60 billion yen increase in the number of -- in the usage of packets. Smartphone and PC data card increased subscription accounted for another 10 billion yen increase of packet revenues and a revenue of i-mode fee also accounted for another 10 billion yen increase. So effectively due to the expanded use of packet service, as you can see on the slide, 70 billion yen additional revenues were generated due to the additional use of packets -- expansion of the use of packets.

Slide number six. Now, how are we doing with respect to cost reduction in order to mitigate the decline in aggregate ARPU? As I said, the cellular services revenues have declined by 128.3 billion yen. In order to cope with this decline, we have been working to reduce our network-related costs and improve the profitability of equipment sales related business. Of course, this is not enough. So we would like to continue the cost-cutting efforts in the fourth quarter as well.

Slide number seven. Other ups and downs. The Mobile Phone Protection & Delivery service. Because its subscriber base reached 24 million as of the end of December, up 10 million compared to the same time of last fiscal year, this has resulted in an increase of both revenues and expenses of approximately 30 billion yen each. Secondly, Oak Lawn Marketing is a consolidated subsidiary. And because of this, on a year-on-year basis, our revenues increased by 35 billion yen approximately.

The third item is repair-related costs. Because the number of handsets submitted for repair has increased by approximately 50% compared to the same period of last fiscal year, we reviewed the allowances for handset repair costs. Therefore the repair cost was increased by 20 billion yen.

Page number eight, the changes in operating income this fiscal year compared against last fiscal year. In fiscal 2008, due to the introduction of Value Course, there was income-boosting effect. And therefore 2008 was an irregular year, but this year is a regular year. And if in fact when you single out the third quarter alone, we have posted an increase of 28% year-on-year in operating income. Towards our full year target of achieving 830 billion yen of operating income, we are making steadfast progress.

Slide number nine. This is about the status of the new business model. I would like to give you some operational numbers. The total subscriber base of new discount service is now reaching its limit. Actually we have seen a slight decrease in its number of subscribers. As of the end of December, we had 34.6 million subscribers to the new discount services, and I think that is already hitting the ceiling. The Value Course is now subscribed by 29.7 million users, and this is continuing to grow. In fact, more than 95% of customers who are buying a handset today are choosing the Value Course.

Slide number 10. This is about our cellular ARPU, which is a fundamental building block of our business. The aggregate ARPU for the first three quarters declined by 380 yen year-on-year to 5,440 yen. Among that, voice ARPU declined by 450 yen year-on-year. Out of that 450 yen, the impact of Value Course subscriptions accounted for approximately 200 yen. And the reduction of billable minutes of use accounted for another 200 yen. On the other hand, the impact of the review of the two-month carryover allowances positively affected the ARPU by 40 yen. So altogether combined, the actual impact was down 380 yen.

On the other hand, packet ARPU has continued to post a steadfast growth. And we believe the growth of packet revenues is very vital for our business going forward, as we have stated on variation occasions. So we would like to further increase the usage of especially the medium and light usage customers.

Slide number 11. This is about our churn rate. Our churn rate has remained very low at 0.45% for the first nine months of this fiscal year. As you may know, because there were many customers who saw the expiry of their Fami-wari Max50 and discount service contracts in September and that has resulted in a temporary increase in churns, but that situation has already stabilized.

Next is about our handset sales. The total handset sales for the first three quarters declined by 12% year-on-year to 13.01 million units. But when you look at the third quarter alone, October to December, the decline was limited to only 6.9%. Therefore we believe the downtrend has come to -- somewhat come to a stoppage. The major reason for why we believe that is because the previous 905 models and 705 models, those were actually very popular models. Actually many customers bought these handsets in December 2007 and March 2008. And these people are likely to replace their handsets going forward.

Page number 13. This is about our market share of net additions. The cumulative number of net additions for the first three quarters was 835,000, up 8.9% year-on-year. So our total number of net additions has risen by just less than 10% compared to last fiscal year. And the market share of net adds for this fiscal year’s first nine months was 26.7%. Number portability, as you can see there, in September, there was a slight increase in the outflows because of the reason that I just mentioned, but this has been continuing to decline.

Slide number 14. The migration of subscribers to FOMA. For the first three quarters, total number of migrators was 1.85 million, reaching 80% of our full year target. And our intention is to have 95% of our total subscribers accounting for -- joining the FOMA service by the end of this fiscal year.

That’s about all. And now I would like to introduce the actions taken during the first three quarters. Page 16 talks about the expansion of packet usage. From the management perspective, as we have repeatedly said, how can we boost packet usage is a very critical challenge. How can we tackle this component is the biggest part of our challenge. So therefore to expand packet usage, we have to focus on i-mode for one thing, and the other is PC-based data access and the other is smartphone. So it’s a three-pronged approach. In terms of i-mode, we will be focusing on the so-called heavy users, naturally. But also we would like to focus on the medium and the light users. How can we further boost the usage among this bracket of users is very critical.

Page 17. This talks about our efforts in relation to heavy users and the medium users. In the case of BeeTV, we want to protect the image of DoCoMo as a company that offers video. So that’s how we want to further promote the BeeTV service. Now, in terms of the growth of the subscriber base for BeeTV, we are at a standstill, but from February we will be launching new programs. I think we can further boost subscribership. Also we have a new joint venture with DeNA, and we hope that this will also help to boost packet usage.

