NTT DoCoMo's CEO Discusses F1Q 2012 Results - Earnings Call Transcript

Includes: DCMYY
by: SA Transcripts

NTT DoCoMo, Inc. (DCM) F1Q 2012 Earnings Call July 29, 2011 4:00 AM ET


Osamu Hirokado – Head-Investor Relations

Ryuji Yamada – President, CEO & Representative Director

Kazuto Tsubouchi – CFO, Director, EVP, MD-Accounts & Finance


Hitoshi Hayakawa – Credit Suisse Securities Japan Ltd.

Daisaku Masuno – Nomura Securities Co., Ltd.

Hideaki Tanaka – UFJ Morgan Stanley Securities Co., Ltd.

Daisuke Oshidari – JPMorgan Asset Management Ltd.

Atsuo Takahashi – Mizuho Securities Co. Ltd.

Hironori Tanaka – Morgan Stanley MUFG Securities Co., Ltd.

Shinji Moriyuki – SMBC Nikko Securities, Inc.

Osamu Hirokado

Ladies and gentlemen, thank you very much for sparing your precious time to attend this meeting. We would now like to start this Analyst Meeting announcing the results for the first three months of the Fiscal Year Ended March 2012.

I am Hirokado, Managing Director of the IR Department of NTT DoCoMo. I will be presiding this meeting. Please be advised that this session is broadcast live on phone and also on the internet. And also, a recorded video of this meeting will be distributed later through an on-demand video presentation.

Now, let me introduce the participants from NTT DoCoMo. We have Ryuji Yamada, President and CEO, Kiyoyuki Tsujimura, Senior Executive Vice President, Masatoshi Suzuki, Senior Executive Vice President, Executive Vice President and Managing Director of the Finance and Accounts Department and CFO, Mr. Kazuto Tsubouchi.

We also have Executive Vice President and Managing Director of Corporate Planning and Strategy Department, Mr. Kaoru Kato, also Executive Vice President and Managing Director of Network Division, Mr. Fumio Iwasaki. And finally, we have Executive Vice President, Member of the Board, responsible for Consumer Sales, Mr. Takashi Tanaka.

For today’s meeting we’ll be using two sets of documents, the earnings release and the presentation slides. Please confirm that you have both.

For today’s meeting we will first start with the presentation from Mr. Yamada, President and CEO, followed by a Q&A session.

We would like to finish this meeting by 6 O’clock. Please also be advised that there are forward- looking statements, and for those potential risks please refer to this slide and also From 20-F filed with the U.S. SEC.

Now without further ado, I would like to ask Mr. Yamada to begin the presentation.

Ryuji Yamada

I am Yamada of NTT DoCoMo. Thank you very much, ladies and gentlemen, for sparing your precious time to attend this meeting. I would also like to take this opportunity to express our appreciation to your continued support and patronize to the company.

Now I would like to start with the presentation of the first quarter results. If you can flip to Page 3, this is the financial results for the first three months of the fiscal year ending March 2012. Operating revenues decreased 3.9% year-on-year and reached ¥1.473 trillion. Operating income increased 11.3% and reached ¥267.7 billion. So we posted a reduction in revenues, but an increase in income. And the progress of operating income to full year forecast was 31.5%, which was almost in line with our earlier expectations.

Slide 4, these are the highlights of the first quarter results. There are five major points. First, the disaster recovery and the new disaster preparedness measures. On March 11, we had the great East Japan Earthquake, which affected many people in the area, causing a lot of service disruption. We are very sorry for the inconvenience caused. We have made all our efforts to restore the service and completed the restoration in most of the areas by the end of April. For the new disaster preparedness measures, of course I will just explain the details later. We would like to complete the implementation of these measures by aggressively working on them.

Second point is about customer satisfaction improvement. With Nikkei BP Consulting’s Mobile Data Communication Devices Customer Satisfaction survey we received the number one rating for three straight years. We’ve been working on many fronts to improve customer satisfaction.

The promotion of smartphones in the first quarter, we sold 1.3 million units of smartphones. In the last fiscal year for the full year we sold 2.52 million units, so more than half of that was already achieved in the first three months alone of this fiscal year. And as of yesterday, as of July 28th, we are – our annual sales for this fiscal year alone already reached 2 million – 2 million. I’m sorry, I made wrong statement, 2 million is the right number. 2.02 million to be more precise.

Number four, about the increase of packet ARPU. The first quarter packet ARPU increased by ¥110 year-on-year, making a steadfast expansion. The total packet revenues for the first three quarter – first quarters – first quarter increased by ¥30.3 billion. And the last point about the Xi service expansion after the launch on December 24 last year, on July1 we launched the service in six additional cities.

Slide 5. This compares the first quarter of this fiscal year and the last fiscal year, the major changes between the two quarters. First of all, voice revenues decreased by ¥43.9 billion year-on-year due to the impact of value plan. The value plan impact was approximately ¥20 billion. On the other hand, we’ve been striving to increase packet ARPU and packet revenues. Packet revenues in fact increased by ¥30.3 billion year-on-year. Of course this is still short of making up for the decline in voice revenues, but we have successfully increased packet revenues. Other revenues also increased by ¥3.7 billion.

And with respect to revenues we posted a decrease in equipment sales revenues. Actually we saw brisk sales in terms of quantity, but the unit price per one handset has come down, and that has resulted in a total decrease of total equipment sales revenues of ¥32.2 billion year-on-year. Wholesale prices reduction wholesale has an effect to decrease the expenses. In fact, equipment sales expenses decreased by ¥30.8 billion in the first quarter. Network-related costs decreased by ¥9.5 billion year-on-year and other expenses also decreased. This was to largely to a reduction in the number of handsets submitted for repair.

