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Wall Street Breakfast

NTT DoCoMo, Inc. (NYSE:DCM)

F1Q08 Earnings Call

July 27, 2007, 5:00 PM JST

Executives

Masayuki Hirata - Senior EVP

Takanori Utano - Managing Director of R&D Division and CTO

Kiyoyuki Tsujimura - Managing Director of Product and Services Division

Noriaki Ito - Managing Director of Corporate Strategy and Planning Department

Bunya Kumagai - Managing Director of Marketing Division

Kazuto Tsubouchi - Managing Director of Accounts and Finance Division

Analysts

Hitoshi Hayakawa - Credit Suisse Securities

Daisaku Masuno - The Nomura Securities Co. Ltd

Atsuo Takahashi - Mizuho Securities Co., Ltd

Yukio Inotsume - Shinko Securities Co., Ltd.

Presentation

Sakai - Investor Relations

Thank you for your patience. And thank you very much for attending this conference despite your busy schedule.

We would now like to start the meeting announcing the results for the first quarter of the fiscal year ending March '08. I am Sakai [ph] of the IR department, I will be serving as MC for this meeting. Please be advised that this session is broadcast online via phone, for rewrite [ph] service. And later on, on a separate day this will be posted and provided on an on-demand basis from DoCoMo's website.

Now I would like to introduce the participants to this meeting. First of all, Mr. Hirata, Senior Executive Vice President; Managing Director of our R&D Division, Mr. Utano; Managing Director of Product and Services Division, Mr. Tsujimura; Managing Director of Network Division, Mr. Futatsugi; Managing Director of Marketing Division, Mr. Kumagai, Managing Director of Corporate Strategy and Planning Department, Mr. Ito; and Managing Director of Accounts and Finance Division, Mr. Tsubouchi.

The documents that we use today are three sets. First, the earning release. Second, is presentation slide document. And there are three sets of press releases. One is about the discount service, the change in the division or structure to reinforce… to establish a new division to reinforce corporate branding. And we have another Japanese document announcing the changes in executive positions.

Now, after my brief introduction., I would like to have Mr. Hirata begin the presentation and then we would like to entertain your questions. And we will try to finish this session by, shortly after 18:00 o’clock.

And please be advised that this slide here and also the Form 20-F describes the risk factors pertaining to our business.

Now without further ado, we would like to start the presentation. Mr. Hirata, please.

Masayuki Hirata - Senior Executive Vice President

Good afternoon to you all. Today, we would like to announce the results for the first quarter ending March 2008. Thank you very much for attending this meeting. At the outset, I would like to make a brief presentation. And we have the whole staff of our brigade here. So if you have any questions, we would like to entertain whatever you may have.

As Mr. Sakai mentioned, we have the risk factors and these are the cautions relating to the risk factors. And I would like to move on to the presentation.

This is the highlight of our financial results. In the first quarter, operating revenues decreased 2.9% year-on-year and reached ¥1.1829 trillion. Operating income decreased by 25.2% year-on-year to ¥203.9 billion, posting a decrease in both revenues and profits. The operating income for the first quarter represents 26.1% of our full year forecast, which may sound slower than usual years, but the progress, the forecast, if you compare with the business plan, I think we are moving just in line with our business plan. So the profit level for the first quarter is just in line with our earlier predictions. Operating income for the first quarter is ¥69 billion smaller compared to the same period last fiscal year. And I would like to explain the reasons using the following slide.

Operating income has decreased by ¥68 billion. And we already have achieved 26% of the full year forecast. Operating revenues on the other hand decreased by ¥35.7 billion. But in the first quarter of last fiscal year we incurred in revenues the expiring portion of two months carryover service, which accounted for ¥30.6 billion. But this is not the case for this fiscal year. So that has… that is one of the major reasons for the decrease in the first quarter of this fiscal year.

Operating expenses increased by ¥33.2 billion and there are three major reasons behind this. One is the increase in the number of handsets sold. Compared against the last fiscal year, we had increased more than 500,000 units. Actually, the first quarter of last fiscal year was a very quiet period, so we had an increase in the handsets sold this fiscal year in the first quarter, which resulted in an increase of revenue linked expenses.

Secondly depreciation and amortization increased. Because of the increase of capital expenditures during the last fiscal year, this has reflected an increase of the depreciation and amortization in the first quarter of this fiscal year. Also in addition, there was a tax code reform and that is reflected in the change of depreciation methods this fiscal year. Up until recently, we have been remaining 5% of value in the depreciation, but with the reform this time, we are allowed to reduce the residual value to 0%. So, we have reflected this change in a depreciation metric and altogether in the full year, this will have an impact of ¥ 17 billion, but for the first quarter this has affected revenues by ¥4 billion.

The third reason for the increase in expense is the increase of the base stations last fiscal year, which resulted in the expense… an increase in expenses. And also with respect to international roaming, we have to pay the IOT fees to the counterpart. So that’s another reason for the increase in expenses. And also we brought forward the advertisement expenses. We even out the advertisement expenses in usual years, is about this year because of the DoCoMo 2.0 campaign, we have actually simplified [ph] advertisement expenses, which resulted in an increase of operating expenses. So that is why we, our operating expenses increased by ¥33.2 billion year-on-year.