Page 18. This talks about the expansion of i-mode packet usage targeted toward the medium users and the light users. This is something that we really need to squarely focus going forward. For one thing, one big goal for us is to encourage subscription to Pake-hodai double. The minimum rate has been lowered to 390 yen. So we would like to encourage customers to subscribe to Pake-hodai double. Once they do so, they will be able to have access to various contents. And this will enrich their lives. We will be offering everyday life-oriented contents. So that’s something that we would like to really promote. So encourage subscription to Pake-hodai double, that’s something we need to do.

And also, in order to further boost usage, the key will be offer everyday life-oriented content. We hope to create and offer a very large volume of such contents. And also, contents (inaudible) senior citizens is something that we need to focus on. Another area, again, since we are talking about light users, we have to offer improved ease-of-use and convenience. Also face-to-face recommendation, I also visit DoCoMo shops from time to time. And DoCoMo shop, one of the popular services, is to offer initial setup for the customers at the DoCoMo shop. That’s something that’s very popular, and this also has encouraged to greater usage.

Turning now to page 19. This talks about the expansion of i-mode packet usage, offering everyday life-oriented contents. What type of contents are they? One type would be to offer community-oriented contents and also offer hobby as well as practical information. That’s something that we would really like to steadily pursue. One service is called (inaudible), offering and delivering garbage collection day related information. That type of content is available. And also we have another service called the Shufoo!, which offers bargain-related information. And also in relation to hobby/practical information, we are now tying up with the video site for (inaudible). So these are the services which we hope to further promote.

Page 20 talks about the expansion of i-mode packet usage in relation to improved ease-of-use and convenience. So we will be offering new concept menu screen and also we want to trigger use of i-mode through mail and also deliver free Deco-mail animation materials through mail magazine. We had a trial in the Kisha [ph] area, which was very popular. So we are beginning to see various new activities in (inaudible). So that relates to our efforts to further expand our packet usage.

That being the case, how -- to what extent rather have we been to promote i-mode packet flat-rate services? The initial Pake-hodai subscription rate target for fiscal year ’09 was 47%, which we achieved in September. We talked about this already. So we set an even higher target of 55%, and we are now close to 49% in terms of Pake-hodai subscription rate. In December, we exceeded 23 million. We have many subscribers from Pake-hodai services, but then the subscription rate for the Pake-hodai double has become somewhat lower. So what is important is that once we encourage them to join the Pake-hodai double flat-rate service, how can we encourage further usage.

Turning now to page 22, which talks about PC data communications. Again, this will help to boost packet ARPU. With regard to PC data communications, DoCoMo’s network quality, as you all know, first quality. So the network quality is very well appreciated. And also, starting from April, we lower the pricing. So this has offered to further (inaudible) to PC data communication sales. And also the monthly PC data communication device sales has reached 50,000 per month.

And also in terms of the market share, DoCoMo accounts for 30% of the PC data communication device sales. In particular, we want to further pursue PC with built-in modules. We are now able to have 20 different models being offered by five different PC manufacturers. So this is one area that we would like to further expand going forward.

Another way to further boost packet ARPU is smartphone. So our efforts in relation to smartphone, on Tuesday last week, we announced the launched of Xperia. And we received various response. So while offering excellent smartphones, it’s important that we actually encourage such smartphones to further expand the usage base.

Up until now, smartphones were primarily geared towards people with high IT literacy. But as for one -- high IT literacy guests, also they might interested though they might take a look at them in shops. They tend to shelf switching to smartphones until a later date. So we need to be able to project the image of smartphones as being very easy to use and as being quite accessible.

So for one thing, we want to further promote and integrate the Biz-hodai double with Pake-hodai double. And also we are going to be launching the so-called DoCoMo market service. So with the launch of the Xperia, we also hope to further enrich the environment for the usage of smartphones. So we will also be focusing our efforts in relation to smartphones going forward. So that is the highlight of our efforts to further boost packet usage.

Turning now to page 24. From this page onwards, we are talking about new services. So let’s me talk about service personalization, i-concier. From the winter model, we will be providing automatic or auto-GPS function. The subscriber base for i-concier has expanded to 3.1 million. So with this subscriber base of 3.1 million for i-concier, we hope that we can further add -- boost, if you will, to the subscriber base.

People living in the Tokyo area, they will be able to have access to train schedule information. But if you go to, let’s say, local communities, can we further boost usage? It’s important that we offer local contents, contents that are specific to each community that -- which will be even more convenient for the customers. That’s something that we need to focus on. So we want to further enrich local content. And this is something that we are doing in conjunction with Kanagawa Shimbun newspaper, for example.

Turning to page 25. This talks about social support. In principle, this is still in its infancy, but we will have to further grow and develop the social support services. One, that’s a DoCoMo point or point rather is Environmental Sensor Network business. We started trial operation in December last year. We are also having capital alliance with Weather Service, offering weather information appropriately to customers.

Another type of service is the Bicycle sharing, which is very environment friendly. So we are going to connect mobile phone functions with bicycle sharing -- rental bicycle services. For example, in what locations are vacant bicycles available? If that type of information could be provided, then we believe that this will really boost the ease-of-use. So we would like to offer verification trial in Hokkaido.

Page 26 talks about converged services. MyArea and Otayori Photo are new wireless photo frame services. In terms of the Otayori Photo or the wireless photo frame, our competitors have been doing very strong sales with type of phone frame. And we are also very interested in expanding our sales in this particular market.

Page 27 talks about the handset lineup. For the winter and spring model, we enjoyed even stronger sales compared against our summer model. So we are quite confident. In terms of the new series, the accumulated sales to date has now exceeded 13 million handsets. Also in terms of the breakdown of the four series, DoCoMo style series accounts for the largest part. That’s something that we had initially anticipated. And I believe the current breakdown is the result of our efforts. We have brand-based collaboration with five different brands. So the price per handset -- or cost, rather, per handset has also been coming down.