And finally, there was a negative impact from the disaster of ¥7.5 billion. Of course, to be more precise we should give a breakdown of revenues and expenses, but there was too detailed, so in a nutshell the negative impact on revenues on income was ¥7.5 billion. Maybe later Mr. Tsubouchi can elaborate on the details of the ¥7.5 billion. So, as a result of the foregoing, our operating income for the first quarter was ¥267.7 billion.

The next slide is about the 50% discount services. On the right – on the left-hand side, we have the 50% discount service subscriptions, and this is already saturating, so there are no effective impacts anymore on the income. The value plan, although the subscription rate has already reached 73%, we will have to anticipate somewhat more impact from this value plan.

Slide 7 is about the ARPU. The first quarter aggregate ARPU decreased by ¥230 year-on-year and reached ¥4,960. To give you a breakdown, voice ARPU decreased by ¥340 year-on-year, of which the expanded uptake of value plan accounted for a negative 100% – ¥100, and the reduction of billable MOU also accounted for a decrease of ¥150 because MOU – billable MOU dropped by seven minutes in the first quarter.

On the other hand, packet ARPU posted an increase of ¥110 year-on-year. Out of this ¥110, if I can give you a breakdown, smartphone accounted for ¥60, i-mode ¥20, and data plan at ¥30 according to our estimate.

As a consequence, our packet revenue – packet ARPU reached a level higher than voice ARPU in the first quarter already.

Next is about total handset sales. The number of handsets sold increased by 0.6% year-on-year and reached 4.64 million units. Due to the impact of disaster, we had a severe shortage and a slight shortage of inexpensive i-mode handset models, and that resulted in a very fierce struggle in the acquisition of net additions. But that problem is already removed, and now we achieved a good progress towards our target of 19.8 million units of sales for the full year.

Next slide is about the churn rate. Churn rate is very important because it reflects customer satisfaction. The first quarter churn rate was 0.49%, maintaining a very low level.

Slide 10, net additions. The first quarter net additions was 410,000. As I said in May, we struggled because of the – for one thing, customers waited for the release of new smartphone models, and secondly the inexpensive handsets of i-mode were – had a shortage of supply due to the impact of the disaster. For these two main reasons, our net additions for the month of the May was quite low, but the situation recovered after June.

Slide 11, migration subscribers to FOMA and Xi. The remaining customers on do mova and DoPa are now less than 1 million, and we would like to facilitate subscriber migration towards determination in March.

Now, I would like to move on to the principle actions and the results. Slide 13 about the restoration – full-scale restoration from the disaster. We have restored the area of coverage to a large extent, but of course the broken or damaged facilities will have to be repaired through full-scale measures. 97 base stations were affected, were destroyed, but out of that the 55 are already completed.

Slide 14, I would like to explain this in detail. These are the progress of the new disaster preparedness measures. Following the Great East Japan Earthquake we thought about what would be a lesson that can learn from this experience, and we announced on April 28 the new disaster preparedness measures, and I would like to talk about the progress here.

First about the large-zone base stations, we would like to install 100 base stations with this large-zone scheme. So in the event of a disaster, the large-zone base stations can cover a 7 kilometer radius.

Therefore we will plan to install them in heavily populated areas so that we can provide a 35% population coverage with these large-zone schemes alone. And the progress to date, actually by the end of December we would like to complete installation of these large-zone schemes in 100 base stations, but of course we will have to prioritize areas like Tokyo or Tokai where there is an eminent threat of a potential earthquake, so we would like to complete its installation for Tokyo five locations, and for Tokai 8 locations by the end of October instead of December.

The second thing that we are working on is the uninterruptable power supply and the battery hours extension due to the depletion of battery that we had experienced after that power outage in the last earthquake.

So especially those base stations covering prefectural capitals or local governments will have to be ensured of longer battery hours. So using UPS, uninterruptable power supply system, we have hence covered 800 base stations already, and the extension of battery hours to 24 hours will be completed by December, attaching priority to Tokyo and Tokai regions. These are the most costly investments altogether ¥14 billion will be appropriated for these two battery-related measures. The next is about the supply of satellite mobile phones, because this can be used immediately by people evacuating in shelters.

By October, we will deploy 2,000 units and by February 3,000 units of satellite mobile phones. We also would like to increase the number of satellite entrance circuits by completing the portable type deployment by October and car amount type by December.

The emergency microwave entrance circuits will be completed by September and the emergency voice message service. Actually in the event of disaster, voice communication becomes difficult, so we would like to develop a new message service that will convert voice into voice files.

This will be installed in the server, which are located in the network, so including this order development works we will like to complete the development and start service by end of March.

Area Mail, this was very effective to improve the sense of security of user, so we would like to offer this free of charge to local governments. Actually, we started the free of charge service to local governments from July 1. After the free of charge service was started, an additional 100 location – local governments, in addition to the existing 80 locations, local governments who had already used the service from before are now applying for the use of this free of charge Area Mail service.

Next about – the next generation green base stations. Actually today, our base stations are operated by commercial power, but in addition to commercial power we will like to utilize renewable energies like solar power, wind power and biofuel cells. For storage battery, we would like to develop next generation lithium-ion batteries, and also would like take measures for securing power in the event of power outage. This will allow us to generate power in a more environmental-friendly manner and also shift the peak power consumption.