And in addition to the depreciation increase, we, on the other hand are expecting the gains from the return of substitutional portion of the pension funds. In the U.S. GAAP, on this we complete the entire procedures. We are not able to account this, but because we have been, we allow… we were authorized this already in July, so I think we will be able to complete the whole procedure by the end of the fiscal year. And so this will have a positive impact, I believe of about ¥25 billion in reducing operating expenses for the full year. So these are also factored in. So, as I said, depreciation will increase… to revise the depreciation methods of ¥17 billion, but there is a decrease of the gains from the return of the substitutional portion. So that is why we have decided not to revise the full year forecast this time around. So the full year forecast that we announced earlier remains intact.

If we can move on to the next slide please… or am I not operating properly. Okay, now we have moved on to the next slide.

Now I will like to explain the individual factors, the share of net additions. In the first three months our share was 17.6%. Due to the introduction of number portability last fiscal year, our share dropped quite significantly. But it has began to recover, but still in the first quarter it was still low and still severe at 17.6%. But we have introduced the 904 series and more recently the 704 series on sale.

So, and also, I'll explain later on, we are going to introduce new discount packages from the fall. And through these measures we would like to acquire higher share of net additions.

And during the quarter there was a discussion about whether to increase the 2-in-1 subscribers in our net additions, and as result we have decided not to include this in the share calculation but 2-in-1 is well accepted, we have achieved more than 67,000 subscribers as of the end of June and we now have more than 100,000 subscribers for the 2-in-1 series as of today. But if 2-in-1 subscribers are accounted for, our share for the month of June would have been around 30% or more precisely, 29.7% as of June.

Next is about the churn rate. First quarter churn rate was 0.85%. Last fiscal year in the first quarter it was very quiet because of customers waiting for number portability. After the launch of number portability, we saw an increase in the churn rate and it's begun to stabilize and decreased to 0.85% and towards the second quarter, second half of this year we believe the churn rate will continue to stabilize.

The migration of subscribers to FOMA is making a steadfast progress. FOMA subs accounts for more than 70% of total, with more than 37 million subscribers as of today. And by March '08 we plan to shift more than 80% of our total subs to the FOMA network. In 2012, the second generation service license will be suspended and in view of that we believe our migration to FOMA is making a steadfast progress.

MOU. MOU for the first quarter was 140 minutes, down 3.4% year-on-year. And this down trend in general is continuing, and we will like to keep a close eye on the future trends of MOU. But just slightly, I believe the pace of decline has been shrinking, but of course the down trend is continuing.

ARPU. ARPU for the first quarter was ¥6,560, and which was a 4.9% decline year-on-year. But as you can see from the dotted line in this chart, the first quarter for last fiscal year was approximately ¥200 higher if the impact of two months carryover service is included. But if that is subtracted actually the decline in ARPU is limited to only 2.1% year-on-year. So we could say that the down trend is continuing but the pace of decline is shrinking. Packet ARPU is continuing to rise, but voice ARPU is continuing to decrease.

Now that was about the financials. I would like to shift to the next topic, the principal actions for the future. Pake-hodai subscribers are growing continuously and topped 10 million just recently. 28% of FOMA subscribers have already joined pake-hodai flat rate package, so that… and because they feel comfortable with the flat rate service. And unfortunately, even if we were leading to this

Pake-hodai flat rate service this is not immediately increasing the revenues, but of course we believe, it is boosting the total usage because there are now subscribers who do not use ¥3,900 a month joining this service. Of course on a weighted average basis, we are still losing, because of, the more heavier usage account for the bulk. Still, but I think the low usage customers are increasing over time. So I think this will underpin our revenues going forward.

Turning to i-channel, we have exceeded to 10 million now and the subscribers have reached 12.27 million today. As far as the i-channel specific data ARPU is concerned, if you calculate this, it would come to ¥70. And in terms of ARPU, it will be about ¥340 per user on a monthly basis. So now that we have a fairly large population in subscriber base, this is going to be contributing to our overall revenue base. So in terms of our packet services and also against usage or volume based services, the subscription model I believe will serve to boost the overall ARPU, and that is what we are attempting to do.

Turning now to video. We’ve just launched this service and we want to be known as an entity that offers or that is strong in video delivery services. The condition is that we have seen spread of HSDPA and also we now have developed a video viewing environment for example 10 mega i-motion. To be more specific, through our alliance with Kadokawa Group, we are able to set up very comprehensive variety entertainment video delivery site called i-movie gate. And so we are able to offer enriched content plan, and we hope to explore as market in this area, going forward.

Turning now to credit business. We are trying to offer life assistance services. And we are endeavoring to create a platform for these services. DCMX subscriber base has succeeded to a million, and we now have more than a 190,000 reader-writers or ID payment terminals. Recently these terminals are now being introduced into all stores of the major convenience store groups, and the places whereby these services can be utilized have been expanding. It's not just the convenience stores, we are now working to explore small medium sized stores as well and we have set up together with Casio, a joint venture called CXD NEXT with this company to promote introduction of IT-enabled net register. And so, we are working to further explore and expand the service. Now, we’ve also set up a dedicated division called DCMX department. It would part of the multimedia department and so the DCMX business department will become a service for this purpose.