And finally, on page 28, we talk about the global expansion. In India, we are working under the brand of TATA DOCOMO. And the startup has been very favorable so far. For example, from August 2009, we enjoyed the biggest market share in terms of net adds for five months consecutively. Success of TTSL will translate into success of DoCoMo. So I have (inaudible) to offer different occasions up until now. So we want to further work together with Tata. Subscriber base exceeded 57 million. That’s DoCoMo alone 57 million subscribers. So that’s even larger than the domestic subscriber base we have in Japan.

So that completes the highlights of the third quarter financial results and our efforts. We’ve been focusing on Change and Challenge ever since we announced our new medium-term vision. And we have -- (inaudible) into tangible results such as lower churn rate and increased net adds. And in terms of customer satisfaction, I think we have been able to further improve this.

As far as our finances are concerned, on a standalone basis, third quarter has actually increased profit -- operating profit by 28% compared against the third quarter of 2008. So the 830 billion yen target of operating target, which we set at the beginning of the year, we are confident it can be achieved at the end of this full year.

i-Pad was announced yesterday. And so the environment surrounding the telecommunication industry is changing quite dynamically. And so there are different type of winds, if you will, blowing in this industry, but we want to be able to very expeditiously respond to any such trend. We believe change means opportunity. So therefore we need to set various challenges and work toward achieving those challenges. We would like to ask for your continued support.

So that completes my presentation. I apologize for the lengthy presentation. Thank you very much.

Question-and-Answer Session

Hiro Okado

Thank you. We would now like to entertain your questions. If you can raise your hand, a microphone will be brought to you. Please begin your question after identifying your name and affiliation. Now, any questions. Yes. The gentleman in the first row, please. The first row.

Hironobu Sawake – JPMorgan

My name is Sawake from JPMorgan. I have two questions. One is about the financial results and the other is about a more medium-term matter. With regard to the financial results, I have the following question. The two-month carryover allowances, you changed the method of its calculation and that has positively affected the ARPU. That’s what I understand. What’s the reason? What’s the background for doing that? Can you explain the more details about it? The other question, which is totally different. Also the DoCoMo Point Services allowances, I think you have changed a lot of that calculation as well. So can you elaborate on that one? That’s my first question.

Ryuji Yamada

Okay, let’s go one-by-one. Mr. Tsubouchi will give you an explanation.

Kazuto Tsubouchi

I am Tsubouchi. I should have commented this from my side. This time around in the first three quarters results, we have made three impactful changes. One is, as you may -- rightly pointed out, the two-month carryover allowances, its calculation method helped to reflect that into revenues were changed. The foundation of the calculation was changed. That’s my first point.

The second is about the DoCoMo Point Service calculation. How much points to be awarded to customers and the according allowances were reviewed. This is because of the mobile phone protection and delivery services had some repercussions on this. And the third one is the depreciation and amortization for last fiscal year’s third quarter was -- has something to do with this fiscal year’s results. So I would like to comment on those.

Now with respect to the first two matters, although these are two independent points, two years ago we introduced mobile number portability. And we revised many systems two years ago. And now we have seen the lapse of two years and we have seen the -- we have a better picture than before. So we thought that it is quite good time for us to reflect on that and make necessary changes with the two-month carryover service.

Since August of two years ago, we introduced Fami-wari Max50 and then various other discount services, and in November we introduced the other discount packages. And those are accounted for hundreds of billions of yen in the decline in revenues. These include a lot of free bundled minutes of MOU. And these free minutes bundled together with these discount services were not decreased when we decreased that basic monthly fees.

So in some cases, the bundled free minutes are much more higher compared to the basic monthly fee that customers are changing, paying after the discounts are applied. But the bundles have to be deducted and will have to be deferred to the following months because of this two-month carryover service. And so in reality what has happened is that the deferred allowances are now sometimes higher compared to the actual amount paid by customers. So there we have decided to review this issue.

And since two years have passed since the introduction of this new service and according to SEC’s guidance, we have to -- we are allowed to review this after two years time when the data is accrued and we have a better picture to the judgment of how much allowances should be given. So that is why we have taken this opportunity to review the amount of allowances to be given to the two-month carryover service.

In the previous calculation method, it should have been 90 billion-plus yen. But after the review at this time around, because of the actual amount subject to be incurred in allowances have been decreased, and therefore that had an impact of increasing the revenues by 18.2 billion yen. And the voice ARPU accordingly has increased by 40 yen for the first nine months of this fiscal year. But when you look at the third quarter alone, October to December, the voice ARPU seems to be 110 yen higher compared to without the review of the allowances. So please be aware of these changes.

The second point with respect to the DoCoMo Point Service, if you can open page 32 of today’s presentation, on page 32, we don’t have the detailed numbers -- the direct number here. But if you can look at the second line from the bottom, the revenue-linked expenses, which had 925 billion yen, we always divide revenue between revenue-linked expenses and other expenses. Out of this 925 billion yen, DoCoMo Point Service related cost accounted for 160 billion yen or so. Last fiscal year, that was 1,862 -- 186 billion yen. So there has been an increase of 143 billion yen.

