NTT Docomo’s (NYSE:DCM)
F4Q13 Earnings Conference Call
April 25, 2014 1:30 AM ET
Kazunori Yamamoto – Managing Director, IR
Kaoru Kato – President & CEO
Kazuto Tsubouchi – SVP & CFO
Daisaku Masuno – Nomura Securities
Hitoshi Hayakawa – Credit Suisse
Tetsuro Tsusaka – Morgan Stanley
Oshidani – JPMorgan
Thank you very much for waiting, and we thank you very much for taking the time to attend this meeting despite your busy schedule. We would now like to start the Analyst Presentation, in which we present the results for the Fiscal Year ended March, 2014. I’m Yamamoto, Managing Director of the IR Department of NTT DOCOMO. Please be advised that this session will be broadcast live on Smartphone’s and also, via the Internet, and also recorded video of this meeting will be presented and distributed through DOCOMO’s website for on-demand distribution.
Now I would like to introduce the participants from NTT DOCOMO. First of all, Kaoru Kato, President and CEO; good afternoon Mr. Kato; Senior Executive Vice President, Mr. Tsubouchi; also Senior Executive Vice President, Mr. Iwasaki; good afternoon Mr. Iwasaki; Executive Vice President responsible for Consumer Marketing, Mr. Tanaka; Executive Vice President and Managing Director of Corporate Strategy and Planning Department, Mr. Yoshizawa; and Senior Executive – Senior Vice President and Managing Director of Accounts Department, Mr. Sato.
We will be using four sets of documents for this meeting, earning release, the presentation slide, and also two pieces of press releases; one entitled "DOCOMO Decides to Exercise Option for Sale of Stake in Tata Teleservices in India", and another entitled "Notice Concerning Authorization of Share Repurchase up to Prescribed Maximum Limit". Please confirm that you have the full set of documents.
We’ll start the meeting with a presentation on the results by Mr. Kato, followed by a Q&A session. We expect to finish the meeting at around 6 P.M. Please also be advised that the meeting statements may contain forward-looking statements and for the potential risk, please look at the last slide of the presentation.
Now, with that further ado, I would like to ask Mr. Kato to start the presentation.
Good afternoon to you all. I am Kato, the President of the Company. I thank you very much for attending this meeting despite your busy schedule. I would like to present the results using the slides. The slides are made up of two parts; first section without highlights, and second part, the future business management policies for fiscal 2014.
Now going to page 2, this is the summary of the results for fiscal 2013. Operating revenue has declined by 0.2% to 4,461 billion yen, operating income down 2.1% year-over-year, and reached 819 billion yen. So, revenues were flat, operating income decreased compared against the previous year. In the middle we have the highlights, total handsets sold decreased compared against the previous fiscal year but Smartphone’s increased and Smartphone user base and LTE subscriptions posted a steady increase throughout the year.
Slide number 3; we saw the selected financial data. Net income decreased by 26.3 billion yen to 464.7 billion yen. Capital expenditures decreased by 50.5 billion yen and reached 703.1 billion yen. Adjusted free cash flow increased by 31.6 billion yen and reached 257.2 billion yen.
Slide number 4; these are the key factors behind the year-on-year changes in operating income. The left hand side, if you look at the revenue changes decrease – voice revenue has decreased by 80.3 billion yen, packet revenue has increased by 121 billion yen, and those exclusive of the multi-support discount, and the negative impact of multi-support discount was 253 billion yen increase comparing to just previous fiscal year. So the increase in packet revenues made up for half of the decline in voice revenues. Other operating revenues increased by 89.9 billion yen, and equipment sales revenues increased by 113.9 billion yen due to brisk handset sales.
Expenses on the right hand side, the cost of equipment sold, equipment sales expenses increased by 10 billion yen, depreciation and amortization, and loss on disposal of property, plant, and equipment increased by 19 billion yen; and other expenses decreased by 21.5 billion yen although there were slight increases in some individual items. So altogether, operating income decreased by 18 billion yen and reached 819.2 billion yen.
Now let me talk about the operational performance. On page number 5 we have the net additions performance on the multi basis. We have seen significant improvement after the introduction of the phone in Q3. And although the target was 1.85 million units, in net additions, we slightly underperformed the target but the momentum has changed and we have achieved 80% increase compared against the previous fiscal year.
The multi net additions performance on page 6, and if you look at the fourth quarter in particular, we have seen a significant improvement compared against the previous fiscal year due to the popularity of the Student Discount Program.
New sales on page 7, compared against the previous year we have achieved a 30% increase on a year-on-year basis and especially we have achieved good results during the spring sale season. And when you look at the teenagers and both, under 20s, in particular, if you compare the second half of the year versus the previous fiscal year we achieved a 30% increase in the sales to the younger segments. This was due mainly to the brisk popularity of Student Discount Program.
Page 9, churn rate. The churn rate rose to 1% in the fourth quarter. Although we achieved a significant improvement in the third quarter, however in the fourth quarter due to the overheated competition in the number portability market we saw an increase in churn rate in the fourth quarter.
Number portability performance is shown on page 10. We have seen a significant improvement in third quarter and fourth quarter respectively. So we succeeded in reducing the number of net losses to half the level of the previous fiscal year. So this is more than a 10% improvement.
Total handset sales and Smartphone sales is on page 11. The total smartphone sales – handset sales decreased but smartphone sales increased, actually 60% of the sales is achieved from smartphones today and the smartphone user base on page 12. We now have 24.35 million smartphone users and LTE users account for 79% of the total smartphone users. Smartphone users increased by 30% year-on-year and the LTE subscribers account for 80% of the total today.