So the main development effort will be geared towards the development of lithium-ion and the green power controller technology. And as you see on the bottom right, we would like to complete the development system evaluation within the fiscal year and start its commercial introduction perhaps in about 5 to 10 base stations in the next fiscal year.

Next, this is about the future plan. So, for example, some areas could be sunny, but some other areas could be rainy. So with the environmental-friendly power generation, we will able to exchange – inter-exchange our power between regions.

Next let me talk about customer satisfactory improvement efforts. Customer service smartphones, we’re interested in what the smartphones are all about, what functions are available, and they want instructions on how to use smartphones. So for that purpose we have set up smartphone lounges which we hope to expand going further.

We have one (inaudible) in each area we launched this last year. And we want to at least one smartphone lounge in each regional office, and we opened new lounges in Hokkaido and Kansai area in April and May this year. And to the right-hand side we have held smartphone classes at DoCoMo shops, customers who come to DoCoMo shops. And I go to the shops myself. But many customers come to see what the smartphone classes are about.

So once every week or every – once every two weeks, we tell them that we hold these DoCoMo shops, and many customers actually attend these smartphone classes. So as of June fiscal 2011, 55,000 people have already attended smartphone classes. These are very elementary classes, and customers are very interested. And we have also established smartphone meisters. These experts capable of providing detailed information on smartphones, so we increased this number from 5,000 to 7,000.

Next, Page 18, also relating to smartphones. Last year, many people who called call centers about smartphones found it difficult to be connected, and we received complaints. So therefore, we have reversed the number of operators who are able to handle i-mode and smartphones. We increased the number of operators capable to handle the smartphone related inquiries, so therefore response rate has now risen to over 80% with regard to the smartphone-related inquiries.

So therefore, we have service call centers that are capable of accommodating these inquiries. So, we want to further maintain the response rate for smartphone-related enquiries as we expect a greater number of smartphone buyers.

Slide 19, customer satisfaction improvement relating to safety and security. First is the DoCoMo Anshin Scan, which is a virus detection service. This will be launched free of charge starting from July 1, 2011.

In the case of PC, anti-virus tools are for a fee. However, in the case of Docomo Anshin Scan, since we want to offer safety and security, we felt that this should be offered free of charge. And on the right-hand side, we show kids phone. This will be released from September through October this year.

And Slide 20, customer satisfaction improvement, external evaluations. Nikkei BP Consulting has provided this ranking. In 2011 as you can see we have received high satisfaction scores in 8 out of 15 items, including overall satisfaction.

With the increase in traffic in various areas and various hotspots for example, let’s say in a certain area in Shibuya for example, some say that the connection was bad. If we received such feedback, we make sure that we respond to those inquiries – to those issues as soon as possible.

And Slide 21, this is a very important part of our management response growth of packet ARPU and revenues. Packet ARPU has increased ¥110 year-on-year for the first quarter. In terms of packet revenue, we saw an increase of ¥30.3 billion increase year-on-year. That’s a 7.3% increase. If I were to repeat myself in the case of smartphones, ARPU increased by ¥60. Data plan increased ¥30 and i-mode ¥20, and that’s a breakdown of this increase.

Now of the ¥30.3 billion increase in packet revenue, let me give you the breakdown. ¥17 billion from smartphones, data plan around ¥9 billion and i-mode around ¥4 billion. These are the breakdown of the ¥30.3 billion in increase year-on-year as far as packet revenues are concerned.

Next, Page 22, here we talk about product lineup of smartphones. We released nine models of smartphones, and they were very favorably received and the take-up has been very high, and that’s represented on Page 23. In 2011 in the first quarter we sold roughly 1.3 million units of smartphones in this first quarter.

In the previous year we sold 2.5 million, which means that in just one quarter alone we were able to actually sell close to more than half of the previous year sales of smartphones in just one quarter.

As I talked about earlier, on July 28 we exceeded 2 million sales of smartphones. So I think this is excellent timing. So it’s – the smartphones sold as of this fiscal year is 2.02 million.

Now in June and July, we released some new models, so let me talk about that. Galaxy S II was released on June 23, and we have already sold 230,000 Galaxy S II. We released MEDIAS WP on June 24. We have already sold 210,000 units, and on July we released Xperia Acro. We have already sold 230,000 units of Xperia Acro. So as you can see in terms of the market share, of our sales in various large mass retailers, you will find that we have sold a very large number of smartphones.

Number 24, smartphone services. We want to migrate i-mode services to smartphones, and we’ve been able to achieve substantially. For example i-channel, Melody Call and G-GUIDE program lists have all them migrated. And emergency earthquake alert based on CBS scheme were already achieved. So in 2011 winter and beyond, we also plan to migrate some of these other services.

Now on Page 25, here we talk about content billing and authentication for smartphones. We want to reiterate this message. We feel official i-mode content are very plentiful. When customers switch to smartphones, they could not switch. They had to actually cancel their contract for i-mode content when they switched to smartphones.

So we want to introduce billing and authentication functions for smartphones, and we want content providers to also accommodate contents in smartphones. Content providers, they will have to adjust their software. So that is costly, but we want content providers to cooperate in this migration.

Now, before this when we announced summer model, we mentioned that we announced that we will be able to accommodate building authentications starting from the winter models. So with the increase in smartphones, we hope that we’ll be able to provide quality content to our customers.