What is the breakdown of it? 27 billion yen was reviewed as a result of the allowances for DoCoMo Point Service. Because the DoCoMo Mobile Phone Protection & Delivery Service was introduced two years ago, and this is an actual insurance service, so if customers do not use this insurance at all for two years, we ourselves give some addition awards to the customers, which equals to 3,000 DoCoMo points, which can be used for various rewards. And this is additional points that we have given.

Upon the introduction of the Value Plan, and we have recognized at the initial launch of the service that this 3,000 points will have to be reflected in the financials when our customers actually use that point, but it was later identified that this has to be included in allowances beforehand whether the customers actually use it or not. So -- but now that it has been two years since the lapse of this service -- since the introduction of the service, more than 30 million customers are now joining the mobile insurance service. So we have decided to review this again and better account it for 27 billion yen or more than 30 billion yen -- 30 billion yen. And this is on the one-time charge for this fiscal year, and we can only expect a gradual change going forward.

The third factor is about the PDC accelerated depreciation of last fiscal year. That was done last fiscal year and that had an impact of 50 billion yen this fiscal year because there has been a decline of 70 billion yen last fiscal year, out of which 50 billion yen is related to the impact of the accelerated depreciation of last fiscal year. So therefore in reality, the pure reduction of depreciation for this fiscal year is only 20 billion yen. So when you make an analysis, please be aware of these changes compared to last fiscal year.

Hironobu Sawake – JPMorgan

Okay, thank you very much. The second question is about your medium-term vision, which is based on the slogan of Change and Challenge. It’s been one year since you introduced that scheme. And during the last results presentation, you said that you have a boot camp of Board members and they discuss the challenges for the future. I guess many of your work items are making steadfast progress. And it seems from the presentation that you are now finding a lot of concrete actions to be taken. But -- except -- other than these, do you have anything else that you want to tell us, including the risk items as well regarding the things that have not come to the searches or something that we have to be aware of for the future. And also I have another question regarding overseas investment, especially Tata. You have 26% stake in Tata today, but in the future do you have any plans to increase that stake-holding in the future? Is there any possibility of such increase in the future?

Ryuji Yamada

Yes. The challenge items -- what we are discussing among the Board members is as follows. After the first half results announcement, we have conducted what we call off-site meeting. We gather in a hotel on Sundays and discuss whole day. The cycle we take is plan, do, check an action. So of course, we plan and do, but check is very important. And after this checkup service -- checkup exercise, we have identified that it is vital for us to increase packet ARPU and how to achieve that. Of course, packet ARPU -- everybody understands that packet ARPU is important and we have agreed through the Board members that down-to-earth approach is very important. And of course, we have therefore identified many concrete plans that we have identified in the slide. So the packet ARPU is our primary focus today.

And in addition to that, according to our challenge plans, we have introduced i-concier service, and this is now developing to a bud, if you will. But the social support service is something that we have to work even harder for the future. It’s all up to the future of development. And another thing that we haven’t mentioned is about the kind of -- new kind of development, which is occurring in the global arena like the iPad, the Kindle and so forth. When these happen in other markets, how we can react is another issue, and whether we can generate something new from ourselves is another challenge that we have to tackle.

And your last question about Tata investment, our possibility of increasing investments, at this moment, we don’t have any concrete plans at all. We will have to continue the possibility of injecting additional money for the sake of 3G rollout, but not for the sake of increasing our stake.

Hiro Okado

Next question, the gentleman in the third row from the front, please.

Tetsuro Tsusaka – Barclays Capital

Tsusaka from Barclays. Thank you very much for this opportunity. First of all, I wanted to ask about packet. Two questions as a matter of fact, they both relate to packet. Expanding packet usage that’s on page five, you talk about 60 billion yen impact from subscriber growth and increased packet usage. You mentioned this number.

And the other is smartphones and PC data card -- data communication devices, 10 billion yen. In terms of subscribers, even at maximum smartphones and PC data card users will probably only have an increase of, let’s say, 1 million. So that probably translates to 10 billion yen. That’s for -- i-mode, you have already 55 million subscriber base. But then this has only led to 60 billion yen impact. So 1 million subscriber base contributes to very large increase. So this very smaller base probably has a greater contribution to your revenue growth, but even against the backdrop. Be it PC data and modules and so forth, it doesn’t seem as though DoCoMo is all that very proactive or that active in terms of the mobile data communication devices. (inaudible) you are going to say that you are interested in both, i-mode as well as PC-based mobile data communication devices, data cards and smartphones. But are you -- do you have any plans to further enhance your smartphone and PC-based mobile data communication devices? How are you going to strike a balance in terms of the revenues and subscriber breakdown?

My second question is this. You talked about iPad. So let me take this up. In the past month or so, globally, we have seen various SIM-free devices being launched into the marketplace, at least that is the trend. Now, when we take a look at your pricing plans, and maybe perhaps wrong, but if one wants to use SIM-free device, then the packet would be set at 30,000 yen. So unless you take the initiative, the users will not be able to receive the benefit of 6,000 yen flat-rate service. So there is an imbalance, if you will. So globally speaking, these devices are becoming inexpensive. The innovation is second place [ph].

So how long can you hang on to this model thereby unless DoCoMo offers the devices, the prices will remain very expensive? How long can you continue on with this current billing plan? Since you talked about iPad, on a related note, perhaps I could ask this question. My question, in terms of 3GPP -- it's a 3GPP standard I think. So responding to micro-SIM, it’s something that can be easily done, is that the case? Or micro-SIM in itself is very difficult standard? In terms of the potential timeline and timing, can you talk about how you intend to respond to micro-SIM? Thank you.