LTE subscriptions increases are plotted here on a quarterly basis and we now have 21.97 million LTE subscribers. And if you look at the global comparison, we are the third largest carrier in the world by the number of LTE subs.
Page 15, ARPU, as you can see here our Voice ARPU decreased by 180 yen but Packet ARPU increased by 130 yen and Smart ARPU 70 yen, so altogether we achieved a 20 yen increase in the aggregate ARPU.
Page 16, this shows the expansion of the service subscriptions to i-concier, dmarket and docomo Service Pack. You can see that these subscriptions are increasing to this level and altogether we have 22 million subscribers on an aggregate basis to these services. And when you look at the dmarket subscriptions in particular, this shows the increase on a quarterly basis. The growth platued in the third quarter but this was due to the delay in introducing these capabilities on the iPhone but after that we have seen steady increase in the number of subscribers, and we have also launched a dhits service or the 500 yen menu as well.
Now page 18 shows the service application rate and the difference by the different operating systems. As you can see, in the third quarter, because of the delay in introducing these d-services to the iPhone there was a discrepancy between the operating system but by March there is no difference in the application rate of these systems by the operating systems. And this shows – page 19 shows the usage growth per subscriber, and we have achieved a 30% increase year-on-year and now the usage has risen to 890 yen. And the key drivers are the expanded use of one-time transaction services and the increased subscription to multiple services.
And page 20, among the different d-services, dtravel’s performances show here in this particular slide, after its launch in December we have currently 20,000 subscribers to this service and we will like to increase the number of subscribers even further, but the usage is quite high, 20,000 yen on an average, so this is quite significant in our view.
Page 21 shows revenues progress of the new businesses. We achieved a 20% increase year-on-year, so the revenues has been boosted by 100 billion yen in the last 12 months.
Page 22, LTE Network. As you can see on the left, we have increased the number of base stations by 2.3 fold in the last one year. So the effects are quite visible. According to the third party survey, that you see on the right, we have received the number one ranking in many locations across Japan.
Page number 23, this shows the progress in cost efficiency improvement compared against the fiscal 2011 level, we achieved 61 billion yen greater savings than planned. The initial plan was 160 billion yen but as it turned out we achieved savings of 225 billion yen altogether. As of the end of the third quarter, we were already ahead of the full year plan and on top of that we achieved a 47 billion yen in savings in the fourth quarter.
Page 24, rather this is the summary. With the launch of the iPhone, net additions and fee performance showed significant improvements since third quarter, significant improvement. As far as the LTE and Smartphone subscriptions are concerned to this increasing, however the market as a whole is beginning to stabilize and that was the case in fiscal 2013, as I mentioned smartphone increase was about 4%. But having said that, again, we are making surface to expansion and we want to make sure that the packet service revenue also increase by 121.2 billion yen excluding the impact of multi-support as far as LTE concerned we doubled the number of base stations, and the market subscriptions are in line with our plan and also we have made subsequent [ph] cost reductions in terms of the financial side.
But having said that we were not able to achieve the sales target, in particular in relation to Smartphone sales. And also, there was an increase in expenses pertaining to the spring sales season, so therefore the fact that we’re not able to – the fact that we saw a decline in operating income on a year-on-year basis, that is something that we do regret and we do feel very badly to our investor base on this matter.
Let me now talk about the challenges for fiscal year 2014, page 25. Boost packet revenues even further, that’s one challenge for this fiscal year. And also usage of smartphone users unless we expand. In order to that it’s important that to me of course switch them from feature phone systems or phone set system [ph], it’s important to promote the use of multiple mobile devices such as mobile phone and tablet. So we would like to promote the usage of multiple mobile devices.
The second is to break away from cash rebate-centric customer acquisition model. We want to be able to differentiate based on our network and service. And also in terms of churn rate, with the overheated MNP competition, churn rate is increasing. So therefore we wanted to make sure that we reduce churn rate and establish a robust customer base.
And the third relates to proper control of monthly support discounts, in other words, marketing expenses – it’s part of that, this is one of the very important management challenges for fiscal year 2014. We want to make sure that we have an appropriate monthly support discount.
Page 26 that’s just the opening charts, so let’s go onto page 27. Fiscal year 2014 planned actions. First is the new billing plan. This is the core of our business, and based on considerable thought we decided to propose this new billing plan. And we went to facilitate communication on this matter and from June 1 we want to launch this new billing plan and we want to enhance communication to that end. And also we will – smartphone sales will be stepped up and also we want to stimulate demand for multi-device ownership to boost packet revenues in differentiating with – or differentiate ourselves from the competition and expand your businesses through enrichment of service portfolio. And we will install another 40,000 LTE base stations to construct the strongest LTE network, 99% area coverage, and also move ahead with business structure reform and reconstruction. As of July 1, we will set up a new organization, we will streamline our business organization and make sure that we are able to realize strategic shift of resources.
Page 28, this is about the new billing plan. We have already made announcement about the new billing plan, so I will not elaborate all that much but we have received responses from the customer base, we have received a very large number of feedback. And in terms of the share – scale of feedback, it’s on core with the launch of the iPhone. We have received both positive and negative feedback, and positive feedback ratio was about the same as at the time of launch of iPhone. So the positive feedback response was about two fold. I was surprised by this one particular matter, there seems to be misconception among the customers that this new billing plan is dedicated only to smartphones, that is not the case. And also, U25 Ouen Discount, this discount – it has not yet got the attraction or the attention of the public, and the appeal of this discount is not yet fully communicated. So therefore, from May 15 we will be beginning to receive applications for this new billing plan, we want to actually narrow down on our approaches and make sure that we’re able to communicate the appeal of this new billing plan. So we’re going to make full-fledged preparation for the launch of this new plan.