Turning now to international services. As we have repeatedly mentioned, international services are growing at a very strong favorable pace. And we believe that this will exceed 10 billion. The reason is that the percentage of owned handset roamers, be it 3G or be it GSM dual mode, we now see the spread of these handsets to more handsets. So, we see increase in roaming service revenues. Of course, international communication and service revenues are also increasing. So as far as the growth rate is concerned we do see a very strong growth in this area.

Let me tap work to the involved investment in alliance, and they have begun to develop and generate benefits. So Korea and Guam/Saipan and Hawai, we see development of 3G services; in Korea with single mode. And so these strong destinations for Japanese travelers are now beginning to accommodate the roaming services.

And turning to Guam and Saipan, right now, its GSM GPRS, they are trying to construct this and this time from next year wideband CDMA and HSDPA can be easily accommodated. And so these would also be a part of our services.

Recently, in Hawaii with AT&T Mobility or the whole Cingular, they are now trying to deliver wideband CDMA services. So inclusive of the popular destination for the Japanese travelers, we are planning to offer these services. So we do expect even further international roaming service revenues, going forward.

And next let me talk about the billing plans, which I touched upon earlier. We would like to actually talk about new billing plans, which is being released today. In the beginning, we were going to launch Fami-Wari Max and Hitoridemo Wari. However, we are now going to be launching Fami-Wari 50 and Hitoridemo Wari 50. For the Fami-Wari MAX and the Hitoridemo 50 Discount services we were planning to receive the applications starting from August 22nd. However, recently KDDI has announced based on three-year subscription that they will be launching the so called Hitoridemo Wari Discount service. We felt that this would have impact on our competitiveness. And so in order to compete with KDDI's discount plan we introduced the Fami-Wari MAX 50 and Hitoridemo Wari 50 and this is what we are announcing today.

Now this would be delivered as of August 22nd and applications will be received as of August 1st. And the assumption is that there be two year subscription and the first year you will be able to have 50% discount. And also the discount menus which were offered by Fami-Wari discount 30% on family members and also two month carryover and so forth, these advantages and also i-mode mail among families being free of charge, these benefits will continue to be delivered in the new discount menu as well. So, we hope to… we hope to be very active in this fall with this new discount plan.

Now for corporate services, we will also be considering similar discount services. However, there is need for full preparatory phase and there may be about one month a gap before similar services will be offered to the corporate market as well.

Now turning to 704 series, this has already been launched in the marketplace and the first model being available as of July 4th. Where we launched 703i series, we launched the concept whereby we will seek to offer more complex concepts with unique features-rich model. And this will be further pursued in the context of 704i series be it one segment TV phones, high-speed and also thin and light models, and also models accommodating 3G roaming or GSM. We will be launching the 700 series in this order offering these unique features, highly advanced and also compact. So that’s all for the 704i series.

Turning now to the network. As for CapEx, we're anticipating ¥750 CapEx for this year and for this… and for this first quarter the CapEx is ¥151.2 billion and I believe we are in line with the business plan. In the previous fiscal year, we were focused on area coverage, which led to substantially increase in CapEx in the previous year. However, this year it’s not just a area coverage expansion; we will focused on fine-tuning the area coverage and also providing expanded capacity. We want to focus on overall qualitative improvement of the network.

As far as HSDPA area is concerned, this has already exceeded 80% and has now reached 82% in terms of population coverage. So showing a very strong growth in the delivery area.

Next, about our organization. As of August 1st we will be setting up the corporate branding division. We will be focused on enhancing further our corporate branding activities and brand marketing activities. So, branding and marketing promotion will be carried out. And as for customer satisfaction department, that will listen to the grievance of the customers, they will be part of this group. We have been carrying out branding, we have been carrying out branding and promotion on a product-by-product basis, and we felt this was not beneficial, so we want to overcome this situation with this new department. And we have invited outside advisors like Utane [ph] San and Kasbe [ph] San and we do hope that they will bring new perspectives and new sense of values to the company.

And now on the next slide, please, I would like to talk about returning value to our customer, to our shareholders. This was already announced prior to the shareholders meeting, and there is nothing new, if you will, but we will be increasing our dividend by 20% for this fiscal year. And we would like to offer ¥4,800 per share. Now as far as share repurchase is concerned we received authorization at the shareholders meeting and so we are authorized to repurchase up to ¥200 billion or up to 1 million shares. For your reference, as for previous year shareholders meeting we were authorized up to ¥250 billion, and we actually carried out share repurchase 72% against the authorized max, maximum. And the number of shares were much smaller but that was the actual shares repurchased. So together with the dividend and the repurchase program, as we constantly say, we believe this to be very important challenges for our management.

So that is all the presentation that I would like to share with you at this juncture. In the reference material you will find various numbers and additional information in the appendix. So I do hope that you will take a look at them as well. So that is all from our side, and we look forward to your questions. Thank you.

