NTT DoCoMo' (DCM) CEO Kazuhiro Yoshizawa on Q1 2017 Results - Earnings Call Transcript

| About: NTT DoCoMo, (DCM)

NTT DoCoMo, Inc. (NYSE:DCM)

Q1 2017 Earnings Conference Call

July 29, 2016 04:00 AM ET

Executives

Kazuhiro Takagi - Head of IR

Kazuhiro Yoshizawa - President and CEO

Hiroyasu Asami - Senior Executive Vice President

Toshiki Nakayama - Senior Executive Vice President

Hirotaka Sato - EVP and GM of Accounts and Finance

Kiyohiro Omatsuzawa - EVP and GM of Corporate Strategy & Planning Department

Hiroshi Tsujigami - Executive General Manager of Sales & Marketing Division

Kyoji Murakami - EVP and Executive General Manager of Smart-Life Business Division

Analysts

Daisaku Masuno - Nomura Securities

Yoshiyuki Kinoshita - Merrill Lynch

Daisuke Oshidari - JPMorgan

Tetsuro Tsusaka - Morgan Stanley

Hideaki Tanaka - Mitsubishi UFJ Morgan Stanley Securities

Hideki Yasuda - ACE Research Institute

Kei Takahashi - Mizuho Securities

Unidentified Company Representative

[Interpreted]

Kazuhiro Takagi

Thank you very much for your patience. And we appreciate you taking time to attend this meeting despite your busy schedule. We would now like to commence NTT DoCoMo’s Financial Presentation for the First Quarter of the fiscal year ending March 2017.

I am the Head of the IR Department. My name is Takagi. I’ll be presiding this meeting. Now, please be advised that this session is broadcast live on smartphones and via the internet. And also the recorded footage of this presentation session will be posted on DoCoMo’s website for distribution. Please be advised of that beforehand.

Now I would like to introduce the participants from NTT DoCoMo. The President and CEO, Mr. Yoshizawa; Senior Executive Vice President, Mr. Asami; Senior Executive Vice President, Mr. Nakayama; Executive Vice President and General Manager of Accounts & Finance Department, Mr. Sato; Executive Vice President and General Manager of Corporate Strategy & Planning Department, Mr. Omatsuzawa; Executive General Manager of Sales & Marketing Division, Mr. Tsujigami; and Executive Vice President and Executive General Manager of Smart-Life Business Division, Mr. Murakami.

For today, we would like the first half of presentation from the President Mr. Yoshizawa; regarding the financial results based on the presentation slides, which will be followed by a Q&A session. We aim to finish this meeting at 6 o’clock p.m.

Please also be advised that the comments made during this presentation may include forward-looking statements and please refer to the cautious pertaining to forward-looking statements which are presented in the last slide of the presentation.

Now, without further ado, I would like to hand over the microphone to Mr. Yoshizawa.

Kazuhiro Yoshizawa

Good afternoon. I am Yoshizawa. Thank you very much for taking your precious time to attend this meeting. I would like to begin the presentation on the first quarter results. But prior to the presentation, I would like to make a few comments at the risk of repeating myself but I just so like to make a brief comment regarding the basic policy for corporate management.

Every improving value proposition to customers and the society I believe are continuing making this kind of proposition is the mission of NTT DoCoMo. And towards this end I would like to work on the enhancement of mobile ICT technology. And also we would like to work together with various external partners incorporating their ideas so that we can develop new concepts. And we would like to manage the business with an emphasis on speed.

And in order for us to make ever-improving value proposition to customers and society, we would like to focus on the three pillars including the creation and evolution of new services; number two, promotion of plus D activities; and number three reinforcement of every foundation. Those would be the focus areas for the company.

By making every improving customer - proposition to customers we would like to make a transition from the acquisitions of subscribers to focus on the services as we compete against with others. And also we would like to gain the trust and confidence of various stakeholders.

And to that end we would like to work on enhancing corporate governance. And at the same time we would like to achieve enhancers’ service to customers and achieved sustained growth over the company at the same time. Those are the efforts that we would like to focus on going forward. So that’s one thing that I would like to remind you at the outset.

Now without further ado, I would like to focus on the financial results in the first half of the presentation. And in second half I would like to talk about the results of actions that we have implemented during this fiscal year.

Now, these are the financial highlights for the first quarter. Operating revenues increased 3% year-on-year to ¥1.1087 trillion. Operating income, increased by 27.1% year-on-year to ¥299.3 billion so recorded an increase in both revenues and income.

Operating income by segment adjusted here, telecommunications business increased by 27.3% year-on-year to ¥270.4 billion. Smart-Life related business increased by 25.7% year-on-year and its operating income reached ¥28.9 billion. So, we’ve got off to a very good start towards the achievement of our full-year guidance.

Other financial indicators, net income increased by ¥38.1 billion year-on-year to ¥206.9 billion. Capital expenditures increased slightly by ¥4 billion year-on-year to ¥97.1 billion. Although this was year-on-year increase, but compared to our initial plan, the progress of capital expenditures was slightly behind the plan.

Free cash flow, due to the increased corporate tax payment and other factors, free cash flow decreased by ¥30.5 billion and reached ¥34.9 billion for the first quarter.

Now these are the results by segment. Telecommunications business, compared to the same period of the previous fiscal year, operating revenues increased by ¥16.3 billion and operating income increased by ¥58 billion. Smart-Life business and other businesses combined, these Smart-Life related businesses altogether increased by up ¥15.8 billion in terms of operating revenues. And operating income increased by ¥5.9 billion.

So, both telecommunications business and Smart-Life related businesses achieved an increase in revenues and income.

Next part is this is the key factors behind the changes in operating income. Let me go into the details here. Operating revenues as you can see in the pink bars on the left, increased by ¥31.8 billion year-on-year. Let me give you the breakdown. Mobile communication services revenues increased by ¥34.8 billion.

The breakdown of this actually in June of last year, we introduced what is called a Zutto Kodikashi [ph], a carryover discount service. The negative impact from this decrease and that boosted the income by ¥18 billion. The Kake-hodai and Packet-hodai is negative revenue impact moderated. So altogether mobile communications services revenues increased by ¥34.8 billion.