Page 29, again this is the significance of the New Billing Plan; the objectives are fulfilled as you see on this page, promoting packet usage, stimulating voice communication. And voice communication by the way, this is the original – the origin of the core of mobile communication, so therefore that being the case, we want to put a hole through the downward trend in the voice communication. And also, we want to pursue a multiple device usage, multi-device usage exploring new demand if it will through multi-device model. And also retention of the customer base and maintain customer base, and this I believe will lead to the expanded subscriptions, and also optimize handset sales expenses. We want to stabilize the overheated MNP competition and optimize this market, and optimize handset sales expenses, and fiscal 2014 is the year to lay this foundation. [indiscernible] talks about customer service enrichment since 2000 I think we have launched various new services in this segment, we want to expand that further and add greater variation to the available services. We will enhance the traction of these services.
Page 31, now in this context, the dmarket transaction is increasing as it is growing and we want to further expand to this growth, we went to even double this growth in 2013, we are aiming for 90 billion yen and we’ll continue to expand further. The targets are described on the right hand side. We want to grow subscriber base of monthly-pay services such as dvideo, danime and dhits. As soon as possible we want to reach the base of 10 million. Right now it’s about 7.7 million, so therefore we want to drive this growth further.
Page 32, this talks about Global Business Expansion. Of course the vertical axis talks about new business, mobile business and the horizontal axis talks about Japan and overseas markets. So in this four quadrants, if you will, four boxes; as you can see we want to leverage the know-how that we have created in domestic base and also further expand revenue opportunities outside Japan as for Tata [ph] is concerned, he will find a better release on hand.
Page 33, about CapEx outlook. The total CapEx will be declining. While this is clear, but I guess the backdrop as far as CapEx for network and LTE related activities are concerned, it’s going to increase to 1.2 fold. So the total CapEx will be down, LTE investment will be expanding. So LTE will account for two-thirds of the expected 690 billion yen CapEx.
Page 34, through this investment we’re going to increase our LTE base stations by 1.7 fold, increase it to 95,300 stations and also the number of more than 100 megabits per second LTE base stations will increase 10 fold, increase to 40,000. So therefore we went off for very first beat, availability and we’ll be expanding area coverage. And it’s a Quad-band area with 150 BPE per second with loads increasing. Number page 34, it’s about Voice over LTE, this will start from long summer this year, and this will be introduced in older models starting from summer. The [indiscernible] that it offers high speed and also offers superior voice quality and low latency, for their operator like ourselves, especially efficiency will be increasing by three times.
Page 36, LTE are down so it goes beyond the current LTE. In the centre you will find preference to LTE-Advanced using carrier aggregation, offering 20-25 megabit per second, this will be realized by the end of this fiscal year. And further beyond, we want to aim at 5G. We are the – the development is in progress, we are aiming for a 10 gigabit or 10 gigabyte, this might take a little bit more time but we’re now getting into the territory of gigabyte. So with this technical capacity we hope to create dominantly strong network for DOCOMO.
Page 37, changing this topic a little bit, I would like to focus on business structure. Reform and reconstruction on July 1 of this year, our group subsidiaries will be consolidating to one. And we will actually provide services through a group of specialists in organization with deep-rooted ties with community, and we want to shift resources by streamlining regional offices, the number of – so the number of regional offices will be streamlined. We want to focus on corporate marketing, and also for new business area. So this is what we have been talking about since the past.
Page 38, it’s about the cost efficiency improvement. Fiscal 2013, we achieved 225 billion yen cost reduction. Fiscal 2014 we want to aim at 280 billion yen, so the gap is 35 billion yen. Back to [indiscernible] a lot of cost rate improvement in fiscal 2013 that is the result for this number.
Page 39, so fiscal year 2014, operations indicators are indicated on this page. As we can see on this page, the highlights are as follows, I suppose two highlights. First, net addition improved. Net additions, it also expand Packet revenue. As far as net addition is concerned, 2.13 million that’s a tight challenging target but we want to aim at this as we go forward. Also we want is important, we offer attractive handset line up and also offering new billing plan. These will be the drivers to achieve this net addition, it will be supported by the strong LTE network. As far as packet revenue is concerned, we are aiming to realize 140 billion yen year-on-year. Again, another challenging target, however, based on the good handset line up, new billing plan, and also enriched service contents, by combining those factors we hope to realize this target. And also we are aiming at Smart ARPU increase of 40 yen year-on-year.
Page 40, fiscal year 2014 forecasts. Operating revenue, we are aiming to – we are aiming at 4,590 [ph] an increase of 128.8 billion yen. Operating income, this will be declining by 69.2 billion yen, down to 750 billion yen. So the recent fall to 70 billion yen year-on-year anticipated for operating income is concerned, allow me to explain why this is going to be the case. The negative or downside factors, the impact from monthly support will continue to have an impact, the impact will be expanding, we’re anticipating negative 130 billion yen impact from monthly support, vis-à-vis operating income for this fiscal year, and also there is downward trend in the voice service revenue, and also the impact of the new billing plan. Kake-hodai, this will be used among high ARPU customers, so as a combination of these two factors, we believe that voice service revenue will decline by 80 billion yen for this fiscal year. So these two factors combined, we’re anticipating a downside in about [ph] 210 billion yen for this fiscal year.