Question and Answer

Unidentified Company Representative

Thank you very much. Now we would like to entertain your questions. Please, before you start a question, please identify your affiliation and your name. If you have a question, please raise your hand and we will put a microphone. We will take the gentleman in the front row please.

Hitoshi Hayakawa - Credit Suisse Securities

Hayakawa from Credit Suisse Securities. I have two questions. One, is about the discount that you announced today. Of course your business management may not work as a textbook, but I haven’t seen your market leader taking the lead in discounting the prices and that was followed by KDDI and now you are taking another counter measure against KDDI. So it seems that you are no longer advantageous in terms of your prices, and you are already equal to KDDI in terms of your prices. So perhaps only the consumers were the only gainers from this competition. So I don’t really understand fully why you are doing this. But what is the aim of DoCoMo for taking the lead in discounting the basic charges and what's the background against that and what are you trying to gain from this? And with Fami-Wari MAX 50 you have now ended up offering the same discount rate as KDDI. So in the future in order for you to shape up or gain more competitiveness, are you thinking of anything new approaches in the future.

And the second question, even if the irregular factors are not accounted for, you are still suffering a 20% reduction in operating income, and that could have some repercussions in the second half of this fiscal year. So maybe you may have to… I am actually concerned about your achieving your full year target. So, as investors invest in DoCoMo, with posting decrease in both revenues and profits, and you are still discounting the prices, what should the investors look for in order to justify their investment in DoCoMo? In that regard, I think dividends will become more important, increasingly important, and the repurchase program of your share buyback program, you only spent 72% of the budget. So perhaps it may make sense for you to take a more flexible approach in the dividends, and announce your dividend or numbers at an earlier stage than before. And also, so can you elaborate this from the perspective of the relationship between the dividend and share buyback?

Unidentified Company Representative

Now if you could answer the pricing scheme, and I would like to take the second part of your question.

Noriaki Ito - Managing Director of Corporate Strategy and Planning Department

Okay, I am Ito and I would like to answer to the first part of the question. Market leader, taking the lead in discount, and you are criticizing that, I guess. Actually we have a 54% market share on an aggregate basis and we post that. But due to a number portability and the competitive situation after the introduction, maybe the media is making too much fuss about it that DoCoMo is the only loser of a number portability and that has had a very big blow mentally on the people in the field.

Originally, our pricing structure is not that weak. Actually that was our recognition. But with the aggressive approach taken by Softbank, we thought that we have to offer a bigger impact to the market in order to turn around the situation. With KDDI following us with a similar approach… actually that was within our expectation. But really I think they made a over purchase, if you will, they overreacted I think. So that resulted in DoCoMo announcing a similar or an additional discount, so that we can offer a similar approach. Of course it is not necessarily good if we offer something steeper, so we made a minimum in order to… we offered the minimum in order to stay on par with KDDI.

As for the future, with the mobile business study group discussing many issues, we have to also think about the balance of the communication charges and the handset retail prices and we will like to give a solution to that problem in the future and therefore we cannot comment on whether this will have… it's just straightforward and just reflected in discounts on the communication charges. And I don’t think that will be the case in the future. So we will like to carefully study the course of discussions in the mobile study group, and come up with the right answer for the future. For the future, if I can comment on the rough or basic general trend we have to respond to the issue of handset prices, vis-à-vis, the communication charges. And we also have to follow the deliberations of the study group. And I think that will have a big impact on the competition.

And if I can add another comment, the discounts that we announced this time and the recent one, we were counter-reacted by KDDI, so we had to take measures against that. That’s the declaration that we are willing to compete against KDDI. And the background of this is because of course we wanted to make sure that we have strength to do that, and also what we can gain from it is that we will commit our customers to stay on our network for two years because even if we talk about and make fuss about the net add share, it's just a small number and behind that there is a lot of porting of customers and number of... a lot of number of churns. So the two year contract is the importance of this discount, because we can retain the customers with this binding. That’s one assurance that we can achieve from this. And I think this new discount can trigger this customer retention. So it's not just about the discussion of the level of the prices. And so overall with… the two years binding is the most important thing. Of course, in return, customers will be able to receive a 50% discount but the two year commitment is the most important thing. And that would be reflected in the usage period of the same handset. And we can ensure that they will stay on the same network, same handset for the duration. Of course the handset thing is not... was not an immediate conclusion. But we wanted our customers to be aware of the contract period when they sign up for the contract. And as I said, we are not going to change the full year forecast. But as we mentioned, when we made the announcement the other day we, to a certain extent had planned for some budget to finance our discounts. And this is always the case whenever we make a business plan, and we wanted you to be aware that we have the strength to compete in this market and that was already accounted for, when we developed our business plan in the beginning. And so, together with the last one and this time's discounts we announced today, this will have altogether a ¥40 billion impact on our revenues but that was already factored in from the beginning when we developed the business plan.

So, on a full year basis as far as… as of today we do not foresee any need to revise our full year forecast. And compared against the usual years it may seem that our growth is slow, compared to the last fiscal year or usual years. But this was because last fiscal year, our sales was slow, and churn rate was low because of those customers waiting for a number portability and also of course our operating income therefore may seem smaller compared against the last fiscal year. But compared against the business plan for this fiscal year, we are moving just in line as our plan.

