(Interpreted) Thank you very much, ladies and gentlemen, for spending your precious time, to attend this meeting. Now, we would like to start this analyst meeting reporting the results for the first three quarters of the fiscal year ending March 2012.
My name is Hirokado of IR Department, and I’ll be presiding this meeting. Now, please be advised that this meeting is broadcast live on FOMA via live streaming and also on the Internet. And also a recorded video of this meeting will be distributed on demand from NTT DOCOMO’s website.
Now, I would like to introduce the participants from NTT DOCOMO. First of all, we have Mr. Ryuji Yamada, President and CEO; Senior Executive Vice President, Mr. Kiyoyuki Tsujimura; Executive Vice President and CFO, Mr. Kazuto Tsubouchi; Executive Vice President and Managing Director of Corporate Strategy and Planning Department, Mr. Kaoru Kato; Executive Vice President and Managing Director of Network Division, Mr. Fumio Iwasaki; and finally, we have Executive Vice President, Senior Vice President responsible for Consumer Marketing, Mr. Takashi Tanaka.
We will be using five sets of documents for this meeting. We have the earning release and two sets of presentations. One for the financial results for the first three quarters and the other one entitled “Response to the Series of Network Malfunctions.” And we have two pieces of press release. One, “NTT DOCOMO to Offer Discount Campaign for LTE,” and the other one entitled “DOCOMO to Offer Discounts to Customers” using Xi for second device. Now, for today’s meeting we will first begin with the presentation by Mr. Yamada followed by a Q&A session. We will aim to finish this meeting at 7:00 sharp. Please also be advised that this meeting including the Q&A session may contain forward-looking statements.
For potential risks, please take a look our Form 20-F filed with the SEC or this presentation document.
(Interpreted) I am Yamada. Good afternoon to you, and thank you very much for attending this meeting despite your busy schedule. First of all, I would like to express our apologies for the inconvenience that we have caused for the network troubles in the sp-mode services. We have considerably inconvenienced to our customers, and we would like to extend our deepest apologies.
In light of the occurred network disturbances we have established a task force for the improvement of network infrastructure headed by myself. Under which we have been – we have explored many counter measures for the improvement of the situation. Now, I would like – because I am heading this task force, I would like to introduce the activities that we have been undertaking in order to improve the situation.
So, we would like to explain the results of the financial quarter or the financial results ended December 31, and also the response to the series of malfunctions. I’ll begin with the response to the malfunctions. Page two which contains the table of contents. And you see there, first, we have given the overview of the sp-mode malfunction which occurred on the 16th of August and the 20th of December as well as the 1st of January this year. Second, we have the overview of the packet switch malfunction that occurred on the 25th of January. First – and third, because we have established a taskforce for the improvement of network infrastructure, I would like to elaborate on the activities there.
Number four, we have the sp-mode malfunction countermeasures. And number five, the countermeasures for the packet switch failure. And under item number six, we would like to explain how we are going to ensure prompt information disclosure to customers.
Now, let me begin the explanation. As I said earlier, on the 16th of August, the 20th of December and 1st of January, we faced sp-mode troubles. As we see in the overview there, the MAPS system, sp-mode system, was the cause of this problem. The MAPS is a group of service that offers the sp-mode service.
And on the 16th of August, the trouble occurred in the network authentication server which is responsible for authenticating customers. Then on the 20th of December, the point of failure occurred in the user management server. And as you see there, this caused a breach of secrecy of communication and leakage of personal information.
And then also in the mail transmission/reception system, we also saw a failure on the 1st of January in the mail information server. So, those are all the troubles related to sp-mode system.
Then on page four, this is about the packet switch malfunction that we’ve encountered two days ago on the 25th of January. Because packets, as you may be aware, packet switch is the switch that handles the data communication service.
Now let me explain this, if it happened, the impact if it happened. Now, we have seven units of existing packet switches and the whole (inaudible) of existing packet switches as you on the left and right on this chart which accommodates the radio network control there, providing service to Area A and Area B of Tokyo. Now, the new packet switches that you see in the model are the switches that we have been introducing in order to expand the capacity of the network in order to accommodate the growth of smartphones.
So, starting from the four units of the existing packet switches on the right, we’ve been gradually switching over to these new switches. And we saw a very steadfast progress, completing the accommodation of 23 units of fiber RNC. But now, the remaining 37 radio network controllers were about to be accommodated in a new packet switches.
But then immediately after the switch over, which was completed after around 3:00 in early morning, then starting from around 8:30 in the morning, we saw a gradual occurrence of congestion in the nodes. And then around 9:00, we have seen a steep increase of convectors – steep degradation of the congestion around 9:00 in the morning of 25th of January.
Now, on page five, so in order to tackle the problem, we established the task force for network infrastructure improvement. The task force is responsible to determine the causes of events that have occurred in line with the rapid increase in a number of smartphone users so that we can implement the immediate countermeasures against the cause of problems.
Secondly, the task force will also perform company-wide cross-sectional studies for stable network operations and further enhancement of processing capabilities so that we can construct the network infrastructure capable of accommodating 50 million smartphone users. So, as an immediate countermeasure against the series of malfunctions, we have decided to invest a total of ¥4 billion for the two years of 2011-2012.
Also, in order to construct an infrastructure capable of accommodating 50 million smartphones, we decided to implement drastic measures as we announced when we unveiled our medium-term vision. We set a plan, we set a target to acquire 40 million subscribers by fiscal 2015 with smartphones. So, in order to reinforce the sp-mode system, we decided to invest ¥40 billion for – in the period between 2011 and 2014 and also to invest ¥120 billion for the packet switch reinforcement.
To give you a breakdown, naturally, because of the foreseen increase of smartphones, we have decided to expand the capacity and build up the facilities in the case of packet switches, for example. This time around, we have seen a huge increase in a number of control signals, so we decided to reinforce the capabilities to accommodate this growth of control signals. It’s not only about the simultaneous connection. So, out of this ¥120 billion of investment, ¥90 billion were already appropriated for in our existing plants.
But then, in addition, because of this huge increase of control signals, we have decided to increase another ¥30 billion of investment in order to take care of these control signals. So, existing plants already appropriated for ¥90 billion, but in addition to that, we have also decided to increase investment by another ¥30 billion for the period up to 2014. And also, for the sp-mode system, we’ve already appropriated for ¥25 billion. But then, in light of this problem, we have decided to increase investment by another ¥50 billion.
So, in addition to the ¥4 billion and ¥15 billion and the ¥30 billion, the total additional investments due to the problem for the next three years is about ¥50 billion approximately, by and large. So, an additional ¥50 billion investment was appropriated for in light of the current study problems. So, these are the current study items undertaken by the task force. We’ve already conducted seven meetings of the task force, and we will continue the activities going forward.
Page seven, these are countermeasures to take care of sp-mode’s problems. Step I countermeasures are already complete. We’ve already implemented them.
And if you go to page eight, regarding what we have done on the Step I, these are quite difficult to understand because this is only – language-only in this chart.
So, if you look at the diagram on page nine, you’ll see where the point of failure occurred – point of failure was and where the countermeasures were implemented. So, with all these immediate measures, I think we’ll be able to sustain operations for the time being. However, we need to further implement additional measures in order to improve our reliability which are illustrated under item six, seven and eight of – under step two.
Step two counter measures are elaborated on page 10 in more detail. And as you see there, we will have to change the connection sequence because of the IP address was replaced. So, the IP address notification from packet switched to devices will be performed after the completion of IP address registration in the sp-mode system and this will prevent the mismatch of IP address, preventing the reoccurrence of the recent trouble. This will be completed by the 28th of February; so, another 20 plus days.