Now I guess the backdrop improved net-adds and also by enriched our marketing sales of smartphones, we’re anticipating a 140 billion yen upside in the packet wherever you’re for this fiscal year. But at the same time network expense is anticipated to increase, that is because we want to expand our network capacity. So therefore there is going to be increased network related cost pertaining to the network. I mean we wanted to naturally offset this increase through cost efficiency. So there are both upsides and negative downsides, but putting them altogether we believe there is going to be a negative impact of 70 billion yen operating income at the end of the day for this fiscal year. We want to naturally improve the situation but at this moment that is regarding further operating income for this fiscal year. So efforts pertaining to new billing plan and network enrichment, we believe that our new billing plan is going to represent the core over business going forward and also network is going to be the source of enriched competitiveness, so therefore we need to enrich the network.
As a result we had appreciated your kind understanding on page 41. This represents our efforts towards medium-term growth, new billing plan, and also as we have mentioned network, service, and devices. These four factors, we’ll focus on this and as this indicator on the right hand side, new growth of normal business and expand new business. So the voice usage and packet usage will be expanded, and through these we hope to once again challenge the growth track. But we also need to fundamentally review the contracture, so costs of share will have to improve, and at the same time marketing expenses, sales expenses should also be optimized at the overall. So we’ll focus on that. So putting together all these efforts, we hope they will be able to pave their way forward and towards new medium-term growth.
So we need to solidify and stabilize smartphone user base, and also we need to expand other new business area so that they can contribute to profit. Page 42, this is conceptual chart, but from fiscal 2015 onwards we want to return to growth track but as far as the medium-term strategy or plan is concerned, we need to observe the impact of the new billing plan, and also we also need to monitor the progress of the impact of this new billing plan. Also the operational targets that we have set, we will need to achieve the progress of these operational targets. So we hope to through around fall of this year. We’ll be able to indicate to you the new medium-term plan. And naturally we will aim to challenge once again the operating income target of 900 billion yen at that juncture.
Page 43, expanding new business towards the achievement of 1 trillion yen income target, so new business breathing new [ph]. I will increase for this fiscal year, I mean for 1 trillion yen in a fiscal year 2015.
Page 44, return to our shareholder base. Allow me to say a few words on this topic. We have consistently mentioned that shareholder return is one of the most important management challenges. So providing stable dividend payment, and also maintaining top level payout ratio domestically has been something that we have been working on. Fiscal year 2014, unfortunately, we anticipate significant decline at operating income but we will maintain our basic policy of foreseeable dividend payment. And we will continue to implement 60 yen per share dividend payment as is the case with fiscal year 2013. Also, we want to further enrich shareholder return and also realize capital efficiency, and for that purpose, this year – today rather, I have announced to you the authorization for share repurchase, that was the result where the maximum is 500 billion yen, so up to 400 billion yen or 500 billion yen we are authorized to realize share repurchase. As far as free cash flow is concerned, we will continue to invest in growth areas, and also provide appropriate returns to shareholder return and we’ll continue to maintain optimal balance.
And page 45, this is the final slide. This talks about challenges to be addressed to establish a growth track. We believe that fiscal 2014 will indeed be the year to lay the foundations so that we could return to the growth track. As is indicated on these pages, on this page rather through these efforts we want to realize bold change, and with this intent we would like to steer our operations for fiscal year 2014. And this is the final slide but there is something that I would like to add at the end.
Fiscal year 2013, as I have explained, operating income target was not achieved. At the same time the overseas investment, in particular in relation to India, if that situation is there we very gravely observe the situation. We need to clarify the accountability. So represent Directors and Manager Executives, above Senior Vice President, there the bonus will be reduced and also they represent as Director [ph] and also strategic corporate advisor that’s the previous President. These four members will further reduce their bonus. We have caused concerns to you but we have taken these measures.
Fiscal year 2014, I mentioned that if I were to summarize the situation, I think the following four issues will allow us to realize growth once again. The first point, the introduction of iPhone, and the same time the summer models – the new summer models that will be introduced in summer, as well as new services. So we will maximize leverage about impact. And also as of June 1, as a replay they mentioned, new billing plan will come into play and we want to enhance our competitiveness. And the day we believe we’re just lead to improve customer satisfaction, this is our ultimate goal improving customer satisfaction. So we hope that these efforts will lead into that.
Third, in terms of management operational structure, we will restructure that organization. And fourthly, as of July 1 we will review our organization, we will make efforts to further enhance our marketing and sales activities focusing on corporate sector, and also exploring new business services. So we’ll be shifting resources to this new business demand, and of course, we will make continue to realize improved efficiencies and times your expression [ph] might these challenges we want to boldly make these new challenges, I would appreciate your kind support and understanding on our efforts. Thank you very much, that is all.
Thank you. We will now like to entertain your questions. (Operator Instructions).
Daisaku Masuno – Nomura Securities
Hello, I am Masuno of Nomura Securities, I’ve got only one question. Under your new business brand, what does this new business mean to you, now that you have this authorization for very sizeable share repurchase of up to 500 billion yen, I think you are trying to do something in the equity market. So, I think with respect to the new businesses – I think you have taken all the necessary measures of whatever you can do. Just – this is something that I just wanted to confirm, now that you have decided to sell off some shares and also you have decided to write-off, and you have decided to introduce LTE advance, and you have already unveiled your new billing plan, and you also have set a new net additions target, 3.2 million – 3.7 million, which may include smart devices and some methods [ph], and also you are expecting to increase your smartphone sales as well. As far as the monthly support is concerned, when you look at the negative impact projected from that compared against the January to March quarter, you’re expecting to decrease the monthly support discounts and optimize the discount level and so that you can minimize the negative impact on your revenues. And perhaps the zero yen handsets and the actual market price of the handsets will be healthier going forward. I think those were the challenges that you had to address in the past but it seems that you have taken steps and measures to tackle these issues. Is that what you are trying to say with this new business plan?