Next, Slide 26. What are some of the measures for i-mode? How can we incur so-called light users to further increase their i-mode usage? First is the service called “i-mode Kantan Mail”. This is already explained on this page, and we also have “Tsunagari Hotto Support”. It’s a service whereby grandparents living in rural communities. When they open up i-mode, and then this would be the – there would be automatic upload of mobile phone usage that is to the relatives living in urban centers for example. So this will further boost time of usage, i-mode package usage.

Next on data communications. We were awarded number one ranking three years in a row in terms of device sales and in terms of subscriptions. So we have made very strong progress to forecast. In particular in the first quarter, we have sold 260,000 units of data device, which represents a very strong increase year-on-year.

Now let me talk about LTE Xi on Page 28. For Xi in the first quarter the subscribers reached 121,000 in the first quarter. And what about the recent numbers? It’s not indicated on this page, let me provide you the details verbally. As of July 28, which is yesterday, 192,000, which means that in the month of July alone we saw an increase of 70,000 users for Xi.

And as you can see from mobile Wi-Fi router that this is already launched, and Buffalo 063 – correction, Buffalo 01C, this is planned for release on August and Xi tablet. Two models planned for autumn, so two Xi-enabled tablets are planned for autumn. And from winter, we are planning four Xi-enabled smartphones for the winter season that is here. So for fiscal year 2011, subscriber base we hope to reach one million subscriber base.

And Page 29 talks about the global expansion. On the left hand side we show you Tata India related numbers. We have shown very strong forecast, however overall net add pace is slowing down in India as far as directions of global expansion is concerned. On the right-hand side, we indicate to you the following. Not much has changed as far as our direction is concerned, but expanding platform business and enhancing added value of network business, which is indicated in the center. This is something we wanted to emphasize.

For example, we have been focused on creating and building our 3G network to date, but smartphones will increase in various countries around the world, so therefore we want to go onto the upper layer if you will. So as one harbinger for that, we acquired net mobile in Germany. So we have been invested in net mobile, and we hope to pursue in this direction globally.

And next on Slide 30, multimedia broadcasting for mobile devices. As of April 1, we’ll be launching this service. mmbi and Japan Mobilecasting, these are the two broadcasters. One is an authorized key broadcasting business operator, and Japan Mobilecasting is the facility supply key broadcaster.

And as far as authorized the key broadcasting business operator is concerned, they plan to apply – we plan to apply for authorization of key broadcasting business operator in August.

Now, multimedia broadcasting service will entail real-time broadcasting, storage-type broadcasting and mobile communications. We will focus on these three services and offer convenient services which we will not able to provide up until now. And as of April 1, these new services will be launched next year.

And Slide 31, new initiatives. We have been involved in various new areas, and we have described them for you. One is a bike sharing service, using mobile wallet services we believe that we will be able to offer bike sharing services.

DoCoMo one-time insurance and one-day car insurance service. This is planned for launch in October, and DoCoMo energy saving support service, DoCoMo medical insurance, DoCoMo mobile remittance and prescription drug information delivery.

I’ve talked about mmbi, Multi Media Broadcasting Service earlier. DoCoMonth, wants to emerge as a comprehensive service provider. So, that is my presentation. So the first quarter for fiscal year 2011, in principle we have been focused on addressing restoration after the earthquake. We believe that we’ve been to bring about restoration, so we’ve been able to bring forward various preparedness measures against disasters. We have been able to increase and enhance customer satisfaction and sales of smartphones have been very brisk.

And packet ARPU we will further increase going forward. So, penetration of smartphones will further expand going forward, and we want to further enrich the product lineup as we had toward winter. And Xi-enabled tablet – correction, terminals and handsets will also be introduced. So we will increase marketing, and we want to further increase our packet ARPU.

So I apologize for the lengthy presentation. That is all for myself. Thank you.

Kazuto Tsubouchi

Since time is limited I would like to give some more detailed numbers for myself. Slide 5, regarding the ¥7.5 billion disaster impact on income, the breakdown of that. Of that ¥7.5 billion, ¥5.3 billion, the large majority of that, the budget that we have spared for customer support and the disaster-hit areas. We provided discounts for customers replacing their handset or provided discounts for the repair charges of damaged handsets. Also for those purposes, we have spent some distributor commissions and also reduced disaffected revenues on our negative – in a negative way.

In addition, 3.5 – this was very well accepted by the customers. ¥3.8 billion was that for those effort. The remaining ¥2.2 billion are the construction related expenses for the metric. ¥800 million were used for stopgap measures, and these are – I’m sorry, the diesel engine fuel charges, ¥1.3 billion was used for that.

And the remaining ¥100 million were depreciation and amortization. So, not manual facilities are completed yet. So the depreciation has not really started for – in many cases, but towards the end of this fiscal year, we’ll start seeing the depreciation to start. So initially we had made a prediction of ¥20 billion to our disaster P&L impact. And I think this will be the number that we will end up I think, ¥20 billion would the P&L impact for the full year due to the disaster.

Osamu Hirokado

Now, thank you very much, Mr. Tsubouchi. We would like to take your questions now. Please raise your hand and wait for the microphone. And also please identify your name and affiliation before you start your questions. Now are there any questions? Yes, I see a hand in the front row, the middle section.

Question-and-Answer Session

Hitoshi Hayakawa – Credit Suisse Securities Japan Ltd

Thank you very much for the presentation. My name is Hayakawa from Credit Suisse. I have two questions. One, as you said in the presentation, your operating income progress to full year forecast was 31%. I got the impression that this is better than your expectations. It was 28% last fiscal year. So perhaps this is a bit higher than last fiscal year the same quarter, maybe because of the revision of the point program allowances.

