NTT Docomo's CEO Discusses F3Q13 Results - Earnings Call Transcript

Jan.31.14 | About: NTT DoCoMo, (DCM)

NTT Docomo's (NYSE:DCM)

F3Q13 Earnings Conference Call

January 31, 2014 03:00 ET

Executives

Kazunori Yamamoto – Managing Director, IR

Kaoru Kato – President & CEO

Kazuto Tsubouchi – SVP & CFO

Analysts

Daisaku Masuno – Nomura Securities

Tetsuro Tsusaka – Morgan Stanley

Ikuo Matsuhashi – Goldman Sachs

Yoshiyuki Kinoshita – Merrill Lynch

Daisuke Oshidari – JPMorgan

Operator

Thank you very much for waiting. We appreciate your attendance despite your busy schedule. We now like to convene our analyst presentation in which we will be presenting the results for the First Three Quarters of the Fiscal year ending March 2014. I’m Yamamoto and I will be serving as MC [ph] for this meeting. Please be advised that this session is broadcasted live on smartphones and over the internet and a recorded video of this meeting will be distributed through Docomo's website later on. Now I would like to introduce participants from NTT Docomo. The President and CEO Mr. Kato’s, Senior Executive Vice President Mr. Tsubouchi, Senior Executive Vice President Mr. Iwasaki, Executive Vice President responsible for consumer sales Mr. Tanaka, Executive Vice President and Managing Director of Corporate Strategy and Planning Department, Mr. Yoshizawa and Senior Vice President and Managing Director of Finance and Accounts Department Mr. Sato.

We have distributed three sets of documents, the earning release, the presentation slides and also a press release entitled notice regarding application for delisting of shares from the London Stock Exchange. Please make sure that you’ve the complete set of documents. For today’s meeting we will like to start with a presentation from Mr. Kato using the presentation slides followed by a Q&A session and we will aim to finish the meeting at around o’clock. Please be advised that there might be risks involved in the statements made during this presentation including the Q&A session. For details please look at presentation slides, forward-looking slide. Now without further ado I would like to invite Mr. Kato to the podium.

[Interpreted]

Kaoru Kato

Good afternoon to you I’m Kato and thank you very much for attending this analyst meeting despite your busy schedule. Now I would like to immediately move on to the presentation using the slides. As you can see here we would like to explain the results highlights, the actions for the spring sale season and the actions for further growth. Slide 2, this is the result summary for the first three quarters of the year. Operating revenues was comparable to the same period of last fiscal year at 3.363 billion [ph], operating income was 688.7 billion and net income increased by 3.3% year-on-year to ¥ 430.2 billion. So revenues were flat, operating income down and net income increased compared to the same period of last fiscal year. The highlights are illustrated in the bottom half of the page, total handset sales decreased on a year-on-year basis however the important indicators of smartphone user base and LTE subscriptions recorded a steady increase. I will come back to this topic later.

Slide 3, these are the key indicators, capital expenditures decreased by ¥ 68.1 billion to ¥ 472.3 billion. We increased network investments for LTE expansion and to accommodate traffic growth but we streamlined the total amount of investments. So we’re making a favorable progress by and enlarge towards our full year target of ¥ 700 billion. Free cash flow at the bottom because we have rolled out the network more efficiently, the free cash flow increase by ¥ 56.9 billion year-on-year to ¥ 86.4 billion. Next slide, these are the factors behind on the year-on-year changes in operating income. I would like to divide by the expenses side as well as the revenue side, first on the revenue side. We were able to make up for the decrease in voice revenues by the increase in packet revenues however due to the significant negative impact of the Monthly Support Discount Service we recorded a decrease in mobile communication service revenues. On the other hand new businesses expanded and smartphone sales expanded and therefore as a result we have recorded increase in other revenues as well as equipment sales revenues.

As a consequence the total revenues were comparable to the same period of last fiscal year. Now the changes behind operating expenses equipment sales expenses decreased which is a sum of equipment sales, cost of equipment sold as well as distributor commissions. On the other hand depreciation amortization increased another expense also increased in-line with increase in total new business revenues however we work to streamline the cost efficiency and as a consequence operating income decreased by ¥ 13.5 billion year-on-year to ¥ 688.7 billion.

Here these are the key developments for the third quarter and I would like to explain the details using the following slides. Net income first of all we have seen improvement quarter-by-quarter. In the third quarter we actually doubled the number of net addition so we’re trying tangible signs of our competitiveness recovering. Now I would like to talk about the monthly net additions performance as you can see the upward trend is quite visible on a monthly basis after the introduction of iPhone 5s and 5c on September 20. We have seen a recovery in monthly net additions as our sales structure became ready and the December net additions performance is as you know. And in MNP performance on the next page for the month of September we had registered 3000 net losses in MNP performance however it has improved to only 51,000 for the month of December. So we have achieved a steady improvement and this graph shows the months, the year-over-year comparison and I think you can see the tangible improvement on a year-on-year basis and we will try to improve the MNP performance going forward although there might be some ups and downs depending on the month but alternately we will try to element the net losses of number of portability subscribers.