Ryuji Yamada

Thank you very much. Let me talk about smartphones, PC data cards and so forth. We’ve been doing this with mass merchandisers, but if you go to DoCoMo shops, you will find that PC data cards and netbooks have the prime location, if you will, even in terms of DoCoMo shop. And even in DoCoMo shop, they get the best places. They get the best spots. Even more than smartphones, maybe PC data cards actually are being further promoted by DoCoMo shops. And this has been something that has been taken place in the last few months. So the situation has changed significantly in the last few months.

From the ARPU standpoint, they offer ARPU of 4,800 yen -- up to 4,800 yen [ph]. So for both smartphones and PC data cards, yes, these users offer higher ARPU. So this is very attractive for us. So naturally we want to further enhance the sales of smartphones and PC data cards. So we are spending in various marketing expenses to promote the marketing because we want to have -- we want to encourage integrator packet usage. You will see for yourself if you visit DoCoMo shops.

As for SIM-free devices, yes, it is true that the SIM-free devices are increasing. If SIM-free devices increase in number, then one has to consider the billing plan and (inaudible) regime. Yes, we are a very fair [ph] company, but then because the environment is so dynamic, we really have to be very, very dynamic as well. As for micro-SIM, well, there is a question of how far can you go. But DoCoMo (inaudible) standard exercise in terms of micro-SIM. And we find that this is not very difficult to achieve. It’s probably possible for us to respond in few months time. But anyway, this exercise is something that will be done from this point onwards.

And as far iPad is concerned, it’s a very sophisticated form of PC in my opinion. So it has a built-in module. It’s a SIM-free module. It’s a PC-like device with built-in module. We are interested in iPad, so we are going to be very forward-looking and positive. And so there are devices like Kindle, for example. So we have to serve the trend among the customers. So the risk of repeating myself, increase of billing plan, yes, we will be giving thought to these matters.

Unidentified Participant

May I? when it comes to micro-SIM, I was thinking that this question would arise. So I brought this with me, maybe somewhat difficult for you to see. This is micro-SIM. I brought this with me because I anticipated this question. This is the standard SIM. As you can see, the metal part -- the shape of the metal component has not changed. And the plastic part has become smaller in size. So the expression of micro-SIM itself made to be misleading. If it’s like a mini -- it has a mini -- it's like mini-USCC [ph]. So the exterior of metal part has not changed.

So as Mr. Yamada mentioned, modifying this part is not going to involve a very large task. The software has to be changed. So that has to be verified and that will be some -- that will take a lot of time, but not such a long time. Also M2M business -- M2M module business, if we are going to pursue that, then I think the micro-SIM module will have to be considered. However, it has not reduced -- it's not been reduced dramatically in size.

Tetsuro Tsusaka – Barclays Capital

May I? As a point of clarification, what about the timeline -- timing? Maybe around summer this year? Do you believe that this type of products and devices will be coming into the marketplace? Is that the trend? Do you believe that your pricing and billing plans would also be adjusted in order accommodate this trend?

Unidentified Participant

Well, it includes how we are going to respond to iPad, for example. It can take credits [ph] of billing plan. We have to consider and observe the trend of the customers. So we will give thought to this matter. Thank you very much.

Hiro Okado

Now we would like to move to the next question. The gentleman in the fourth row, please.

Hitoshi Hayakawa – Credit Suisse

My name is Hayakawa from Credit Suisse. I have two questions. First, with respect to voice ARPU, voice ARPU offsetting data ARPU, actually compared against last fiscal year, your revenues declined by more than 100 billion yen, and voice, in particular, declined by more than 200 million yen. Now looking into next fiscal year, can you give us some guidance that is the current state of ARPU? And based on that, I’m asking this question.

With respect to voice, voice ARPU, definitely I am expecting a continuous decline in voice. When it comes to data, on the other hand, I do understand your ambition or your intent to raise data ARPU. But given the track record of data ARPU so far, after you made an upward revision, it seems as though that the upward -- the growth has leveled off or just it’s not so strong anymore on the 240 billion yen. And if that packet ARPU levels off next fiscal year, it seems that you have no choice but to continue cutting costs because voice is going to decline in any event.

Now, you are envisioning to achieve 900 billion yen for the future. And if voices -- voice declines next fiscal year and if data does not grow as much as you intend, how much cost can you work on in the next fiscal year, with 830 billion yen next fiscal -- this is the operating income target for this fiscal year and there is no guarantee that you can repeat that next fiscal year. So what is your view on ARPU towards the future? That’s my first question.

Ryuji Yamada

Let’s go one-by-one. Okay. Next fiscal year, we are now making the additions. So it’s very difficult for us to give you a definitive answer at this point. So our basic approach is to try to offset a decline in voice revenues by packet ARPU partially and also by growing the number of subscribers partially, but that is not enough to completely offset the decline. And how to do -- what to do next is to work on the challenge items, the new business areas that we have identified in our challenge program. So these are the two fronts that we have to work on.

We would like to also -- the two fronts is the challenge -- new challenge growth and the other is the efficiency improvement. And what are the efficiency improvements? Actually we have integrated the former regional subsidiaries. For example, this resulted in the integration of call centers. We are making steadfast progress in the integration of call centers and other operations. And what is good about this consolidation of regional subsidiaries is that we have initiated this best practice approach. For example, what is good in Q2, the best practice in Q2 is that’s a very good thing to be copied elsewhere, we do it in other regions.

