NTT DoCoMo ADR Earnings Call Nuggets: New Campaigns and the Current Executive Team

NTT DoCoMo, Inc. ADR (NYSE:DCM) recently reported its third quarter earnings and discussed the following topics in its earnings conference call.

New Campaigns

Daisaku Masuno – Nomura Securities: This is Masuno from Nomura Securities. I have several questions. First, about the recent performance of your business. After the release of winter collection and also on the 17th of January I think all the previous campaigns were terminated and from 18th of January I think you launched the new campaigns. As with the campaign, the previous campaign that expired on the 17th, I think you done the family discounts and also the family and student bundle discounts, so have you seen any changes in the basic trends after the new campaigns were launched on the 18th of January, are you seeing improvement? Are you seeing a slowdown? Are you accelerating the sales, so can you comment on the most recent performance trends and Xperia Z when is expected to go, say on the 9th of February, so I think you are receiving orders, so can you also comment on the prospects for the winter or for the spring sales, so can you comment on your recent trends?

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Unidentified Company Speaker: Okay, I think this is a question about the January performance. Yes, on the 17th of January or the previous campaigns were terminated so we saw a temporary improvement in number portability trends, so if you compare our January performance vis-a-vis December, actually we announced a new product in January, so we are seeing some signs of customers waiting for the release of the new Xperia products because we said this is a strongly recommended product. We are seeing orders placement. So if you talk about the month of January, the improvement slowed. But then from February onwards to March, we are seeing certain signs of improvement as part of our prospects for the future.

Daisaku Masuno – Nomura Securities: Then I believe March would be the busiest season in terms of the volume of quantity. So you are seeing prospects for improvement?

Unidentified Company Speaker: Yes, we will have high expectations for March.

Daisaku Masuno – Nomura Securities: Now further down the line, from next fiscal year onwards, there might be some factors that will affect your operating income level. On Page 4, you see the cumulative numbers – you have presented a cumulative numbers for the last nine months, it seems that your communication revenues have posted a decline, including the impact of Monthly Support discounts. Then if you calculate the gross margin, which is subtracting cost of equipment, then that is boosting your total operating income. So if you consider next fiscal year, the contribution from devices will become smaller next fiscal year onwards and I believe the Monthly Support negative discount impact will become larger next fiscal year. So in order to offset that, I think you will have to improve your ARPU, otherwise I don’t think it will be possible for you to offset the decline of communication revenues and that is the reason why you have hammered out this JPY200 billion additional cost reduction project, which I think is very important for you to achieve. So if you can comment on the equipment sales (revenues, the communication) service revenues and if you – I think it will be difficult for you to make a prediction for the future, because there are many varying factors behind all these elements, but can you comment on the prospects of these three things equipment sales, communication network revenues and also the cost reduction. How will that look like in one year time from now?

Unidentified Company Speaker: Well, it’s very difficult to give us the forecast for next fiscal year, because as far as the fourth quarter of this fiscal year, this is the biggest season, the sale season for us. So we will like to see the results for the fourth quarter first before commenting on the next things, but all the three elements as you mentioned are very big factors for next fiscal year’s business. We’ve already launched the cost reduction program from this fiscal year and we are seeing results already and that has been reflected in our third quarter results, and we will continue to work on these things without unrelentantly in the fourth quarter as well. So cost reduction and also how we can boost the Packet revenues is another factor which will be key in the – that will determine the fourth quarter results.

Daisaku Masuno – Nomura Securities: Then the JPY200 billion cost reduction program. That is inclusive of this fiscal year, but if you – how big will that be for next fiscal year, can you comment on that?

Unidentified Company Speaker: It’s not. I don’t think it is appropriate to comment on that one – this one. We will move ahead with the structure reform project team and the cost reduction project team are also working in parallel. So we will have to see the progress. But in the third quarter, we’ve already achieved JPY10 billion cost reduction in addition to the previous reduction. So we believe we are well-positioned to achieve this cost reduction target. In terms of size, JPY200 billion of course what is the comparison level that’s difficult to comment, but as far as this fiscal year, we have a great ambition to reduce our cost by JPY200 billion and we believe for the total of this fiscal year, we’ll be able to achieve JPY50 billion or so and we might be able to add another JPY50 billion next fiscal year as well. So for the single one year of next year we would like to achieve JPY100 billion already. That our current immediate target, but – thus all three points that you mentioned are appropriate. So cost reduction is only about JPY200 billion or so at maximum. So this cannot be sufficient to offset the decline in revenue. So we will have to boost our ARPU and we also have to improve our net addition so that we can increase the total subscriber base, so that we can achieve the operating income target in totality. So we will continue to accelerate the cost reduction efforts. That I can promise.

Tetsuro Tsusaka – Morgan Stanley: Tsusaka with Morgan Stanley. I believe that this is a very rare opportunity to have exchange of views with the management of this company. Now, I would like to ask the three representative directors on the podium to share with us your thoughts about how you see the objectives as executive team and how you intend to take accountability for the results?

Unidentified Company Speaker: Yes, I think this is a very unique question in a forum of this kind, but if I were to speak on this matter, I have aspirations. I also believe that there are missions which I must meet. Now the mobile telecommunication business is now undergoing transformation primarily based on smartphones. To put it bluntly, the smartphone user base must be established. I believe that is one management goal for us and on top of this platform I have a sense of mission if you will being able to deploy services on top of this foundation so that part I believe is part of my aspiration. So therefore we want to achieve this and through such activities I hope that the sustainability of this company can be well established that I believe is my mission and that is my management goal. Well, it’s very difficult to talk about this in just one word, but yes, there are three representative directors here I believe my mission is how to enrich the core part of the business and how to realize cost reduction and at the same time be able to secure profit how can I create such a foundation, I believe that is my primary obligation and mission for us. But then we should not do this just for the sake of cost reduction, we must have strong network based on which we can actually prepare for introduction of the next layer if you will. Hopefully we’ll be able to create something; we hope that we’ll be able to make something flourish on top of the network. But for the time being we must place our efforts on solidifying rather our core business.

