Japanese

Presentation Materials

• Questioner No. 1

  Q1 Your financial results for FY2010/1H look very favorable with a steadfast progress in the generation of free cash flows. However, it was unfortunate that you did not make any comments concerning the improvement of shareholder satisfaction. As your competitors are repurchasing shares in large quantities, we wanted to hear some positive news from DOCOMO. What are your views on shareholder returns?

  Open

  A1 We consider providing returns to shareholders one of the most important issues in our corporate management, and we have been studying the ways to improve shareholder satisfaction of shareholders on a continual basis. We are not satisfied with the current level of our share price, and we are currently reviewing the overall structure of shareholder returns, including the use of cash to repurchase our own shares. In order to enhance the enterprise value of the Company, we will look into this issue in a positive manner taking the consideration the progress of achievement of our medium-term vision.

  Q2 GALAXY S went on sale today. I hear this product is enjoying a good reputation, but some distributors have temporarily stopped accepting purchase applications due to a shortage of supply and lack of any indication concerning the arrival of additional shipments. I believe you faced a similar situation when you launched Xperia, which resulted in a loss of sales opportunities. Don't you think you have problems in your internal system, repeating the same mistake from the fear of taking risks? Have you devised any measures for improving this for the future?

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  A2 It is true that we are again facing difficulty in securing sufficient amount of supply for GALAXY S, as occurred in the case of Xperia. From early on, we had been aware of the favorable response to GALAXY S as a result of various market surveys, etc., and we have requested Samsung to provide us with ample supply. The current situation was caused by the global shortage of organic EL screens.
  You mentioned that we might have been over-concerned about the risk of procuring excessive quantities of popular products, but we do not think that was the case. We would like to sell products aggressively in the future securing ample quantities in our inventory. In fact, some of our distributors are bringing forward the acceptance of purchase applications from customers who have agreed to product delivery in November 2010. We would like to prepare a system that will allow us to properly respond to customer requests.

  Q3 I think it was a wonderful decision on your part to introduce "sp mode" to enable the use of i-mode mail on smartphones. On the other hand, I believe you should try to incorporate other i-mode services in smartphones a little faster. I understand that you have separate teams for smartphones and i-mode, respectively. Do you think the coordination between these teams is functioning smoothly?

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  A3 We tackled the development of "sp mode" expeditiously to respond to the strong requests from our customers, which made it possible to implement i-mode mail on smartphones at an early date. Going forward, we plan to enable the use of "i-channel", "i-concier" and other i-mode services on smartphones, and our "Osaifu-Keitai" e-wallet service will be embedded in some of our 2010 winter/spring smartphone models. Many of these smartphones were originally designed for global markets, and we need to add some localization to adapt them to the Japanese environment, which sometimes result in a slight delay in the timing of launch compared to overseas markets.
  On the other hand, we also intend to incorporate the benefits of smartphones such as their user interface in i-mode handsets. Going forward, these two product lines are expected to be much closer to each other and the business units responsible for i-mode and smartphones are working in close cooperation in view of this trend.

• Questioner No. 2

  Q1 Can you elaborate on the changes made to the loyalty programs and their impact on your financial results?

  Open

  A1 The changes made to the loyalty programs had an impact of slightly over 50.0 billion yen on our FT2010/2Q results. These changes comprise the following three elements;
  (1) We lowered the rate of loyalty point accumulation and instead extended the validity period of points. Although this does not reduce the points currently owned by the customers, it has an effect to alleviate our cost burden in the future.
  (2) We optimized the period of handset repair service. Previously, we shouldered the burden of repair costs in excess of a certain amount for damages attributable to customers for an unlimited period. With the revisions made this time around, we shortened the period in which we accept repairs to three years. Previously, when the average handset replacement cycle was two years, the number of handsets submitted for repair was insignificant and the program was originally designed based on this assumption. As the replacement cycle became longer, the allowances that we needed to appropriate in relation to handset repairs became a significant financial burden. In reality, however, the number of handsets submitted for repair after over three years of use due to damages attributable to customer's own fault account for only a small percentage of the total. This time around, we optimized the program to offer service quality suited to the needs of the current times, taking into consideration the balance of our cost burden while ensuring that the revision does not cause any significant deterioration of service quality.
  (3) We also changed the insurance premium for our Mobile Phone Protection and Delivery service, introducing a two-tier price structure. In concrete terms, we set a lower premium for waterproof handsets and a slightly higher rate for feature-rich models. We made this revision to ensure fair cost sharing depending on the handset model used by each user.
  While the overall impact from the revision of loyalty programs was slightly over 50.0 billion yen, among the above three major revisions, the changes made to the handset repair service had the largest impact on our financial results. Amid the recent growth in the number of handset repairs, we hitherto appropriated allowances calculated based on a certain failure rate. However, with the latest revision, we now have to bear repair costs for only up to three years after purchase, so we dropped some of the allowances that we had set aside for potential future repairs. This is a one-time impact applicable only to FY2010/1H.