Item number seven, we will take countermeasure against burst traffic as well. Because Android system has a constant connection, so, in the event that these connections are disrupted, all the devices will make reconnection attempts. And this may result in burst of – burst signals, burst traffic and that was part of the reason why we saw the failure this time around. So, we would like to avoid condition due to reconnection. And also, the countermeasure against this is elaborated under item number one of item seven.
So, in the case of reconnection, if there is a failure in the connection root, all those devices that you are using or that are currently in session or not in session, everything, everybody will – every device will make a reconnection attempt under the current scheme. And this will cause unnecessary problems. So, we have decided to alter the procedures so that only those devices that are currently in session will be allowed to make reconnection attempts. But those devices that are not in session will not make reconnection attempts under the new approach.
So, with that change, those that are not in session, will they be left untouched? No, that is not the case because in Android system, we have this keep-alive session. So, every 28 minutes, the Android devices will make a session attempt. So, maybe before the 28 minutes, the devices may be lost from the system perspective, but after 28 minutes, it will always go to establish a session.
That means those devices that are not in session, and there may be millions of them, so they will have a random connection all the time in this keep-alive system of Android because the keep-alive generation of signals will not happen simultaneously. So, naturally, if customers want to activate and operate the handset in order to do something, then the session will be reestablished. So, this will not cause any inconvenience whatsoever even if we change the procedures in order to avoid burst traffic.
The second item under item number seven is also a similar approach that we will also prevent the unnecessary occurrence of location registration updates. And this will be also be completed by August of this year.
Item number eight, migration to new mail information servers. The trouble – the countermeasure against our January problems will be fixed by the 20th of February.
Now, step number three, these are the efforts to ensure scalability to sustain the accommodation of 50 million smartphone units with the MAPS. When we first developed MAPS, sp-mode system, we didn’t have this view of having 50 million subscribers with smartphones. But in order to have and ensure 50 million smartphones, we have to have a solid server structure that can sustain the buildup up to 50-million capacity. We would like to – we will have to re-examine if that is ensured. And if there’s anything that has a defect of achieving that, we will fix it. So, as the number of subscribers of smartphones increase, we will build up the facilities in line with that increase. And these efforts will be continued throughout this fiscal 2012 and 2014. And that altogether, we will be spending ¥120 billion – I’m sorry, excuse me, ¥40 billion for this purpose.
Now, page 12, packet failure countermeasures. This is about the packet switch. Why does this failure happen? Let me give you the details. The packet switch can handle simultaneous connections and also control signals. These control signals and – packet switches are defined by the capacity of these two. And with the growth of smartphone numbers, we’ve been focusing on the number of simultaneous connections. That was the approach so far.
But recently, as we incorporate new applications especially with VoIP for chat services, because with the average system, every 20 minutes, the device will go and access the network in order to identify the location. But when it comes to VoIP because – and chat, you have to have an immediate interaction. So, every three minutes or every five minutes, the device will go and send a ping signals to the network to keep alive. And with that application increasing in number, this will result in the huge increase of control signals. So, as a consequence, this increase of control signals caused the failure of the packet switch this time around two days ago.
So, we always have to keep an eye on the volume of control signals. Up until one year ago, the number of control signal was at only at the negligible level because the location registration signals were very limited. But with the increase of applications, with the VoIP and chat services increasing, the control signals have increased. So, from about a half a year ago, we started developing a tool in the new packet switches that can measure the volume of such control signals.
So, now, we are in a position – we’ve been in position to be able to measure those control signals with the update of software starting from the 20th of January. So, because we updated the software version of the packet switches on the 20th of January, some of our packet switches are now capable of measuring the control signals. So, we will, under the new countermeasures, we will have a comprehensive inspection of the processing capability of the packet switches across Japan.
So, if there is a huge increase of simultaneous connections, we will build up the capacity. But in addition to that, we will also look into the volume of control signals set into the packet switching system. So, with the new software, using the new software, we will carry out a comprehensive inspection on the processing capability of all packet switching system across Japan. And we will complete this inspection by mid-February. In addition to that, the capability of processing those simultaneous connections and also the control signals, this will have an impact on the performance, so we will have to further improve the processing capability of the packet switches because this relates to the control signals. That’s the second item under the comprehensive measures for packet switch.
And number three, because as I said, we will have a comprehensive inspection of the packet switches nationwide, some of the packet switches maybe just fine, but some other packet switches will have a very tight capacity. So, on a necessary basis, we will increase the capacity of the packet switches, and we’ll be using both the new switches and the existing switches in parallel in order to secure sufficient capacity.
In the previous plan, we were planning to completely – have a complete migration to the new switches and abolish the existing switches. But in light of the recent problem we decided to operate the new and existing switches in parallel because that will enhance the capacity.
Another item as you see at the bottom is that in order to be able to accommodate 50 million smartphones, we decided to store additional packet switching systems. So, altogether we will be spending ¥120 billion for these packet switches reinforcement. In addition to – because of the ¥30 billion that I just mentioned. So, altogether, we’ll be spending ¥120 billion for the packet switches.
But challenges here in corporation was the global carriers. We will have to address the issue of the control signals transmitted by the applications. This was out of the scope of many – in the conventional systems, but we will have to gain the recognition and gain the understanding that this will be a very big problem for mobile connections.
Item number six on page 13. Because of this – after this problem, we were very much criticized by our customers that our information disclosure was so slow. So, in the event that this kind of failure happens in the future, we will ensure prompt information disclosure, approximately within 30 minutes, posting information on the homepage, distributing information to DOCOMO shops and information centers, and also to the corporate marketing teams in order to respond to our corporate clients. Also, we will be reporting to the relevant institutions, including the Ministry of Internal Affairs and Communications as quickly as possible.
So, those were the countermeasures for the network problems. And what I would like to say here is that this resulted in the breach of secrecy of communication and leakage of personal information. So, as you see in the attachment, we have decided to return part of the executive compensation of the board – some of them the board members and the executive team. We are once again very much sorry that this has happened. And we will exert all-out efforts in order to prevent reoccurrence from – of these failures. We are strongly determined to work hard for this goal. That was about the response to the – of network malfunctions.
Now, I would like to move on to the financial results. Going to page number three, these are the financial results for the first three quarters of the fiscal year ending March 2012. Operating revenues decreased by 1.1% and operating income decreased by 1.9%. So, both revenues and income decreased. But if you look at the single quarter of 3Q alone, we posted an increase. But if the impact of the system enrichment made in the second quarter fiscal year was removed, we have effectively posted an increase on a year-on-year level in the first three quarters.
The progress of operating income vis-à-vis our full-year forecast was 85.5%. And because it was determined that the corporate tax rate will be reduced from this fiscal – from fiscal 2012, we have decided to recognize corporate – I’m sorry – deferred tax assets of approximately ¥40 billion. This will be explained in more detail by Mr. Tsubouchi. But as a result of this, we have made a revision to the net income attributable to NTT DOCOMO to ¥474 billion for the full year.
Slide number four is about the highlights of the third – first three quarter results. We’ve been promoting smartphones which is a very ironic given that what has happened to the metrics. But in fact, we have achieved quite good sales of 5.53 million units as of December. And as of today, we sold 6.2 million units of smartphones. We’ve launched dmenu and dmarket as well.