And as for the sentiments, or the message to our investors, of course we increased the dividends to ¥4800 this time intending for customers to, or our investors to invest in DoCoMo and that accounts, that translates into a payout ratio of 44% approximately. And EBITDA is not that low either. So I want the investors to be aware of these factors.

And as for the share buyback program, certainly we have the authorization and we are trying to use up all the budget authorized, but actually when it comes to actual purchasing from the market we cannot buy limitlessly because the share prices and also a lot of the internal information and the market trends are all considered when we make a purchase. So please be… please if you could appreciate that there are some constraints when we actually try to lock it, and we cannot necessarily use up all the budget, although we are trying to. We tried to purchase a lot from the market directly last fiscal year. And in the years before that NTT was willing to offer the shares. So we were able to acquire quite a large chunk from NTT. But last fiscal year we had to rely on the market and that accounted considerable portion of our repurchase program last fiscal year. So we are doing whatever we can. And please, it will be appreciated if you can understand that. And we are not trying to add up the share buyback. So that is why we have decided to increase the dividends this year, instead of increasing the share buybacks.

Hitoshi Hayakawa - Credit Suisse Securities

Just to follow up for confirmation, in the discount prices, of course there are, because of the mobile study group's conclusion, I do understand that could have some impact on your business decision but you have come up with this two year binding contract, and the separation of the terminal handset prices and the communication charges may have because that could be… that is one of the directions set forth by the ministry. But with a two year contract, if I can confirm, does that mean the customers will be limited in the purchasing of a new handset for two years? In the case of Softbank, maybe they may change in the future but Softbank will have… the customers will have to stay on the same handset for two years. But were those handsets were subsidized by ¥40,000 or so, if you want to recoup that investment, maybe initially… ideally you will have to ask the customers to pay the full price or limit the repurchase or the replacement. Are you thinking of those measures?

Unidentified Company Representative

Well, certainly the discount that we announced this time is after the contract relating to the duration of their communication service contract. So it has nothing to do with the handset itself. So we’ll have to design a separate arrangement for the handset. If we are going to do that, we are still studying it. But rather in the case of the Japanese market, the customers do not necessarily have the concept of a binding period. So they’re not really aware of that. So we just wanted you, wanted the customers to be a little more aware of the contract period with this new arrangement. Essentially, the handset contract, or the contract for the usage of the handset, will have to be considered, going forward. It may be reflecting the prices or of course we may have to decide on the arrangement, if we cancel the handset contract in the middle of the contract period. So we have to educate the customers with these new arrangements going forward and we’re still studying it.

And communication equipment, there was a general understanding that they are free to contract anytime and cancel anytime. But this time around, we came up with a new discount plan, which will allow customers to receive a bigger discount but with a limited… with a constraint on their use of the service. So this is a new approach from us to our customers. And this is not related directly or immediately to handset arrangement. So, we will have to consider a new arrangement for the handsets, going forward.

Unidentified Company Representative

Yes the person in the front row in the center of the room.

Daisaku Masuno – The Nomura Securities Co. Ltd

Masuna from Nomura Securities. The impact of this discount starting from next fiscal year ordinarily, the basic charge is about 50%, 60% we’re talking ¥2.9 trillion of revenue. And with this new billing plan, this is going to be expanding by 10%. I’m not sure how many years it will take. But additionally, I believe going forward, we can anticipate ¥ 150 billion to ¥ 160 billion impact on your revenue. So how are you going to cover the impact on your revenues? We would like the management to be very straightforward in this. Are you going to be recovering this impact through cost reduction or are you all trying to improve the efficiency of your distribution network? You are a market leader. So maybe you should be the ones to be promoting reform in certain sectors. I think you really need to be very straightforward in declaring this.

Unidentified Company Representative

Well, as you point out in the next few years, it may exceed ¥ 100 billion. That is true, as you point out. Now in the meantime, as you point out, Mr. Masuno, we have to consider the marketing of the handsets and the contractual periods and so forth. Yes, perhaps these are issues which could see further improvement.

And of course the deliberation of the advisory group or study group is not yet over. So we cannot make a casual comment, but I believe that is the course that is being pursued. And I believe there is a certain fatigue in the current system. So we do intend to pursue this matter. It is simply a matter of timing and the methodology that you do see us as a market leader. However, we are being characterized as being the sole loser, we may not be the leader in that regard. So how do we address this matter is something that needs to be considered.

But in any event we’re in a competitive environment, and in that environment we have to consider ways in which we can market our handsets. So we’re trying to identify a good timing for such endeavors. But as you point out, the overall course or direction that should be pursued, yes, it is true that we have to pursue that and in promoting reform matters.

Unidentified Company Representative

The gentleman sitting next to the previous questioner, please.

Atsuo Takahashi – Mizuho Securities Co., Ltd

I am Takahashi from Mizuho Securities. I have several points to ask. And if I could go one by one. First is about the net additions in the first quarter. The net additions may look lower than your expectations. In the background, if you could separate between corporate and individual customers, what are the reasons, can you explain? That is my first question.