Although we do understand that this is going to be a tough challenge. Going forward we will also like to improve the churn rate on the next page in line with improvement MNP performance we have seen a significant reduction in churn rate from 0.91% for the month of September to 0.72% for the month of November. December was a month with high liquidity but we were able to keep the churn rate at 0.74%. Total handset sales and smartphone sales although we’re facing difficulty but we will try to accelerate these sales in the month in the spring sales period leveraging the iPhone.

Next smartphone user base on page 11, as of the end of, as of third quarter we had a total of 22.78 million smartphone users although we’re not really content with this number in light of our full year target but we are seeing increased number of subscribers migrating from the earlier former phones to the advanced LTE smartphones. That’s the reason behind this steadfast increase in the total number of smartphones and in fact LTE accounts for 73% of our total smartphone user base.

Next page LTE subscriptions reached 19.40 million as of the end of the third quarter and we’re currently working on quad band LTE expansion so that we can further achieve improved satisfaction of our customers. Packet ARPU on the next page, excluding the impact of multi-support was ¥ 2930 up ¥ 100 year-on-year. The uptrend is continuing to the increase of smartphone and LTE subscribers. Page 14, smart ARPU we’re also recording a favorable increase here. It has reached ¥ 500 for the third quarter up ¥ 80 year-on-year. This is due largely to the opening of new the market store such as Dfashion and also the compatibility with iPhone has contributed to this growth. Next page aggregate ARPU. The Packet and Smart ARPU is driving the growth of aggregate ARPU so excluding the Monthly Support impact it was ¥ 5230 recording on year-on-year increase.

Page 16, cost efficiency improvement. In the third quarter we executed the four year plan ahead of schedule and achieved 61 billion cost reduction as a consequence we have already achieved a full year target of reducing cost by 110 billion in fact we have already achieved 160 billion so we will try to continue these efforts so that we can maximize the effect of cost improvement. This from here I would like to move on to the second portion of the presentation in which I will be explaining the spring sales seasons actions. As I said earlier after the release of the iPhone we’re seeing steady improvement in the competiveness and we believe we have entered a new stage of competition. We will like to add mobile income [ph] leveraging the spring sales season in order to increase net additions, boast smartphone sales and also expand LTE subscriber base even further.

Page 19, these are the planned actions that we will like to focus during the spring sale season. Number one we will like to heavily implement the promotions focused on youth and families. Secondly we will like to further reinforce our world’s fastest quad band LTE service and number three we will make to leverage our strength in distribution channel and after sales support.

I will like to explain the details using the next few slides. Slide 20, during the spring actually spring is the most important sales season in a year so we will be implementing promotions, targeting the youth and families and I would like to explain the details in the next slide. As you may be aware for our commercial film we have decided to use One Direction a very popular music group this is a first time for a Japanese company to use this group and this commercial is receiving very good reviews from the youngsters in particular.

Slide 21, is the detailed actions that we will be going to implement during the spring sale season and therefore customers especially student customers who will not have to pay for the monthly charges for upto 3 months. We will also be offering discounts for the purchase of smartphones and we will be giving away 1 gigabyte of additional data allowances. In order to allow smartphone users to utilize smartphones at reasonable rate. On top of this the families of the students will also be receiving benefits without having to pay for the basic monthly charges for upto either 1 year or 3 years maximum and what is unique about Docomo is that this is going to be offered not only for new subscriptions but also two existing subscribers.

Slide 22, efforts [ph] related to network. We have the quad band so in the urban centers we are expanding areas where we were able to offer world’s fastest under 50 megabit per second and I will be talking about this in the subsequent pages of slide number 23 with regard to area coverage toward the end of this fiscal year we were working toward achieving 50,000 base stations however we’re accelerating these efforts and we’re now aiming to install 52,000 base stations by the end of March. From the latter half of September we began to offer quad band LTE inclusive of 1.7 gigahertz band and the areas has been expanding in the third quarter as well.

Slide 24, we’re expanding base stations aligned with the raising needs in everyday life of our customers for example we’re now covering nationwide (indiscernible) stations as well campus of all universities in Japan and there is still commercial, leisure [ph] facilities. And the breadth of the areas is highly received by the customers we want to continue to meet the customer expectations.

Slide 25, we’re offering (indiscernible) per second coverage. The area is expanding primarily to urban centers so therefore the Osaka Loop Line and also the Yamanote Loop Line in the serial race [ph] where we’re covering all stations in the Osaka Loop Line and 24 stations in Osaka Line. So therefore we will dominate the others with the dominant speed and we saw that we will be able to offer that we will discuss this LTE to our customer base.