The optical fiber broadband revenues, due to the expanded subscription numbers to DoCoMo Hikari service, the service revenues from broadband services increased by ¥19.7 billion. Other operating revenues also increased by ¥12.9 billion due to the growth of Smart-Life related businesses.

On the other hand, operating expenses if you look at the grey bars on the right overall, cost reduction efforts and all these other efforts led to a reduction of ¥32.1 billion, in operating expense. Consequently operating income increased by ¥63.9 billion year-on-year and reached ¥299.3 billion.

But now if you look at the far right, the balloon on the far right, out of this ¥299.3 billion in operating income, this includes the positive impact from the change of depreciation method which accounted for ¥25 billion. And also there is a special factor due to the introduction of the Zutto Kodikashi discount that represented ¥18 billion of impact. So, altogether ¥43 billion of positive impact came from these two elements.

So, were it not for these elements, the actual operating income would have been ¥256.3 billion up ¥20.9 billion year-on-year. So, this was actually more or less in line with the original plan. So, we were more or less progressing in line with the original plan.

Now, moving on to the telecommunications business; operational performance first. The total number of mobile subscriptions reached 71.61 million up 6% year-on-year. The number of smart-phone and tablet users was 33.44 million up 13% year-on-year. The churn rate was 0.62% remaining at very low level.

The other operational indicator here is the number of DoCoMo Hikari subscribers which amounted to 2.07 million representing a five-fold increase year-on-year. The total number of Kake-hodai and Packet-hodai new billing plan subscriptions reached 31.59 million up 1.5 fold year-on-year. So, the operational performance of telecommunications business in general has achieved a favorable progress.

Now, let me talk about the enrichment of the billing services. For the low usage customers starting March, we introduced what is called the Share Pack 5 and also expanded the applicability of the Kake-hodai Light package. And also for long-term users starting June, we expanded the discounts offered under the Zutto DoCoMo discount package in order to improve the services offered to our customers.

And for the first quarter, as you can see there, the Share Pack 5 selection rate was approximately 20% for the three months of April, May and June. The flow selection rate was about 20%. Kake-hodai Light selection rate was about 60% and the Zutto DoCoMo discount application rate was about 70%.

Due to the expansion of the applicability, it increased by 10% because previously it was only 50 that you were able to apply this, but now this was reduced to full-year of subscription to have eligibility. And going forward for the billing plans, we would like to further enrich the billing plan, we will study into this. And also we will work on cost reduction efforts so that we can further improve the services offered to our customers and at the same time achieve a sustained growth as a company. So we would like to achieve both pillars by working on these altogether.

Now, ARPU and MOU trends on the next page. As you can see there, the first quarter aggregate ARPU including the discount impact offer multi-support and other discount packages was ¥4,330. The voice and packet ARPU as you can see there recovered to the level before the introduction of the Kake-hodai and packet new billing plan two years ago. So we have continued to achieve a recovery in the ARPU after hitting bottom, after dipping for a while, we have achieved a recovery in these ARPU for packet and voice.

Voice ARPU was ¥1,240 up ¥10 compared to the previous quarter i.e. the fourth quarter of fiscal ‘15. Packet ARPU was ¥2,960 up ¥20 compared to the fourth quarter, the previous quarter - the fourth quarter of 2015.

DoCoMo Hikari ARPU was ¥130 due to the increase of subscribers and also because of the increased subscription to the optional services which I will refer to on the following page. DoCoMo Hikari ARPU increased by ¥40 compared to the previous quarter.

So, on the following page, as you can see here, the subscription, the monthly usage per one subscription has increased by 20% roughly. Many of the customers are now subscribing to optional services such as DoCoMo, then IP phone service and IP telephone service and remote support services. As a result of that we have seen a change in the revenue structure. And that is driving the growth of ARPU.

Next page, I’d like to talk about LTE network. The number of base stations at the end of June this year was 143,500 of which premium 4G base stations reached 30,900. And we’ll be expanding this to 1,203 cities across Japan.

Starting from May, we also launched 275 megabit per second to the Japan’s fastest service. And also from June, we’re going to be through a carrier aggregation company, combining new spectrum with 3.5 gigahertz will be launched in 377 megabit per second. And this will be expanded to cover 49 cities throughout Japan.

And furthermore with regard to LTE network planned advances, is as follows. During this fiscal year 2016 we plan to launch services that exceed 500 megabit per second and will be using MIMO. And also on top of that towards 2020, we’ll be further enhancing the network foundation eyeing the possible launch of 5G.

Next, let me talk about the cost efficiency improvement. As you can see on this page, in the first quarter we were able to realize cost deficiency improvement of ¥25 billion for this quarter and we’re making very strong progress towards the annual target of ¥80 billion for this fiscal year.

Next let me talk about the Smart-Life business and other businesses. First let me begin with our operating income. In the first quarter, compared on a year-on-year basis, we realized 26% increase for ¥28.9 billion increase. We’re making again steady progress toward the annual target of ¥120 billion for the year.

And the principal services in this Smart-Life business are as follows on the right hand side, these five principle services. Now with regard to these five principle focuses, there are some discrepancies. However overall we are making very strong progress in terms of growth in profit.

Next, let me focus on the content services. As far as D market subscription at the end of June this year, it reached 14.48 million. You might say that this was a slight decrease compared against the previous quarter. However, due to the aggressive marketing campaign in spring this year, there was some reaction to that. So therefore, so comparing us to previous quarter, it showed decline. However, on July 27, we made a recovery up to 15.20 million so therefore we’ll be introducing these services at just going forward. And we’ll make sure that we pursue both for profit and revenue growth on a well-balanced basis.

Now with regard to - as for other focuses flag services market or subscriber pack, subs reached 5.17 million and answer back subs reached 15.01 million, this is on the right hand side. So therefore back-spanning and such services we also want to contribute to drive growth in the profit 4 content services.

Let me now talk about finance payment services dCard. At the end of June this year, the subs reached 16.68 million, which dCard Gold subs exceeded 1.3 million. And we’ll continue to seek expansion of subs as well as growth in profitability.

Next, let me talk about promotional plus D. The number of partner, are expanding very steadily. And the number of partners reached 66 at the end of June this year. And also at the, we are 49 at the end of March this year. So, we have shown very strong progress during the last quarter.