Regarding Xi LTE service, because sales has been very brisk, and as of the end of December, the subscriber count reached 1.14 million, and today, even higher than 1.4 million. We initially set a target to achieve 1.3 million subscribers as of the end of March, but we’ve already exceeded number as we speak today. So, we believe the total number of subscribers will end up higher than 2 million units as of – 2 million subscribers as of March.
Packet revenues, we’ve been working to increase the revenues. And in fact, the packet revenues increased by 9.5%, year-on-year in the first three quarters. Customer satisfaction improvement was one of the focus areas. And as a result, we were awarded number one ranking by J.D. Power Asia, although this may sound ironic given the failure but we will work hard going forward to regain the confidence from our customers. We’ve also been implementing the new disaster preparedness measures and that’s making steady progress.
Slide number five, this is about the changes of year-on-year – year-on-year changes of operating income illustrated on a quarterly basis. If you look at the third quarter here, you’ll see that we’ve posted gains in operating income and we are making steadfast progress towards the full year target of ¥870 billion.
Slide number six, this explains the year-on-year changes in operating income. If you look at the cumulative operating income for the first three quarters of fiscal 2010 and compare that with fiscal 2011, you’ll see the progress here and you’ll see the changes, the major factors that contributed to the increase of operating income. You’ll see here that the relationship between the operating – the decrease of our voice revenues and the increase of packet revenues.
Although we have the voice revenues continue to be – the decline of voice revenues continue to be higher than the packet revenue’s decrease, but the gap is shrinking. Other revenues increased by ¥8.5 billion due to the mobile phone protection and delivery service and credit revenues. Equipment sales revenues decreased. Although the total number of handsets sold increased, the unit price has come down. And therefore, the total handset sales revenues decreased by ¥4.1 billion.
On the other hand, on the expense side, the equipment sales expenses increased by ¥14.8 billion despite the increase of procurement costs. Because of that, the cost of equipment sold decreased by ¥5.3 billion. However, because of our promotion of Xi and smartphones, the total distributor commissions increased by ¥20 billion. But the cost of equipment sold decreased by ¥5.3 billion so, as a consequence, equipment sales expenses increased by ¥14.8 billion.
Communications network charges decreased by ¥27.5 billion due to the decrease primarily of excess charges. Other expenses also decreased because the number of handsets repair has decreased, and also the battery has impact support cost have also have down.
Slide number seven, cellular services revenues and packet revenues. You’ll see here that voice revenues and packet revenues relationship reversed in the fourth quarter of last fiscal year.
Slide number eight is about the ARPU. Of course, not only the ARPU but also the absolute amount of revenues of packet revenues will be an important indicator to illustrate our business conditions. Because of the number of diversified use of devices, we believe ARPU alone will not illustrate the actual picture of our business. So, we’ll continue to use ARPU but the total revenues will also become an important indicator for us.
Aggregate ARPU for the third quarter decreased by ¥250 year-on-year. But packet ARPU increased by ¥150 year-on-year. Then on the next slide on page nine, this shows the packet revenues and packet ARPU. Total packet revenues and packet ARPU. If you look at the ARPU side, it increased by 5.9% or ¥150 year-on-year. But total packet revenues, if you look at that, we achieved a 9.5% increase year-on-year. So, that’s an important difference that to be aware of.
Slide 10, these are the discount – MAX Discount packages and the value plan. The negative impact of these discount services has become negligible. We only have to anticipate slight more increase of Value Plan subscriptions. Total handset sales, we saw 15.41 million units in the first three quarters, which was 13% higher compared to the last fiscal year. We are now striving towards the full-year target of 21 million units of handset sales.
Slide number 12, churn rate. Churn rate for the third quarter was 0.59%. Unfortunately, we had seen a slight increase especially in the high sale season of December and in November, the mobile number portability outflows has increased. But we are determined to maintain the churn rate low approximately at around the 0.5% level.
Slide number 13, the net additions. Net additions increased to 1.61 million compared to 1.13 million for the last fiscal year, which was 43% higher than last fiscal year.
Page 14, subscriber migration to FOMA and Xi. As of December combined mova/DoPa subscriptions reached 520,000 as of December 31, 2011. We hope that this could be brought down to zero by March this year.
However, having said that I would anticipate that maybe 200,000 PDC subscribers will remain even at March. But in terms of the corporate market, we believe that we have seen progress in our dialogue and discussions in the corporate sector. Many customers are beginning to migrate to FOMA away from PDC.
However, since the mova is not yet totally removed in certain cases, so we need to bear that in mind.
Next, page 16, improved customer satisfaction. We attain the first place in the ranking for two straight years. Three straight years because of the malfunction recently, it may not be easy target. On Monday, this week, we actually carried out a kick-off event towards achieving three straight years.
Number 17. This talks about the product lineup for our smartphones. LTE-enabled three smartphone models were introduced as part of the 14 model release. In the case of Xi or LTE, we have seen more sales than we had initially anticipated. So, we enjoy very strong sales in LTE smartphones. Soon, we’ll be carrying out LTE-related campaign as well.
Page 18. Number of units sold in relation to smartphones, 5.53 million units and it’s now 6.2 million units as we speak. In December, in a single month, we were able to sell more than 1 million smartphones. Actually, 1.02 million units of smartphones were sold just in the month of December. This reflects an introduction of new models and new products. And we’re very pleased to see the strong sales. So, one-month sales exceeding 1 million. And so, LTE-enabled smartphones in the third quarter alone achieved 400,000 unit sales.
Page 19. Ouen Student Discount. DOCOMO was not able to carry out very aggressive student discount. However, from the previous year, we began to launch this. So, this year, we were the first to launch this new Ouen Student Discount. And we began accepting applications from January. And compared against other operators, we believe that we are able to offer very competitive discount program for students.
Page 20. New services for our smartphones dmarket and dmenu. We launched both. In particular, dmarket, we have found that 80% of the subscribers who have visited dmarket among total compatible smartphone users use services for smartphones, i-concier and data security service. We’re going to be launching these services as well. Now, these were services which were very popular on our feature phones. So, we are going to be migrating them to our smartphone universe as well.
Next, page 22, new services for smartphones called the Voice Agent Service. So, customers can use voice and this is a operation based on intuitive – intuition, if you will. For example, send message to Mr. A. If you speak out and the subscribers speaks out, then A – Mr. A has to be registered on the directory. But if that is the case, and then Mr. A will appear.
And how should the body text read? That’s the response on the part of the smartphones. So, you can operate this in a very intuitive manner. And the mechanism is described on the bottom of the page. In the network, we have information processing function. And so, a voice recognition engine, intention interpretation engine are on, and also the voice synthesis engine is provided to allow for this. We hope to further see – penetration of these services going forward.
Page 23, new services for smartphones called Memory Collection. Face recognition will be offered. And under new category, sender’s categories, you’ll be able to sort out the photos that are stored. So, this new rearrangement type of service has been in place on a trial basis since December of 2011.
Next is the remote test environment for CPs. Content providers, when they create and develop applications or contents for the smartphones, we have to store them. However, through Internet, it’s not possible to supply – or actually, it’s possible to verify operations of content by remotely connecting with actual devices located in the remote test center. And the charges are kept very low. We hope that this verification service can be used in a convenient fashion.
Next is the growth of Xi or LTE subscriptions. As I mentioned earlier, this has been increasing very steadily to exceed 1.4 million, and we are on our way to exceed 2 million at the end of this fiscal year. When you use Xi LTE services, it’s very fast, it’s very speedy and customers are very pleased with the performance.