This may have achieved some upsize. But, I think given the momentum, do you think that you’ll be – you also – do you think it can also beat your last year’s performance for the full of the first half, one and two quarters as the first two quarters? Of course, in the first quarter alone it may – it might perform better than last fiscal year?

Ryuji Yamada

Right, okay. I liked your question. The first quarter achieved some upsize compared to the last fiscal year. When you compare the second quarter with the last fiscal year’s second quarter, because we revised the handset repair procedures and the first quarter number for last fiscal year was before that revision, but the second quarter we did revision. So this is difference on the grounds of comparison.

Now the question is, I think, how far we can increase the ARPU? And the driving force, the main driving force for the increase of ARPU would be smartphones. We sold 2.02 million units of smartphones so far, and this will have an impact on the ARPU, right. For those customers who bought our smartphone in April, we conducted a monitor survey on them. And those customers who spent an ARPU of ¥,3500 before, their ARPU after migration to smartphone has come up to ¥5,200. So a ¥1,700 increase is already achieved when we track their usage for several months after April. So, this is the question.

Depending on the sales, how good we are in selling smartphones? This will have an impact on our revenues. Like, we sold 1.3 million units in 3 months and 2.02 million units in four months. So if you multiply that by three times, then the total sales might be 6 million units for this year, but we are predicting greater sales towards the end of the year. So, we might be able to achieve some upsize in smartphone sales.

So, after the first half, after the first two quarters, we will have to look into and review – revisit handset sales performance, platform performance and the ARPU performance. But given the current momentum, we might be able to seek some upsize in the order of another 1 million units in smartphones. So we would like to strongly promote the smartphones so that they can be purchased by our customers.

Hitoshi Hayakawa – Credit Suisse Securities Japan Ltd.

My second question, on a related note your distributors and manufacturers, when I have some chats with them they say that some particular brands and some models are enjoying a concentration of popularity like the models that you mentioned earlier. But there are some other devices from some other manufactures, and they will have to be reduced of their prices or apply some effective cash back in order to sell these products. This is what we are seeing I think in the smartphone market.

So then when you consider the expanded impact of the monthly support program going forward, what kind of impact will they have on the voice ARPU going forward?

Of course, we do understand that it is very important that you use – that you try to increase your packet ARPU levels in smartphones, but it seems that the competitive environment has become more intense and fierce than before. And that may have some impact on the monthly support that you have to provide more hefty incentives under the name of monthly support, don’t you think so?

Ryuji Yamada

Well, when you look at the overall competitive environment, all carriers are now trying to strongly promote smartphones because that’s important for them, and therefore many companies are now reducing the prices by pulling back cash to the customers. Now in the case of DoCoMo compared to the competition, our models are more expensive even if it’s the exact same model. Our handsets are more expensive because of our superior network quality and network services and also value-added services like net, the Anshin Scan program or also the SP mode service.

As a general trend I cannot – I will not rule out the possibility of providing some more discounts, but this is not going to be a significant discount campaign anyway, because with the value course, we’re asking customers to pay full price for the handset, and in turn reduce the basic monthly charges. But now the basic monthly charges have come down, we cannot do so much in the area of handset hardware prices because we would like to maintain the prices to the extent possible so much as the competition allows us to do that.

Now, the other factor that we have to consider is the distributor commissions. Our distributor commission on average is about ¥16,000, and therefore we have not made any huge increase and maintain this market share.

Unidentified Company Representative

Next question please. Any other question? Then we’ll go to the next question, please.

Daisaku Masuno – Nomura Securities Co., Ltd.

Thank you. Masuno, Nomura Securities. Two questions if I may. First relate to the recent trend and smartphones. In the month of July, you enjoyed very brisk sales of smartphones.

I think smartphone sales increase has been much higher than your plan. And in terms of profit, comparing the initial outlook, I think your first quarter operating results – operating profit was higher. And if the momentum continues, then from second quarter onwards can we expand – can we continue to expect this upward trend in your performance.

Second question relates to LTE-enabled tablets, two models in force, LTE- enabled smartphones, which you are going to be launching going forward. Can you elaborate on the details? Can you provide us with – correction, are the smartphones going to be fully functional? I know you have plans for 1 million units, but if you’re going to be offering fully functional LTE-enable smartphones, then how much sales do you expect? I know you have been talking in greater detail to the mass media people, so could you not give us more details about Xi? Thank you.

Unidentified Company Representative

As far as the transport smartphones are concerned, from July 1 up until July 28, we have sold more than 700,000 units, as much as maybe 710,000 maybe.

Galaxy S II, Acro, and the MEDIAS WP and Aquos Phone, these are the models which enjoyed very strong sales. We have excellent product lineup, and we just launched these new models.

Daisaku Masuno – Nomura Securities Co., Ltd.

Then will we enjoy the same number in the month of August? That’s a bit questionable, but what about the winter model, how much sales do we expect? What will be the lineup for the winter model?

Unidentified Company Representative

So July has been very strong. Can we expect the same level of sales in the month of August. It’s something that we need to watch out for. Naturally, we will expand efforts for marketing. But everything is up to the momentum of the customer demand. We need to watch for that.

Now as for LTE, LTE-enabled tablet, two models we are planning for autumn. One domestic vendor and the other a non-domestic vendor, that’s what we have in mind. And in winter, we are planning Xi-enabled smartphone launch, four models hopefully, two domestic vendors, two non-domestic vendors.