And also, our plus D related activities received MM Research Institute Grant P Award 2016, the most prestigious award in this category. And on top of grading new surfaces and also creation of business, we hope that we’ll be able to contribute toward the resolution of social issues such as vitalization for industries and also revitalization for each of the economies. I think that was well appreciation. So, together with these partners, we hope to further pursue core creation.

Next, let me talk about plus D initiatives using artificial intelligence, three examples. First, is the realization of tax demand prediction, so together Tokyo, Fujitsu and Fuji, cooperating with those companies, we are carrying a verification trial on the world’s first AI based real-time mobile demand prediction technology. This has been in places June 1 this year.

And also the other two are realization of autonomous driving services too cases, to get the key generosity and MD&A and [indiscernible] where we have a greater sub consolidation toward launch of self-driving business. This was agreed upon on July 8 this year. And we intend to launch the services toward the second half of fiscal year 2018.

And also on the bottom, realization of autonomous driving services, as was announced on July 19, we were served by MIC as the contractor for development and verification of autonomous mobility system. And we aim to develop efficiency distributions technology of dynamic mapping to realize self-driving cars.

So, these are actually are base plus D initiatives which really have begun in earnest. Now before I talk about the summary, let me talk about our share repurchase activities and then talk about the summary.

With regard to share repurchase, in the first quarter we carried out the following share repurchase from May 2, through July 30, we carried out roughly 20.7 million shares repurchased equivalent to ¥50.6 billion and we have roughly ¥137.9 billion remaining in authorization. And we continue to repurchase shares on the Tokyo Stock Exchange as we head towards the end of this fiscal year.

So, the summary, it is self-explanatory. It is simply a summarization of what I have mentioned so far. So, realized position recovery in the telecommunication business that is driving growth and profit for Smart-Life business, and we have made this very strong growth progress rather towards achievement of annual target by realizing increase in both operating revenue and operating income on a year-on-year basis.

Just one last word. There is reference to danger head smart-phone distracted walking well throughout the world, Pokemon Go, which is allocation information linked smart phone game. This has caused various issues and problems such as people falling as a result of smart phone distracted walking. And here in Japan, unanticipated troubles and problems are occurring as a result of this smart-phone distracted walking and we’re worried about further issues.

So, therefore in the usage of this game through smart-phones, please do not walk while, please do not carry out smart-phone distracted walking. And also do not drive. And also please be careful about the outlook personal data. There are various cautions that we are warning about. Just for our DoCoMo is concerned through all possible opportunities we hope to publicize about these cautions.

So, that is it from the presentation. So danger, smart-phone distracted walking, public relations on my part. Thank you very much. So that’s all.

Kazuhiro Yoshizawa

Now we are ready to entertain your questions.

Question-and-Answer Session

A - Kazuhiro Takagi

Before you begin your question please let us know your name and affiliation. Now are there any questions, but if you have any questions please raise your hand. The gentleman in the front row in the middle section.

Daisaku Masuno

My name is Masuno from Nomura Securities. The first quarter results seem to be very favorable so there are, not so much for me to question. But there is only two things that I would like to comment on.

If you are able to generate this much of profits, maybe monthly support discount should be squeezed. I think if it’s possible, I think you have already shrunk the amount of monthly support but you might be able to do more if this. So, now that you have these good results presenting and the momentum is great, so, why don’t you do something to shrink the amount of monthly support for your profit generation in the future?

And nowadays in the market, my second question, there are very less expensive smart-phones becoming available at ¥1980 or although DoCoMo doesn’t have that kind of cheap measures. But what are your plans pertaining to how to present counter against these cheap smart-phones becoming available generally in the market? That’s my second question.

Kazuhiro Yoshizawa

I would like to take the first question. The monthly support discount, we are taking measures to minimize its impact. And we are now taking measures in that direction. So for example, due to the review of the depreciation method, extra profits are going to be generated. And we’ll be using that amount in order to alleviate the impact on the subsequent years.

But those are basically non-cash measures. We are basically planning non-cash measures so that the EBITDA will not come down as much as possible. So those are the basic policies for the control. Of course the monthly support discount of course will come down but then of course that will have a slight impact on EBITDA as non-cash measures. But we will like to boost the profits so that we don’t have to have any non-cash spending. So that we avoid any impact on the EBITDA and accelerate in monthly support.

So, these are the complicated handling that we are currently implementing. But the basic directions as you pointed out, we are trying to limit and reduce the number of monthly supports as much as possible. So still we are only at the end of the first quarter but we will like to think more as we run going forward.

And my second, regarding your second question, I think you’re referring to Y-Mobile and all these sub-brands offered by other carriers. Those prices of course, we are quite aware that because our customers, some of them are shifting to these cheaper price propositions. But we do not have any immediate plans to follow them immediately. By staying with DoCoMo, there are benefits and of course we will be able to counter them through other measures.

For example if subscribers agree to join as a group, as a family, their prices can be reduced significantly. So, I think the services in some caskets, in terms of services we excel compared to the competition as those offer, of the services offered by these carriers. So these are the areas that we would like to strengthen going forward.

And of course those subscribers who migrate to these cheaper propositions are quite, price sensitive. So, when it comes to the feature phone users, they are quite interested in these low price offers. So, as far as the feature phones are concerned, we are now planning to introduce LTE enabled feature phones in the coming autumn. And when we do implement these new feature phones, we would like to come up with affordable price plans for the feature phones so that we can counter these cheap offers offered by the competition. But we do not want to immediately compete on the same level as these cheaper prices with sub brands.

And the 5G plan, this was something that was further down the line but looking at the past six months, the world is moving as Verizon has also decided to introduce 5G. So, at DoCoMo, I think the Verizon is very great when it comes to 5G. They’re quite good marketing they call them wireless fiber for example, wireless fiber as a brand.

Daisaku Masuno

So, 2020, if the commercialization is 2020, I think this will be the last year for them to decide on the spectrum. So why don’t you take the leadership to expedite introduction of 5G, what are your plans about that? Is that still four years ahead for you. But what kind of brand design that you have in your mind for 5G?