So integration of logistic centers, call centers, and also the best practice copying. That’s one thing we are doing. And another -- and what I learned a lot, the most from my experience in NTT list is the repetition of best practices because I think that was one of the greatest benefit of integrating the regional subsidiaries. Of course we are not really optimistic about next fiscal year, but we are determined to try to achieve a level higher than this fiscal year. Now, I would like to take your next question.

Hitoshi Hayakawa – Credit Suisse

Yes. My second question is about the DoCoMo market, the apps market. I don’t think this is well known. As an ambition or as an action, other carriers as well as companies at upside [ph], they are taking actions. And perhaps i-mode might be the only successful model in the world -- vertical integration model. I think the world is now again headed toward that vertical integration model. So my question is, how serious are you about the DoCoMo market? What kind of structure will be in place for the development of these apps market? What is the philosophy behind? Can you elaborate on that? For example, do you have a project leader? And if there is any, can you identify the name? What is the team structure? Can you give us some more details if you can?

Ryuji Yamada

The project leader is Mr. Yamachita [ph], who has a beard. And DoCoMo market is after all is an approach for the age of open applications, like the Google’s open applications. Do customers really want to go to the United States and buy them? Actually the programs or applications, which are popular in Japan, developed in Japan, it will be much easier for customers if there is a market for Japan. It will be more convenient. Highly literate people who can read and speak English will be okay. They can just go to the Google’s applications -- Google's market and then buy from there. But our target is to allow customers who are not that different, but still be able to access the application they want easily.

So our intention is to develop an applications department store and fill that department with good quality applications, popular ones, give some ratings as to the most popular apps; one, two, three. It will be easier for customers to buy a new app if that department store is there. We would like to start that from April. In April, it will only be a link. But from the winter, we will further advance that. We will allow customers to buy programs from there, and if it’s a premium -- if it’s a paid application, we will enable customers to pay via DoCoMo using our billing systems. Android, of course, is an open system. So the DoCoMo market will have to be an open system. So we are not intending to do any vertical integration. So other carriers can of course join the service if they want to. Of course, initially it’s only going to be a collection of links. But anyway, we would like to enhance the convenience. That’s the overall intention for this.

Hitoshi Hayakawa – Credit Suisse

And a follow-up question. Maybe I didn’t really understand. Then if that’s the case, I don’t see the overall picture yet, but SoftBank is intending to realize, what is called, JIL, and compare against SoftBank’s JIL, what is your apps market? Is it much smaller? That’s my intention that I got after your explanation. So you are intending to develop on how -- DoCoMo market in a much smaller scale.

Ryuji Yamada

I guess JIL is quite different from the DoCoMo market. DoCoMo market is a department store of contents and apps, a Japanese department store, which is operated by DoCoMo. And in that department store, developers can bring their application and put it on the shelf of the department stores. Customers can access the department store, and if they like it, they can buy it. So it’s going to be a store, but JIL, on the other hand, is more model-specific. So it’s different from -- in nature.

Hitoshi Hayakawa – Credit Suisse

And which department of your company is responsible?

Ryuji Yamada

No, no, no. It’s the Frontier development department responsible for the development.

Hiro Okado

Next question, please, the gentleman in the second row from the front.

Daisaku Masuno – The Nomura Securities

Thank you very much. I wanted to ask a question about the open environment.

Hiro Okado

Can you identify yourself, sir, please?

Daisaku Masuno – The Nomura Securities

I do apologize. Masuno from Nomura Securities. The universe as seen by Google and the universe as seen by Apple, I suppose it’s very good that they are offering such universe. But then the scheme was created by them. And the ecosystem was also triggered by them. So suppose one way is to see yourself as a dumb pipe, if you will. Or the other route is not to aspire to be a dumb pipe; be something else offering added value. I suppose there are two paths.

You are going to be pursuing Android. Depending on the carriers that there is a great gap as to how much they could take in -- for example, in case of China Mobile, they customize and there is no logo indicating that it’s China Mobile. But in the case of smartphone efforts by yourself is concerned, although you’re going to be providing Android the mail, and the billing structure isn’t there in the DoCoMo market. It’s such that it is running in parallel. It’s going to be indicated in parallel to, let’s say, Android market. So it’s not fully integrated.

So it seems as though you do not have a finalized overall structure in place to accommodate open environment. So you talk about the Frontier Service, headed by Mr. Ikli [ph]. I think you have -- unless you’re going to be promoting this and providing (inaudible) people in this team, you won’t be able to accommodate this. So to what extent are you going to be expanding this team? Are you going to be able to finalize the structure by the end of the year? Do you have any plans? What are your thoughts in promoting this service?

Ryuji Yamada

Well, I think there are two steps involved. In the first step, we are going to be beginning the first step from April. And the second step will be from the winter of 2011 I suppose. Now, we are going to be launching Xperia in first step. And Android phones will also naturally be available. So we will be providing links. And if customers are going to be using this link, they are going to be linked to the Android market. But then at first glance, it would seem as though it is DoCoMo’s site. They are going to be buying with DoCoMo card.

Now, when we get to the winter, the second step, then we will be considering payment. This will be integrated with the DoCoMo bills. So the services and the contents and the applications continue in the DoCoMo market. Although DoCoMo will be providing in creating certain contents, most of the contents will be provided by others. So it’s like a department store. So others will be putting in their contents in DoCoMo market and the buyers will also flock to that DoCoMo market. So we don’t need several hundred people in our team. We do need to finalize what our department stores are going to creating and we need to establish a secure billing structure. And we need to offer convenience to the customers. So we also need to offer schemes, thereby the content providers will be able to very easily provide their contents to the marketplace. So this is what we need to do.

