Presentation Materials

You mentioned that the new handset purchase methods had an effect to reduce your distributor commissions by an amount between 10+ billion and 20 billion yen. If the equipment sales revenues from the handsets sold under the new purchase methods were assumed to be 10+ billion yen, does that imply the savings per one unit of handset was limited to only 10,000+ yen?

Distributor commissions comprise various items. To calculate the reduction on a per-unit basis therefore does not seem to be appropriate. Please allow us to reserve further comments on this matter at this point, as we plan to offer a more detailed analysis when we announce the full-year results.

How long do you plan to continue the "Direct-wari" discounts?

We decided to offer "Direct-wari" discounts in order to alleviate a radical surge in the market price of our handsets resulting from the introduction of the new purchase methods, and to narrow the price gap with our competitors' phones. Although we cannot comment on a concrete time frame, we basically intend to decrease the amount of "Direct-wari" discounts going forward, as exemplified by the reduction to 4,000 yen for the 705i handsets.

It seems that the supply of 905i handsets ran out, most conspicuously in the Kansai region. Have you lost sales opportunities due to a lack of sufficient inventory?

We are sorry to have inconvenienced some customers due to the shortage of supply in some models resulting from the favorable acceptance of our new handset purchase methods. We believe the circumstances are now improving, thanks to cooperation from manufacturers. The missed opportunities are not considered to be significant because quite a large number of customers have made purchase reservations. We intend to respond to the demands of our customers also by leveraging the 705i handsets that will go on sale shortly and other products.
The impact of the new purchase methods was predicted differently by each region, and the Kansai region adopted a more cautious view. It is better not to have discrepancies in the marketing strategy by region, and we decided to integrate our regional subsidiaries after reflecting upon these types of problems.

I believe the real profit-boosting effect that you can expect from the introduction of the new purchase methods is only limited to the gains achieved through reduced handset sales. Currently, I believe those users who replace handsets in less than two years account for 20% of the total. The new purchase methods are not considered to have an effect to extend the replacement cycle of users who are already using the same handset for over two years. I also hear that a relatively large proportion of users who chose the Value Course have purchased the handset in one-time lump-sum payment or in installments over 12 months, which can be construed that these users were reluctant to be conditioned upon the use of the same handset for two years. In view of such circumstances, don't you think that the new purchase methods will only have a limited effect to extend the replacement cycle?

Previously, some 40-50% of our total users replaced their handsets in less than two years. Immediately after the launch of the new purchase methods, the percentage of users choosing to pay in one-time lump-sum payment was high, but more recently, we are seeing a gradual increase in the percentage of customers choosing installment payments. The number of users choosing to spread out the handset payment over 24 months is also on the rise. Unlike the purchase scheme offered by Softbank, in our billing plans, the discounts on basic monthly charge remain intact even after the user completes the installment payments, keeping the total monthly bill lower. When these factors are taken into account, we believe the average replacement cycle, which currently stands at 24-26 months, will become slightly longer in the future.

Are there any differences in the handset replacement cycle between 90X series and 70X series phone users?

Although there is no quantitative data available, we believe the replacement cycle of 90X series is longer, given that this product is more preferred by users who wish to use cutting-edge phones.

Do you foresee any possibility of increasing the amount of "Direct-wari" discounts when you release the next model of the 90X series, i.e., the 906i model, to an amount higher, for example 15,000 yen, than the amount you currently offer for the 905i handsets? Do you think you can compete against KDDI, who is continuing to subsidize the handsets with incentives, without changing the market price of your handsets? If you face a situation where you have no choice but to bring down the market price of old models, I believe many users will wait until the prices drop.

Under the conventional purchase methods, we sometimes intentionally procured old models and sold them with incentives in order to boost our sales volume. This, in some cases, put a damper on the sales of new models. While we cannot completely rule out the possibility of selling handsets at discounted prices, we basically do not plan to procure old models as we did in the past. To sell out old models prior to the release of new models, a highly accurate demand forecast is required. A different approach for inventory control is also necessary and we have introduced a new system for this purpose.

I do not think the increase in data ARPU can completely offset the fall in voice ARPU. Is it correct to assume that after the earlier profit-boosting effects of the new handset purchase methods disappear, the only way for you to sustain your operating profits at the 800 billion-yen level is to reduce the number of handsets sold?

