Q&A for 2Q of FY2014.3

Q&A for the Second Quarter of the Fiscal Year Ending March 2014

Date	Monday, October 28, 2013, 5:00 pm-5:50 pm
Location	20F Conference Room, Garden Air Tower
Respondents	Takashi Tanaka, President; Hirofumi Morozumi, Executive Vice President; Makoto Takahashi, Senior Vice President; Yoshiharu Shimatani, Senior Vice President; Yuzo Ishikawa, Senior Vice President; Tsutomu Fukuzaki, Associate Senior Vice President; Hidehiko Tajima, Associate Senior Vice President; Takashi Shouji, Vice President; Hiroki Honda, General Manager, Corporate Management Division; Kenji Aketa, General Manager, Investor Relations Department (MC)

Questioner 1

It appears that voice ARPU is showing signs of a turnaround, and the"LTE Plan" (under which free voice communications to other carriers' mobile phones are not included in a basic plan) seems to be attracting an increase in billings.
Do you expect this trend to continue going forward?
Also, when do you see the amount of discount applied bottoming out?

The range of data ARPU is increasing in line with expansion of the scope form high- to middle-ARPU customers. Voice ARPU is down ¥110 YOY, but as you have noted, the "LTE Plan" is fueling an increase in the minutes of use (MOU) billed. We believe we are making good progress toward our target of turning voice ARPU back up YOY in 4Q of the current fiscal year.
The amount of discount applied is down ¥340 YOY. Of this amount, "Maitsuki Discount" accounts for a negative ¥230, and this portion has flattened out.
This time, you have not announced any revisions to your performance outlook, but given that you are making extremely good progress with subscribers, and ARPU appears to be going well, won't you be looking at an increase of around ¥50 compared with your forecast at the beginning of the fiscal year? How do you think ARPU will ultimately compare with your initial forecast, and when do you plan to announce a revised performance forecast?

ARPU and subscriber acquisition are both proceeding favorably. We still need to determine what impact the iPhone will have on this year's results, and as in previous years we will probably need to wait until around the 3Q announcement at the beginning of the calendar year to make any revisions. We also need to take the year-end shopping season into account, which is why we have not revised our outlook yet.
Are your corporate priorities on acquiring as many subscribers as you can now, and linking that business to profits in upcoming fiscal years?

This probably appears to be the case because of the significant costs we have incurred in 2Q, but we are holding the "Maitsuki Discount" flat. Unit commissions are up ¥12,000 YOY, but reducing the set monthly "Maitsuki Discount" amount by ¥350 has an impact of ¥8,400 over a 24-month period, so the real difference is a ¥3,600 increase in the acquisition cost. This is showing up in the 2Q figures. At the same time, we have reduced the applicability of discount points toward reducing handset prices, so the total selling cost actually has not increased all that much. We are controlling costs carefully. In some cases, we have made selling cost investments on some handset models where we have a bit more leeway, but we do not plan to adopt this approach as a general sales strategy. Our stance on adapting to market trends remains unchanged. We plan to acquire as many subscribers as we can while maintaining profits.

Questioner 2

Marketing expenses are piling up as you counter the impact of the NTT DOCOMO iPhone introduction. On the other hand, you are moving toward the Jupiter Telecommunications (J:COM)/JCN merger and working to boost subscriber numbers through new data pricing plans on tablets ("Smartphone Set Discount") and bundled plans for using WiMAX 2+ ("au Smart Value mine,") and mobile ARPU shows signs of increasing. Taking these factors into account, how much do you expect to be able to boost sales in the future?
On the final slide, you reiterate the phrase "Double-digit growth in operating income every fiscal year through March 31, 2016." Should this be assumed to indicate you have reconfirmed a double-digit profit increase?

The net increase in mobile is proceeding favorably in comparison with the targets we have set, and ARPU is also above expectations. We believe this progress will continue, and at present we do not expect any major changes in this trend.
I would like to confirm your thoughts on the use of cash. You are nearing a phase in which net cash is positive, and some market participants wonder if this is a good thing. What are your thoughts on this?

We are not thinking much about paying down debt with any cash that is left over after taking part in necessary M&A activity and paying dividends. The scale of funds for M&A is a topic for future discussion; we are not ready to elucidate on this point at the moment. We are considering a number of alternatives.

Questioner 3

How much do you plan to invest in M&A, in what businesses, and in which fields? What sort of M&A does top management consider necessary strategically?

We will invest in M&A that is necessary for future growth. In addition to communications, where necessary we will consider M&A in "upper-layer" areas that are based on communications. I would like to provide further detail, but am unable to do so today.
Operating income is solid, but your operating income margin is not as high as your competitors'. What are your thoughts on that? I would like to hear any specific thoughts on that topic, such as the fact that the rise in income is more noticeable if you look just at the mobile business.

Our operating income margin is rising, but the growth is not explosive. Our subsidiary, CTC, has an income margin of more than 20%; we would like to raise our margin to that sort of percentage.
Are you not aware of competitors' income margins?

We are aware of their margins, but a direct comparison is not possible, due to differences in accounting standards and other factors. First of all, we plan to maintain solid double-digit growth in operating income. Once we do that, the income margin should rise naturally.

Questioner 4

At one point, you made the comment that value ARPU was"¥750 for 'au Smart Pass' users." What is the current trend, what are your thoughts about maintaining or revising this level in the future?
As we have indicated in the past, we are aiming for ¥290 for the fiscal year ending March 2014 as a whole. In 2Q, value ARPU for smartphone users was ¥440. Among those, the figure was ¥690(Note) for "au Smart Pass" members. In 1Q, we had not yet begun charging for the service for use with iOS, so the value ARPU for au Smart Pass members was ¥610(Note). In 2Q, after we introduced charges, the figure rose to ¥690(Note), and we would like to see that trend continues. As much as possible, we aim to promote "au Smart Pass" subscriptions.
- Note)
  
  The figure has been revised from that announced on October 28, 2013.
  ¥669 > ¥610
  ¥755 > ¥690
I would like to ask about sales promotion expenditures. You appear to be embroiled in a battle for MNP by using cash back. Is this likely to continue into the future, or do you expect the market to change beyond those conditions at some point?

Now that NTT DOCOMO has begun selling the iPhone, we recognize that it will be difficult to expand sales further. Our weapons of choice are "au Smart Value" and "au Smart Pass," and we will deploy these fully as our basis for expanding sales. We do not plan to step up competition ourselves. Rather, we plan to increase sales by promoting sales channels that have not yet been taken advantage of.