Daisaku Masuno – The Nomura Securities

Well, let me compare. SNS, you are trying [ph] to open up for the SNS environment. They have to begin with billing structure and the revenue and the advertising. They really have to finalize that initial phase. And that’s how they were able to incorporate more than several hundreds of content providers. So it seems as though you don’t have a finalized structure. When we will be having such a finalized structure involving application providers? When do you believe this will be possible?

Unidentified Participant

Now in your content, there was reference to the new trend of smartphones. And this trend is now coming into Japan. There is no operator in the world who will be satisfied at being just a dumb pipe. So it’s a matter of how can we create our own unique business model. One is to offer DoCoMo market.

As Mr. Yamada mentioned, we need to offer access even to customers with lower IT literacy. But on top of that, we have various thoughts in mind, and this relates to our strategy, our core strategy, and that’s why we can’t be totally open about it at this juncture. But then when we enter the smartphone era, we are going to be approaching an era [ph] whereby one subscriber will be having several different devices, maybe mobile phone and smartphone, or maybe mobile phone and iPad, and maybe -- or a mobile phone with photo frame.

So when we talk about telephone directories, if you download, let’s say, new person in your mobile phone directory, then you want to be able to link that to your PCs and other data. So telephone directory functions, it has to be promoted to the crowd, to the server, if you will. So that being the case, as an operator, there are many things that we must address and consider. So that is what we are doing right now with our team under Mr. Ikli’s team. But then if we disclose everything to you at this juncture, then it will be disclosing our secret strategy, if you will. But it’s a matter of being able to create a strategy, which will allow us to secure certain profitability.

Daisaku Masuno – The Nomura Securities

I think naturally I have very strong expectations. That’s why I’m asking this question. So by winter, I think you hinted that you will be able to provide something. Then do you believe that by next year you will be able to provide something that has certain scale? And do you believe -- suppose that you will have a certain subscriber base. So that should be an incentive for various application providers. So I suppose at that juncture you will be having a fairly large ecosystem. That’s what I wanted to get at.

Ryuji Yamada

Well, as far as the timing is concerned, we are talking about a year or maybe two years at the latest. So within that timeframe we have to be able to launch (inaudible). So maybe a year later or two years later, you will be able to find what we did. But that’s the timing that we have in mind. Are we going to be able to expand everything all at once at a certain time? Then it’s really not the case. It’s probably more gradual.

Hiro Okado

Now let’s move to the next question. The person sitting right in front.

Atsuo Takahashi – Mizuho Securities

My name is Takahashi from Mizuho Securities. I have two major questions. Well, because we are running out of time, I would like to be quick. First is about the improved profitability of equipment sales business. This is a question that I have mentioned earlier. But when the number of PCs that you sell increases, what will happen in the future, i.e., you are not procuring the PCs yourselves, but the number of subscribers are growing? So what kind of commissions are you paying for that? Are you bearing a huge amount of commission fee for that? It might be so that I’m misunderstanding it or mistaken, you are talking about the data cards, like the networks of course, the data cards as well. But the data cards are hardware. I think it’s procured solely by DoCoMo. But what do you see the profitability of general handsets compared to the PCs? That’s my question. In terms of cost, of course I do understand that these devices are contributing to increasing ARPU, but can you compare the cost versus general handsets and PCs?

Bunya Kumagai

My name is Kumagai, and I would like to take that question. We are not selling PCs. We are only selling the data cards and the data services. And for its promotion as a means towards that goal, the most popular device is PC, and in some cases we bundle the sales and sell the PCs together with the data card. This is what we request to the distributors. This is a campaign, if you will, though there are customers who buy only data cards without a PC. So we pay out commission charges or incentives in order to promote the sales of the PC data cards. So we are not shouldering the entire cost of PCs all the time. In order to promote the sales, we decide on the adequate amount of costs that we can spend for promotion.

Atsuo Takahashi – Mizuho Securities

I do understand that. But when you compare against the general handsets in terms of cost, can you give us a more quantitative number as to what will be the profitability level of the PC sales, PC data card sales when compared against general handsets, like i-mode handsets?

Bunya Kumagai

If you compare with general i-mode handsets, as I said, because we believe this is a strategically important growth market, we are spending more amount of commissions for PC-based data cards, but not to the extent of our competitors. We sometimes combine with netbooks only to the extent possible.

Atsuo Takahashi – Mizuho Securities

My second question is about the repair cost of handsets and its outlook for the future. You said that your repair costs are increasing. But on the other hand, for the mobile protection and delivery service, you said that the revenue impact is neutral, but I guess the insurers underwriting is not facing a tough situation. So today -- I think the repair structure that you have today will only have a negative impact on cost. I think that entails a lot of cost, but what are your plans for the future to rectify this problem?

Ryuji Yamada

If you can open the page of repair, the repair is still a neutral factor. Repair cost is neutral. But of course, if the number of repairs increases significantly in the future, we cannot guarantee that to be the case forever.

Atsuo Takahashi – Mizuho Securities

Because customers usage period is extending, the number of handsets submitted for repair is increasing. So how to cope with the situation that will have to be studied further?

Ryuji Yamada

In some cases, if customers submit the handset for repair, we may have to recommend customers to replace to a new handset by giving some discounts.

Atsuo Takahashi – Mizuho Securities

So do you think that next fiscal year you will have to spend a huge amount for repair costs?

Ryuji Yamada

Because this is a customer satisfaction improvement measures, we have to spend some amount. But of course, if there is a steep increase, we may have to come up with some additional countermeasures. But we are not foreseeing a steep increase at this point.