Slide 26, this is something that we have consistently mentioned. It's not visible but this represents our goal innovation and I believe this will be reflected in customers experience and so we’re using six sector base stations. I think people will feel that Docomo’s network is indeed the number one; we will continue to make those efforts.

Slide 27, third party survey results in relation to speed. So, the results of our quad band efforts, (indiscernible) research laboratories has ranked us number one that’s in terms of download speed in Osaka Nagoya in Tokyo and also we have carried out in-house survey during the beginning of the new year. The popular shrines for one time visits of the year, again we were able to realize number one speed in these very popular spots. So quad band LTE we will accelerate in terms of expanding our area coverage.

Slide 28, now this were the services LTE roaming naturally outside Japan so fast speed can be enjoyed and from March we will be offering LTE roaming out for iPhones and for android handsets. So with this we will be able to facilitate an environment where customers can comfortably enjoy communications on a global scale.

Slide 29, relates to distribution channels, we have constantly mentioned that in a harsh competitive landscape our customer responsiveness will become even more crucial going forward and so we have been continuously carrying out through our in-house survey and based on the result Docomo shop and call centers and other customer interfaces, we have been ranked us number one among all the carriers. We will continue to leverage, we will continue to maintain and expand our leverage so we will be able to increase customer confidence.

Slide 30, this relates to after sale support. If there are problems relating to handsets we offer mobile protection and delivery services and even for iPhone users we will be offering comparable services and to the end we have begun to offer unique mobile phone protection services for iPhone’s from the third quarter. So damages, repair, losses and thefts all of this will be covered for a charge of ¥ 7875 and this again is very well received among the customer base.

Slide 31, after sales support, we’re offering Smartphone Anshin Remote Support, subscriptions are increasing because of popular reception as the graph indicates the number of subscriptions are increasing and we have dedicated operators and they are able to see the customer screen and they are able to actually operate on top of the customer screen and these subscription is now 5.32 million. So in conjunction with mobile phone protection delivery services we hope we will be able to offer climates [ph] where by customers can feel secure in using their smartphones.

I talked about the mobile phone protection and delivery services are there and Smartphone Anshin Remote Support these were targeted for android handsets and this is part of the Anshin Back Support. Part three, let me talk about actions for further growth 33, here we talk about historical growth and changes of content business. Let me show you some historical trends. This relates to changes in the gross spending amount of Docomo’s content business you will find that this is on expansionary trend and also (indiscernible). This is a platform model we also have the service delivery model based on Dmarket’s. We have this (indiscernible) models and the transaction of them is increasing it's similar to buying.

With the spread of the smartphones we believe there is going to be excellent tool and expansion over needs for various contents and we will continue to expand revenue opportunities to appropriate business model and we believe the service delivery model is going to be a very important area for our growth.

Slide 34, here we show you the subscriptions growing at favorable pace, so Dvideo, Dhits and Danime these are monthly subscription models. We already have 7 million subscribers. We have exceeded our number and in the third quarter with the introduction of the iPhone we reviewed our marketing methodology and on temporary basis the growth slowed down however recently we are once again beginning momentum and also (indiscernible) back that we launched in May of this fiscal year. The subscriber base is net 2.06 million and Anshin Back net has 3.4 million subscriber base and it's expanding very steadily. So (indiscernible) has 9.45 million subscriber base so therefore with increase in the smartphone users and the services combined now have subscriber base of close to 20 million.

Slide 35, this shows the usage per subscriber for Dmarket. As I mentioned in the previous page the service subscriber base for Dmarkets have already being covered, on this page we show you the usage of the Dmarket contents and as an indicator we have to focus on Dmarket usage per subscriber in March last year with ¥ 680 it has now increased up ¥ 800 which represents more than ¥ 100 growth. Going further we expanded and reach our stores and also we will have enhance cross selling one of these in different stores so that we will be able to facilitate and promote greater usage of these services.

Slide 36, Dhits, this was launched at the end of November and it's only being one month but we now have more than 20,000 subscriber base so it's off to a very strong start, 40% of the subscribers are actually acquiring this in conjunction with tablets and slide 37, here we show global business expansion. So global business related revenues. At the end of third quarter on a continuous basis it was 81.3 billion and this represents year-over-year increase of 19%. It's been growing so e-commerce payment in Europe.

Handset newly launched, in relation to carrier business we have efforts in relation to Japan, China, Korea in carriers and also greater coordination to (indiscernible) also through our investing Guam we’re also offering bundled services combining mobile, fixed and internet and cable television services and in December we also began to offer global one day Packet flat rate data billing so that customers will feel even more secure in global warming.

