Presentation Materials

Concerning the packet ARPU of smartphone users, can you provide us with some concrete data that shows the difference of usage before and after migration from i-mode?

According to a sample survey of Xperia users, their packet ARPU recorded an increase of 2,100 yen, from approximately 3,400 yen before to approximately 5,500 yen after migration.

It seems that some of the features carried in globally marketed smartphones, such as tethering capability, are disabled in the models you offer. Going forward, as you enrich your smartphone lineup, do you intend to offer global models on an "as is" basis, or do you plan to add local customization as you did with i-mode phones?

Basically, we hope that Japanese manufacturers will also aspire to develop smartphones that can sell on a global scale. As proven by the popularity of the REGZA Phones, we believe there are strong demands for features like one-segment broadcasting, "Osaifu-Keitai" e-wallet capability, and waterproof casing for smartphones. We therefore intend to add a certain degree of customization to the global models to meet the requirements of our users, and release smartphones compatible with various i-mode services such as "i-channel" and "i-concier" as soon as possible.
While our smartphones currently do not carry some of the features that are installed on globally marketed models, such as tethering capability and inward-facing cameras, we would like to conduct studies to offer models that carry the same capabilities in the future.

You have reduced your annual capital expenditures over the last several years. If the adoption of smartphones and data cards expands further in the future, do you think you can maintain your CAPEX at the current level? If possible, please provide us with a quantitative explanation regarding your network capacity.

Total data traffic on our network has been increasing by 1.6 times every year, so we need to make proper capital investments to accommodate this growth. When we make capital investments, we take an approach to secure ample network capacity foreseeing the demand one year ahead. Because we prepare additional capacity to be slightly more than enough for the 1.6-fold growth in traffic occurring each year, you can consider that every year we prepare a little less than double the level of capacity of the previous fiscal year.

In your medium-term business plan, you mentioned you target of achieving over 900.0 billion yen in operating income and an operating profit margin of 20% in FY2012. With the recent surge in the uptake of smartphones, do you feel more bullish or bearish about the achievability of these targets?

Our position towards our FY2012 goals remains unchanged.
The smartphone market is a growth market. With the introduction of the "Monthly Support" program, we believe we can create an environment where customers will find it easier to buy a smartphone. In principle, we set our rates in view of the competitive environment, but we strategically offer steeper discounts for products like the GALAXY Tab that can generate demand for a second phone. Under the "Monthly Support" program, the impact of discounts will become visible in subsequent years in the form of reduced revenues, so we would like to keep a close eye on trends with its adoption.
Although we cannot draw a simple conclusion that the expansion of smartphone sales will immediately provide upsides to the 900.0 billion yen operating income target, we will continue our managerial efforts toward the achievement of our FY2012 income target.

The newly announced "Monthly Support" program and the reduction of the maximum rate of the full flat-rate billing plan gave me an impression that you started steering towards expanding the smartphone business in full throttle. The smartphone sales target of 6.00 million units for the next fiscal year seems to be somewhat challenging. If there is any chance of falling short of this target, and what would be the potential risks?

Possible factors that may hinder the achievement of 6.00 million units in smartphone sales include the inability to offer an attractive lineup of smartphones and failure to smoothly introduce "i-concier" and other services that are planned to be transplanted to smartphones.
In the next fiscal year, we plan to add more variety to our smartphones so that the number of newly released models will be split 50% each between smartphones and feature phones. To this end, we will need to shift the focus of our development activities and other operations from i-mode to smartphones. Among i-mode handsets, while the STYLE series, featuring standard functionality and stylish designs, continue to enjoy the greatest popularity, many of the users who currently use the PRIME series are likely to switch to smartphones in the future.
One of the disadvantages of smartphones today is shorter battery life relative to i-mode handsets. Generally, the i-mode phones can be used for three or four days without recharging the battery, but in the case of smartphones, the battery runs out sometimes in less than a day. We believe that smartphones are required to offer benefits that can overcome this weak point, such as a rich array of applications and superior operability, etc.

Can you elaborate on the amount of discounts you plan to provide under the "Monthly Support" program?

The monthly amount of discount is expected be roughly equivalent to the sum of the various discounts we currently offer for the purchase of a new handset and such, divided by 24 months, but the actual amount of discount will vary for each model.