And also, as is indicated on page 26, Xi Talk 24 is now offered. It’s a flat-rate voice plan. So, among the total Xi comprehensive billing plan subscribers, 80% the users are now subscribing to Xi Talk 24. In our initial calculation, we thought that maybe 60% of the total Xi comprehensive billing plan subs would have subscribed to the service. But now, 80% of the comprehensive billing plan subs are now subscribing to Xi Talk 24.
Page 27, billing plans. Xi Start Campaign-2. We plan to launch this. As for Xi billing plans, we’ve been doing various campaigns and we’ve been offering ¥1,000 discount. But from May 1 this year, we would have reverted to our original plan. We were supposed – we offered ¥1,500 discount. But then, we’ve decided to extend this discount. So, the discount will be reduced from ¥1,500 down to ¥1,050.
Now, as of October, this will go back to the original plan based on this billing – based on this billing chart. But up until October 1, we hope to offer billing plans that are even more convenient for the customers. We hope to offer even greater array of options at that juncture.
Page 28, data communications. Devices are enjoying very strong sales. 29, billing plan. Xi discount campaign. So, it’s written Xi squared, but it’s read “crossy crossy.” What this means is that if the first – if you have one device that are using the Xi data billing plans, and then for the second device such as tablets or Xi Wi-Fi routers and data cards, and you have a second device, then your communication charges will be reduced substantially.
In the case of tablets, as you can see, for the first two years, you’ll be able to enjoy close to ¥3,000-per-month discount. You can use this at ¥2,980. From the third year onwards, it will be somewhat more expensive, but still, it’s priced at ¥3,980 per month per device.
Now, the application will be accepted from March 1 this year to March 31, 2013. Of course, as long as you’re using two Xi-enabled devices, and then the customer will be able to enjoy this benefit, the Wi-Fi router and the data cards. It’s offered other than ¥180 per month, and a discount of ¥2,000.
Next, page 30, Xi area expansion plans. The highlight here is that as of end of fiscal year 2012, we were envisioning to 60% or approximately 20,000 base stations. However, when you go to – when you talk to the people on ground, they want LTE area expansion as soon as possible. So, therefore, we’re going to further expand this, and so 70% coverage, approximately 21,000 base stations, 1,000 more.
And so, we’ll be making – first to reduce cost. And from 2010 up until fiscal 2014, we’ll be spending ¥30 billion. So, our level of investment will not be changed. However, we’re going to expand our coverage to 70%. And 75 megabit per second is the throughput. And even in outdoors we hope to offer this level of 75 megabit per second throughput as much as possible. And hopefully, we’ll be able to expand this to 100 megabit per second, partly from a certain stage.
Now, page 31, actions for transformation into an integrated service company, entitled NOTTV service. Real-time and storage-type broadcasting services to be provided for ¥420 per month as you can see. We are going to be exerting a lot of efforts for this service. So, DOCOMO together with various broadcast partners will be offering NOTTV in partnership.
Now, we would also like to carry out to monitoring campaign with NOTTV monitors when we launch this. We have to have receivers to receive (inaudible). So, we hope to rent 20,000 such units on rental devices for a two-week period for monitoring purposes. Naturally, customers will be able to use this free of charge. So, the quality of NOTTV products or contents and programming and also quality. We hope we’ll be able to deliver that to the customers.
32, page 32, actions for transformation into integrated service company, NOTTV-2. Our compatible devices will be released from April. So, one smartphone, one tablet and to – from maybe five more models.
33. Here, we talk about machine to machine. We want to offer prepaid data plan 20 hours and prepaid data plan 100 hours. Playstation Vita was the first to introduce this data plan.
On top of that, flat-rate data plan at a slower speed will also be offered at a very inexpensive rate. It’s called flat-rate data plan 128K value, ¥1,380 per month.
And on page 34, here, we talk about our actions in relation to education, medical and healthcare area. In the case of medical and healthcare, on December 7, we announced our alliance with Omron Healthcare Co. And from about maybe May or June this year, we hope to actually launch specific services. So, we have established a very strong alliance with Omron Healthcare Co.
Page 35, new disaster preparedness measures. We have exerted many efforts. ¥20 billion have been spent for this purpose. Large-zone base station rollout is described on the following page. We have talked about this repeatedly in terms of earthquakes or major disasters. An antenna to accommodate such disasters have been installed into these base stations, and the coverage is approximately 7-kilometer radius. This is unique only to DOCOMO.
So, out of the total 104 plant locations, we have already installed this in 100 locations. This is indicated on page 37. You’ll find pictures of these large antennas. If an earthquake is to darkly hit Tokyo, well based on the statistics is that there’s a 70% probability that an earthquake will darkly hit Tokyo in the next four years, it’s important that we have a robust telecommunication system in the case of such a disaster.
38. Securing communication in key areas. Especially in prefectural capital and municipal government in this important – the base stations in these areas be able to maintain their services on a 24-hour basis. So, therefore, we’re offering such 24-hour battery supply.
The roadmap to achieve this is very important. Right now, it is stored battery and it’s very heavy and it has to (inaudible) done this. You see the crane picking up these battery cabinets and we’ve been able to this in 1,000 base stations already.
And also, disaster voice message service was developed. This is the case where voice channels are usually flooded with calls. So, there’s congestion. So, therefore, this message will be converting into a distal and then be conveyed. So, we want to motivate this, rather mobilize this in times of disaster.
Page 40 talks about restoration area maps and functional enhancement. So, this is all for our new disaster preparedness measures. Now, as far as the fourth quarter is concerned, from the standpoint of aggression, as far as our third quarters are concerned, I think we have seen achievements as well as challenges. As far as the achievements are concerned Xi-enabled or LT-enabled smartphones have been launched. And also in the light of harsh competitive landscape, we’ve been able to offer fairly inexpensive commissions, so we were able to maintain sound business management. And we have been able to pave the way for a trend of increase in packet-related revenue. We’ve also been able to offer security – safe and security measures.
However, the challenge is if there was a malfunction in our communication network, we need to work hard so that we could restore confidence on the part of the customers. So, that is the highlight of our performance. We’ll continue to work hard to achieve the operating income ¥ 870 billion for the year. Thank you very much.
(Interpreted) Thank you very much, Mr. Yamada?
(Interpreted) I don’t want to reduce your time for Q&A. So, I would just like to add another comment regarding the deferred tax assets. Because of the enactment of the tax reform in late last year, in order to secure the costs for reconstruction of the Tohoku area and also for the reduction of corporate tax rate, we believe that the actual tax rate will be about 48% – will come down from 40.8% to around 35% in the coming years.
But this will be applicable for the three-year period from 2012. 10% of tax rate will have to be increased so three-point-something percentage point will be added to 35% so the effective rate for the next three years is expected to be around 38%. That is going to be the taxation that we will have to anticipate. And this tax reduction will be applicable from next fiscal year onwards. But in terms of our balance sheet, because of the deferred tax assets, we had approximately ¥400 billion on that including the allowances for the retirement and others. And this has built up to ¥400 billion. And that will still have a taxation effect, tax credit in the subsequent years.
So, ¥400 billion was built up assuming 40% taxation rate. But when this comes down to the – corporate tax rate comes down to 35%, we believe we can reduce the deferred tax assets by 10% or so because that will be excess allowances. So, we decided to derecognize part of the deferred tax assets.
And in terms of PL, this will have impact on the net income because of – this will be the corporation tax adjustment rate. And that will have an impact on the net income. And so, ¥36 billion was added to the corporate tax for the third quarter. If you can refer to the earnings release afterwards, there was an increase of ¥39 billion in corporate taxes, and that’s mostly due to the derecognizing part of the net deferred tax assets. So, altogether, ¥40 billion or so impact will have an impact on the net income and that is why we revised our net income forecast for the full year. That was all that I wanted to say.