Slide 38, this relates to the progress of new business domain revenue, new business revenues that’s the slide indicates. At the end of December it reached ¥ 465 billion which represents 26% increase from ¥ 270 billion last year as we have consistently mentioned we’re having ¥ 1 trillion of revenue towards fiscal 2015 and we will be making ever so that we will be able to realize the concept of smart life partner.

Slide 39, on a different topic, we’re working to a business structure reform and reconstruction. Our urgent challenge is to it has those capability and also has our abilities in relation to new business so to fulfill that purpose we’re working toward reform a business structure so we will reorganize Docomo Group inclusive of subcontractors, we will reorganize Docomo Group that we will be able to realize faster decision making and more efficient business operation and this will be implemented as of July, 2014.

So slide 40, this is the final slide. Let me offer summary of the third quarter results for fiscal 2013. There are three major issues, the iPhone in fact is becoming very tangible and visible so in terms of MNP and net adds we begin to see steadfast improvement in major indicator such as MNP and internet apps and other operational indicators. Second, is in relation to our efforts toward the spring season. We want to be able to connect the current momentum to the upcoming spring sale season in particular we will enhance our sales efforts to the young people and also we will enrich LTE network at the same time. Third, toward accretion and expansion of new revenue sources we will maintain the expansionary trend in new business domain services and we will also make steadfast progress toward the future growth.

So through such efforts we will also pursue bold cost efficiency improvement so they will be able to realize medium term growth. With that I would like to conclude. Thank you for your attention.

Question-and-Answer Session

Operator

(Operator Instructions).

Daisaku Masuno – Nomura Securities

I’m Masuno from Nomura Securities I’ve several questions. First with respect to your income forecast you did not change the full year forecast that means the January to March period you have to achieve operating income totaling ¥ 160 billion or so given that the mobile communication services revenues has been coming down by approximately 8% then we would be able to assume that you will be able expect a ¥ 56 billion decline in operating income for the third quarter or the fourth quarter. If not you will have to find out other revenue sources for that to of ¥ 60 billion to ¥ 70 billion, if it's not going to be the handset sales what are you going to use to make up for the projected decline in operating income. So what will be the driver for that? So can you explain a background why you did not change your forecast for the full year and what will be the driver to make up for the projected decline?

Kaoru Kato

The spring sale season the most important and highest volume sale season is going to start from now onwards so we have expectations with that. In the meantime we’re also going to pursue further cost efficiency improvement. So on these two wheels we will try to make the maximum effort.

Kazuto Tsubouchi

I would like to add some more comments. On a cumulative basis for the first three quarters in may have an impression that the revenue growth is weak, it's what we share as well because we thought that recovery will clear faster with the introduction of the iPhone but that has taken longer time than expected but operational data is showing improvement so we’re seeing tangible signs for further improvement going forward so we believe the revenues will start growing steadily going forward. So the issue is therefore cost reduction and cost control. First about the general expenses and as the numbers show we’re controlling and achieving cost reduction much larger than expected than initial plan so we believe we’re well in track to achieve cost reduction in that regard but when it comes to operating expenses or sales expenses it depends on how much volume will sell in the last two months of the fiscal year so it depends on whether our competitiveness recovery is a full scale recovery so that is why we decided not to change or revise the full year forecast.

Daisaku Masuno – Nomura Securities

My next question is about data ARPU I think essentially you have to boast data ARPU in order for you to achieve a whole fledge recovery. But excluding Monthly Support discount for the December you achieved 3.5% increase or so in Packet ARPU so even if the Monthly Support discount impact is excluded the growth rate is declining or slowing down so when you look at the balance of sales of iPhone versus the android devices I think the balance is already beginning to collapse so the android devices are so expensive if you go to the shop front so that’s perhaps the reason why you’re not able to sell as much quantity as you wanted and even if an introduction of the iPhone you’re not expecting, you’re not achieving the expected amount of replacements so you may have to rebalance your sales strategy by bringing down the android prices at the shop level. So do you really think that you’re going to continue the sales balance of android versus the iPhone?

Kaoru Kato

I think there are many approaches to this but overall I would say that from feature phone to smartphones this migration is not as significant as we had expected. However the iPhone policy [ph] was quite instrumental to stimulate the migration from feature phones to smartphones so that was effective in that regard but yet when it comes to porting and the migration from feature phone to smartphones there has been a strong demand for iPhone so how to strike a good balance of the portfolio is something that we have to work harder on but for the time being I think we will like to stay on course of what we’re achieving today.

Daisaku Masuno – Nomura Securities

The iPhone is 16 gigabyte bonus for both for new sales and also for the replacement. Are you really going to continue on this track? Because I think this is going to be very tough on you going forward.