I think you got it all right. The introduction of iPhone was one challenge that we had to overcome and we did it, and with the introduction of iPhone we have seen some effects with the number portability rates becoming overheated. That has – was – that going too far to unhealthy level, and we wanted to rectify that for sometime, and although it took sometime we have decided to introduce some new counter measures such as the introduction of the new billing plan. So those were the intentions behind the introduction of a new billing plan. We wanted to resolve these issues and on the other hand we had this Tata issue and also, all the organization issue. So if that was your understanding, we appreciate because you got – I think you got the message correctly. So, looking into the results of 2013 we are trying to rectify all the problems with fiscal 2014 measures, of course we don’t think we can solve everything in a single year, there are many things that we have to address further, and of course there might be new challenges coming out from the competition. I think they will come up with new ideas and counter measures, so I will try to monitor what the future developments so that we can respond immediately. Thank you very much for your understanding.
Daisaku Masuno – Nomura Securities
Then just one follow-up. So then, all that matters from now is execution? 3.7 million units – net additions, and the control of the multi-support discounts and the actual price of the handsets, how healthy can it be? How will you be able to execute on these issues?
Well, for example, we just started the New Year after April, so it’s only a limited time after the New Year. But I think the market has become quiet, quite heard that before, the MNP market stabilized, and in December we are seeing tangible results in our net additions acquisition, and also the new billing plan. I think each and individual workforce / employee is trying to understand the new billing plan and we are taking – launching our company wide campaign to raise the awareness of the employee pertaining to these new billing plan. So we would like to run the PDC cycle plant and check cycle as quickly as possible so that we can share the understanding among the entire workforce.
Next question please.
Hitoshi Hayakawa – Credit Suisse
Thank you for your explanation. Credit Suisse, Hayakawa is my name. I have two questions. Well, you are now carrying on to a very large total share repurchase but for the first time you may be closer tenures? When you both reconsider the fre-flux shares of DOCOMO, it’s going to represent a very sizeable figure. So how do you intend to actually carry out your share repurchase against the backdrop? I suppose this is going to raise a lot of attention in the coming week I believe? And naturally that the parent company, I suppose we had prior consultations with the parent company on this matter, I would imagine, but can you share with us what you envision? In other words, the buying from the market and the buying from the parent company, what do you envision? So what is the state or the level of buying from the marketplace that you envision, still it is going to represent a very sizeable figure, so what is the pace and the timeline you actually imagined? Within a year financial presentation numbers, the financial reports were actually this than the market expectation but then, the share repurchase authorization actually is probably even more than enough to offset the downside of your full year financial reporting. So I suppose just a matter of feasibility, you have now received the authorization but do you really believe that you are able to actually use up the authorization provided to you or is it simply just an authorization? So can you tell us – so how do you see the amount of share repurchase if that’s going to be possible in the marketplace, I would appreciate your comment on this point, I’ll ask one by one by the way.
Well, first of all shareholder return, and also capital efficiency, in respect of these elements naturally we had continuous discussions with the holding company, and due to holding company. Now the authorization is 500 billion yen, this time around. If we look back in the past, we had cases where buyer authorization was 600 billion yen, so I think it’s comparable to that. It is just simply that we got authorization, no that is not the case, we are going to implement vis-à-vis this authorization. Now there are elements that I’m not able to respond directly to you but to the extent, I would like to invite our CFO to respond as I would refer to our CFO.
Thank you, Tsubouchi is my name. And the timeline is up until March 31, 2015. Of course we have to consider the period in which we’re able to actually buy, there are also windows that are available, we have to consider that. But hopefully we will not be criticized as not being able to repurchase to the amount of the 100 billion yen. As far as cash is concerned, I think we have enough cash to cover this share repurchase. For the past two or three years, the cash flow was on the weak side, that’s because of the increased installment claims. But I think from the second half of this year the situation will begin to improve, so that being the case I think we’ll have sufficient cash buffer to be able to repurchase the supple of our shares, we would like to comment.
Hitoshi Hayakawa – Credit Suisse
If I could also add one point, as was point to note, in the past as far as authorization is concerned we have received 700 billion yen authorization in the past, that was back in 2003-2004. At that time we implemented 400 billion in 2003, I believe, and in 2004 we actually carried 430 billion yen. So the usage of the authorization – and that was about 70% to 80% at that juncture. So as Mr. Kato and as our CFO mentioned, it’s not just an authorization, it’s not just a level, we have an idea that we’re able to use up the available authorization amount. So in the past, we actually bought from the marketplace, so we would like to refer to those past experiences. Then that being the case, we have talked about fiscal year 2003 and 2004 which say that help is from the entity holding company, was that the case? Would that be a good benchmark for this share repurchase, this year around?
Well, we cannot fulfill the 500 billion yen solely by buying from the marketplace, so we have to combine the two, but we have not made any final decision on the breakdown. Thank you very much.