  Q2 What will the impact of this loyalty program revision be on your results for the next fiscal year and beyond?

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  A2 It is difficult to give a definitive answer, because there are many variables, such as the length of use of handsets by each user and the rate of point expiry, but there is a possibility that we may be able to reduce our allowances by some 10-20 billion yen compared to the amount before revision.

  Q3 Please comment on your thoughts about the billing plans for smartphones. Your competitors seem to have slightly changed their policies, introducing new plans for smartphones. What are your plans? Do you intend to maintain the current structure which has a ceiling of 5,985 yen per month? How would you react if KDDI changes their rates?

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  A3 We believe the future rate strategies will have to be considered in conjunction with the rate settings for LTE services.
  While we have not yet finalized our plans, we believe we can seek higher charges for LTE compared to 3G because it offers extra benefits such as higher transmission speeds. Also, from the standpoint of fairness, we would like to study the possibility of charging a higher amount from users generating massive volumes of data traffic. We also believe it might make sense to offer promotional discounts for a limited period, because it will take some time before we complete the roll-out of LTE. We will study the rates for smartphones as part of our overall billing strategy including the rates for LTE and 3G.
  Of course, the rates offered by our competitors will also be included in the factors to be studied. We will carefully examine our rate structure taking various factors into consideration, because it has a significant impact on our financial results.

• Questioner No. 3

  Q1 I would like to ask your views on the ARPU. Although your voice ARPU is still declining, I think it is fair to assume that the decline in aggregate ARPU has nearly come to a halt owing to the increase of subscribers. In view of the recent trends, do you think your aggregate revenues have returned to a growth track?

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  A1 We would like to achieve a rebound in aggregate ARPU after halting its decline in FY2011. We would like to evaluate our performance to the extent possible using our total revenues as a benchmark rather than the ARPU, because the total revenues can increase even if the ARPU continues to decrease if we can secure a favorable growth in the number of net additions. Our assessment of the current situation is that while the aggregate ARPU is continuing to fall slightly, our total cellular services revenues are growing at a favorable pace.

  Q2 Let me ask a question for clarification regarding the impact of the revision of handset repair system. You responded to the previous questioner that you dropped the allowances because you shortened the period of your handset repair "Anshin" support service. Do you think you will continue to see this impact of lower allowances the next fiscal year and beyond?

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  A2 While it is difficult to provide you with a definitive answer because the impact on the results for the next fiscal year will be affected by the prevailing circumstances, we currently do not foresee any increases in the amount of allowances for the next fiscal year, because the total number of handsets submitted for repair, which currently averages some 4.00 million units per annum, is expected to remain flat going forward. With the latest revisions to the insurance premium for the Mobile Phone Protection and Delivery service, we believe we can optimize the handset repair operations, for example, by recommending users to subscribe to this service upon the purchase of a mobile phone as a protection against possible failures in the future, or encouraging replacement of a handset if the user is using the same phone for a period over 3 years. Under these assumptions, the number of handset repairs is projected to remain flat in the future, and we therefore do not foresee any significant financial impact resulting from this change.

  Q3 I heard KDDI plans to announce a new flat-rate plan for smartphones around November 10, 2010, and SoftBank is already providing an aggressive billing plan. What are your thoughts on your future rate strategies, when your competitors are beginning to revise their traditional flat-rate plans with an upper limit of approximately 6,000 yen per month?

