Presentation Materials
Analyst Meeting Q&A (Earnings Release For the Six Months Ended September 30, 2014)
Announced on October 31, 2014
Please be advised that the following text has been edited/modified from the original Q&A conversations for the sake of clarity.
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Questioner No. 1
Q1 Please explain the philosophy behind the design of your rate structure. Your acquisition of subscribers using Mobile Number Portability (MNP) system has not really changed between FY2014/1Q and 2Q. I believe this was due to the lack of differentiation after all carriers made similar moves in the introduction of new billing plans and promotions for the iPhone. I expect that the optical fiber services to be offered by different carriers in the future will also be almost identical in price, leading only to diminish the revenues of each carrier. How do you view this situation?
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A1
- We introduced the new billing plan to convey a message that we will value customers that will continue to use our services for a long period of time. Our operational performance has improved steadily after the launch of the new billing plan. Being the carrier with the largest subscriber base, we are certainly in the most disadvantageous position in the competition for MNP subscribers. However, our goal to achieve a net inflow of MNP subscribers remains unchanged.
- We plan to unveil the details of "docomo Hikari" service on a separate occasion. Fixed-mobile bundles are already provided by some players, but we plan to devise a unique offer using a different approach. Our intent is to provide an environment that will allow customers to utilize ICT broadband services in an integrated fashion. We plan to promote our service appealing its ease of use and the graduated benefits based on the length of subscription.
- We are truly sorry that we had to make a downward revision to our full-year guidance due to the faster-than-expected subscriber migration to the new billing plan, which, in our view, reflects the favorable reviews it garners from customers. The key to growth going forward is how we can provide customers with added value using the new billing plan as our central offer and combining it with "docomo Hikari" and other services in the new business domains. We believe the real battle will start from this point onward. In light of its projected ripple effects on socio-economic activities, we concluded that "docomo Hikari" would be indispensable for our offerings.
Q2 I need a clarification on your medium-term targets. You mentioned that as a target for FY2017, you will aim for an operating income at least comparable to the level of FY2013. Your goal to achieve 100 billion yen in operating income from new non-core businesses in FY2017 is challenging, and I am also skeptical about the achievability of your plan to reduce costs by a total of 400 billion yen in the next three years compared to the FY2013 level. How do you assess the achievability of your FY2017 operating income target of at least 820 billion yen?
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A2 The way we presented the target, i.e., "over 820 billion yen in operating income for FY2017," is somewhat frustrating. To be honest with you, we intend to aim for a slightly higher number. We have already delivered on our cost reduction targets ahead of schedule, and we will seek further savings by comparing our cost structure with those of our competitors in light of the changes in the competitive environment. We also plan to control our capital expenditures without slackening our efforts for LTE network reinforcement. We plan to manage our business devising creative measures to reduce the unit cost of construction and other expenses, while keeping a close eye on the level of free cash flow.
Questioner No. 2
Q1 It has been a while since your operating income has been maintained at the 800 billion yen level. Now that it is getting difficult to grow your income, would you consider separating your shareholder return policies from your operational performance, so you can plow back profits to shareholders leveraging your balance sheet?
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A1 Providing adequate returns to shareholders has always been considered one of the top priorities in our corporate agenda. I hope you would take the 5-yen dividend hike that we announced today as our message to shareholders. We will explore ways to provide returns to shareholders on an ongoing basis, taking the progress of income recovery into consideration.
Q2 It seems that you have hitherto decided on your dividend payments using a yardstick of 50% payout ratio. Can we expect that you will not necessarily stick to the number of 50% going forward?
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A2 We are not fixated on the number of 50%; the payout ratio is merely a consequence of our decision on the amount of dividends. The payout ratio for this fiscal year is estimated to rise to 60% because of the projected decline in income. We attach utmost importance to continuing stable dividend payments. To cite an extreme example, even in years when we record a plunge in profit, we have no intension to bring down our dividends for the sake of maintaining the payout ratio at around 50%.
Q3 With respect to your share repurchase program, can you explain the current status after the completion of tender offer and the future outlook?
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A3 We have performed various studies as to how to make repurchases for the remaining authorized amount after the completion of tender offer taking insider events into consideration, and concluded to execute open market purchases as we announced today. We plan to repurchase up to the authorized limit during the period from early November 2014 through March 2015.