Now that’s what we have in mind. But in any event for LTE service as far as the bidding is concerned, we will have to consider a few factors. For example, Verizon has been doing the same, but we may have to tweak the billing scheme.

Daisaku Masuno – Nomura Securities Co., Ltd.

Can we really introduce uniform price?

Unidentified Company Representative

In the case of LTE, we have found that many heavy users are migrating to LTE. So heavy users who use a lot should hopefully pay for that service.

Daisaku Masuno – Nomura Securities Co., Ltd.

We have announced our pricing scheme for LTE. But then are there any additional factors we need to bear in mind?

Unidentified Company Representative

It’s a flat billing scheme right now for LTE card, because it’s a promotional period. And we receive feedback from the customers, and the customers say that they are afraid that they might – they are afraid that they might to have to pay a very large amount on a single month basis if it’s a tiered program.

Daisaku Masuno – Nomura Securities Co., Ltd.

So are we going to consider a tiered billing scheme, or are we going to consider flat billing scheme, but depending on usage the speed of the service declines?

Unidentified Company Representative

We’re talking about a one month program. Up until April 26, for example, let’s say – correction – up until the 26th of the month, maybe the customers reach the second tier, maybe they can come down or we can consider uniform scheme whereby the speed of the service declines. We have not yet made any final decision, but we have to consider these options.

Daisaku Masuno – Nomura Securities Co., Ltd.

Now if 1 gigabyte is the threshold whereby – 1 giga, correction, is the threshold whereby the tier is increasing, but that’s – 5 giga is the ceiling beyond which – is the threshold or the thresh...

Daisaku Masuno – Nomura Securities Co., Ltd.

But is this really the highest that customers can really go to? In other words, should we consider increasing this 5 gigabyte threshold? Is this appropriate? So, tiered billing scheme or uniform flat scheme whereby the speed declines, which of the options are we going to consider? And also at what point should we increase – at what point should we set the speed of the delivery?

Unidentified Company Representative

Some people say that they don’t want 3G. In the case of LTE, these are volume customers, and they want to go to LTE. So maybe the 3G related pricing scheme should be as it is right now. Again, we will have to monitor the situation.

Unidentified Company Representative

If I may add with regard to the so-called ecosystem factor. When we announced the models for the fall season, we hoped to describe this in greater detail, but I think there is an LTE ecosystem, for example videos and games. This highest – I think there are services that are appropriate for high speed delivery, so together with the handset we have to introduce new services at that time.

Daisaku Masuno – Nomura Securities Co., Ltd.

1 million subscribers – I think – what about more than 1 million subscriber base? I know that to the media people you have provided explanations about front loading your CapEx, because you expect an increase in the potential subscriber base for LTE. What about that?

Unidentified Company Representative

Actually, that’s not what we meant.

Daisaku Masuno – Nomura Securities Co., Ltd.

Could you confirm that?

Unidentified Company Representative

We have plans for 1 million. We like the unit of 1 million, we like 1 million as a unit, so 1 million customers for LTE. We want to go there.

Daisaku Masuno – Nomura Securities Co., Ltd.

So 121,000 for one quarter, can we really with this number reach 1 million?

Unidentified Company Representative

We really want to go there. Now for Xi, I think it’s not viable just with the data card, we need Wi-Fi routers and of course you need Xi-enabled smartphones.

Daisaku Masuno – Nomura Securities Co., Ltd.

Thank you.

Unidentified Company Representative

Any other questions. Yes, I see hand towards the left-hand side of the room, maybe the tenth row from the front.

Hideaki Tanaka – Mitsubishi UFJ Morgan Stanley Securities Co., Ltd.

Mitsubishi UFJ Morgan Stanley, my name is Tanaka. You said that you are going to appropriate ¥50 billion for growth initiatives for the full year. How much of that budget have you spent in the first quarter, and what’s the progress?

Unidentified Company Representative

Out of that ¥50 billion, this actually – this is the amount to cultivate new revenue sources, and also for mmbi business and also the priority measures. The new growth measures, these refer to the personalization effort, social support and conversion services. mmbi is the broadcast service that we’ll be launching in April, so we have already appropriated expenses for that business. The priority measures mean the measures that we are taking to encourage customers to migrate from i-mode to smartphones and also to shift the human resources in call centers to smartphone-related operations.

With respect to mmbi, these are very important, and we are expecting a greater amount of expenses towards the latter half of the year. So out of that ¥50 billion, we’ve already spend ¥5 billion in the first quarter.

Hideaki Tanaka – Mitsubishi UFJ Morgan Stanley Securities Co., Ltd.

¥5 billion is out of – only ¥5 billion out of your total ¥50 billion budget?

Unidentified Company Representative

To be more precise, this is an incremental ¥50 billion compared to the last fiscal year. That’s the accurate observation of it. And so out of that ¥50 billion incremental cost, we spent ¥5 billion. Now, we would like to take the next question. The person in the fifth row, please.

Daisuke Oshidari – JPMorgan Asset Management Ltd.

Hello, JP Morgan, Oshidari is my name. Thank you.

Unidentified Company Representative

Oh, yes, thank you. I see you now, thank you very much.

Daisuke Oshidari – JPMorgan Asset Management Ltd.

Now this fiscal year, what about expenses that are expected to decrease? I think ¥50 billion improved efficiency you talked about, this is the – this was in the initial business plan. And taking a look at 5 – on Page 5, you have reduced expenses significantly already. Can you give us the breakdown of the decrease in other expenses and so forth? And you mentioned getting into further improved efficiency, but isn’t there room further cost efficiency improvement? So can you – what are your thoughts about the progress in terms of cost efficiency improvement?