Kaoru Kato

Well we would like to give more thinking to this going forward because it's only effectively three months or four months after starting handling the iPhone so we will like to look into the sensitivity, price sensitivity, price elasticity and because we’re the last comers to the iPhone market so we don’t really know we are not really confident to make a judgment as of today as to how to sell the product. We’re still studying the adequate price for the iPhone.

Tetsuro Tsusaka – Morgan Stanley

Tsusaka from Morgan Stanley, thank you very much. I would also like to talk about the topline in the service revenue I think that’s the issue here. I would imagine that on the year-on-year basis you’re talking about maybe 230 billion, 240 billion decline in service revenue at the end of the day for the full year. On the other hand the handsets were well the price were increased so therefore that makes it even so I think that’s why you’re at the current level. Now for this fiscal year I suppose you’re going to try to extract later profits so that you will be able to reach ¥ 840 billion operating income at the end of this fiscal year but if hypothetically come next fiscal year if the amount of the operating revenue were to be halved it means that there is going to be a possibility that you’re revenue, your topline could possibly go down by as much as ¥ 100 billion on the other hand I think it's impossible for you to raise handset prices. So therefore you can expect the same type of operation you enjoyed during this fiscal year. So next fiscal year you’re going to have ¥ 100 billion decline in your operating revenue meaning that you will have to reduce cost by the same amount unless you’re able to, in order to maintain a flat level of operating income on a year-on-year basis. So my question is what’s going to happen next fiscal year?

Kaoru Kato

If you disaggregate various elements I have a sense that it's going to be a very tough year for you. You’ve to be fully prepared if you really want to maintain the same level of operating income for the next fiscal year as you might gain at the end of this fiscal year.

Tetsuro Tsusaka – Morgan Stanley

But taking a look at your comments in the various media suppose you’re looking at operating income on flat or perhaps I think you’re talking about trying to increase your operating income for fiscal year 2014. So is it really consistent? How can this be compatible that’s my question?

Kaoru Kato

Well again we have not yet completed the spring sales season so therefore during that period we hope that we will be able to gain as much net add as possible but certainly we will try to mitigate the negative impact that you alluded to. On the other hand we do realize there is not going to be all that easy. But we need to change many things of course cost structure we will continue to restructure that and also inclusive of distribution channels, how can we be creative. So we have to combine all of these elements and we’re considering all of these elements at the same time. So to an extent can we execute? We will very carefully and cautiously consider this matter.

Tetsuro Tsusaka – Morgan Stanley

Well the target operating income for this fiscal year do you believe that the same levels of operating income can be achieved next year? Do you intend to do that?

Kaoru Kato

Well I think that’s the target we shall set, but what is possible, what is not possible inclusive of that. We have to carefully consider that.

Tetsuro Tsusaka – Morgan Stanley

My second question. I think it's time that the profits from your new business domains are generated and Smart ARPU is bit of increasing but in Smart ARPU it's all cost, that makes it zero contribution to your profit. So I think isn't it time that you give us some indication about the profitability of new business?

Kaoru Kato

Allow me to respond to my question. We have consistently, correction we realize that has been your request for some time. Now for this fiscal year we think we need to organize such a structure so that we will be able to put forward straight forward numbers we have not yet being able to do that. We need to apologize but for the next fiscal year we want to rearrange the segment so that we will be able to offer this indication in a straight forward manner. We’re considering that possibility so that’s be the purpose to my comment. Now if we assume what about the situation pertaining to you at the third quarter number, we’re too concerned what’s going to happen in the next fiscal year but from the second quarter to the third quarter I think there is improvement in the income by as much as ¥ 5 billion also a few percent change points of profit. Now what are the major segments in the media contents in particular, it is still yet in the deficit. As you’re aware MMBI deficit is the bulk of that so if you exclude that part actually it is in its surplus but with MMBI its surplus, e-commerce it's breakeven more or less. And also in the case of financial payment it's in the surplus. So it can only give you some qualitative indications whereas I mentioned earlier for the next fiscal year we will be able to disaggregate because right now it's in one segment but next fiscal year we hope we will be able to offer this numbers in a more straight forward manner. We will consider that if you could please patiently await for that we would appreciate it.

Tetsuro Tsusaka – Morgan Stanley

This year I would imagine that there is going to be a launch of the regulation related discussions and the conclusion is likely to be arrived at October. So for the first half of the year around maybe May, June I have no indication of the timeline but during that first half I would imagine that inclusive of MIC various issues are going to be discussed and considered. Now the media has been talking about the smartphone prices been steep lasted more at higher level maybe that’s an indication from the MIC. But do you believe that your regulation related discussions begin this is going to be negative for the industry.