Second, this may relate to the previous question. With respect to ARPU, the three allowances to the ARPU before the allowances are accounted for and the discounts are accounted for, can you give us the genuine number? And of course we do understand that the discount rate is steeper but, without the two month carryover service, you said that the decrease in ARPU is not that significant. But with the impact of the new Fami-Wari Discount and on the other hand, if you consider for the next two years, what will be the trend in ARPU? Do you think the old discounts that you have offered in the past may have… and its impact will dilute over time? Is that the case?

And so, can you explain the ARPU trend mixing the two factors, the new discounts and the old discounts? And as for the capital expenditures, I think you are proceeding with the Super 3G experiments? And for the CapEx, from next fiscal year, you have given the guidance that you are expecting a gradual decline in CapEx in the future. And when you consider the current state of Super 3G development, is it correct that we can expect a continuous decline in CapEx, going forward? What about the base station's unit price and the cost of handset? If we… do you have any blueprints or idea about the costs for the future?

Bunya Kumagai – Managing Executive Officer, Chief Director of Sales, Director

As for the net additions, the first quarter net additions, I am Kumagai by the way… if we could separate between the corporate and individuals, I cannot be so precise. But if you could look at the number portability impact, we are not losing significantly only in the corporate market with number portability. So compared against the first quarter target, our share has been small, lower just slightly. And there are two major reasons behind this. One is, because we thought that the number portability impact will subside over time from the first to second, second to the third quarter, gradually; and we thought that we could strengthen our position over time. That was the basic assumption in our business plan. So in that regard, we are doing lower than expected. But rather than that, our share of net additions are smaller, mostly because of the larger than expected overall market size, because of our many stimulus taken or undertaken by the industry I think the share, the net additions… the additional number of subscribers in the total market has been larger than expected that we will like to continue watching this whole future trend. And new subscribers has been actually larger than expected. But in reality, the churns has also been larger than expected in the first quarter. Compared against the first, the previous quarter, it has been declining but still we thought, we had expected a smaller churn rate in our business plan.

So, but with the introduction of new discount packages this time around we believe this will lead to a decrease in the churn. So leveraging the new discounts we will like to curb the churns going forward. So, of course this have an impact on net additions, but then our net additions has been smaller, but in terms of actual numbers, as opposed to the market share we have been doing more or less in line with our prediction.

The second question, I think nobody can answer properly to your question, but for the ARPU, we divide the total bills and the total revenues for the number of subscribers, so the theoretic number which is not really calculated because MOU is the basis for the voice ARPU cultivation and the pocket ARPU is only the packet numbers. So we can not comment or cannot answer to your question.

And, by and large the discount will have an impact of ¥40 billion this fiscal year and it kind of, could be affected by in the total number of subscribers joining this service, and we all are expecting 10 million plus to join this service, this fiscal year. So if you can reverse calculate, I think you will have a general picture as to the impact of the discount services, I think. But of course, well this is only a prediction, I mean we cannot guarantee how it turns out in the future. So we have the baseline numbers and we have developed these numbers, and we shared with you.

And as for the investments over the mid to longer-term, which is your third question, of course, if there is any technical issues, I will ask my colleague to comment later, but Super 3G technology will use the same spectrum band as our current 3G system, with a very spectral efficiency. So in terms of capital expenditures, just by simple calculation, we can share the same base stations and same antennas and the transmission module in between the transmission equipment may need some new equipment. But this is not… Super 3G is not a rollout from scratch. We can considerably share the existing equipment and just add on some components. That’s our view. So with the addition of a package or with the addition of an adaptor unit, that’s the case, that’s what we can do with… that’s how we will achieve the Super 3G technology.

So the capital expenditures required for Super 3G is not going to be that significant compared against a second… a 3G technology. But this is only going to be only after 2009, so we cannot comment on the actual prices of our equipment.

Super 3G and HSDPA are different stories. I think you are mixing it. You talked about the panel additions. And as for HSDPA, I think your CapEx requirement is smaller and still offer a highest transmission speed. But when it comes to Super 3G, I think you will be using… we will be sharing the same infrastructure, same network will be upgraded, and therefore the cost for capacity will be going down. But the traffic on the other hand is going to increase because we are going to offer new services and customers will be using more services. So, capacity will increase. So if you consider the capacity vis-à-vis cost reduction, this is just a trade off. So you have to look at both the elements. And so in terms of investment over the short-term, we will have to review it from a longer term perspective. And in that regard, the capital expenditure level this time alone may not change that significantly over the future.

Atsuo Takahashi – Mizuho Securities Co., Ltd

And according to my understanding, as far as the network cost is concerned the development team is now trying to make utmost effort in order to bring down the prices or the cost of development. Then the ¥750 billion or ¥700 billion annual capital expenditures will not likely go down significantly or are you expecting a slight increase? Is that correct?

Unidentified Company Representative

Well, we are talking about 2009 or so which is two or three years ahead and therefore the ¥750 billion is not going to be significantly higher or lower than this level, I think, because that’s that basic range that we are looking into for the next few years. That’s the general direction that we are anticipating.