Kazuhiro Yoshizawa

Well, as far as 5G is concerned, the PR promotion methods could vary. We would like to focus on this and prioritize this project. We believe we are putting a lot of strength and muscles in this. Verizon, I think they are now taking the lead because of, and also South Korea because in Korea, because of the Olympic Games in 2080, companies like KT are taking a lead.

And also there is another company I forgot the name of this company but there are so many companies that are now taking a lead in 5G. And we have already established a consortium. And that consortium is already making tangible steps. And at the Shanghai Mobile World Congress the other day, DoCoMo has shared our views regarding the standardization approach to 5G. And we have declared that we are going to take the lead there. So we have declared that already in a clear fashion.

So, in reality, we would like to show the results that we have achieved in a verification experiment. And we would like to make an aggressive PR to make the motion of 5G.

Kazuhiro Takagi

Thank you very much. Next question please. We’ll go to the gentleman in the third row, over the central block.

Unidentified Analyst

SMB [Indiscernible] is my name. I have three questions that I would like to ask. The first question, it’s about the change in the depreciation method. As a result, as you did explain about this but you’ll be minimizing, increasing expenses to minimize future cost burdens. But in the first quarter, to what extent, how much extent, will you be reflecting, I suppose, this might have some impact on the worsening of the handset related environment? So, that’s my first question.

Also my second question is, what impact will, this have on your performance starting for the next fiscal year? So, these are my first questions I should say.

Kazuhiro Yoshizawa

Yes, the depreciation method will be changed and the impact of that that I believe was your question. On annual basis, we are anticipating ¥20 billion impact. Now, of that, in the first quarter, it was about roughly ¥44 billion impact for the first quarter.

And also carrying out for example, ¥40 billion as a result of changing the depreciation for useful life down to two years, so, in the first quarter, roughly ¥10 billion was the impact. Now to minimize future cost, ¥10 billion as a result of changing deprecation to your useful life, that is included. So, if you add altogether, the total comes to ¥44 billion, ¥11 billion in the GAAP will be the ¥25 billion positive impact on the operating income. So that was the backdrop behind the numbers you saw on the slide.

Unidentified Analyst

Then, what about those that exceeds, what about those that involve residual value?

Kazuhiro Yoshizawa

Now, the valuation loss of handsets on a quarterly basis, we will value that, we have valuation of that. And they will be reflected on quarterly basis. These are all non-cash items. And this would be actually having impact every quarter going forward and also the second half will have a lot of construction installations. So therefore the disposal on planned property and equipment, this will also come into play.

And also next fiscal year, if we decide that we’re not going to be spending anything, then we might actually accelerate the disposal on planned property and plants, so, in this end, the equipments so all of these elements will be reflected.

Unidentified Analyst

I see, thank you. You mentioned ¥44 billion?

Kazuhiro Yoshizawa

So decline the depreciation by ¥44 billion. On a net basis, this will have positive impact of ¥25 billion on the operating income and the GAAP will be roughly ¥19 billion. Of that ¥10 billion will be review of the useful life.

Unidentified Analyst

And ¥9 billion will be related to devices right?

Kazuhiro Yoshizawa

Yes, not just valuation loss of devices. For example the cost to minimize and to reduce monthly support and so forth. So, on a total basis, ¥90 billion will be the annualized target in order to minimize future cost.

Unidentified Analyst

So, monthly support, will reduction of monthly support, this is one element for the worsening profit or loss situation for the handsets right?

Kazuhiro Yoshizawa

Well, yes, we’ve been reducing wholesale prices, so yes that has had an impact.

Unidentified Analyst

I see. Thank you. My second question, it’s about the Smart-Life business operations. Can you talk about increase in both revenue and profit? Now in certain focus areas there are some GAAPs or discrepancies. So, in certain softwares of the Smart-Life business the growth rate has begun to slowdown. Now of course the Smart-Life business covers many, many areas so therefore can you give us a breakdown? So, can you give us the breakdown as to the increase in both operating profit and operating revenues for the Smart-Life business as a whole?

Kazuhiro Yoshizawa

Thank you. Then I would like to respond to that question. So, let me try to recap as I was covering the presentation, in the Smart-Life business operations combined, other business combined, we have been able to realize ¥5.9 billion increase on operating profit on a year-on-year basis in the Smart-Life business and other business combined.

And on the slide, we provide you rather with five principle areas on four Smart-Life businesses. Aside from I think we see very well balanced progress in all of these principle services for smaller business and businesses. But let me talk about some of the exceptions.

Group companies will be one exception to this rule. As you’re probably aware but with regards to the Group companies, in the previous year, we had very strong performance and in some group companies really it was strong growth in the operating income. So, this is a reaction to the change in the whole business cycle. And also within the group companies, again you’re probably familiar but among some of the group companies, not TV services, MMBI that group company is included.

But as of June this year, they have suspended services. So therefore, as a reduction of the business is where MMBI also had impact. And so, MMBI is operating profit also shows significant declined compared to the previous year. So that being the case, within the group companies, compared against the previous fiscal year the same period, we saw a decline in the operating income. In the other four principle services though, we saw a steadfast growth in the operating income.

Unidentified Analyst

So, in terms of rough, so roughly speaking, including group companies, what about the breakdown?

Kazuhiro Yoshizawa

With regards to content services, roughly 30%, finance payment services accounting for roughly 10% and enterprise solutions accounted for roughly 20%. And sub offering customers’ peace of mind roughly 40%, that’s the breakdown if you will of the contribution of principles, the four principle services and increase operating income excluding group companies.

Unidentified Analyst

Thank you. So, if you exclude group companies, how much increase did you have in operating revenue and operating income?

Kazuhiro Yoshizawa

So, excluding group companies, well, I suppose even.

Unidentified Analyst

Well, then how much reduction in operating income to operating revenue did you have in group companies?

Kazuhiro Yoshizawa

I see well it’s a very regular calculation and we do apologize for that. But with regard to group companies, due to various factors, they realized a reduction in operating income on a year-on-year basis. But if you exclude that as for the positive increase in operating income, we just shared with you the breakdown among the four principle services.

Unidentified Analyst

But you’re not disclosing the overall increase, you’re not disclosing the impact of the group companies?

Kazuhiro Yoshizawa

That’s right but we’re not disclosing that. We appreciate your understanding.