Kaoru Kato

Again it's very difficult to predict what type of discussions will ensue but this is something, this review is something that takes place every couple of years. But the background and the environment that surround our industry has changed and that’s a fact so we sincerely hope that this will be reflected in the regulatory debate and on the other hand. We have to consider what is best for the user base and to the customers? So, that’s the perspective based on which we hope to be able to share output and deliver and put forward our views and I think it's important that the discussion take place in this prospect with churn all of the telecom industry. Again there is no telling how this discussion will transpire but the agenda is not yet sure. But as far as we’re concerned we will continue to carefully observe the debate and in areas where we need to be fully involved we will certainly be very actively involved in the discussion.

Tetsuro Tsusaka – Morgan Stanley

We talked about placing emphasis on users I think that’s a given but if that is the case then as far as Docomo is concerned is it, there is an emphasis on Docomo customers or are you talking about entity group user base? Which is the direction of the debate that you will be looking forward to?

Kaoru Kato

I think it should be telecom industry as a whole if that’s the case I suppose it should be entity group as a whole but on the other hand when it comes to IT in particularly mobile what’s the best for the mobile customer base, that also needs to be considered as well inclusive of the competitive landscape I hope that will be addressed in the regulatory debate that’s my hope. Thank you very much.

Ikuo Matsuhashi – Goldman Sachs

Goldman Sachs, my name is Matsuhashi I have two questions, first of all regarding the Monthly Support discount that has a negative impact on your income. Actually when you look at even if you subtract the track record for the third quarter well you’re not increasing the negative impact vis-à-vis the second quarter at least that’s appear to be the case. So when you consider that when you look at the iPhone handset alone it tends to be that the negative impact is going to be increasing but when you look at the total absolute number the Monthly Support total amount is not increasing so can you elaborate why that’s the case and then what’s going to happen for your Monthly Support discounts for the fourth quarter? And overall was this when you had assumed prior to the introduction of the iPhone so it's the thing the development in-line with your expectations?

Kaoru Kato

Well first of all regarding the impact of Monthly Support discounts if I can talk about the numbers for the first three quarters or for the first nine months actually the impact is almost comparable to the same period of last fiscal year but when you look at on a quarterly basis the third quarter Monthly Support total amount has become larger compared to the first two quarters. This is of course due to the introduction of a new product and we had to increase the amount of discounts for the new product but when you look at third quarter vis-à-vis the third quarter of last fiscal year we have recorded a steady a slight decrease because we were able to control the amount of discounts.

Ikuo Matsuhashi – Goldman Sachs

That means the replacement demand was not really so much stimulated even after the introduction of the iPhone, isn't that the case?

Kaoru Kato

Well even for iPhone when you look at the 5c product this iPhone 5c stimulated the migration of feature phone users to smartphones when it comes to 5s I think it just stimulated the smartphone to smartphone replacement.

Ikuo Matsuhashi – Goldman Sachs

My second question now when going into next year I believe you will have to aggressively address cost reduction. I think that was the message that you indicated earlier. But for you to have make a drastic change it doesn’t you just can’t do it overnight so you will perhaps have to make preparations and set the directions during this January to March period and make necessary announcements for example like maybe the paper invoices are sent to each customer so if you stop that maybe you will have to make an announcement to customers earlier so if you’re to going to decrease your costs to deliver benefit so in the order of ¥ 10 billion to ¥ 20 billion you’ve to make necessary preparations and announce that so can we expect that kind of preparations are going to take place this quarter? I’m not really sure if you’re going to make announcement but are you going to make all these detailed actions in order to achieve cost reduction.

Kazuto Tsubouchi

Exactly. I think you got the point; it's not that we’re going to announce initiatives to say it because we’ve started this exercise already from three years back. So but of course we cannot you know talk about reducing the subscriber contract charges from next year immediately but these are the exercise that we have been repeating for the last three years and especially this year facility related expenses have come down just recently and this is boasting the cost reduction effect and we believe this effect will continue going into next year and we’re reviewing every possible course all the time. So I won't go into the details but through these exercise repeated exercise we are achieving significant cost reduction.

Kaoru Kato

And I will like to add another comment the cost structure reform is ongoing as Mr. Tsubouchi said, this is not an exercise done on a spot by spot basis this is a continual effort that we have been continuing for years and there is no end to this. We will, this is going to be a perpetual process then different projects will be established from time to time and on a quarterly basis or even on a bimonthly basis we establish new project or renew the project on a repeated basis so that we can improve the cost efficiency, we bring down the absolute cost and we are trying to set deeper cost reduction targets for next fiscal year. How to present that is a separate story but the actions are already started have already been started. If you’re talking about the item starting in April this year we’re going to view the mileage point structure and this I already announced six months back. So I think customers are already prepared for that but the actual results will be convincible from April 1st onwards and the allowances is going to be say we will start seeing the analysis starting this year already. So all these items are the actual efforts that we’re undertaking in order to save cost.