Sorry that our presentation was quite lengthy. Now, we would like to entertain your questions.
If you have any questions, please raise your hand and wait for the microphone. And before you start your question, please identify your name and affiliation. Now, do you have any questions? Yes, I see a hand on the left-hand side, fourth row from the front.
Makio Inui – UBS
Thank you. My name is Unui from UBS. I have two questions. First of all, thank you very much for all the detailed explanation regarding the countermeasures for the traffic. But due to the localized burst of traffic and the behavior of traffic this time around, I think this was like – although you had the impact of the train accident that also affected, I think, the network performance.
But let’s say that – if you say that this – should these countermeasures that you have contemplated be insufficient, what additional countermeasures do you have to employ going forward into the switches or to other nodes in order to improve your processing capabilities? What kind of contingency plan do you have as a next step should this turn out to be insufficient?
The countermeasures to the packet switches, this is the countermeasure rather for the quantity. Now, do we foresee – do we see – are we seeing changes in – qualitative changes? Actually, as far as the packet switch is concerned, quantity is most important, especially when the traffic increases, this relates to the increase of control signals. So, so long as we’re able to control the traffic and the control signals, I think we are fine. I don’t think we have to anticipate any qualitative factors here.
And as far as the control signals are concerned, it will be nice if we can identify the number of applications that will cost increase of controls – control signals so that’s going to be very difficult. So, we will have to – now we are able to see and measure the total volume of control signals on a per switch basis. So, based on that, we’ll be able to count the total volume of control signals in the network. And if we are able to do that, I think we can take proper measures.
Makio Inui – UBS
Now, the second question.
Makio Inui – UBS
Now, it’s going to be – you are going to celebrate your 20th anniversary after the inception of the company. But are you – and I am anticipating any commemorative dividends. Is there any possibility for this, Mr. Tsubouchi?
Well, since I was nominated, I would like to answer to that question. It is. We are very much aware that we are going to celebrate the 20th anniversary. So, whatever that pleases our customers, we’ll try to do that. In terms of services, in terms of price discounts, all our business cards are printed with the 21st anniversary logo. And I think you can appreciate how much value we put on to this.
Yes, 20th anniversary, we are aware of that. And this will be the time for us to express our appreciation to customers. So, if you ask us if we are doing something special, first and foremost, we would like to focus on our CSR and customer satisfaction. And of course, in terms of shareholder returns, we will look into many options, but at this point, there is nothing decided and we cannot comment on that.
Next question. We’d like to go to the person in the center part of the room, towards the left-hand side of the center row.
Hitoshi Hayakawa – Credit Suisse
Thank you. Hayakawa from Credit Suisse. I’d like to ask several questions – two questions. Two days ago, well, to see a stoppage of telecommunication service in the Tokyo urban district was something we never envisioned. I received many feedback from people saying that their calls could not be connected. This was totally not expected. So, going forward, how are you going to try to monitor if you will the level of traffic? Of course, with smartphones, this leads to burst and, of course, sending a lot of signals. But this was probably expected when you first introduced smartphones. Wasn’t this expected?
In the past, DOCOMO, developed these feature phones and you try to have a design which did not lead to the equations at signals. But with smartphones, you add on applications and it’s only taken for granted that something unusual, something unexpected will happen. So, going forward, how are you going to try to capture the assumptions of traffic and what type of contingency plan do you have? What countermeasures do you have in mind?
I would appreciate your input and also on a related note, when you take a look at the material and tethered response to series of network malfunctions, I get the sense that it’s IEEE. It’s like IEEE or 3GPP type of initiative. In other words, data offload initiative is not reflected, not even an inch, not even a – not – there is no hint of data offload.
Hitoshi Hayakawa – Credit Suisse
But if you’re going – are you going to try to absorb the increasing traffic? Are you going to resort to data offload? That’s one option. So, bearing in mind this recent malfunction, how are you going to accommodate this and what are your thoughts about data offload? Thank you very much.
What about the assumption of the traffic volume? That’s your first question. Let me try to organize my thoughts. Android phones, we all know that there could be a boost in traffic – of Android phones, so that’s why we developed various circuit switches, packet switches. And we were already about to address this. And as we talked about earlier, I think it’s possible to control the traffic volume at a certain level. At least, we haven’t – we were able to do this when we installed these new switches in April through August.
Now, as far as application is concerned, it is regrettable, but we – the applications could generate so much level of traffic signals through applications and voice and chat. This was something with which we did not expect. We might ask why could not we expect that? But six months ago, we thought that we needed to measure that. In order to add to this measurement functions, we began the development. And on January 20, we had incorporated this function for software starting from January 20 this year.
As you’ve pointed out as far as applications are concerned, up until now, DOCOMO is able to exercise control in terms – even in terms of applications. However, in Android, it’s open application environment. Everybody could do this. So, we cannot accept control over that portion. As far as this challenge is concerned, this is something common to all network carriers, I believe. We will continue to struggle with this.
Hitoshi Hayakawa – Credit Suisse
No, as far as our countermeasure is concerned, we are ready for the fact that these applications will generate many traffic signals. So, we can introduce this. If we can use control signals, I think we can do this. So, we need to monitor this signal generation, naturally. So, that’s something that I want to point out. And also, Mr. Tsujimura will respond to this issue. But what is the GSM – countermeasure, the GSM? And also in the case of wireless, what about the countermeasures?
As far as control sectors are concerned, it’s not generally, but applications. In the case of Voice-over IP, for example, voice applications. In the case of these voice applications, they continue to offer distinguishing small packet to indicate that they are alive. So, it’s to keep alive several functions.
Hitoshi Hayakawa – Credit Suisse
Now, we want you to ask the wireless spectrum in the most efficient manners possible.
So, wireless network is that when the ping is not essential. However, when ping signals are sent, then we offer access. So, it’s a series of connections and cutting out the connections. And that’s where the control signals have to be introduced. So, therefore keep alive signals, this is done. Whenever the ping application is done, ping application is done.
So, in essence, what problem does this embrace? In the case of fixed-line network, this would have no impact whatsoever. It’s wired. It’s fixed. So, therefore, it’s dedicated. However, in the case of wireless environment, in order to utilize the wireless section, it’s open to everybody, if you will. So, sometimes when a network is kept connected or disconnected from time to time. And whenever that takes place, signals are generated. So, the environment varies from one moment to the other. And so, the application providers have to understand the variance in this environment. Application providers until now, they had envisioned the condition that it’s PC-based, it’s based on fixed line. And connection is available at all times.
However, in the case of mobile, a PC-like devices are connected to the mobile network. So, the environment in the mobile is totally different, so that type of information needs to be provided to these developers. So, in conjunction with other mobile operators around the world, we need to send this message to application providers.
Second, your question about data offload. As for data offload, we’ve (inaudible) data traffic offload because traffic was expected to increase by as much as 12-fold. So, we needed to offload this level of increase in data traffic as much possible. That was the value of Wi-Fi. But also, in the case of traffic signals, I think there is value to offload. In the case of wireless or cellular, for spectrum – efficient spectrum utilization is a series of connections and disconnections. But in the case of Wi-Fi, the spectrum is dedicated, which means that there is no need for control signals.