And if I can add another comment. When we migrated from 2G to 3G the network was a complete overlay, and we had to roll out a separate network. And as far as HSDPA and Super 3G are concerned, they are the same 3G network with some additions, so the handsets are also… we also have a dual model handsets for Super 3G and HSDPA. And that’s the basic approach for your development. So, and these additions will only be added, and we have the flexibility to add the capacity only where there is a demand for this high speed service. So that’s one of the characteristics so for these new technologies. And in that regard, we do not foresee, we do not have to foresee any steep increase in capital expenditures because we do not have to increase the capacity or the coverage significantly need over a short time.

Unidentified Company Representative

Next question, go to the person sitting in the third row.

Unidentified Analyst

[Inaudible] from JP Morgan. I would like to go back to the first question of this session. Mr. Hirata responded about this discount plan. You said that there is a… or the assumption is that the subscriber will be subscribing to your two year contract. As far as the effect is concerned, what about the impact on replacement, and also what about churn? How much will churn and replacement be brought down as a result of this new discount plan? Can you share with us your assumptions.

And the next question might be somewhat ambiguous? You have changed your organization and you established the brand marketing division, if you will, you have set up the corporate branding division, this is headed by the President. From our position, how should we view the impact of this new division and what time span can we expect the benefits occuring from this new organization?

Unidentified Company Representative

Yes, thank you. In terms of churn, we do anticipate that this will be brought down. However as far as the impact is concerned we will really cannot identify a specific numerical number, if you will. Because we really didn’t see similar experiences of this kind in the past. So if we calculate the potential impact, we of course will take a look at the impact as a result to reduction in the plan.

Unidentified Analyst

So you are saying that you do not anticipate or reflect any positive impact, you’ve only reflected the negative impact, is that the case?

Unidentified Company Representative

Yes. Yes, we only focus on areas where the discount could impact, you are right in that regard.

Unidentified Analyst

So with about the potential impact on reduction in churn? What about the longer retention? And what about the potential or positive impact on distributor commissions?

Unidentified Company Representative

Yes, we did not look at the positive side. We simply take a look at the difference in the price when we did this calculation. Am I making myself clear?

Well in general, within the mobile business study group, there have been some deliberations on this matter, so let me try to share with you, the discussion. It's not just us, it's also related to AU as well. But when we take a look at the duration time for the handset, so it's about two years. So that means that half of the people actually replace their handsets under two years time. Now can we expect everybody to stick two years with the same handset? I am afraid that is not the case. Some people may want to change handsets at six months which will accompany certain penalty and that of course will be somewhat risky.

But when we consider the assumptions, in all likelihood, about 20% we have a simulation whereby the replacement will be brought down by 20%. It's not directly related to the most recent discount plan.

Unidentified Analyst

But we are talking about, in general, if you have a constraint of a contractual, if the contract is, let's say two years, how much will this impact the handset sales? They are such simulations. But then having said that, there is no telling how the consumers may behave in the world, we are talking about simulated figures here.

Unidentified Company Representative

As Mr. Hirata mentioned earlier, although we do anticipate certain positive impact and there was certainly a ¥20 billion impact, but that does not reflect the positive impact.

Now turning to the corporate branding division, let me say a few words about this. From the perspective of marketing, there is a sense of urgency that perhaps the brand strength of NTT has become somewhat diluted. So we focus on our promotion and corporate advertising and also the consumer's behavior and perspective. We have a sense that perhaps there is lack of consistency perhaps within our organization. So we really have to focus on DoCoMo brand as a whole, as a majority. That is the objective behind this new structure. Now of course we will know what results this may emerge. But we have carried out a surgery, if you will, we don’t know where the illness may lay. We are trying to explore that and we do have certain ideas, but are we talking about cancer, are we talking about an ulcer, we do not know what ailments may ail us. But as a result, I believe we will be able to identify what the disease is but we certainly want to take out the disease through this surgical experiment.

Earlier we talked about a mobile business study group’s deliberation and the conventional incentive model, maybe they are faced with a certain constraints, maybe they are faced with a certain fatigue in the system and that is why diverse operators are now beginning to consider the situation. And so it is within this new environment that we have to consider either new branding and the establishment of a new distribution channel, because we cannot expect the conventional business model to work. For example, having the DoCoMo shops, all the way until the mini shops to be sufficient, in terms of marketing.

But then we are not talking about a simple change in the business model. The external environment is undergoing change and internally, as well, we have shifted from the other various departments, which we have very respective divisions in terms of product and marketing and corporate services. But they cannot be independent from one another. We are not at a phase whereby the market is going to be rapidly expanding. So if that is the case we have to be more focused in our approach if we want to be compelling and more attractive to our customer base. So both external and internal conditions must be revisited and reviewed.

So the President is heading this new division and I think that is simply a reflection of the very strong resolve that our company has toward this matter. So that is the very forward-looking perspective that we bring to the table this time around.

Unidentified Analyst

In the press release you talked about nationwide unified consistent promotion. You have nine regional companies separately within the country, don’t you? So you are talking about trying to integrate the message, is that the case?