Yoshiyuki Kinoshita – Merrill Lynch

Kinoshita from Merrill Lynch, I’ve several questions I will like to ask one question at a time. My first question, in your case the data billing for iPhone is quite low and also you’ve of course the light plan but from 3G smartphones when you migrate to LTE based smartphones is there an increase in the data ARPU for customers that switch from 3G based smartphones to LTE based smartphones?

Kaoru Kato

Well theoretically it should go up slightly and also by offering more convenient services we hope that the data ARPU will be boasted even more significantly.

Yoshiyuki Kinoshita – Merrill Lynch

Well based on the current balance is there really a boast of data ARPU?

Kaoru Kato

You’re talking about light plan?

Kazuto Tsubouchi

Well the data light plan I think is now 60% or 70% if that’s the case then automatically the data ARPU may not be boasted even if the customer switch from 3G based smartphones to LTE based smartphones.

Kaoru Kato

Well in average it should go up and also there is a pressure pertaining across, for example Dvideo well maybe this is something that, this is my own thinking of Dvideo and other usage increases I think their ARPU will indeed increase.

Yoshiyuki Kinoshita – Merrill Lynch

Well the spring sale season has already begun and January well this is the final day of the month of January, your numbers improved significantly back in December so in terms of MNP and also net adds what’s the trend for the month of January? I would appreciate some indication.

Kaoru Kato

Well when we consider the ordinary pattern the numbers for the January should come out on February 7th but let me give you some preliminary indication it's slightly weaker than the performance back in December why? Again competition has become even more harsh I think that’s the reason. Especially from the mid-January other carriers are offering ¥ 0 and also give even deeper cash backs. So I think that’s affected the sales. Now in our case we believe the student discounts will be even more important during the spring sale season and we have to of course counter any competition.

Yoshiyuki Kinoshita – Merrill Lynch

But then should we offer such hefty cash back? Is this really ideal situation? That’s something that perplexes us.

Kaoru Kato

Again we’re in in competition so therefore naturally we will take measures where necessary but is this something that should be continued? Is this really must for this industry in the long haul? As I mentioned earlier especially for long term users is the current situation really positive? I think that something that we need to fundamentally reconsider and we’re really perplexed over at this moment. So that being the case we want to in terms of devices network and services and also pricing and also churns. I think we have to strike the right balance between all these factors and consider the best mode for competition. So this is something that we have been consistently thinking about.

Yoshiyuki Kinoshita – Merrill Lynch

If I may elaborate or confirm so you’re saying, is it better or worse than December?

Kaoru Kato

Weaker.

Yoshiyuki Kinoshita – Merrill Lynch

I see. Thank you very much for that clarification. My third question, you talked about the pricing for MVNO in an article in a newspaper that came out quite recently. Do you’ve any comment about the pricing of MVNO? I think MIC is going to setup a guideline for MVNO; I’m sure there is various carriers will interpret this guidelines in their own way and come up with a pricing. Do you believe that there is a chance that they will be more coarse if it will they are just pretending to these pricing?

Kaoru Kato

As far as the guideline is concerned we understand the draft guidelines came out. Now the interconnection charges to begin with. We already have rules and it relates to the guidelines for designated facilities and interconnection charges are based on those guidelines. For fiscal ’13 interconnect charges are based on the actual results for fiscal year 2012, it's calculated that way.

Yoshiyuki Kinoshita – Merrill Lynch

So you’re talking about actual results from one year ago?

Kaoru Kato

So if you’re talking about the particular fiscal year you’ve to take provisional numbers you see, you have to work on provisional numbers as well. So if that’s the case may be as some say that interconnecting charges could be halved of course it's a separate question as to whether or not the interconnecting charges will actually be halved but I think that’s the backdrop behind the article but I think the specifics will have to come out from this point onwards. MIC has not provided us with any specifics so therefore I think we need to put out our own comments and our views. So I think all of this will be determined based on these activities.

Unidentified Analyst

I have got two questions, first about the churn rate. The churn rates is now improving, does it mean that when you divide between feature phones and smartphone users which of these segments are reporting better churn rate improvement? Can you share your views on this?

Kaoru Kato

Well we will look up and so can you allow us some more time?

Unidentified Analyst

Okay then in a mean time I would like to go to the second question. You’ve achieved your cost reduction target ahead of the plan but your initial plan was to achieve ¥ 250 billion cost reduction in a three year period so when you consider this, so when you consider next year and the year beyond that what will be the total cost reduction that you realized to achieve now. In the third quarter you achieved an improvement of ¥ 61 billion according to your presentation and that means you will be showing you have the effect of the revised contract charges or commissions and that’s going to have a huge effect in the fourth quarter. So what kind of effect can we foresee for the fourth quarter as well on a continual basis?