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  A3 We believe other carriers also want to maintain their flat-rate charges to the extent possible, and we will take measures keeping an eye on the moves of other carriers in this competitive market. There are various options for us—we may offer discounts for a limited period of time as a promotional campaign, or we may choose to drastically change our rate structure.

• Questioner No. 4

  Q1 So far, you have adhered to a policy to incur costs for the improvement of customer satisfaction. Given the revisions to the handset repair program announced on October 19, 2010, is it correct to construe that you have room to cut your budgets for customer satisfaction improvement programs in the future?

  Open

  A1 It does not mean that we abandoned the banner of prioritizing the improvement of customer satisfaction. The changes to the handset repair program are not likely to cause any significant deterioration of service quality to users. The revision was made to shorten the period of repair acceptance to three years instead of an unlimited period to align with the real circumstances, because the number of handsets submitted for repair after being used for over three years was limited in the first place. So we do not think this change will significantly affect the level of customer satisfaction. The changes made to the Mobile Phone Protection and Delivery service were intended for the optimization of insurance premium based on the functionality or type of handsets. Going forward, we plan to incur necessary expenses for customer satisfaction improvement, but the amount will be determined taking into consideration their balance with our overall business management. At this point, we do not believe that there are other costs that we can cut without negatively affecting the satisfaction of our customers.

  Q2 This is a question relating to your handset costs. You previously mentioned that it is difficult for you to reduce the cost of handsets remarkably so long you make functional enhancements to the handsets. Now that your procurement costs are coming down, does it mean you can seek further reduction in the handset costs going forward?

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  A2 We have been working together with the manufacturers on the reduction of handset costs. In addition, the popularity of the relatively inexpensive STYLE series in the recent years has contributed to lowering the average cost per unit. And we will continue to strive for the reduction of costs going forward.
  The product mix played a great role in bringing down our handset costs. While part of the savings achieved was as a result of our continual cost-reduction efforts, the effects had not been so visible in the past because of the extra costs incurred by the addition of new features to high-end models like the PRIME series. But now, we do not have so many costly new features left to be added to the PRIME series, so our ongoing cost-cutting efforts are beginning to deliver visible results. We believe we can further reduce our overall procurement costs in the future.

  Q3 Does it mean that you have room to further cut your procurement costs even if you introduce smartphones?

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  A3 Yes, that is correct.

• Questioner No. 5

  Q1 Can you explain the year-on-year changes in the pure i-mode ARPU for FY2010/2Q?

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  A1 The pure i-mode ARPU for FY2010/2Q increased by 40 yen compared to the same period of last fiscal year. Although it may give an impression that its growth has slowed compared to the FY2010/1Q when it posted a year-on-year increase of 60 yen, we believe it is faring well given that high-ARPU i-mode users are migrating to smartphones.

  Q2 I believe the revenues from users who have migrated from i-mode to smartphones are accounted for as smartphone ARPU as opposed to i-mode ARPU. Have you singled out the ARPU of such users who have migrated to smartphones?

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  A2 We have not separately calculated the ARPU of users who have migrated from i-mode to smartphones. However, when we look at the total packet revenues for the three months of FY2010/2Q, we recorded an increase of approximately 25.0 billion yen compared to the same period of last fiscal year, of which i-mode accounted for approximately 10.0 billion yen, the flat-rate revenues of smartphones 5.0-6.0 billion yen, and flat-rate PC data communications and other services approximately 9.0 billion yen.

• Questioner No. 6

  Q1 You set a target to sell 1.00 million units of smartphones this fiscal year. Do you foresee any chances of achieving upsides in view of the track record for the first half of FY2010? Also, can you give us a medium-term outlook? I heard Mr. Yamada mentioned at the press conference that you have an ambition to grow the smartphone sales to nearly half of the total number of devices sold. To achieve that, how much do you have to spend for the incentives to distributors?

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  A1 In the beginning of this fiscal year, we set a target to sell 1.00 million units of smartphones within FY2010. However, given that we sold slightly less than 600,000 units in the first half, and GALAXY S and other new models will go on sale in the second half, we currently believe the total number of smartphones to be sold within FY2010 will end up some 30% higher than our initial forecast. While it is difficult to give you an accurate outlook because the sales will be affected by the competitive environment and other factors, I believe smartphones will account for nearly half of our annual device sales of 18.00 million units in 3-4 years time.