Unidentified Company Representative

Well, compared against the past, let's say compared against ten or five years ago I think we are beginning to see greater integration, if you will, in our message but I think there is still more to be done. There may be some gaps in the way that consumers view our message. And in terms of TV commercials in certain regions there are maybe different commercials being launched. So when it comes to branding, maybe we need a greater sense of integration.

And also what about… but this is a simpler in terms of the discussion what to do about the nine regional company based structure. But having a branding strategy, having more consistency integration we want to make sure that the message is not… there is no gap in the message that is delivered to the customers. There might be some gaps or differences in reality. So I think we really need to have a consistent direction. Thank you.

Unidentified Company Representative

Okay, the gentleman towards the left of the room in the front row, please.

Unidentified Analyst

Hi, my name is [inaudible]. I have three questions. One is about the pricing policies and you are going to change and offer discounts in order to align your price level with the competition. But of course in the beginning from… in the first place the factors why you lost against number portability may be relating to the network quality and other factors. Don’t you see any problems in these areas anymore? That’s my first question.

Second question is about the 2-in-1 service. You now have more than 100,000 subscribers. And can you give us the subscriber attributes of these 2-in-1 subscribers? Does it mean that the existing customers have been migrating to the 2-in-1 service or are there any migrators from other carriers joining DoCoMo for the sake of 2-in-1 service. If you have any data available… of course we do understand that the service is quite new… but if you have any data that you can share with us, that will be appreciated.

And the third question is about the corporate branding division. You have set up the branding division and also the DCMX business department. At this juncture what is the reason why you have decided to create this new department at this timing? Is there any particular reason why or is it because the DCMX started to take off and you wanted to accelerate the uptake of DCMX is that any... was that the intention behind it? Those are the three questions that I have.

Unidentified Company Representative

The first question which relates to the network quality, other than the pricing… of course other than pricing, the network quality was one of the reasons why there were some port out customers from DoCoMo to other carriers. Of course that was a problem in the past but when you compare the PDC and FOMA networks coverage basically our FOMA coverage has already been expanded to at least on par or maybe superior to the PDC coverage. And in reality, we are listening to the voices of customers in order to improve the quality of our FOMA coverage whether there are connection difficulties and so forth. And still there are many voices for improvement of FOMA customers and we are trying to accommodate these requests going forward on a continual basis. And in terms of this fiscal year’s business plan, our basic approach is to continue working on the quality enhancement of our FOMA coverage.

And in October last year when number portability was launched one of the primary reasons why customers ported out from DoCoMo to others was this quality problem, and this quality problem accounted for let's say about 20%. But this has reduced approximately 10% recently. So, the area coverage is no longer the biggest reason why customers are porting out from DoCoMo to other carriers. But still that accounts for 10%. So we still have to work on it. It has been declining but we still have to work on it because there are still some voices complaining this issue.

And as for the 2-in-1 subscribers, it's just a new service. We have just recently started this service, so we cannot talk about so much details. But the new subscribers joining 2-in-1 are those customers who want to have multiple circuits with a single handset. And there are some subscribers, existing subscribers adding another line. So these existing customers adding another line accounts for 90% of the total. Completely new subscribers are 10%. They could be from other carriers or they could be some other cases, I cannot give you a break down further. And the attributes, most of them are youngsters, young generation. And the young generation are now joining our service as the first adopters. That’s the current situation as far as 2-in-1 is concerned.

The third question relating to the DCMX business department as you may know, we are now promoting the credit card service in terms of the branding business and also the issuance business, which have two different natures. The branding business is to employ DCMX on as many cards as possible, issuance is another story. So, we will like to clarify these differences going forward. And the reason why we have decided to set up this DCMX department is because we have issues of new cards like family cards, gold cards, and the ETC cards. So, we now have the basic platform. So, we will like to become more independent as an issuance business, in order to improve the profit and losses from this business. And that is why we have decided to set up this new business department.

Unidentified Company Representative

Next question please. We will go to the person in the second row.

Yukio Inotsume - Shinko Securities Co., Ltd.

Inotsume from Shinko Securities. It's not directed to the financial results, but I would like to ask about the license for 2.5 gigahertz… megahertz rather, I believe you are going to be receive the applications. But are you going to go up until one-third or are you going to simply pass this opportunity by. Can you talk about how you intend to be involved in this spectrum?

Unidentified Company Representative

I think you are talking about WiMAX. As we have consistently said since the past, as far as 3G license is concerned we are able to have equity stakes up until one-third. And NTT group as a whole is now considering whether or not we could address this matter as a group. Now, the deadline itself is not yet clear and we are not sure as to when the applications will be received. So it is… we are not yet at that final stage. But the situation is that we are discussing this matter as a group. Thank you very much.

Unidentified Company Representative

Any other questions? It seems we have no more questions. So, we will now like to close this Analyst Meeting at this point. Just before we close, I have one request to you. We have given you an entry card when you entered this building. But, as you leave, please return the entry card to the IR staff, who are located at the 27th floor. Thank you very much for your attendance.

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Source: NTT DoCoMo F1Q08 (Qtr End 6/30/07) Earnings Call Transcript
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