Unidentified Analyst

Point taken, thank you. My third question. This plan, the ¥127 million is the increase for the annual target. So therefore, already in the first quarter you have achieved 50% of that. So, if you included a review of the depreciation method, while ¥25 billion will remain. So that being the case, I think even with slight increase in operating income for this business in the following quarters, you’ll be able to achieve the annual target?

And of course during the second quarter the increased telecom business revenue will continue. So, are you anticipating anything different in the second quarter vis-à-vis the first quarter? Do you anticipate any factors that could lead to significant reduction in operating income from the second quarter onwards?

Kazuhiro Yoshizawa

Let me respond to that question. And so, if still for calculation, multiplied by four times, the operating income will become enormous but that is not the case. In the first quarter, as I mentioned earlier, there are some special factors that are unique to this particular first quarter.

Now, of course, the ¥25 billion is the impact of the review in the depreciation method. But then, I must say this is half of the ¥50 billion expected for this fiscal year. But then again, we will be taking measures in order to minimize future cost burdens.

So, therefore this ¥50 billion target, it will become smaller as we go down the years. So, we cannot, and in the case of the first quarter, there was the carryover impact as well. So, the overall impact will be transferred to ¥6 billion. You see that our graph on the very right-hand side.

Unidentified Analyst

But frankly, second quarter onwards what factors will come into play that is the question?

Kazuhiro Yoshizawa

As I mentioned earlier so measures to minimize future cost burdens that will also become more significant. So, therefore, so any positive impact of the change of depreciation will become smaller as we go through the second quarter. Of course non-cash items and cash items, also some of those cash items will come into play.

And also in the first quarter, we had the impact of the [indiscernible] carrier but that will not be the case for the second quarter onwards which means that ¥18 billion will not be a factor in the second quarter onwards. And also enriching billing services, we talk about Light plan, and also rewarding long-term customers the impact of these billing plans.

We anticipate ¥70 billion for the full year but only ¥10 billion was the factor in the first quarter. So, the remaining ¥60 billion will come into play from the second quarter onwards. So, if you take all of these factors into account from second quarter onwards, we cannot expect increase in operating income on a year-on-year basis. That is on par with the first quarter.

Unidentified Analyst

So, if that is the case, then at this juncture are we going to announce review of the annual target?

Kazuhiro Yoshizawa

I’m afraid we’re not at that stage.

Unidentified Analyst

Thank you.

Kazuhiro Takagi

Okay. Thank you very much. We will now like to take the next question, the gentleman in the fourth row towards the right-hand side from my point of view.

Yoshiyuki Kinoshita

Okay. My name is Kinoshita from Merrill Lynch. I’ve got two major questions. One is about Smart-Life related businesses. Roughly speaking, when you look at Smart-Life, regarding the previous questions, the comments pertaining to the previous question, let’s say that this current trend that i.e. you have the group companies, I’m not really sure if we are synchronized in our way of thinking.

But last year your group companies were faring quite well. So this year you have a reaction and is that going to be action going to last for the full year for this year? So, and therefore the other businesses may not well grow significantly but the other Smart-Life business may not be so significant in terms of the growth rate. So is that going to be the trend that we can foresee for the next full-year or so? Is that correct or not?

Kazuhiro Yoshizawa

Then, regarding that question, yes, the group companies’ performance. We talked about I cited two examples of two companies. If this company that had a very good performance last fiscal year due to the lifecycle of the product there are some ups and downs and therefore the reaction. And therefore I don’t think that the situation will reverse immediately all of a sudden. So I think for this group company, the current trend is likely to continue for some time.

But the other company, the TV company MMBI, not TV, they have shut down the company itself as of the end of June. So, we don’t have to anticipate this impact, you don’t have to multiply this impact by four for the full year because this is only the first quarter, unique impact. So, the impact from the MMBI business will be moderated going forward, that’s our assumption at the moment.

Yoshiyuki Kinoshita

Now, regarding my second question, regarding the content business, overall, when you look at the content business, of course we do understand that new services are now becoming available. But when it comes to D-TV service, I look at the data set and D-TV and D-Animation and D-Kids this is on Page 4 of the data compilation.

D-TV service, the subscriber base has come down to the June level of last year. D-Animation has also been even lower. And D-Kids, is suffering net losses for some time already. So how do you foresee the performance of these individual services under the DoCoMo business? And what is your projection for the future?

Kazuhiro Yoshizawa

Well, we cannot give you any concrete numbers for the individual services. But some of the services that you pointed out are now showing a sluggish growth or a down trend even and for various factors behind us. But first of all, we have altogether 50 million subscribers to these content services roughly.

So the basic trend is that, in the first quarter, due to the reaction from the fourth quarter, we’ve suffered a decline in the total subscriptions but as we mentioned earlier, as we speak today, we have more than 50 million subscribers altogether to these content services. So the baseline is an uptrend.

But when you look at the details, there are some ups and downs and various factors in play. So we will likely make many creative efforts such as the sales promotion and marketing method of these content services and the services per say. We would like to make sure that these customers will utilize these services on an ongoing basis. And towards that end, we would like to brush up the content services that we offer under the market.

And also, we would also like to look into the portfolio for example in July, we are, we have just launched a new service called D-Living. And back in April, we added the healthcare package. So the composition of the portfolio itself is now being changed with some new additions. So basically we are expecting a baseline growth in this content service subscriber base.

Yoshiyuki Kinoshita

Okay, just one supplemental question. I would like to have an overall comment so, the video services seems to be struggling overall. But is this because you are affected by the companies like Hulu, NetFlix or Amazon Prime or is it for some other reason? Can you comment on that?

Kazuhiro Yoshizawa

The impact from those services cannot be ruled out. However, the major reason I believe in the case of D-TV is that we have now more than 4 million subscribers, close to 5 million subscribers. So the subscriber base has come to a significant number already. So, as a general trend of these kinds of services, after our stock established to a certain level, we have to anticipate a certain number of deflectors.

So, because this is a content distribution service, and once the service subscriber base increased to certain knowledge, certain scale, it is getting increasingly difficult to expand the subscriber base. So we don’t want to give this up. We would like to further polish up the content services offered at D-TV to further increase the subscriber base.

Mr. Nakayama has some additional comments.