Questioner No. 3
Q1 You made a downward revision to the profitability guidance of equipment sales business of 60 billion yen. Does this account for the positive effect of reduced Monthly Support impact that can be expected from next fiscal year onwards? If it is already factored in, how sizable is the impact? Is it correct to understand that your equipment sales profitability forecast was revised downwards after offsetting the positive impact on Monthly Support discounts?
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A1 You are correct. In association with the 60 billion yen decline, we expect a decrease in the impact of Monthly Support discounts of a few billion yen for the current fiscal year, and savings worth the remaining amount in subsequent years.
Q2 Let me confirm the impact from the optical fiber service for this fiscal year and next year. In your business plan for the current fiscal year, how do you estimate the impact from the launch of optical fiber service? Also, can you expect an income growth owing to the "docomo Hikari" service in the next fiscal year?
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A2 For the current fiscal year, the expenses required for the launch of service in February 2015 are factored in our business plan. We would like to reserve comments concerning the impact on the results for the next fiscal year, because we have not yet publicly disclosed the details of its billing arrangement.
Questioner No. 4
Q1 What are the objectives of introducing "docomo Hikari?" Are you aiming for an improvement in churn rate? Is it designed to provide positive effects on your profits?
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A1 "docomo Hikari" will allow us to provide integrated fixed and mobile offerings centered on our new billing plan. In addition to improved churn rate and other operational performance, we also hope to upsell customers to larger mobile data buckets by providing an integrated package combined with our new billing plan. By launching this service, we intend to provide customers with one-stop access to ICT broadband environment, rolling out a number of convenient, safe and secure services in collaboration with other players at affordable prices.
Q2 Despite the continuing income erosion caused by the new billing plan and other factors, you set a target to achieve 820 billion yen or higher in operating income for FY2017. Please explain the rationale as to how you arrived at this target.
Open
A2 The principal factor behind the downward revision this time was the negative impact from the new billing plan, but we do not think its introduction was a misjudgment. In June 2014, the month of its launch, as many as 4.7 million subscribers signed up for this service—which was beyond our earlier expectations. Although this resulted in the downward revision, we were able to solidify our customer base by enhancing their satisfaction. Going forward, we will explore upsell opportunities among customers who initially selected the least expensive plan, to switch them to larger data buckets in conjunction with the promotion of "docomo Hikari". We will pursue the 820 billion yen operating income target for FY2017, which was decided in view of the competitive dynamics and various other variables. We look forward to your continued understanding and support.
Questioner No. 5
Q1 Which is the area that offers the greatest opportunity on your journey towards your medium-term cost reduction target of over 400 billion yen?
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A1 The addressable areas can be roughly divided into network-related costs, sales and marketing-related expenses and others. The current cost distribution among these three elements is almost 1:1:1. As for network-related costs, which are also linked with the planned reduction of annual capital expenditures to 650 billion yen or lower, we believe there are further opportunities for reduction in each phase of the flow of activities (from development, procurement, construction to maintenance). With respect to marketing expenses, we need to review our shop network and commission structure, questioning whether the traditional approach is adequate for a mature market. While addressing these opportunities in network and marketing-related expenses, we will also thoroughly scrutinize other cost items. To achieve our targets, we have established a cost structure transformation project spearheaded by Senior Executive Vice President, Mr. Yoshizawa.
Q2 Your medium-term CAPEX target is set at 650 billion yen or lower. Your competitors, however, are managing their business spending much less in CAPEX. Can't you lower it even further to around 500 billion yen per annum?
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A2 It is not that we are fixated on the amount of 650 billion yen. As you can read from the description of "650 billion yen or lower", we are committed to strongly pursuing a reduction.
Q3 According to your forecast, the negative impact of the new billing plan is expected to moderate after hitting bottom in FY2014/3Q. Do you really think this turnaround will happen? Do you foresee any risk of subscribers with potential upsides switching to other carriers because of the option to subscribe to the old billing plan? Don't you think your forecast is too optimistic?
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A3 We only have the records of the new billing plan users for the four-month period through September after its launch in June. We presented a slide that shows the improvement trend that we actually tracked in this four-month period. Also, the new billing plan is designed to offer greater benefits when subscribed by the family, and one of the reasons why we expect the users with potential upsides will switch to our new billing plan is this family benefit. We will devise ways to lure more families to larger data buckets by proposing valuable bundle discounts, combining the new billing plans with the "docomo Hikari" service scheduled for launch in February 2015. We will provide more details as soon as the preparations are complete.