  Q2 Don't you think it will be difficult to grow the sales of smartphones to half of the total devices sold unless you maintain the current level of incentives?

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  A2 We are seeing a gradual decline in the procurement costs of smartphones on a global scale, which provides us with an opportunity to reduce the incentives going forward.

  Q3 How do you foresee the demand for tablet devices? Also, how do you plan to cultivate the demand among enterprise users?

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  A3 The iPad is currently the best seller among the various tablet devices, but we also hear voices that iPad is too heavy to carry around. In that regard, the 7-inch screen GALAXY Tab that we plan to offer comes in a very handy size as it fits in your jacket pocket. The product enjoys a good reputation among many corporate managers, and we established a project team within the Company to propose this device to enterprise clients.

  Q4 Do you foresee any shortage of supply with GALAXY Tab like you did with GALAXY S?

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  A4 GALAXY Tab does not carry the supply problems of organic EL screens, so we believe we can procure sufficient quantities depending on the production capacity of the manufacturer.

• Questioner No. 7

  Q1 You mentioned that there is a possibility to further reduce the procurement cost of PRIME series phones. If you succeed in lowering the cost of handsets, will you attach stronger emphasis on decreasing your expenses by cutting the incentives or on the reduction of their market price? Will you consider using the savings in the procurement costs of i-mode handsets to lower the market price of smartphones? How do you plan to take advantage of the benefits of lowered procurement costs?

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  A1 If the procurement costs of PRIME series come down, in principle, the market price of PRIME series will be lowered. Some customers complain that the PRIME series are relatively expensive as they cost more than 50,000 yen per unit, while smartphones are sold at approximately 30,000 yen per unit. There are still many customers who prefer to purchase PRIME series, so the reduction of their prices is important. Another option that we could possibly explore is the improvement of our profit margin, but any decision regarding whether to adopt this option or not will be made in view of the market conditions.

  Q2 You have achieved favorable growth in the number of net additions, but the composition of devices among these net additions has diversified due to the expanded uptake of PC data cards, Wi-Fi routers and digital photo frames. I believe the ARPU, incentives and traffic levels of these new products vary significantly. How should we consider the profit margin of these new products?

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  A2 As you pointed out correctly, the profit margin of each product is affected by various factors, but we would like to reserve our comments on the specific profit margins for each product. Although we do not necessarily make a precise calculation on the life-long profitability of each subscription, we set higher amounts of discounts for new markets we intend to cultivate strategically, taking into account the additional revenues to be expected from the acquisition of a new subscription.

  Q3 Your services and billing plans are more complex and difficult to understand compared to those of your competitors. Don't you have any plans to streamline them to make them easier to understand for users?

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  A3 Our data plans for smartphones and PC data cards are basically the same, and we only have one rate structure for i-mode. Although we currently offer discounts under a promotional campaign, the rate for Wi-Fi-enabled devices is also basically same with that of PC data cards, so we do not think our rates are so complex.
  The rates for some new services may look somewhat different because of the individual sales strategies that we adopt, but our intent is to keep the rates as simple and easy to understand as possible, and we are continually making efforts to this end.

• Questioner No. 8

  Q1 Regarding your capital expenditures plans for the next fiscal year, how much do you plan to spend for FOMA-related CAPEX going forward?

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  A1 We plan to maintain total annual CAPEX below 700.0 billion yen for the next few years, which is on par with the forecast for this fiscal year of 675.0 billion yen. Going forward, we plan to deploy LTE facilities in high-traffic areas in lieu of FOMA. We attach higher priority to LTE in our future capital investment plans because LTE offers superior spectral efficiency, which is three times higher than that of HSPA.

  Q2 Do you think you can decrease your capital expenditures even further leveraging the higher efficiency of LTE?

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  A2 If we tried to accelerate the installation buildup using FOMA to accommodate the growth of traffic, which has been increasing by 1.6 times every year, we will have to anticipate an increase in total capital expenditures. By mixing LTE equipment that offers better spectral efficiency in our infrastructure, we believe we can improve the efficiency of capital expenditures.