Toshiki Nakayama

I have some additional comments, yes. In terms of the numbers, compared to the fourth quarter of fiscal ‘15 and towards the first quarter of this fiscal year, many of these individual services suffered a decline. And I think that’s the point that you are concerned about. But basically from the fourth quarter to the first quarter, generally speaking in every single year, because in January through March timeframe, because that’s the peak season, the number of sales increases and because of that we have more frequent contact with customers.

And that results in an increase in the market kind of services. And as a reaction to that, generally, in every single year, we are seeing a slight slowdown in the subscription in these D-market services. And of course there are some specific special factors for this fiscal year as well. But when you compare with the fourth quarter, there was certainly a decline in the number of subscribers.

But as you can see, if you compare the first quarter versus the first quarter of last year, we have shown a significant increase already in all of these services. And we have more than 15 million subscribers altogether as we speak today. So, in a sense we can say that still these content services are enjoying an uptrend.

Yoshiyuki Kinoshita

And one more thing, yesterday on the [indiscernible] newspaper, there was an article relating to Fair Trade Commission instructions. Do you have any comments on that?

Kazuhiro Yoshizawa

The Fair Trade Commission yes, we have only read the article so we don’t really know about the details pertaining to their intent. We haven’t received any notification. So in that regard, it is difficult for me to make any concrete comments on that matter.

As for the future trend or future movements, actually according to the [indiscernible] newspaper, sometime 2 August, some announcement is likely to be made. So we will have to wait and see that before we make any comments. So, it’s very difficult for me to make any further comments beyond that.

Yoshiyuki Kinoshita

Thank you very much for your appreciation.

Kazuhiro Takagi

Thank you very much. Next question please. We’ll go to the gentleman in the third row, the central block. The floor is yours.

Daisuke Oshidari

Thank you, JPMorgan Securities, Daisuke is my name. I have two questions. First about the churn rate, 0.62% that was the number, so it’s very low. So I have nothing to say about that particular number. However, compared to on a year-on-year basis, you’ve been down went actually worsened by three basis points on a year-on-year basis. So, the discount for handset sales, this was a restraint. And also you’re providing ¥10 billion worth of just got to long-term customers or long-term users.

So, as far as the number itself is concerned, it is worsening. So, how do you evaluate the churn rate of 0.62%? I would appreciate your thoughts on this number.

Kazuhiro Yoshizawa

Yes, let me respond to that question. As far as this particular number is concerned, it’s very difficult to identify anything that is symbolic. In the context of mobile number portability, of course this is related to the churn rate number. But compared against the first quarter of the previous year, it is improving actually, the churn rate itself.

Daisuke Oshidari

So then what about in relation to M&P, it is improving. So what is the, what are the factors, is there significant increase in the pure churn?

Kazuhiro Yoshizawa

That is not the case either. So, as far as we’re concerned we actually see the trend as being flat actually on a year-on-year basis. But we will continue to carefully monitor the situation going forward. But there was nothing unique or anything characteristic about the churn rates for this first quarter.

Daisuke Oshidari

Thank you. My second question about the DoCoMo Hikari subs, an increase of ¥1.5 billion, maybe there was seasonality so this is after the season where people actually moved to different addresses. But switching from Flits Hikari, the new subs for DoCoMo Hikari, can you give us the breakdown between the two, the transition customers and the pure new subs.

And also, in the previous financial presentation, you mentioned that you will be carrying out aggressive marketing in order to publicize DoCoMo Hikari. So what was the effect of that? And also going forward, what trend to envision and how should we envision the trend going forward? I would appreciate your insight.

Kazuhiro Yoshizawa

Well, with regard to DoCoMo Hikari, right now we’re seeing very positive growth. Now comparing as the previous fiscal year, what is different? The percentage of transition searching conversion customers is different naturally. We still see of course conversion customers still. But then the number of conversion customers, are limited.

So, in order to expand the subs for DoCoMo Hikari, and then we have to acquire new customers. So, the percentage of few new subs for DoCoMo Hikari, it is increasing at this moment. There is still demand for fiber optical fiber. We believe there is still potential demand. There is still market out there for new subscribers for optical fiber.

So, if we acquire these new subs, then they will actually remain as a long-term customer. So therefore that being the case, in order to acquire new subscribers for fiber, at shops and also at DoCoMo shops we need to render our support to a lot.

So, acquiring new customers, new subs, that is something that we’re beginning to shift towards. So the fact that the number is increasing, it is strange that there is still demand out there for fibers. So we really need to address the market in order to catch and capture these demands.

Daisuke Oshidari

So, multiplying a few thousand for four quarters, do you have such a plan?

Kazuhiro Yoshizawa

No, we have no such plans.

Daisuke Oshidari

Did you give up the number, the unknown guidance for subs?

Kazuhiro Yoshizawa

Well, on application basis, it is 1.6 million. So it is on par with the previous year, so, in terms of the application basis, 1.6 million that is the number that we have out there. But I think we have to serve how the market evolves going forward. So, we wait for another three months, I think we’ll have a clear picture of the prevailing market situation.

Daisuke Oshidari

Thank you very much.

Kazuhiro Takagi

Now, I would like to take the next question. The gentleman sitting right behind the previous questioner, the fourth row.

Tetsuro Tsusaka

My name is Tsusaka from Morgan Stanley. Well, after all looking at the first quarter result, ¥299 billion in operating income. How do you analyze this, how do you take this? I think you said that you are just in line with your plan, that’s you said I think. But on a full-year basis, EBITDA is going to still suffer a negative growth.

That is your business plan projection. But this time around hypothetically, if ¥180 billion temporarily if this is subtracted due to the reaction from the last fiscal year first order, EBITDA from last fiscal year was ¥390 billion, and this fiscal year if you subtract that it will be approximately ¥400 billion. So, ¥100 billion of increase of EBITDA can be calculated. Are you still saying that you are in-line with the plan? I’m saying that you are already beating your plan. So your calculation is wrong. How do you comment on this?

Kazuhiro Takagi

Mr. Sato, can comment.

Hirotaka Sato

Yes. EBITDA in the original plan projection, we were expecting a ¥17 billion decline year-on-year. But in the first quarter result, EBITDA increased by ¥25.6 billion compared to the previous fiscal year. So, there is a change of direction.