Kaoru Kato

Well in this fiscal year our original target was to achieve a reduction of ¥ 160 billion but of course ¥ 50 billion is from last fiscal year and effectively the target was ¥ 110 billion but we have already achieved ¥ 170 billion to ¥ 228 billion. So that means we have to bring forward the plans for next year as well. So 10s of billions of cost reduction and we will have to be anticipated.

Unidentified Analyst

So that means you will be bringing forward from next fiscal year so ¥ 250 billion at 2015 was the original target but we will have to seek upsides from that target naturally.

Kaoru Kato

Regarding the churn rate question I need more time to look up, so sorry for that.

Unidentified Analyst

Regarding the cost reduction for the third quarter what will be the element that we can continue to see benefit in the fourth quarter and how sizeable will that be for the fourth quarter? You said 61 billion for the third quarter but what about fourth quarter?

Kaoru Kato

Well actually if everything stays on track on course after the third quarter.

Unidentified Analyst

I’m talking about what will be the cost effect that will continue on in the fourth quarter does it mean, most of the items that will have attributed to the ¥ 61 billion reduction?

Kaoru Kato

Well the majority of that will be continued and we will like to achieve ¥ 40 billion to ¥ 50 billion cost reduction in the fourth quarter as well. I think that’s the lasting effect.

Unidentified Analyst

And did you get the churn rate?

Kaoru Kato

I’m sorry we don’t have the numbers here with us so we will like to come back to you through the IR department on a separate occasion.

Daisuke Oshidari – JPMorgan

JPMorgan, Oshidari is my name. One question only, at the end of the day you launched the iPhone product and you are now saying that you wished that you had done this earlier but last year you introduced the iPhone and the net loss has stabilized. So it's not yet back to the normalized state? But it's at least better than the past. So when you consider the current situation especially the overall situation the migration to smartphone has probably begun to slow down compared against your expectations and also back three years maybe I suppose you said we had introduced iPhone three years ago but as opposed if only. So what you’re doing right now is this going to be translated into profitability? You’ve been talking about larger bidding operating income and trying to recover ¥ 100 billion operating income as soon as possible but what timing do you believe that your current efforts will be translated into actual profits? As far as we’re concerned it's ¥ 840 billion is the target and maybe we’re going to simply hover around ¥ 840 billion for a couple of years and we have taken all the measures that’s possible especially last fall with the decision to launch the iPhone product. You’re now carrying out campaigns and in terms of tariff setting you’ve taken all the measures possible. So in order for you to normalize the profitability state and let it for the sake of argument define normal state as ¥ 100 billion operating income, what is the timed line in which you will be realize your turnaround of your operations?

Kazuto Tsubouchi

Well we take a look at the most recent improvements on pages 6 through 8 I talked about improvements and the indicators. The improvement in the three month of this third quarter is the satisfactory. Of course there are areas that we’re not fully satisfied, naturally it would have been even better if we could have improved a bit earlier that is true but then we’re in competition and the competitors of course took actions but I suppose we realized we wish that we could have realized the tangible resource back in December and back in November for example. Now to the spring sale season we now have the iPhone as part of the lineup. It's the first time that we’re able to compete with iPhone during the spring sale season. We will be able to appeal to the young people. If we take a look at the young people it's a significantly improved more than 70% improvement among the young people. So therefore net loss has improved by as much as 30%.

Now among the improvements of MNP there is significant contribution from the young people so teenagers actually we now see positive numbers with MNP. So to what extent during this upcoming spring sale season can we translate into tangible results? This is of course one of our immediate target and how can we continue the current momentum inclusive of that? We need to look towards fiscal year 2014. As you mentioned I wish that we could have had the same impact our model [ph] and if only we had introduced iPhones a couple of years ago we change your point but then past is past. So we have to put that aside. At the same time we have to consider the ideal competitive landscape. Should we pay hefty cash back to go after customers in a very limited market of MNP? So we have to consider the competitive landscape. How can we change and transform the competitive landscape? And so that’s one area where we need to be creative and so I’m considering those ideas to improve or to change the competitive landscape. So inclusive of that we are aiming for operating income of ¥ 100 billion and we want to create such a structure and also change the structure.

Daisuke Oshidari – JPMorgan

So in that respect are you seeing that for some time? You’re going to go through this trial and error phase? You could just going to take a wait and see attitude, is that the case?

Kazuto Tsubouchi

Well I don’t think we have the luxury of time to go through this trial a lengthy trial and error process.

Kazunori Yamamoto

Also we would like to limit to only one additional question. Is there anyone with a question in the room? Doesn’t seem to be the same so then we would like to finish this meeting at this juncture. Thank you very much for your attendance.

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