Presentation Materials
Analyst Meeting Q&A (Earnings Release For the Nine Months Ended December 31, 2018)
Announced on Feb. 1, 2019
Please be advised that the following text has been edited/modified from the original Q&A conversations for the sake of clarity.
Opening comments
Before going into the Q&A session,I would like to spend a few more minutes to comment on some of the questions that we have received during the 3Q.
First, I would like to touch upon the objectives and timing of the "customer return measures of up to 400 billion yen." On January 17, the Ministry of Internal Affairs and Communications finalized and presented a new regulatory framework known as the "urgent proposal for rationalizing mobile services, etc." The proposal has two pillars. As you are aware, one is the realization of "rate plans that are simple and easy to understand" and the other is "ensuring appropriateness in the business operations of sales agents".
Media reports are generally written from the perspective of consumers, focusing on the "ban of bundling service charges with handset prices" and the "contraction of handset market as a result of soaring handset prices. "However, when we look at this regulatory change from a competitive policy perspective, the "complete separation of telecommunications service charges from handset prices" (1-(1) of Urgent Proposal) and "ban on excessive time-binding contracts" (1-(2) of Urgent Proposal) can be construed as measures aimed at prohibiting or restricting the retention measures promoted by the carriers hitherto. It is thus obvious that the regulatory authority's primary aim is to ensure equal footing with MVNOs and new entrants or to promote competition in the market.
Now that smartphones are widely used among the population, we have received complaints and criticism against our rate structure due to its complexity, incomprehensiveness, lack of fairness and relatively expensive rates. Amid this environment, we are about to experience a major change in the regulatory framework and the entry of the fourth player in the mobile market. When we look at precedents in Europe or the United States, markets with four mobile players have seen a significant reduction in mobile rates and a huge volatility in market share distribution. We therefore considered that the impact of the new entrant must not be underestimated. By announcing a large-scale customer return program ahead of the competition in light of these changes in environment, we intend to clearly present our position as a "market leader" to win greater confidence and understanding from our customers, so we can take an initiative in the competition ahead.
Second, I would like to talk about the "path to profit recovery after introducing the new rate structure." We have received complaints for "too limited information disclosure" and we feel very sorry about that. But at this juncture, it is too early for us to give you any indication on the "P/L impact of the new rate structure" and the "path to profit recovery". Accordingly, we would like to ask you to wait until the FY2018 full-year results announcement because we plan to present the guidance for FY2019 on that occasion. Having said that, however, I would like to add one comment, which is about the role of "telecommunications business" in our profit recovery. Under the new regulatory framework, the effects of the "retention measures" of each carrier is expected to become weaker, which will likely result in higher user liquidity. DOCOMO will not only take the lead in reducing our rates but also evolving our customer touchpoints (e.g., shortening wait time/attendance time) and proactively use micromarketing to further enhance customer loyalty, thereby defending our telecommunications customer base.
Also, as we still have a large number of feature phone users on our network, we will focus on revenue growth and upsell activities by strongly promoting their migration to smartphones, leveraging the upcoming rate revision. Furthermore, given the projected decline in business revenues, we cannot spend costs the same way we did in the past. We will pursue a drastic operational reform both in our sales and network-related units to achieve cost reduction.
By driving growth with the "two wheels" of telecommunications and non-telecommunications (e.g., Smart life, corporate and 5G, etc.) businesses to deliver profit improvement, we will strive to recover our operating profit to 990 billion-yen as early as possible.
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Questioner No. 1
Q1 Please explain the mechanism or the factors behind the rate reduction of up to 400 billion yen. I believe the expenses for campaigns and promotions are included in this 400 billion- yen estimate, so there must be a positive impact from the elimination of such expenses. I also believe the profit recovery after the rate revision is predicated upon the positive impacts from eliminating the Monthly Support discounts, users' migration to larger data plans, and upsides from feature phone users' switch to smartphones. Can you elaborate how these elements are factored in your revenue and profit projections, and how you plan to roll out these measures?
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Q2 Is it correct to understand that the "maximum 400 billion yen" rate reduction includes campaign or promotion-related expenses as well as the impact from the temporary discounts for users who have completed their handset installment payments and ready to switch plans, and these discounts will not be provided on a permanent basis?
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Q3 You mentioned that you will aim to grow the size of video/imagery business to 300 billion yen, but NTT Plala's scale is not that significant. I understand that "dTV" and your other offerings are generating steady sales revenues, but can you share with us the concrete components included in your plan to deliver 300 billion yen?
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Q4 Growing revenue from 100 billion to 300 billion yen sounds like a major leap. Listening to your explanation, I thought it would be difficult to achieve that number unless you succeed in enlarging your membership base. Is it right to assume that your basic strategy is to expand the membership base?
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Questioner No. 2
Q1 The numbers of handset upgrades and contract changes did not increase in FY2018/3Q compared to the same quarter of the previous fiscal year. In the case of DOCOMO, how fast you can migrate subscribers to smartphones, I believe, is a very important factor in your business. Are there any impediments for users' migration to smartphones? Also, I have an impression that handset discounts are getting overheated at the retailers, so can you tell us how such discounts have contributed to handset upgrades?
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Q2 Is it right to conclude that the decrease in handset upgrades in FY2018/3Q was largely attributable to the less-than-expected popularity of certain handset models?
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Q3 I am surprised to see the continual improvement of the profit margin of Other businesses within the Smart life domain every quarter. The profit of this segment has been improving despite the slow revenue growth. You previously explained your cost reduction efforts in the Mobile Device Protection Service, but can you share with us once again the elements driving the profitability improvement? Please also comment on the prospects for further profit expansion in this business segment.
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Q4 Is it correct to assume that at present Mobile Device Protection Service is making a larger contribution to the profitability improvement?
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Questioner No. 3
Q1 Regarding the trend of mobile communications services revenues, I got the impression that the drop in revenues in FY2018/2H caused by the rate revision was moderate. Can you share your views on the status of revenues?
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Q2 How do you foresee the expenses in the fourth quarter?
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Q3 Aren't there any one-off expenses included in FY2018/4Q that will not likely be required in the next fiscal year?
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Questioner No. 4
Q1 Regarding the strategic positioning of your new rate structure, according to my calculation, if customers purchase handsets in lump sum, your rates will be lower compared to the competitions' in most cases. When you design your rates, what kind of objectives do you set in your competitive strategy? Now that you have better visibility on the rates to be provided by the competition, please share with us your philosophy concerning rate setting, if any.
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Q2 Does it mean that you will break away from the conventional sales approach bundling handset prices with service charges and secure revenues individually from telecommunications services and equipment sales?
Previously, when you had dead stock, I believe you had an option to provide discounts on handsets on the presumption of recovering such discounts with the communication service charges. If you are to handle products like mobile phones for which freshness is important as a hardware offering, I believe you have to anticipate additional business risks such as inventory risks. Is my understanding correct?Open
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Questioner No. 5
Q1 Was there any impact on your recent business performance, such as acquisition of new subscribers or handset sales, after you announced the upcoming large-scale rate reduction?
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Q2 You explained that the progress of operating profit is in line with your plan despite the favorable pace of profit generation from Smart life and Other businesses, which is already approaching your full-year guidance level, owing mainly to the weak sales of handsets. Can you elaborate on the factors that are behind vis-a-vis your full-year plan, and the measures you plan to implement in FY2018/4Q?
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Q3 The profit from Smart life and Other businesses is approaching your full-year guidance. Do you have any plans to spend additional expenses?
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