So, on a full-year projection basis, as we mentioned earlier, due to the change of depreciation method, we are now trying to implement measures in order to alleviate the impact on subsequent years. If this is everything non-cash, the EBITDA may not suffer such a decline. But some of cash measures are contemplated in the plan.

But in the first quarter, we didn’t have so much cash measures implemented, so that’s the reason why EBITDA showed a positive increased compared to the year-on-year level. Now, towards the second half of the year, non-cash measures, excuse me, cash measures, for example the monthly support related measures are going to appear in the second half in a more increased way.

Tetsuro Tsusaka

And therefore if you’re really going to be able to achieve ¥57 billion increase?

Hirotaka Sato

We have to review that after the first half. We will have to review everything. And once again we would like to talk about the appropriate numbers. And if there is any chance, we would like to explain that to you. But we’ll try to reduce the profit as much as possible so that the EBITDA reduction can be minimized to the extent possible. And if possible, we would like to achieve an increase in EBITDA, that’s the general direction that we would like to pursue.

Tetsuro Tsusaka

All right. So you’ve been talking about non-cash, non-cash, so I hope that you will do everything in a non-cash way. Now, the second question regarding the Smart-Life related businesses, revenues and income has both grown. But when you look at the balance, on a cost basis, 37% is the cost margin I believe?

But going forward when Smart-Life business continued to increase and grow, the revenue growth is estimated to be 40%? And so can we expect 40% of the revenues to turn in as income? Can we expect that kind of calculation or is the profit margin smaller? I believe you are going to further increase the revenues for the Smart-Life related businesses. And what is the profit level you’re expecting out of that?

So, what will be the margin of profits? Is the current assumption going to be in place or are you going to expect better profit margin or smaller profit margin, what is your sense on direction of that Smart-Life related profits?

Kazuhiro Yoshizawa

It’s a very difficult question. Certainly this time around, compared to the previous fiscal year, the margin on profits, the profit margin has increased compared to the previous quarter, or the previous comparable quarter. But Smart-Life business is still in aggressive stage, we have to take on the offenses so we would like to continue generating new services and capturing new revenues.

But on the other hand, when the momentum goes to this level, the profitability improvement is something that we have to work on. So, we have to work on both ends, both fronts increasing revenues and increasing profits. And in addition to that, the business size has grown to a significant level, so we have to review and make modifications in many fronts and work on cost reduction to maximize the profits out of Smart-Life related businesses.

So, are we going to expect improvement or deterioration, it’s very difficult to give you a generalized comment. But we’ll try to maintain the profitability at the highest possible level and so that we can strike a well-balanced growth both in revenues and profits.

Kyoji Murakami

And one additional comment from myself. Last year the Smart-Life drew a lot of attention from the analyst community. And that drove a lot of growth in the income. We were very much appreciated for that. But the suspension of the MMBI business was one factor. And there are so many loss-making businesses. And we have exited from many of these loss-making businesses, in fact behind the scene.

So, cost drive, managing the cost, by managing the cost, we have generated some profits and that had a direct repercussion on the profits. And that’s the reason why we were able to significantly grow the profits.

Kazuhiro Yoshizawa

And maybe that inflated your expectation level. But when things settle down to the cruising speed, I believe the Smart-Life related businesses the profit margin for each of these components of services will be reflected in the overall profit level. So, one, it goes down to the, normalizes from the cost driver growth base. I think the profit level will be normalized.

So, the payment services in particular has very high profit margin. And we cannot expect that this profit margin will come down. But when things get normalized the top-line revenue is a certain level. So, now that we are moving from the cost drive-out phase to a cruising phase, I think there will be some reduction in the growth rate.

Tetsuro Tsusaka

One more last question. Regarding the Kake-hodai Light, the selection rate is 60% in the presentation. Now, Kake-hodai Light customers, the voice ARPU of these customer, are they lower, is it lower? If it’s a 60% selection rate continues, that means Kake-hodai Light subscribers in general terms will increase. And that I think will have a dilution effect on the voice ARPU. Isn’t that the case?

Or on the other hand Kake-hodai Light is not really a Kake-hodai, it’s not unlimited program. You can also have usage base spilling in addition to a certain threshold. So are you expecting a reduction or are you expecting not so significant change from the ordinary ARPU users?

Kazuhiro Yoshizawa

Well, the first quarter voice ARPU when you look at it, for the first quarter, compared to the last quarter, there was a ¥10 increase, although there are many ups and downs when you look at the individual elements. But the Kake-hodai Light impact when you single out the Kake-hodai Light impact, that had a negative impact of ¥20 approximately, excuse me, had a ¥20 increase compared to the fourth quarter. So, in total there was a ¥10 increase. So that’s the size of the Kake-hodai Light package.

Tetsuro Tsusaka

And how will that balance out in the future, will the Kake-hodai Light package have a negative impact? Will that have a stronger negative impact or will there be more potential upside users who are joining Kake-hodai Light will that beat the negative impact of the Kake-hodai Light package?

Kazuhiro Yoshizawa

In the original business plan, we believe, we haven’t really seen any positive impact from Kake-hodai Light. We are in our projection, we have a more conservative view.

Tetsuro Tsusaka

Okay, thank you.

Kazuhiro Takagi

We’ll take next question. In the interest of time, and let’s see, we see three people with their hands up. So, we’ll take questions from these three questioners and then conclude the session. So we’ll go to the gentleman in the central block.

Hideaki Tanaka

Mitsubishi UFJ Morgan Stanley Securities, Tanaka is my name. I would like to ask, I would like to make one big question, about the Smart-Life business and other businesses combined. Well, group companies, if you could give us the numbers for the group companies then, it’s very difficult to see the long-term outlook. So what about the D market subs?

If the number of membership and the usage were to increase in a simple manner, then I think the long-term expectation for Smart-Life business and other businesses will be more visible. So if you could give consideration to how you actually give out these numbers, I would appreciate it.

Kazuhiro Yoshizawa

Thank you, we’ll take out for your comment. Thank you.

Kazuhiro Takagi

Okay. The next questioner will be the gentleman right here in the front row.