Atsuo Takahashi – Mizuho Securities

A follow-up question. According to recent KDDI’s announcement of their capital alliance or investment with J:COM or Jupiter Telecommunications, and of course you also have some investment in Oak Lawn Marketing TV shopping service. What is your plan for the future? Do you offer to -- do you plan to offer TV marketing in the future? With respect to Oak Lawn or -- maybe not directly to Oak Lawn, but do you have any plans for that?

Ryuji Yamada

For Oak Lawn Marketing, we bought that company because we believe this company can offer a lot of synergies with our mainstay cell phone business. Oak Lawn is a very good company profit-wise, but I think we can further increase their revenues and profits by achieving synergies.

Kazuto Tsubouchi

And I would like to follow up. My name is Tsubouchi. As I said earlier, Oak Lawn Marketing offers online shopping, and these online shopping have a very good synergy with cell phone business. Of course we are not selling anything real. We are commodities, but by having something that we can sell tangibly -- having tangible products to cell is a very good proportion for a cellular phone company. And Oak Lawn itself -- using our platform there, thinking of many possibilities, numerous possibilities, for instance, they are handling health-related products.

So the brochure, for example, they can be done paperless. They just have a barcode printed in the product. And then video message, their intention is to save all the paper manuals and then offer only video through our cell phones. Also some health-related food, they -- customers who love to have those food want to have a continuous supply when they run out of stock. And that can be done to our cell phone as well, which is a very attractive tool for the sellers of these online products. And Oak Lawn is now looking into this possibility and they are now finding numerous opportunities to utilize our network for their own sales. So we can stimulate each other and then deliver synergies. And we can foresee a lot of benefits from that investment.

Hiro Okado

We have already gone beyond the scheduled time. We can take one final question perhaps.

Unidentified Analyst

Thank you very much. (inaudible). I have three questions if I may. First, it’s related to Android and Xperia. I saw the handset. And I think the Android machine itself has become much more sophisticated. So there is Android on the one hand. You also have the operator spec, and Symbian and Linux-based products. Going forward, how are you going to position these different products? Is it going to be somewhat ambiguous or going to be even more -- are you going to more earnestly consider how to position these different status [ph] and products going forward?

Ryuji Yamada

Well, to give you the conclusion first, i-mode handsets and open OS handsets, how are you going to address this? At the end of the day, if this could be integrated and converged, it would be the most desirable. But then to converge these two different things, you have to go through various obstacles. It’s not going to happen. So that’s what, it has to be a two-pronged approach. So i-mode handsets on the one hand and the open operating system handsets on the other. So it’s going to be a two-pronged approach. So it’s up to the customers to decide between the two. It’s the customers’ choice. Now in terms of the open operating system handsets and devices, it is true that the number of subscribers for (inaudible) is increasing steadily. So it’s important that we focus on this. Maybe we can generate a new market, a second handset market. And that’s how we want to promote the open operating system handsets going forward.

Unidentified Analyst

Thank you. My second question. This relates to Tata. I asked this question in the previous session. I think you mentioned that as far as the license is concerned, that would be done by Tata, your partner. But when it comes to 3G infrastructure investment, maybe you might have to consider something when it comes to 3G (inaudible) infrastructure investment. Now, it is likely that next month 3G auction will be coming out. So has your position remained intact or has your position changed in relation to 3G? It seems that in India price-based competition has become very, very severe. And this has seemed to really exhaust the operators in the Indian marketplace. What are your thoughts about the current situation in the Indian market? Thank you.

Ryuji Yamada

With regard to 3G auction relating to Tata and creating infrastructure, which of the partners will be investing, our position has not changed. In principle, 3G auction will be carried out by Tata. Once the 3G auction is over and once the license is acquired, then at that juncture we consider some increased investment. Now, price-based competition in India, yes, it is quite harsh, quite tough. TTSL has begun the second-based billing, but we see on a monthly basis, net add of 19 million. So it’s not just that operators are being exhausted because there is increase in the volume and in the subscriber base. And I was in India starting from [ph] January 5th this year, and they are still very, very -- they are energetic. So they are not disappointed, I can assure you.

Unidentified Analyst

Thank you. My third question.

Ryuji Yamada

Yes, please.

Unidentified Analyst

It’s about the i-concier. You talked about providing local contents and how that is important. But one thing that concerns me is that when you consider your DeNA and when considering your operation, I don’t think you have any functions then enabling to catch that local content. So if you are going to be offering local contents seriously, although I understand the direction that you are headed to, can you be more specific as to how you intend to do this? How are you going to be offering local contents? If you don’t have that function internally, how are you going to offset that? How are you going to augment that? That’s my third question.

Ryuji Yamada

Yes, thank you. You mentioned the (inaudible) DoCoMo’s DeNA. I can assure you, that is not the case. The local contents for i-concier, who is responsible? It’s a relation to the corporate sector. What do I mean? It is corporate -- the head office and the branches and the local offices, so therefore -- and there are also regional offices. So there can be very strong links between the regional offices and the branches and the local offices. So that will help in creating local contents for the i-concier. For example, let’s say that there are certain local contents that are very popular (inaudible). If you change just the content, that will be very popular too in the (inaudible). So we can horizontally expand the local contents throughout Japan. So we have teams that are responsible for the local contents for i-concier. If you go to our regional offices, you will understand that there are such teams available.

Hiro Okado

Now we would like to finish this conference at this point. Thank you very much for your attendance today.

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