The introduction of the new purchase methods has an effect of bringing forward the generation of profits. Before this effect levels off, we will work to reduce the churn rate and extend the subscription length and replacement cycle, and thereby decrease the cost per subscriber. We introduced the new purchase methods believing that we can maintain the balance of revenues and expenses through the above measures.

The churn rate for the FY2007/3Q dropped to 0.74%. Have you witnessed any change before and after the introduction of the new purchase methods and the 905i series phones?

As shown in the chart in the presentation, the churn rate first dropped after the introduction of "Fami-wari MAX 50" and other new discount services, and declined even further following the launch of the new purchase methods and 905i phones. According to our analysis, the churn rate is expected to decrease in all categories of churns except for forced cancellation—including genuine churns, churn-out to competitors, and cancel-and-join as a new subscriber.

You currently have approximately 2.5 million HSDPA users on your network. When the number grows to 20-30% of your total subscribers, how much increase in packet ARPU do you think you can achieve? Also, will the network be able to handle such subscriber growth without any problems? How much increase can we expect for the packet ARPU for FY2007/4Q, as the number of HSDPA users is likely to grow significantly by then?

It is difficult to predict the future growth of HSDPA users, as it depends on the sales of compatible handsets. The question is how we can accommodate "pake-hodai" users, regardless of whether they are using HSDPA-enabled handsets or not. While it is difficult to completely respond to the demands of a limited number of super-heavy users, we intend to roll out facilities with the goal to secure throughputs that can be perceived "satisfactory" by the majority of users.
The packet ARPU is expected to increase as the number of flat-rate packet access users ("pake-hodai" and "pake-hodai full") grows. But it may be too early to expect the effects in FY2007/4Q, as it may take a little longer to see visible results.

When we look at the total capital expenditures for FY2007/1-3Q, the progress vis-a-vis your full-year forecast seems to be slow. What are the reasons for this? Are there any irregular factors for this fiscal year?

There are no irregular factors, and we have not made any changes to the method of executing capital expenditures. We believe we are moving more or less in line with our plans. The cumulative capital expenditures for FY2007/1-3Q equaled 64% of our full-year forecast. The progress may look slower compared to the figure for the same period of last fiscal year of 73%. Last fiscal year, however, we front-loaded our planned investments in order to improve FOMA's coverage prior to the launch of MNP. Because the figure for the same period of FY2005 was 67-68%, figures in the range of 60-some percent for the first three quarters do not necessarily indicate that progress is slower than usual years.

With no large-scale investments in sight, if your profits recover next fiscal year owing partly to the irregular factors (accelerated profit generation due to new handset purchase methods), can we expect good returns for shareholders?

As we announced already, we plan to raise our annual dividends for this fiscal year to 4,800 yen per share. Dividends for the next fiscal year will be studied after our financial results forecasts are prepared. We currently believe that it will be difficult to raise the budget for share repurchases, because our free cash flows are not likely to increase significantly due to the installment claims payable to distributors. The amount of dividends will depend on the level of profits we can secure. If only a small change is projected, we do not intend to change the amount of dividends, as our basic philosophy is to continue stable dividend payments.

Starting next fiscal year, you will award higher points to your royalty point program customers. How much additional allowances do you think you need to prepare for this?

The royalty point expenses are expected to increase by an amount between upper-20 billion yen and 30 billion yen.

You explained that the DCMX business is about to enter "the next phase". Now that its combined subscription count is approaching 5 million, what kind of strategies are you planning to take as a next step?

We need to work on two fronts to grow the DCMX business: (1) expand the credit card business and (2) encourage our customers to use the "lifestyle infrastructure" services (iD) and create new businesses as a result.
As for credit card capability, now that DCMX subscriptions have risen to nearly 5 million, the key challenge for the future is how to increase its actual usage. We need to take more advantage of its benefits as a credit payment capability installed in cellular phones, and we are studying various measures including its use in Internet shopping. We are also aware of the need to improve the benefits customers can enjoy by using this service, and we are therefore studying the royalty point system for credit payment users.
With respect to the electronic wallet (iD) functions, we have increased the number of outlets where the service is provided by adding nationwide McDonald's shops and convenience store chains to its coverage. If we can motivate our customers to try the service and accustom them to using it, it will pave the way to new business opportunities such as sales promotions based on ToruCa data retrieval service or customer relation management (CRM) solutions.