So, Wi-Fi environment, from the standpoint of control signal, there is need for this. So, therefore, Wi-Fi offload needs to be enhanced. So, Wi-Fi-based offload, up until the first half of this year, we have already provided 30,000 access points. This is done in conjunction with our colleagues at NTT-BP. We want to further add the number of base stations – access points rather, hoping this could be increased to 160,000.
But in any event, we have to also use Wi-Fi and also use various other countermeasures to accommodate the increase in data traffic. And also, by doing so, I think this will benefit – this will provide benefit from the standpoint of control signals. Wi-Fi is one of the options, although we do not do refer to this in this material.
Hitoshi Hayakawa – Credit Suisse
What about GSMA?
I’m not well versed in GSMA’s activities. So, based on what Mr. Tsujimura mentioned, the device vendors or operating system players are able to say to them to avoid certain designs. Is it difficult for you to say that?
Well, in our case with Google, we’ve been talking about Android operating system. We’ve been talking about the environment which we see. It’s not just us. Hopefully, other operators will be sending out the same message to these players. And also, on the top of operating system, application providers also need to understand the situation. So, again, not just us. But in conjunction with other operators around the world, we hope to send the same message to application providers and offer information.
Hitoshi Hayakawa – Credit Suisse
I know this might be somewhat premature, but when you envisioned the next fiscal year, this time around, you adjusted your CapEx. So, data ARPU in the recent times seems to be somewhat stagnant. But on top of that, you’re offering extension of the Xi-related or LTE-related discount campaign. So, therefore in terms of your performance, I wonder what the impact is. You talked about your midterm plan and ¥100 billion operating income.
Have you changed that target or are you going to slightly regain your target or do you believe that – even at the risk of taking these countermeasures, do you believe that you’ll be able to maintain the ¥90 billion operating income target in your medium term? So, what is your position about the medium-term vision even in the light of these recent changes?
Thank you. From the standpoint of investment and CapEx, over three-year period, ¥50 billion will be added on top of the investment. The investment is over ¥20 billion per annum. Now, our overall CapEx is about ¥17 billion per annum. So, I think any additional or incremental CapEx could be absorbed. So, in terms of overall CapEx, we want to keep this under ¥700 billion.
And also, in terms of accommodating increasing data, I think we’ll be able to work based on this assumption. Or we’ll be able to do this at the level of CapEx. And as far as packet is concerned, in the beginning of third quarter, especially in the month of October and November, we found that there was – some of us slowed down in our handset sales. However, toward the latter half of the three quarter – at the third quarter, we saw an increase or pick-up in the sales.
I think we’ll be able to – we’re in line with the business plan. So, I think (inaudible) in terms of medium-term plan is on track. We’ll continue to make efforts for this target. Thank you.
Now, we’d like to take the next question from the same table.
Daisaku Masuno – Nomura Securities
Masuno from Nomura Securities. My first question is about the fact that from December, your Android devices sales have increased. That’s what I have known from my interview with the retail shops.
On the other hand, the churn rate in November and October was higher and you had an increase of NMT outflows. So, perhaps that is why you have decided to extend the LTE discounts looking into the market movements. And I believe that this will not have significant impact on your operating income even if the discounts period has been extended. So, what our views regarding the churn rate and the NMP outflows, do you – are you foreseeing the improvement going forward?
Well naturally, I think your question employed what we are going to – what kind of measures are we going to take to compete against the iPhone 4. Actually, in the month of October, we saw a huge – steep increase in the number of portals in the first four days after iPhone went on sale, 2.5 times as usual then stabilizes to – stabilized about 1.2 times higher than usual.
In November, the same situation continued, but then what happened in December was quite different. Actually, in December, the absolute number of total sales was quite high in the month of December compared to November and October. So, in terms of port ins and port outs, the number of port ins in November was 1.3 times higher compared to the previous month. But the port ins was 1.7 times higher compared to the previous month.
But in terms of NMP, we had higher numbers. But still the port-in improvement was quite significant in the month of December, and that was due to the release of new smartphone products. So, the number of port in increased quite significantly in the month of December.
Now, looking into the performance in January, the port-in performance has begun to slow or become weaker. So, what we would like to do for the month of February is that we would like to strengthen our port-in measures starting from February because previously, we focused on measures to prevent port outs. But in addition to that, we will likely focus on increasing the number of portends from other operators providing privileges to those customers. This is something that we would like to start going forward in order to improve our net MP performance. Our great target is to improve the churn rate to around 0.50% and maintain the churn rate at that level.
Daisaku Masuno – Nomura Securities
My second question is something about the entire NTT Group, the overall industry is now moving towards FMC, Fixed Mobile Convergence, and I think there are difficulty for you to offer similar services given the restrictions or regulations that you were imposed of. But given the Wi-Fi, I think these are the new trends that we are foreseeing in the market. So, what kind of packaging plans do you have over the medium term? Packaging of services, I mean.
Well, as you may be aware, fixed mobile blending or packeting is quite difficult for us to offer. So, we will have to look into other alternatives like – we would like to prevent us from falling into the trap of price competition offering discounts after discounts so we would like to offer enhanced utility, ease of use by offering additional or enhanced high quality services. One of the typical advantages that we have is the Xi connections, Xi networks, so using the Xi campaign because – we are unparalleled in the rollout of Xi network. We will leverage this in order to compete against the rivals.
So, how to appeal the strengths to the public and offer and develop new services and new solutions is something that we have to work on. Of course, it is difficult for me to immediately mention one killer applications. But these are the area that we would like to focus going forward.
Daisaku Masuno – Nomura Securities
Now, over the medium term, you set a target in your medium-term plan to achieve ¥900 billion in operating income. On the other hand, you haven’t really stipulated this, but we are all looking forward to a possible dividend hike, shareholders or as investors. So, you don’t have any – should we consider that there’s no changes in that? If possible, are you going to increase your dividends? Does this approach remain intact?
Yes. We believe shareholder return is one of the important issues for the management of the company. And rather than a share buyback, we would like to emphasize dividend payment. This remains intact, no change.
Any other question? We would like to go to the person in the third row in the right-hand side of the room.
Atsuo Takahashi – Mizuho Securities
Thank you. Takahashi from Mizuho Securities. I’d like to ask two questions. First question to clarify or to reconfirm this, in the financial figures, you mentioned that the churn rate is quite higher than your initial indication. And also, distributed commission is beginning to increase or rise in the third quarter. So, are we seeing perhaps a weakening of your foundation? Of course, the operating income target for the next fiscal year.
Let’s put that aside. But are you – maybe due to the aggressive measures taken by your competitors, are you beginning to swing? Because in the past, competitors tell their competitors your churn rate was very low, stabilized. And I think there is a very strong stability in your churn rate. However, the rise in your churn rate in the third quarter.
Maybe this is towards your LTE Xi strategy. But if this is to continue into next fiscal year, maybe next fiscal, you’ll have to significantly increase your gross new subscriptions. And this could actually impact your handset strategy. So, let me confirm, for the next fiscal year, do you believe that for the stable profitability, I think you need to increase your net increase, net addition. If there’s momentum in your net addition, this will give you post momentum. So, should we be concerned about your next fiscal year?
I don’t think there is – we are not late at all. You might scold us for being brazen. The churn rate did increase to 0.59%. And we’re confident that this can be lowered. And we’ll make efforts to reduce this churn rate. And this only hinges on mobile number portability. There was increase in outflow based on mobile number portability. As I mentioned earlier, we need to take measures to encourage port-in of customers. So, we need to monitor how this goes and also consider additional measures to encourage further inflows of customers.