Hitoshi Hayakawa – Credit Suisse
My second question then, you talked about the net addition of 3.7 million for this fiscal year. It’s not a very convincing number, I’m sure that this represents a lot of elements but this so called mobile phone or tablets, will smartphones, mobile phones, tablets – excluding smart meters, if we focus on devices that are actually to be used by humans, what would be the true net addition that to envision, so we conclude those machine related numbers, what would the number be?
Well, I suppose it’s like a pet but – as Mr. Masuno asked in his previous question, it is true that these numbers seem very old of these different elements that is true when we talk about the net additions. So you talk about devices that are actually used by humans. We haven’t really talked about this about [indiscernible] but we have actually set up an intelligent target for – if you will human related net additions if you will. Well, up until now both, especially when we take a look at the marketplace for the past two or three years, this so called handset side, well there is a certain range but the handset range between 2 million to 3 million net additions I believe. And at minimum, we have 3 operators, so we want to be able to achieve one-third if you want market share. So suppose that’s one way of looking at this number.
Well recently, MVNO has caught the attention. But as far as numbers concerned, would that also represent the 700,000 yen in the 3.7 million net addition target. Well, at end of the day MVNO mobile probably coming into the play that’s true but as far as we’re concerned, in our plan and our prediction, well it’s always very difficult to make an accurate prediction. So we are focused on elements that we are able to control if you will, for example, inclusive of machine-to-machine, the numbers are included but of course tablets, we are aiming for multiple device model if you will, we want to promote that as well. So these are the elements that we want to focus. So we want to do our very best in areas that we are able to actually have control over.
Now Pake-aeru and Kake-hodai, the – DOCOMO was actually ahead of the others in launching this type of billing plant and I think this will resonate with certain users. So it represents a totally new billing plan, Kake-hodai and Pake-aeru, so shouldn’t you actually bring forward to your marketing plans and put forth more robust plans because the others are actually struggling to put together this billing plan. The fact that you actually boldly introduced this plan, I think you should communicate this if or more aggressively to the customer place, to the customer base. So you should do this, you should actually carry out aggressive marketing campaign ahead of the June first launch. I will appreciate if you’re doing that. Thank you very much. We have received such feedback, we’re very encouraged by your comment. As a matter of fact, we already announced this on April 10, we did respond to many other questions. But we really wanted to put this out there much earlier.
Now this new billing plan – we have to consider consistency with existing plans and it took us four month before we arrived to this new billing plan, and in order to achieve this consistency we need systems, and that’s the reason for this June 1 launch date. As I mentioned, they are casually earlier, it’s not just to get [ph] the Smartphone’s by the way. Majority of the people have this conception because of the lack of information perhaps, so maybe our message really did not resonate with them, so we’ll try to do that. So we really rest through before the launch, and before the announcement rather of April 10 but this represents the core of our business, we were very careful in terms of the control and the management of information. As far as promotion is concerned, we did not allow our staff to prepare for the marketing campaign, so that’s why perhaps the exposure of this billing plan is not yet that large but it will begin to take applications and orders as of May 15 before the consecutive holidays we want to really put out a robust campaign. So we are making all out effort to launch this campaign, so please expect a great deal from the new campaign. We are reducing our reductions but for the promotion expenses are actually, considered a separate category. So the other expenses increased, we hope that you will not criticize because that is when you – because we want to put out a very good campaign. Thank you.
Hitoshi Hayakawa – Credit Suisse
Thank you very much for your response.
This gentlemen sitting right behind the previous questionnaire.
Tetsuro Tsusaka – Morgan Stanley
My name is Tsusaka from Morgan Stanley. Now first of all, regarding your share repurchase, to be very honest with you because the results was very bad and the prediction – the forecast for fiscal 2014 is very disappointing but the share buyback is excellent. So I think you just gave out a half [ph] in return for the very bad apology. So if you don’t want to apologize anymore you have to give out some present. So share repurchase in one way or another I think to shareholders – this is a some sort of return that you are going to do to provide to that shareholders in one way or another, so at last, if this is the case and if this is what you’re presenting to shareholders who will welcome your message, if it’s just an apology then this is just a one-time apology but if you are going to continue this – I just wanted to know about the continuity of this kind of program going forward. Now you have this 60.6% issue, the shareholder – the share ownership by the parent company will have a very sensitive implication on your share buyback. So unless you make a purchase on a pro rata basis, the shareholders that holding companies ownership will increase by – to more than 66.6% or two-thirds of the level, that might have a understanding for the share – for the parent company not to exceed that threshold or – I’m very sorry for this lengthy question but what kind of continuity are you planning with respect to this share buyback program going forward?
So this is my question. I would like to ask you your question. I have – there are two points here with respect to the 66.7% issue, yes, this is – we’re not in a position to comment on the NDT holding companies willingness to unload their share. So you have to redirect that question to the holding company. It’s just that we had made a declaration that we are willing to buy the common share from the market and also from elsewhere. And so therefore this is a matter that has to be decided by the shareholder – the holding company.
And the second question, this is just a one shot-ish program? No, in the past we have – we awarded our shareholders through the combination of the dividends and share buybacks, of course in the recent few years because the shareholders preferred rewarding by dividends but now that interest bearing liability has come down to this level and cash compiling up to this level we just thought that it is time – it is about time for us to review our capital structure and therefore that we made this decision this time around. Now, also the medium-term free cash flow generation over the medium-term, we’ll have to look at the profit level and the investment level and secure some cash flow. Now when you consider that I think we should be able to maintain a stable cash flow going forward and therefore because of this confidence we decided to conduct a share buyback at quite a sizeable level like this time around. So, and we will continue to do this and I think that this is a message that we’re having behind this. Of course we should have been better to declare that we will continue this on a medium-term but I think we can do that when we announced the medium-term plan going forward but this is not on a one shot issue.