Unidentified Company Representative

Thank you. As for details, I’d like to defer to Mr. Tsubouchi, but let me begin by talking about our cost reduction efforts. We anticipate ¥40 billion cost reduction for fiscal 2011. Now out of that, I would say in the first quarter ¥10 billion has already been achieved. Mr. Tsubouchi?

Kazuto Tsubouchi – CFO, Director, EVP, MD-Accounts & Finance

Yes, I think that’s the detail that I really wanted to mention. At ¥40 billion for the full year, in the first quarter ¥10 billion has been achieved. But most of that relate to network construction costs, the efficiency has been improved. So our subcontracting cost has been reduced, as a result we improved efficiency network buildout. So ¥10 billion is the progress set of ¥40 billion full year forecast.

Daisuke Oshidari – JPMorgan Asset Management Ltd.

Now what about the other drop in expenses as you pointed out?

Unidentified Company Representative

After the first half of 2010 with regard to repairs and point schemes, we revisited, we reviewed this. So that has had positive impact for the fiscal year.

Daisuke Oshidari – JPMorgan Asset Management Ltd.

Thank you. I see then that means that you’re not exceeding your business plan in terms of our cost reduction. Would that be correct?

Unidentified Company Representative

We’re making steadfast progress, so you’re in line with the business plan.

Daisuke Oshidari – JPMorgan Asset Management Ltd.

I see. Thank you very much for that.

Unidentified Company Representative

Any other questions? Yes, towards the right-hand side of the room, fifth row from the front.

Atsuo Takahashi – Mizuho Securities Co. Ltd.

Takahashi from Mizuho Securities. I have only one question. The ordinary communication services, and if you divide that – separate that from the equipment sales business, the equipment sales business performance is not necessarily improving in terms of profitability. So other than costs of the devices, you have to improve the cost margin of your other services to telecommunication services. And that is I think the major reason behind the improved performance in the first quarter. So can you elaborate on the other expenses there?

Unidentified Company Representative

Like other expenses in the first quarter it has not increase significantly, but on the full year basis that amounts to a significant amount.

Atsuo Takahashi – Mizuho Securities Co. Ltd.

So just as a confirmation, these kinds of retention cost in the second quarter and beyond, are expecting – do we have to expect a steep increase in these expenses because it was flat in the first quarter at least? So what are the prospects for the second quarter and beyond?

Unidentified Company Representative

I think some explanation is needed here. In the first quarter, non-operating expenses has not increased that much, and it doesn’t seem that way on the full year basis. The reason for this is because in the first quarter – in the second quarter of last fiscal year, we revised our point program allowances and the repair – handset repair cost structure.

And the allowance has been decreased quite significantly in the second quarter. So an expense reduction – significant expense reduction was achieved in the second quarter of last year, but in the first quarter we are making a comparison under the new scheme, and the situation was different in the first quarter of last year.

So, that is why we have made a huge improvement this year, but now in the second quarter, we are going to make an apple-to-apples comparison. Therefore it’s not going to that different. That’s one thing that you have to bear in mind, and the expenses themselves are not going to be so significant. But other costs have been reduced quite significantly, especially the capital expenditures and the network construction related costs have made a great improvement.

Atsuo Takahashi – Mizuho Securities Co. Ltd.

Another point that I would like to confirm regarding the ARPU forecast for the future. The first quarter I thought that the handset equipment sales revenues shrunk at least for the first quarter. And with your serious efforts to increase the smartphone sales on a full year basis, are you expecting upsize in equipment sales revenues?

Unidentified Company Representative

Well, smartphones sales is one of the reasons by which we would like to achieve an increase in operating revenues this fiscal year. But on the other hand, you have to consider that the per unit cost of handsets are coming down, which have a negative impact on both revenues and also expenses.

So when you consider the revenues and expenses, therefore this is posing us difficulty in increasing the revenues. Actually on a per unit basis, the cost has come down by ¥5,000 on average. Part of the reason of that is that the style series among the feature phones are now becoming increasingly popular, and customers are shifting to the style series.

So, the expensive i-mode models are not selling well these days. Less expensive models are popular. So, that will have a direct impact in reducing the revenues, and smartphones are not expensive anyway.

We are able to achieve a reduction year-after-year in the smartphone prices. So the wholesale price are coming down, so we have to increase our sales that can more than make up for this decrease in the average cost.

Atsuo Takahashi – Mizuho Securities Co. Ltd.

All the other measures are to increase your gross margin on handset sales?

Unidentified Company Representative

Well, of course, that will be affected by the moves of the competition, but now we have the results becoming available from three of the mobile operators, and many companies are now expanding the sales.

Atsuo Takahashi – Mizuho Securities Co. Ltd.

I predict an expansion in smartphone sales, but you are the only exception, I guess.

Unidentified Company Representative

But, well, we would like to study that. But gross profit, no matter what you do we have the monthly support program, so it’s going to be the same result anyway, don’t you think so? Next question. Well, we see two hands up so, these are the two final questions we will take. We will go to the person on the right-hand side then.

Hironori Tanaka – Morgan Stanley MUFG Securities Co., Ltd.

Thank you. My name is Tanaka from Morgan Stanley. Just one question, it’s about pricing, your philosophy behind billing or pricing. Earlier, Mr. Yamada said that smartphone users will shift from packet ARPU of ¥3,500 to ¥5,200 after migrating to smartphones. So, more than – so people who have high average use – more than high average use is migrating to smartphones.