Now, as far as LTE or Xi is concerned, from October, we will go back to the original price, and LTE handsets have very strong sales. And, of course, Xi customers will lead to increase in ARPU.
Now, in October, the original or the current campaign is one option, but I think there’s room for more convenient billing plan at that juncture when October comes around. In other words, couldn’t we not lower some of the charges because going back to the rate of ¥5,100 or ¥6,000 might make it difficult for some customers after the campaign ends. And also, we have seen migration of heavy-volume users to smartphones. So, from this point onwards, customers who migrate to LTE will be medium-volume users. So, what type of billing plan would most suit some of these customers? That’s something we need to consider. So, I think in total, we need to further boost packet ARPU.
Atsuo Takahashi – Mizuho Securities
Thank you. My next question relates to spectrum allocation this year. I’m not sure whether or not you submitted your applications, but maybe you have. But up until the 4G auction for 2014, what is your medium-term outlook for spectrum?
The new spectrum allocation, 900 megahertz and, of course – and 7 gigahertz. 2.5 gigahertz will be coming up.
Atsuo Takahashi – Mizuho Securities
What are your plans? Have you reflected the possibility of not getting the spectrum allocation? For example, your spectrum allocation assumption, are they very realistic? Is there sufficient room in your capacity? Do you have any specific spectrum allocation proposals in mind? Can you talk about your spectrum assumptions?
As far as spectrum is concerned, as far as 900 megahertz and 700 megahertz is concerned, we have submitted applications for 900-megahertz band. We have submitted this application so that we could receive the 900 megahertz spectrum. In the past, we had to provide submission for both 900 megahertz and 700 megahertz. However, the 700 megahertz spectrum allocation has been pushed back. So, we first submit our submission for the 900 megahertz spectrum. We hope we’ll be allocated spectrum.
As far as 1.5 gigahertz for LTE, this has been provided. This is not yet utilized, and to megahertz. This will be transferred. This will be vacated but from 2011 up until 2015, the traffic is expected to increase by twelve-fold. That is our assumption.
To counter that, to accommodate that, our assumption is that we acquire either 900-megahertz or something comparable. That is assumption. So, it is imperative that we’re allocating the spectrum. But even after we get that, 1.5 gigahertz will also be utilized. But of the twelve-fold increase, a six-fold increase only can be accommodated by increase spectrum allocation. Meaning that for the remaining six-fold increase, we need smaller zone balance, or we need to improve efficiency to network. And also, that we need smaller sectors. And also, we need to introduce Wi-Fi. We also need to have (inaudible) in the control of heavy users.
In the case of LTE, this is much more efficient. So, we’re hoping to encourage customers to migrate to LTE. So, we need to recover the remaining six-fold increase in traffic based on these other measures.
Atsuo Takahashi – Mizuho Securities
Now, after that, 4G will be coming around.
Yes, I think that’s the situation.
Atsuo Takahashi – Mizuho Securities
So, you’ve refocused some of these – in other words, some other megahertz or platinum bound that will make the difference?
900 megahertz to 700 megahertz, these are the ones which we assumed that we will receive.
Atsuo Takahashi – Mizuho Securities
But in the case of 900 megahertz, to what extent you’ve reflected this in your plan, your assumption? So, with that 900 megahertz, will this impact your performance from next fiscal year? Is this a very real key problem, either 900 megahertz or 700 megahertz?
We very much want 900 megahertz. If that is the case, we could get 700 megahertz. So, based on the assumption that we get out of the spectrum, we’re working on our simulation. So, it is imperative that we receive either the 900 megahertz or the 700-megahertz spectrum. 700 megahertz has that respect. So, that is why we very much appreciate 900-megahertz spectrum allocation.
Now, in the event that we do not get 900 megahertz, we’ll be able to accommodate net increase of 50 million sales for the next fiscal year. We don’t have to talk about the hypothetical – our assumption is that we’ll get it. If not, we’ll get the 700 megahertz.
Our assumption if you get 900 megahertz, the competition for 700 megahertz will be somewhat weakened. So, it all depends on how the structure allocation goes. Thank you very much.
Now, the second row from the front.
Tetsuro Tsusaka – Morgan Stanley
My name is Tsusaka from Morgan Stanley. I have one major question. Regarding your data ARPU, it seems like you’re struggling to increase it. Apparently, from my point of view, actually, I think you feel fall short of our full-year plan unless you achieve a steep increase in the fourth quarter. I think you fall short of your full-year target by ¥10 or ¥20 or so.
And on the other hand, tablets and Wi-Fi routers are the devices that you can leverage and, of course, therefore, ARPU will not be – may be as important indicator as before. But on a quarterly basis, you’ll reduce your revenues in one to three quarters in the first three quarters in each quarter by the order of ¥12 million to ¥13 million, so I’m not really sure if you are ever going to achieve an increase in revenues.
In the beginning of the year, you said that you will be achieving an increase in packet revenue – packet ARPU, but now that has changed that you’re seeing that ARPU is not important because you are now addressing many more different devices. But still even that is said, it seems that you will have to anticipate any decrease in operating revenues, then the only way of you achieving an increase in income will be cost reduction.
So, my question is when do you think you will be able to achieve a healthy increase in revenues and income, given the competitive landscape today that your churn rate is increasing and your tablets, although despite all your efforts, you won’t be able to achieve the full-year target of 800,000 units of tablets? So, everything that you had anticipated in the beginning is now unfolding to become difficult.
So, what are the things that we have to anticipate over the medium term? And this time around, you came up with the second Xi phone discount, something that doesn’t seem to be appealing to the majority of the public. So, what are your plans going forward in light of all the things that I’ve said?
Maybe Tsubouchi can answer the details, but let me first comment. Regarding ARPU, the full-year target was to achieve a ¥160 increase, and now we have achieved ¥150 already. ¥160 increase per annum is something very difficult in the first place. Having said that however, if you look at the total volume by total ARPU, we have only achieved a 5% increase but in terms of total packet revenues, we are achieving a 9% – over 9% increase as I explained in the presentation.
So, now you are asking whether we are going to achieve an increase in both revenues and income. The difficulty is the procurement prices we are putting pressure on the manufacturers to reduce their cost of equipment. And when the procurement cost comes down this will have a negative impact on revenues as well. That’s a dilemma.
Actually, in the competitive environment, how inexpensive – how many inexpensive devices you can offer to the customer is one key. So, that’s why we try and strive to reduce the procurement cost. But when the procurement cost comes down, that will have a repercussion on your sales revenues. So, that’s something that you have to bear in mind.
Tetsuro Tsusaka – Morgan Stanley
I’m talking only the teleservices revenues excluding equipment business. Even so the total revenues for the teleservices revenues are coming down excluding all the handset business so given that – taking that in mind, what are your plans in the future?
Well the revenues on a quarterly basis – your question is asking the quarterly basis for our next fiscal year, so I will have to say that we cannot make any promise at this point. But as far as the fourth quarter of this fiscal year is concerned, when you look at the packet revenues, I think the packet revenues increase will almost offset the decline of voice revenues for as far as the fourth quarter alone is concerned.
And also, how we can defend the high end MNP, high ARPU users in the MNP raise is one key parameter there. So, this is something that is difficult for us to predict. So, if we succeed in this effort, in the spring campaign, I think we’ll be able to achieve a packet increase as much as we had anticipated. And that will have an impact of reversing the voice revenue decrease and the packet revenue increase situation. And we can give you more details when the fourth quarter ends.
The other factor that you have to – that affects that debate is the cost structure. We’ve been trying making steadfast efforts to improve our cost efficiency and therefore, we won’t have to anticipate any burst in the cost structure. We’ve been also been successfully maintaining the core commission rates while maintain our competitiveness.