Tetsuro Tsusaka – Morgan Stanley
Thank you very much for your textbook answer but whether your cash flow is low or high, has been an issue for sometime. And there was no indication as to the optimal level, so what kind of leverage do you think is appropriate in terms of capital efficiency that was never mentioned before according to what I know. So going forward, what will be your basic approach? What is your optimal level as to leverage? Can you comment on that one first. And when it comes to free cash flow, your free share cash flow leverage is coming down compared to before. So if you look at the total balance sheet, vis-à-vis the share buyback, what is your philosophy going forward? What would be the optimal leverage level in your viewpoint? Can you comment on that one in addition.
Okay, I’ll try to answer that. Well, when it comes to leverage we don’t have any benchmark, we’re just looking into the overall picture but ROCE is the indicator that we emphasize. We – because being a facility based industry, liabilities plus the equity level has to be predicted to adequate level. So this is what we emphasize ROCE. Sometimes we pay back the liabilities, based on the opinions from the shareholders and sometimes about with the [indiscernible] 5% level of liabilities that 1% level, so when we consider that in order for us to improve we thought we think we should take a shift to improve our capital efficiency, therefore ROE is now becoming more important at the current level. So ROE has been coming down over the years, so we have been quite – we were aware of that so that is the reason why we decided to emphasize the equity level. I’m very sorry for this textbook answer.
Now, finally towards the medium-term growth, you have this some bullet points towards medium-term growth. I didn’t really measure this with a yardstick but with this on page 42 at the bottom line, the bottom is 700 billion yen and – 750 billion yen, and when you look at the medium-term I think will go back to 820 billion yen as in fiscal 2016 and in fiscal 2015, and perhaps in fiscal 2016 I think you are looking into a profit level, 900 billion yen according to what I plotted on this trajectory. So this looks like – is it correct to understand that this is – you are aiming for 900 billion yen for fiscal 2016? I think you had a very good measure but this graph is not that precise, not that accurate. So this is only a conceptual graph, so I’m very sorry for that but as far as fiscal year 2015 – 2014 is concerned, we will like to make this a bottom. And we are determined to make this a bottom and this is written in more detail in the presentation. So as – this was just as illustrated by the first questionnaire, and we have taken many measures to achieve that, so including share buyback we have that prospects on the horizon and we have a strong resolve to achieve this, this is what we wanted to convey as a message here.
So as you mentioned, the new billing plan is one critical point how well this would be accepted overtime and how will this lead to an increase in packet revenue growth on the multi-basis or even a weekly basis we will like to monitor that. That’s one point that I would like to emphasize here. And based on the performance we will like to present the medium-term vision, the new medium-term vision around autumn of this year.
Thank you, we have only five minutes remaining. So we’ll take questions from those of you whose hands are already up. So we’ll go to the gentlemen in the third row from the front.
Goldman Sachs, Matahachi [ph] is my name. I have two questions. First, with regard to Tata I would like to receive your confirmation on this point. So, what was the overall acquisition price? And also as of the end of March this year, what was the book value? If you could explain that, I would appreciate it. And also, as a point of clarification that I would like to seek but – in the past, we have sufficient tax deferred assets but – deferred tax assets but what about the deferred tax assets, is this in the picture? And also there is reference to the file that there may be a possibility that this transaction may not be achieved or realized. Can you talk about what options are available, you talked about how – you talked about it is on certain health option will be performed but can you elaborate?
So that’s my first question. Yes, thank you. I would like to go on to the acquisition part and the current book value pertaining to Tata. Acquisition price was 266 billion yen, 266.7 billion yen, that was the overall acquisition price. And write-downs have been already carried out, I mean this is what we reflected. So, the book value is 450 billion yen, that is going to book value, that is how we see it. Correction, 45 billion yen; correction, 45 billion yen. This is as of the end of the fiscal year, yes, that is the case, 45 billion yen. India went that it is not sold, can you explain what will happen if this transaction is not performed? When you say well it’s not sold, well – that would be perplexing, the contract is that it will be sold, so we want to carry this out. So in this press release there is a reference to – it is uncertain health option will be performed. We have simply written this as a general risk.
Then second, operating expense; the breakdown of the operating expense. As far as the expenses are concerned, for this fiscal year you’re anticipating a very substantial increase on a year-on-year basis, that is your guideline but what is going to drop this increase in the non-personal expense if you could identify two or some of the larger impact items, I would appreciate it. Yes, thank you. I would like to explain if I may. The fiscal year 2014, other expenses, the – this is increasing significantly. And the breakdown is as follows, new business related expense, its new business revenue linked expenses. So that is going to be the majority of the increase if you will of this expense. And other operating expenses and naturally this is already set, however, we are not anticipating very large profit from that.
Over the past few years, especially fiscal 2013, you would carry that substantial cost free reduction, for this fiscal year is the assumption that this is not going to be the for fiscal 2014 but as far as the new business is concerned, the increase in the expenses related to new business. And the structural reform and cost reduction thereof – we note that this result is shown in this number. So, the increase in the new business for example, that’s a 137.2 billion yen, no there is an increase of this amount in other expenses. Majority of this increase can be explained by this structural reform, represents roughly 55 billion yen. So it doesn’t mean that we’re not going to carry forward with cost reduction for this fiscal year. I say, thank you very much.
The gentlemen in the right left hand side of the room.