So therefore they’re very causal about paying for receiving information, but I think going forward when you have to sell smartphones to low-end users, people who only pay maybe ¥500 to ¥1,000, are they really going to shift to ¥5,200 packet ARPU immediately unless you have the double flat billing scheme? But the upper ceiling is 50 megabytes.

If you go – if you surpass this stage, then you have pay ¥6,000, and the data pricing scheme is probably the highest in the world. In the case of AT&T, Verizon two gigabyte they offer this speed at $25. You don’t need to compare of course with other operators, but considering the data pricing for smartphones today, can this be sustainable if you continue on with this billing for data services for smartphones? Do you think that the customers will accept this billing? How sustainable is it?

Unidentified Company Representative

I think I know where you are coming from. Smartphone users are people who have fairly high literacy – PC literacy, IT literacy, so when people with low IT literacy migrate to smartphones, do we have to tweak or adjust our billing scheme? We can’t abandon i-mode. So some people will be satisfied with i-mode phones. So we need to further brush-up and enhance i-mode phones. We shouldn’t allow degradation of i-mode based services. We need to offer strong i-mode services. We need to make our regular feature phones very attractive as well.

So, under the current pricing scheme, we’re not going to force people to go to smartphones per se. And in order to encourage people to migrate to smartphones, naturally we have to consider various measures, that is true. So I think we have to take two prompt measures, if you will. So I think there is no one exact solution to this issue.

Unidentified Company Representative

Now this will be the last question.

Shinji Moriyuki – SMBC Nikko Securities, Inc.

SMBC Nikko, my name is Moriyuki. I was going to ask about the data ARPU increase, but the previous question had talked about the possible discount in prices, so it’s kind of difficult for me to ask this question. You say that there was a ¥1,700 increased after the migration to smartphones from feature phones. Is this that the actual record? And can you give you me some details regarding what kind of customer profile you’re talking about? And what usage – what’s the usage difference after the migration? And you clearly mentioned that you have to increase the number of units of sales, can you also talk about this trend?

Unidentified Company Representative

Well, after ¥3,500, after they migrate to smartphones, before the migration they were spending ¥3,500. And usually the overall average is ¥2,500, so these are actually higher than average users, and these are the customers who are now migrating to smartphones. So after the migration, as I said, the usage has increase to ¥5,200. So this – we are talking about ¥1700 of incremental usage.

Shinji Moriyuki – SMBC Nikko Securities, Inc.

Now how do you analyze this?

Unidentified Company Representative

We originally predicated ¥1,500 of incremental usage. So actually the actual usage has fared higher than our predictions. Now going forward, I think many customers will choose a flat rate plan for smartphones, and smartphones’ ceiling today is ¥5,200.

So, perhaps the actual average will end up around ¥5,000 or so, slightly lower than the ceiling of ¥5,200. So, we will be able to see kind of ¥1,500 incremental from ¥3,500 to ¥5,000. Now then, now we talked about the average ¥3,500 users, now then the next people who will be migrating will be the average ¥3,000 users.

So then the question is will really the low rate and average people migrate to smartphones going forward? I think that will depend on the measures that we will adopt in the future. We cannot see complete migration of all people of sub ¥2,000 level people migrating to smartphones immediately. That’s something we cannot expect.

Shinji Moriyuki – SMBC Nikko Securities, Inc.

Well, another question. Is that – the medium price I think is about – usage is about ¥2,500. But when I go to the retail shops, senior people are now taking to their hands the smartphones and looking into them. But I guess this people are very low usage customers. But interest level I think is increasing. So even if the higher level would be ¥5,000, but maybe there will be very low usage customers of ¥2,000 people doing the smartphone camp. What do you think about that?

Unidentified Company Representative

Yes, I think, we’ll see those people migrating to smartphones as well. But I visit the shops as well, when I see – when I go to the shops, I see that many customers go immediately to the smartphone customers one stand to the shops, many of the customers do that. And they hear the explanation of smartphones. Some decided to do so, some decided not to choose smartphones, and pick i-mode instead.

But the interest level of smartphones is very high today. And so we are now holding elementary level classes at DoCoMo shops to instruct even the elderly people to migrate to smartphones. So very small level or very small percentage, 3% to 4% of smartphone usage today are already senior people. So I think lower than average people might migrate to smartphones, but these are the customers who have to have some basic level interest, and they will have to understand how convenient their lives could be after migrating to smartphones. We’ll have to educate them.

But it doesn’t mean that all of the people will migrate to smartphones. And also regarding a business plan, when you look at the performance -the difference, we have seen a ¥1,700 increase that’s true. But going forward, we are expecting a slight decrease going forward, according to our business plan. But the most recent number shows that the decrease is not as steep as what we had actually expected. So what happens after the usage level comes down, we’ll have to see that. But the recent number shows that the usage is not dropping as much as what we had expected. So they are quite heavily using the smartphones.

Shinji Moriyuki – SMBC Nikko Securities, Inc.

And this will be my last question, you said that you might be able to seek some additional 1 million units of smartphone sales this fiscal year. If that’s achieved, this will have some upsize of ¥100 billion or so in your revenues. So if that’s the case, your revenues, I think will see some significant upsize? And then what will that be used for?

Unidentified Company Representative

Well after we announce – when we announced the first half results, we would like to revisit our forecast with the full year. I basically believe we might be able to seek some upsize.

Osamu Hirokado

Then thank you very much ladies and gentlemen. This concludes this meeting. Thank you.

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