How strongly do you plan to promote tablet devices in the next fiscal year?

GALAXY Tab is popular among consumers, but we believe its main demand will come from enterprise users. We established a project team within our Corporate Marketing Division to study how to market this product, and the team is currently analyzing customers' reaction to tablet devices. We also plan to release another new tablet device in March 2011. While we have not yet set a definitive target, we would like to sell hundreds of thousands of tablets in the next fiscal year.

It seems that some of your smartphone models still face a supply shortage. Do you think you can procure products without problems in the future?

We caused inconveniences to customers due to shortages of supply. Going forward, we would like to place orders to manufacturers after carefully assessing sales volumes. Manufacturers newly entering the smartphone business cannot prepare a large production line from the beginning. If we are to sell 6.00 million units of smartphone in a year, the volume per model becomes quite large, so we will consult with each manufacturer to avoid shortages to the extent possible.

Can you give us an indication regarding the revenue/profit impact of the expanded use of smartphones, and the resulting increase of network load?

We have hitherto successfully maintained favorable network quality and the introduction of LTE allows us to use our capital expenditures even more efficiently than before, owing to its superior spectral efficiency. In addition to the roll-out of LTE, we will employ dynamic traffic control and data offloading to avoid any situation where the traffic load on the network could negatively affect our performance.

Your domestic mobile phone business is achieving positive results, but do you think the returns from your overseas investments will grow in the future? If they are expected to increase, when do you think this will become visible?

With respect to the businesses of our overseas investments, due to the strong growth of demand for data communications in the recent years, carriers in each country are now entering a new phase where they are required to increase their network investments and introduce new value-added services. Under these circumstances, we adopted two different approaches to deploy business overseas leveraging our strengths: (1) Through direct investment in wireless carriers like India's TTSL, whereby we will seek to enhance the enterprise value of our partner operator by rolling out a new network and introducing new services; and (2) through investment in value-added service providers like net mobile AG, through which we will explore ways to expand the value of upper layer businesses by providing content distribution platforms and other capabilities.
Recently, we announced a business alliance among the three countries of Japan, China and Korea. This was made possible by the collaboration we continued with KT, our Korean investment target, over the last five years. Going forward, we will continue to pursue a business model that generates revenues from upper layer businesses primarily in the Asian region. Although we have not presented any concrete numbers concerning projected returns, we would like to disclose such projections when circumstances permit.

Do you think you can sell smartphones in the order of 6.00 million units if you improve the accuracy of your demand forecasts?

Again, if we aim to sell 6.00 million units with 10 different models, then the sales for each model would be 600,000 units on average. We believe we can sufficiently handle demand of such quantity or even slightly higher. However, our main focus is how to improve the accuracy of our demand forecasting, and to offer products to the market in sufficient quantities, rather than trying to catch up with demand exceeding our earlier expectations.

Up until now, you have worked toward the goal of receiving the No. 1 customer satisfaction ranking. Now that you achieved that goal, from the perspective on an investor, I would like to hear your views on how this will contribute to your revenues or income. Please give us a qualitative assessment or some other explanation of how this rating should be evaluated.

We have repeatedly explained to our employees that our primary objective was the improvement of customer satisfaction, and the No. 1 ranking was only a side benefit of our efforts. Although the acquisition of the No. 1 ranking per se has never been our primary goal, our failure to receive this ranking signaled that we fell short of our planned customer satisfaction improvement targets. If that was the case, it could have resulted in an increase of churn rate. While our churn rate is currently slightly over 0.40%, it once reached close to 1.0%. If we calculate the financial impact of a scenario where our churn rate returned to that level, this could have a significant negative impact on our revenues.

At present, your churn rate is fairly low at 0.4%. I believe it will be difficult for you to seek further reduction, but do you think there is still room for improvement? Or do you need to incur expenses on a continual basis to maintain it at the current level?

Reducing the churn rate below from the current 0.4% level would be very difficult when forced churns and natural churns such as cancelation of a subscription contract owing to the subscriber's moving overseas are taken into consideration. Basically, we intend to maintain the current level and do not seek further reduction. The expenses required for maintaining customer satisfaction will be financed by the cost savings achieved through the improvement of efficiency of other operations. We are committed to continuing our endeavors for customer satisfaction improvement.