Japanese

Presentation Materials

• Financial results for FY2007/3Q

  Q1 How has the introduction of the new handset purchase methods affected your financial results? It seems that equipment sales revenues for FY2007/3Q grew by approximately 30 billion yen, while revenue-linked expenses dropped by approximately 75 billion yen compared to the same period of last fiscal year.

  Open

  A1 Distributor commissions for FY2007/3Q decreased by an amount between 10+ billion and 20 billion yen year-on-year as a result of the introduction of the new purchase methods.In FY2007/3Q, we sold a considerable number of handsets under the traditional purchase method, and successfully maintained the average acquisition cost of the handsets sold under the traditional method at approximately 35,000 yen per unit, which significantly contributed to the reduction in distributor commissions. In fact, the savings in the acquisition cost of handsets sold using the traditional purchase method made the greatest contribution among all factors to decreasing the total distributor commissions.
  The outstanding installment accounts receivable as of Dec. 31, 2007 was 54.5 billion yen. This, however, appears to be slightly larger than the current figure as the initial payments received from customers are not reflected in this figure.

  Q2 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?

  Open

  A2 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.

• Marketing policies

  Q3 The "Direct-wari" discount offered for 705i series handsets is set at 4,000 yen per unit, about half the amount of the same discount for the 905i series phones. How did you arrive at such a bullish price setting?

  Open

  A3 The amount of "Direct-wari" discounts were decided after comprehensively taking into consideration various factors, including the procurement costs of 705i phones, their price balance vis-a-vis the 905i handsets, and the competition with other carriers. The market price of 705i phones will vary by model, but in general, we believe the amount of discount is adequate.

  Q4 How long do you plan to continue the "Direct-wari" discounts?

  Open

  A4 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.

  Q5 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?

  Open

  A5 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.

• Handset sales

  Q6 The number of handsets sold decreased by approximately 10% compared to the same period of last fiscal year. Do you think this trend will continue next fiscal year?

  Open

  A6 In the second half of FY2006, the number of handsets sold increased because the market was invigorated by the introduction of Mobile Number Portability (MNP). As more than a year has passed since the launch of MNP, we do not think this fiscal year's sales volume will rise to a level comparable to last year's. However, because our 905i phones and other new handsets are reporting brisk sales, the total number of handsets sold during this fiscal year will likely end up higher than our original projection of 25 million units. As for the trend for next fiscal year and beyond, we generally believe the number will decrease as the effects of the new purchase methods become more visible, but we cannot provide a concrete forecast at this point.

  Q7 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?

  Open

  A7 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.

  Q8 Are there any differences in the handset replacement cycle between 90X series and 70X series phone users?

  Open

  A8 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.

  Q9 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.

  Open

  A9 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.

• ARPU/churn rate

  Q10 Voice ARPU dropped 12% compared to the same period of last fiscal year. Please explain the factors behind this decline.

  Open

  A10 Voice ARPU for the first nine months of FY2007 decreased 490 yen year-on-year. To give you a breakdown of this decline, 50-60 yen is attributable to the impact of the accounting change in FY2006 to initially recognize as revenues the portion of "Nikagetsu Kurikoshi" (2-month carry-over) allowances that are projected to expire. The remaining decline of 400+ yen resulted from the following factors: impact of the drop in MOU (approximately 160 yen), impact of the introduction of "Fami-wari MAX 50" and other discount packages (approximately 80 yen), and impact of the longitudinal change of "Ichinen Discount" service (approximately 160 yen) which offers incremental discount rates in accordance with the length of subscription. With respect to the impact of the longitudinal change, because of the introduction of "Fami-wari MAX 50" and other discount plans, the decline in ARPU is expected to occur faster than the conventional pattern. Accordingly, the decline in ARPU resulting from the longitudinal change is expected to become more moderate in the future.

  Q11 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?

  Open

  A11 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.

  Q12 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?

  Open

  A12 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.

• Network and capital expenditures

  Q13 To try to differentiate your service by offering various video services (e.g., "Nico Nico Douga", YouTube) is a positive move for the acquisition of new users. On the other hand, however, don't you think video offerings could cause problems to your network due to a steep rise in data traffic?

  Open

  A13 We believe we can accommodate the growth of data traffic to some extent with the HSDPA system (3.6Mbps) and further speed enhancements (to up to 7.2Mbps). If congestion in the radio interface is detected, we will try to acquire the necessary spectrum bandwidth. The traffic pattern varies by region and time of the day. Generally, data traffic increases during the evening and night hours. We are developing our capital expenditures plans taking into consideration the regional characteristics and traffic distribution by time.

  Q14 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?

  Open

  A14 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.

  Q15 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?

  Open

  A15 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.

• Investments/return to shareholders

  Q16 You have become less active in new business investments. As the negative impact on revenues resulting from the introduction of new business models is expected to become larger going forward, what are your views on making investments to seek new revenue sources?

  Open

  A16 We intend to respond adequately if there are any good opportunities for new business. Currently, however, we are focusing on how to secure profits from our past investments, as we cannot find any outstanding opportunities at this point.
  With respect to overseas investments, we have taken actions primarily in the Asia Pacific region, by acquiring additional stakes in Philippine's PLDT, investing in Malaysia's U-Mobile, and acquiring MagiNet through our subsidiary, intertouch. Although these were not sizable investments in the order of hundreds of billions of yen, we believe we invested in promising deals from the available choices, which have expanded our business domains for the near term.

  Q17 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?

  Open

  A17 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.

• Other (handset procurement cost/point service/DCMX)

  Q18 As of the end of FY2007/3Q, I believe your handset procurement cost per unit was still approximately 10,000 yen higher compared to au. Please give us guidance on the outlook for the future.

  Open

  A18 There are no changes from what we explained before: the procurement cost per unit is likely to decrease by several thousands of yen per year, as a result of our efforts to develop common software platforms and single-chip LSIs, and raise the proportion of 70X series handsets to total handsets sold, etc.

  Q19 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?

  Open

  A19 The royalty point expenses are expected to increase by an amount between upper-20 billion yen and 30 billion yen.

  Q20 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?

  Open

  A20 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.