Next question please? We have two people with their hands up. So, these will be the two final questions. We’ll start with the gentleman in the second row.
Shinji Moriyuki – SMBC Nikko Securities
Moriyuki from SMBC Nikko Securities. Thank you very much. I have two questions. First question, earlier, a similar question was asked about the weak ARPU trend. Mr. Yamada mentioned that the delay, if you will, or the slow start in the smartphone sales in November and December occurring that November had an impact. But if you exclude that, I wonder what the user trend is? In other words, is there a slowdown in the overall trend or is there acceleration or pick up in the trend of the uptake of smartphones because at one time, I think you talked about middle aged subscribers using smartphones and also with the introduction of ARROWS model, you’re beginning to see a pick up in the sales of non-global models. So, that’s my first question. What is the overall trend?
When we did the spring research, we found that ¥1,700 pickup in ARPU when customer switched for feature phones to smartphones. In October, we did the same research once again. If you compare September and November, again, there is a pick-up of about ¥1,500 in the ARPU. So, as far as the fundamental trend is concerned, there is no slowdown or downward trend in the pickup in the ARPU.
Now, the sales of smartphones in November was about 40,000 or 500,000 per month. So, comparing against our plan, this low sales has actually helped to actually push down the level of ARPU.
Shinji Moriyuki – SMBC Nikko Securities
I see. So, there was an impact of iPhone in that particular period. But what about now, are you back on track as far as the fundamental trend is concerned? Should we not be concerned?
You do not need to be concerned if we want to maintain this upward trend.
Shinji Moriyuki – SMBC Nikko Securities
So, ¥1,500 pick-up in ARPU, that seems somewhat unnatural. Is there no change in the customer profile? Or is there expansion of the customer base?
I think we see an increase in the number of female smartphone users. Any additional comment from my colleagues on this point?
Shinji Moriyuki – SMBC Nikko Securities
Well, so you’re talking about customer profile or user profile, any change?
Yes, in the past we have heavy users migrating to smartphones. But these days, non-heavy users are beginning to migrate to smartphones. I think that is beginning to pick up. Of course, we cannot – these people may not introduce that many applications or install that many applications.
And also, entry-level users are migrating to smartphones. For example, remote support service, we’re offering this remote support service. We want to introduce this from February. If you call the call center, and you would introduce the software, the call center can actually remotely operate your smartphones.
Shinji Moriyuki – SMBC Nikko Securities
So, in the past, you had to have a verbal communication between the operator and the user. So, with this new service, the call center will able to remotely operate your smartphone. They will be able to remotely operate your smartphones. So, even for entry-level customers, they’ll be able to actually utilize their smartphones even though they may not be PC-literate. So, when these type of customers migrate to smartphones, the ARPU will actually begin to pick up.
But – and the increase, the level pickup in the ARPU has been very constant over this month.
Shinji Moriyuki – SMBC Nikko Securities
My next question relates to the competitive landscape. Earlier, you mentioned that you do not want to be bogged down by meaningless price war, but should the churn rate pick up, what is going to be your response? In other words, at what threshold will you begin to actually engage in this price – not just price campaigns but also price war? Are you going to – at what point will you begin to increase your incentives? So, what indicator are you going to basing yourself to check whether or not you’re going to engage in price competition?
Well, our basic philosophy is this
we’d actually want to scrutinize the customers’ reactions. And depending on the customer reaction, we want to address these requirements. But if we do so, solely based on tariff, it will be very difficult. So, Xi Xi discount is a campaign. And with this campaign, we hope to capture the customer trend, and if the customer reaction is very positive, we hope that we can keep this to a campaign level.
So – in the case of smartphones, as I mentioned earlier, different type of customers are beginning to migrate to smartphones these days for example, (inaudible) smartphone. We hope to create that eventually. So, at that juncture, customers who will be migrating to smartphone, for example, they probably will not find it – the problem will not be conducive for, let’s say, a second LTE device handset sales. So, I may not be directly responding to your question but we hope to be very flexible in our response that is our thinking. Thank you.
Okay. This will be the last question. The fifth row from the back.
Daisuke Oshidari – JP Morgan
JP Morgan, my name is Oshidari. Just as a recap or a reconfirmation. You said that your capital expenditures will stay unchanged that around ¥700 billion per annum. But now that you’ll see these many network-related problems, are you really sure that you can maintain at the ¥700 billion level or do you foresee any possibility of increasing this again to ¥750 billion or ¥800 billion?
Because you are now seeing this increase of users in the first place, you don’t have to be so conservative. If you are – if you have to increase it to ¥800 billion, you may have to. But even if you were able – but if you are using money for – purposes, without any outcomes, then that’s going to be meaningless. But with all these troubles of maintain the CapEx – not changing capital expenditures seems to be awkwardly as well.
It’s also difficult for me to answer your question. Actually, we being commenting, that we would like to keep our capital expenditures per annum at a level below ¥700 billion. But with that, we would like to sufficiently handle the traffic and expand the area of coverages. But then – but without the smartphones, I think we would’ve been able to anticipate a huge decrease from the ¥700 billion.
But then, we saw the steep increase in the number of smartphone users, but still, even that, we thought that we will be able to maintain the total CapEx at around somewhere between ¥600 billion to ¥700 billion. But now, we are – we came to a conviction that the ¥650 billion will be not sufficient. We will have to at least maintain a level close to ¥700 billion. So, next is clear, either LTE will have to maintain a level slightly higher or similar to this year, i.e. slightly higher than ¥700 billion, not significantly higher. This is our current simulation that we have in our mind.
Daisuke Oshidari – JP Morgan
On a related note, then, on other costs such as the cost of maintenance of your network, what kind of cost do you have to anticipate for that? What is the absolute amount of cost for the maintenance of network going forward? So, far, you have gradually slashed these costs but with all these recent accidents and incidents, with additional equipment in place, I think you have to enlarge the total size of the network. When that happens, what kind – how much cost do you have to spend for O&M, operating and maintenance, not the CapEx.
For operation cost, because we entrust this operation to our group of companies, our subsidiary companies, so my gut feeling is that we don’t have to anticipate the steep increase in O&M cost because our O&M cost are the cost that we entrust the activities to the DOCOMO group of companies. We may have to anticipate a slight increase but then, it’s not going to be that significant either.
Daisuke Oshidari – JP Morgan
Now, what happens when the group of servers expands in size?
Then we may have to anticipate some additional costs.
Daisuke Oshidari – JP Morgan
But do you know anything about that?
Right. Regarding the operation cost? The maintenance expenses is something – this is the maintenance expenses of our sales. But the number of base stations is not going to increase significantly going forward and this is about the operations internally. So, that operation cost will not have to – will not increase significantly going forward.
So, with a certain level of maintenance staff, we will have to improve the quality of our services and also improve the efficiency of our operation activities.
The other thing that you have to think about is the software license fee. In order to advance our services, of course we may be able to rely on more packet software. But in addition to that, because of the migration from 3G to LTE, we will have to make a forecast as to when the traffic on 3G will peak out. It may be somewhere between fiscal 2013 or 2014. And then when that is contemplated, because we are now upgrading our systems, and then, we may be able to integrate some of the notes going forward for the formal service. So, when all of these are taken into consideration, I don’t have – I don’t think we have to foresee any steep increase in operation and maintenance cost.
With this, we would like to finish the analyst meeting at this juncture. Thank you very much for still bearing with us.