Hideki Yasuda

Thank you very much for your presentation. My name is Yasuda from ACE Research Institute. I have seen the performance from this month. So I would like to talk about Pokemon Go. This is a content that has become popular on a global scale. So, is this a welcome development as a carrier from a carriers’ point of view or because of this distraction walking or using smart-phones, is this a problematic development for you?

So, I think you have seen some results in the first week after the launch of Pokemon in Japan. So, what kind of change have you seen traffic wise and accessory sales? Have you seen any change that will affect the handset sales? Can you comment on that one?

Hiroyasu Asami

So, this is Asami. I would like to answer your question. First of all, yes, the Pokemon Go number of users has been increasing at an exponential rate. But the communication traffic, are rising out of Pokemon Go is not that significant in fact. So, because this is GPS based solution, so, you have to locate the handset. So that kind of traffic is generating on a localized basis. So compared to ordinary times that kind of traffic has increased but on a macroeconomic point of view, it’s not so significant that will require us to increase the capacity.

So, although this is a popular game and it’s making headlines, but still in terms of traffic it’s not that significant in terms of an impact. Now, as Mr. Yoshizawa mentioned at the outset there are many dangerous way of usage arising out of Pokemon, that’s true. So, how will that be appreciated in the society is something that we have to be very careful about as carriers’ point of view.

We have to carefully observe how this unfolds in the future. But that kind of dangerous way of usage is something that we have to be very cautious and it will be a very big trouble. So we have to prohibit using smart-phones while walking. So that kind of education activity is necessary. That’s what we would like to work on going forward.

Hideki Yasuda

And regarding your handset replacement and the accessory sales?

Kazuhiro Yoshizawa

It’s too early for us to make a comment. It’s only like a very short period of time after the launch of Pokemon launch. So we haven’t really been able to seeing or haven’t been able to get a statistics whether that has affected accessory sales or not.

Hideki Yasuda

Thank you very much. I understood very, very well. Thank you.

Kazuhiro Takagi

Thank you very much. Then we’ll go to the gentleman fifth row from the front.

Kei Takahashi

Mizuho Securities, Takahashi is my name. I have one or two questions, please bear with me. It’s about the, D market? The subs for the D market service. The reaction to the sales in the fourth quarter of the previous year, you mentioned that the sales actually slowed down in the first quarter. And from the January through March 2016, I think it was the subs increased by 1.3 million. But for the first quarter this year, actually there was a reduction by 1 million.

So, the volatility is quite strong. And you mentioned earlier that from, at the end of July you saw an increase by as much as 600,000 from that point. So therefore, backed from behind the recent increase, is it that you have taken different initiatives from January through March? And do you believe that you have to realize the highest yield from the increase of 600,000? Or are you saying that there is a potential risk that same thing could repeat itself again going forward?

Kazuhiro Yoshizawa

Thank you. Another very difficult question. As far as we’re concerned, actually we want to make sure that we make strong sales so the customers are willing to stay on as long as possible and also that they make active use of the services available. We can only work toward that on our part. So that being the case, so be it contents or be it applications, we need to brush up for each and make them more attractive.

And also, we provide careful explanations at sales at DoCoMo shops so that we’ll be able to expand sales. So I think this [indiscernible] - efforts on our part and that’s all we can do. So we’ve done this up until now and we continue to do this going forward. So it’s not - there was nothing different for the first quarter against other quarters. We were just doing what is expected of us. We’re accumulating efforts.

So that being the case, be it, retention, the same usage, we can only work to improve that. As I mentioned earlier though, there are various conditions in play. For example, the handset sales, naturally it will depend on handset sales. And so business sales and business opportunities, sales opportunities, it will depend on handset sales. And there are other conditions in the environment that we have to work with. But we have, still we want to able to increase the - expand by and encouraging customers to remain.

Kei Takahashi

I see. Then about the handset sales, the net ads for this quarter were 650,000. So, as far as the first quarter is concerned, I think the progress to your full-year forecast is very slow. So, and I know contribute I’m sure is there. If we envision that then, in terms of DoCoMo handsets or DoCoMo brand based net ad growth pace is coming down. So, that is the case.

So, if you want to acquire new subs for D-Plus services, then this could pose a risk. So how do you see the net ads for the first quarter? And also, what about the impact on the expected D market subs for the full-year? I would appreciate your response. Thank you.

Kyoji Murakami

Well, I can only repeat the same response. What is different from other years is that the promotion for March, the impact was very strong. So therefore that being the case, the reaction was probably very stronger for the first quarter against other years, so because we’re making a start from the negative turn during that response - in that regard. But eventually this will stabilize. So, I think going forward to be able to add on net additions, as it gets for other previous years.

Kazuhiro Yoshizawa

If I could also add at the very end, as far as D-Market is concerned, I think there is volatility. But even if we take two steps backwards we can go forward three steps. That’s why I’ve been saying internally. So there are volatilities and there were reactions from time to time. But as Mr. Murakami mentioned earlier, at the end of the day we want to make sure that we retain customers.

And we need to take measures so that customers would be willing to stay on. Also we want to go forward, we help to deliver something new. So, D-TV, D-Magazines, we’re doing that, what’s next, that’s what we need to consider. And that’s the way we expand the subs for D-Market services. We hope you look forward to our activities.

Kei Takahashi

Yes, we are looking forward to that. Thank you. And also but net ads for subscribers, how do you see the progress of the net ads for the first quarter?

Kyoji Murakami

You’re talking about total handset sales or you’re talking about the net ads? Well, as far as net additions are concerned, as was mentioned earlier, it 650,000, it was roughly 100,000 so it’s about 3% lower than the previous year compared against 114,000 of the previous year.

But among the mobile carriers there is, MMP related competition. As was mentioned by Mr. Yoshizawa, though this decision has stabilized in terms of competition among the mobile carriers inside the subs, however, in terms of the cheap handset sales I think the competition is intensifying.

And also, compared against the previous fiscal year, the second handset sales that is growing stronger. But then as we head toward the summer, hopefully families will be signing on to DoCoMo, as a host we want to aggressively market that. So, we want to recover our ground as a result. Thank you.

Kazuhiro Takagi

Okay. Thank you very much. With this we would like to conclude this presentation. Once again thank you very much for taking your precious time to attend this meeting.

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