Q&A for 1Q of FY2014.3

To meet our guideline targets, we are working to acquire as many customers as possible.
With telecommunications carriers engaging in heated battle, we increase sales commissions only on weekends, but try to keep down sales commissions during the week. At first glance, it may look like sales commissions are increasing, but on the other hand we are holding down the level of "Maitsuki Discount (Monthly Discount)," so we are working to achieve balance overall. Our policies will not change as we move into autumn, but if the competitive environment changes we will put up a fight. Even so, we will not add too much in the way of costs.

Mobile handset chips have grown able to support multiple frequencies. We plan to make full use of KDDI's frequencies, at 700MHz, 800MHz, 1.5GHz, and 2.1GHz. In addition, our affiliate, UQ Communications Inc., has newly acquired the 20MHz bandwidth, which we plan to use for the expanding smartphone business.

We are pursuing offloading at the same time, so we should be abundantly able to respond and maintain our service levels.

As we said when we announced our full-year results in April, we are targeting double-digit increases in operating income for the next three years. The fact that we are willing to make such a commitment regarding a three-year period shows that we are confident in our ability to achieve these figures. In fact, it is likely that the results could outpace these projections.
We are seeing steady increases not only in the Personal Services segment, but in other segments, as well. As the stock business model indicates, after a company's customer base reaches a certain scale, increases in sales translate directly to higher income. Lower costs have a positive effect on top of this. We expect to see some slight fluctuations, but the most important fact is that we have entered this phase. Our operations are also solid enough that fixed costs are falling, too.

We have only just finished 1Q, and we face risk factors, such as the possibility of other companies launching popular handsets, so we need a little more time on this question. We cannot yet say at what stage this will be, but we will revise our performance forecasts when necessary.

Business is going well in the Value Services segment. It is true that we increased content providers' share of revenues. When we introduced charges for "au Smart Pass" for the iPhone in June, the percentage of customers that continued using the service was around 90%, and this figure remains above our expectations. You can take this to mean that "au Smart Pass" is turning into a profitable service. As the number of members is also growing steadily, the amount of revenue we share with content providers also rises, but this does not have a negative effect on income in the Value Services segment. We are making steady progress toward the income forecast and value ARPU figures we have committed to for the current fiscal year.
Revenues are also increasing in the Business Services segment, although not substantially. There are two major reasons for the rise in income in this segment. The first is that the migration costs accompanying bandwidth reorganization that we incurred in the previous term are eliminated in this term. The second reason is that both revenues and income are increasing thanks to cumulative mobile subscription figures. Whether or not we will be able to maintain our revenue levels from the 2Q onward will depend on the competitive situation, but at any rate we do not expect them to decline.

The impact of the J:COM consolidation was ¥88.2 billion for operating revenues and ¥16.2 billion for operating income. This is in line with our full-year forecasts of an impact of ¥360.0 billion for operating revenues and ¥60.0 billion for operating income. If anything, the impact was somewhat more than we had expected. Our initial forecast was for a loss on step acquisitions of ¥37.5 billion, but the actual figure was ¥38.4 billion. This was because we revalued the difference between the acquisition price at the time we first entered into the capital participation and the TOB price, and booked this difference as an extraordinary loss. However, because a squeeze-out of remaining shareholders is planned for 2Q, at that point we expect to handle the custodial trust portion and record a tax effect. Consequently, there should be no major difference in our full-year results from the amount we had initially expected.
J:COM's results have already been announced on July 25, so you can refer to those figures for details. As J:COM's reporting is in line with U.S. GAAP, we have converted these results to Japanese GAAP, included the impact of J:COM's accounting treatment with that of JCN, and incorporated the overall figures into the "impact of J:COM consolidation."

When we increase the markup, the "Maitsuki Discount (Monthly Discount)" will have to go up as well, so we aim to conduct our operations in a way that will allow us to increase the markup as little as possible.
Looking at the correlation between increases in commissions and decreases in the "Maitsuki Discount (Monthly Discount)," unit commissions are up ¥7,000 year on year. Meanwhile, whereas we set the unit price for the "Maitsuki Discount (Monthly Discount)" at ¥1,750 in 1Q of the previous term, this year it is ¥1,400, amounting to a ¥350 reduction. As the "Maitsuki Discount (Monthly Discount)" applies to around 90% of handsets sold, this comes to ¥350 x 90% x 24 months = ¥7,560. The difference between the ¥7,000 increase in lump-sum commissions and the total "Maitsuki Discount (Monthly Discount)" over 24 months amounts to a real cost deduction of ¥560. Last year, there were a large number of upgrades to new 800MHz -compatible handsets accompanying bandwidth reorganization, but that factor will be eliminated this year. Since then, the percentage of new handsets is increasing compared to last year, a strict year-on-year comparison is not possible. Nevertheless, we can say that we are controlling overall expenses.

4Q is right in the middle of the season when the flow of users to "Student Discount," which has a strong affinity with "au Smart Value," is the highest. Consequently, the percentage is higher in 4Q than in other quarters. This effect tends to be less pronounced in 1Q, which is why the percentage is slightly lower than in 4Q. Going forward, we believe we should be able to maintain the percentage at or slightly below the 1Q level.

We think we will be able to maintain these conditions. We do not expect any major issues to arise. Our smartphone sales momentum could be affected by conditions at other companies, but given that the smartphone penetration rate is currently at around 40%, we believe that ample demand remains. We are keeping a firm handle on costs, but we are not going overboard on efforts to cut costs.

As we announced on June 10, we have increased capital expenditures by ¥30.0 billion to address the issue of communications outages. Our software response, which was scheduled for the end of August, is ahead of schedule, so you need not be concerned about the state of affairs.

We do not plan to continue in our current vein forever, but we believe that the timing for such introductions needs to be right. At the present, we are not ready to discuss when this timing might be.

The management integration between J:COM and JCN is proceeding apace. After the squeeze-out that is nearing, both companies will set up committees to prepare for integration, and the integration is expected to take place from autumn through the end of this year. In the past, we have expanded CATV as a new sales route. We have recognized that this is an effective route for marketing to seniors. We plan to ramp up full-fledged cross-selling with CATV, and you should continue to watch this space.