Oshidani – JPMorgan
JPMorgan, my name is Oshidani. Just for my reconfirmation, I have several questions, three questions. First about the share buyback, instead of dividend increase what’s the reason you decided to conduct a share buyback? If you want to continue stable dividend payback, maybe why don’t you raise a payout ratio to 80% or so and continue that on stable basis, commit that on a stable basis, then I think that could be a very good commitment vis-à-vis your operating income level. So why did you decide to flow back the returns in the form of share buyback to usual cash? What is your management rational behind that? Secondly, regarding Tata, this sizeable loss is going to be incurred. So as a consequence, the investment is going to incur that amount of losses. So what’s the reason – on what grounds you have decided to make an exit from this business? Is it an operational results or decision or was it such that you didn’t have any reason to make an investment, now that you have this option deadline you just made a decision to get out because it’s not performing well? So what’s the reason, why decided to exit from the Indian business? Well, the person presiding this meeting is now – is the person who made this decision several years back, so can you comment on Tata’s case? And my third question regarding page 42, you have this slide entitled towards medium-term growth, in the last 15 years or so, whenever you dipped below 1 trillion yen and 900 billion yen, we are seeing this familiar picture every once in a while. So whenever we see this kind of picture, do you always envision a L-based return – recovery instead of a V-shaped recovery? So compared against the past this time around what’s the reason why you came up with this kind of graph, what’s the difference from the past exercise? Is there anything unique this time around compared against the past, something trustworthy that we can trust? So, again this picture, this is not convincing at all. What’s the difference from what you have said in the past?
Well, let’s go one by one then. Regarding share buyback, as I said earlier, I think I just can only repeat my message. Whenever we conduct a dividend increase, people ask us why don’t we conduct a share buyback and the other way around, the other answer. So we always communicated that we are trying to optimize our capital efficiency. So it’s not just a one shot firework, we will like to return the profits to the market while improving our capital efficiency, and over the medium-term we believe we are well positioned to generate stable cash flow, so I just hope you will render us your understanding. Even if our profits decrease on a short-term in the near term, there might be possible for us – it might one way to pull back just to increase our dividends in such timing but it’s just that we’ve wanted to pull back the returns in a stable manner looking into capital efficiency.
And the Tata, I just hope that the MC will answer that – that’s not good solutions but 5 year was a good deadline, maybe 7 years, 10 years could have been a good deadline to make a decision but this is an emerging market, but I just thought that 5 years is all that we can make for a foreseeable future. So, and in the fifth year, we are now in the fifth year, we have to make a decision and this is so – we made an agreement that will allow us to return 50% of the acquisition price if we have to. So if we defer the decision to not to exercise the option, that’s one option but then if that – if we decide on that that will lose our way to exit from this investment and that means we will stay in the market and given the uncertainty in itself the telecommunications market in India, that was a difficult choice for us. So at the current environment – in the current environment we thought the exercising the option that we have is the best option that we can choose. So that’s a reason why we made this decision. We perhaps believe this is the best option that we can choose at this point of time.
And if I can add or comment, it’s not that we made this clear – this very calm decision that because this is underperforming we made this decision, this was a very bitter decision on our part because when we decided to invest in India, we were determined to capture the growth of Indian market and we were committed to partner with India over the medium-term. So, more than 100 people alternatively came to Japan and when we went to India we have BTCC, Business Technology Corporation Committee meetings, we also had many working groups, four or five of them, and we had regular meetings every six months and we improved the performance overtime. Initially our attempt was to rollout the 3G service as quickly as possible and offer the services that we cultivated in Japan in the India market as well. And we thought that things were moving great pace smoothly in the beginning but as you know very well, the Spectrum administration India was so confusing this was beyond our expectation, this was totally unpredictable, the license that we had was repelled and our Spectrum was taken away and they will redistribute the Spectrum but that would entail some money. And also in addition to that, we have to pay Spectrum utilization charges on top of the license fee. And in India, the Spectrum is awarded on a circle by circle basis, say and in fact, the most congested, most – the highest traffic circle of New Delhi, we paid for the Spectrum but we haven’t been able to receive the Spectrum yet.
In this environment Tata introduced a second-based billing and that was well received and at one point we became the number one – number four player, by the number of subscribers but the rest of the market followed suit immediately and that resulted in intensified competition. So therefore Tata is struggling today in making profitable business. So that is what is happening today. So, as Mr. Tsubouchi mentioned, how do we foresee the future, we made utmost efforts in the past, we were so creative in the market and we completed very creatively and we enjoyed a very good relationship with our partner Tata for Indian business. And even if we have to exercise this option, we will like to value this good relationship that we enjoyed with our Indian partner going forward.
And the third question, although you said that this is not trustworthy whether it is L-shaped or V-shaped recovery but when we announced our third quarter results, I remember that I received a question from Mr. Oshidani and I answered to you that this is something that I recall, that I said myself. We don’t have so much time, we don’t have the luxury of time, that’s the message that I convey to you. We have to change, we have to change the market, and I think I show the determination that we are going to change, and this is – that is why we came up with this new billing plan, and that is why we are going to reshuffle the corporate organization, and that is why we have been moving ahead with a structural reform. So this is a year that we are going to embark on new challenges.
So this line on this graph, this is somewhat similar – this is somewhat close to a V-shape, and that is what we convey as a message here, and that is the reason why we decided to conduct a sizeable share buyback. I hope you understand. Thank you.
Thank you. We’d like to conclude the meeting at this juncture. Thank you for your kind attendance. With this we would like to complete the session. Thank you very much for your attendance.
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