Fumio Iwasaki – SEVP and Chief Privacy Officer: Thank you Iwasaki is my name. You asked about management goal, what goal do we have? I think we have good understanding we share good understanding about the goals ahead for this company, so what is my role in pursuing such goal? Yes, I’m one of the Representative Director, but having said that, which only just define if you will our scope of responsibility, but if I look back on my past carrier in terms of asset network and services I think we have all those trying to address these three issues that’s more or less as long being involved on the network side of the business. So therefore as the company grows further, it’s important that we have a very strong and high quality network so that’s something that I would like to emphasize as in my own capacity. Now turning to handset. Well, handsets are actually part of the two wheels together with network. Handsets and networks goes side by side. So therefore, there are some areas that we must broadly challenge, and we’ll certainly do so. I’d certainly like to make active contribution towards that.

The Current Executive Team

Tetsuro Tsusaka – Morgan Stanley: My second question. This relates to the previous question. Communication network charges and revenues are actually faced with challenges ahead. Of course, it depends on how you predict the projection, but it’s likely that the service revenue will decline in the order of JPY100 billion next fiscal year, and your revenue – correcting, your profit is only JPY800 billion, meaning that we have to expect for substantial loss in the revenue in the next fiscal year considering these elements? Now, of course, it’s difficult to identify how much profit or increase in profit you can realize, but should you face with a decline in profit for the next fiscal year, you talked about structural reform in your presentation, but inclusive of the executives, I think structural reforms substantial structural reform will be required to be blunt. I think you need optimal allocation of human resources at the top. So this type of structural reform will have to be implemented. Are you prepared to make such – build such a reform? If you are confident that, yes, we can make recovery, we’ll definitely realize increase from profit, then that’s not a problem. However, considering the possibility of very difficult challenges ahead for you, do you believe that the current executive team is appropriate to face these challenges? That’s my second question.

Unidentified Company Speaker: Well, as far as my currently understanding is concerned, as I try to explain in my presentation, yes, we are aware that the current situation is quite tough and I do agree with some of the elements you cited Mr. Tsusaka, At the same time, as far as our structural reform efforts are concerned, we are going to be covering all aspects of our business and also related to how we carry out our business, we are doing our business and also our structure if you will, our organizational structure and also allocation of human resources that was a part of our studying, so therefore bearing this in mind, we’ll try to grade the most optimal situation for the company and that’s the study that we are carrying out.

Tetsuro Tsusaka – Morgan Stanley: My last question then. I would like to ask about some numbers in relation to your operation. It seems that the smartphone are – the smartphone sales are expanding and that has translated into packet revenue. Now your smartphone handset sales and also the actual utilization of smartphone?

Unidentified Company Speaker: I think it is not very efficient because in terms of the active usage is only about 60% of your smartphone handset sales. So that – the presentation of active smartphones sold are very low. So we have a lot of idle smartphone handsets that’s not being activated. So that’s a waste.

Tetsuro Tsusaka – Morgan Stanley: So out flow of customers that’s why you want to sell smartphones as much as possible, but because you want to sell your smartphones you are actually spending a lot of money, especially marketing expenses. So when do you believe that you’ll be able to more efficiently improve your packet revenue? When will you be able to introduce more efficient marketing? When will you be able to put a stop to this idle smartphones handsets, because this is comparison with your competitors, that’s the impression that I have.

Unidentified Company Speaker: I should maybe take a note of your question as a comment. As you mentioned, the month of October and November were very tough for DOCOMO and we very seriously accept the situation and we have a sense of urgency about this issue and in terms of total number of handset sales and also in terms of new subscriptions, we are seeing signs of recovery. Also on a full year basis, we are actually quite competitive, but at the same time in terms of the mobile number portability there is continuous outflow from DoCoMo. Device network and services, we talked about the importance of these three elements. In particular, perhaps device for handsets, maybe it’s in this aspect that we could actually further strengthen our competitiveness. So in the fourth quarter, inclusive of Xperia Z, it’s not just about one single product, but inclusive of Xperia Z, we want to actually focus our resources so that we could compete in the marketplace and we are taking a look at the details for this strategy as we speak.

Tetsuro Tsusaka – Morgan Stanley: As far as device and handsets are concerned, so you have no silver bullet right? Is my understanding correct, you have no silver bullet?

Unidentified Company Speaker: Well, are we going to out of the blue create something that (indiscernible) all of the competition as far as smartphones are concerned, that may not be the case. However, other vendors are strengthening the attractiveness of their models and I think their competitiveness is being strengthened and (indiscernible) to our handsets sales going forward.

Unidentified Company Speaker: You talked about the inefficient marketing of smartphones in your question. Well, in terms of net adds, I suppose if you take a look at the cost to acquire one net add, that may be the case. However, when we sell smartphones, our focus is to improve the ARPU as a result of people migrating to smartphones.

Tetsuro Tsusaka – Morgan Stanley: Yes, of course, how much active usage? It really is a multiplication between the two.

Unidentified Company Speaker: Yes, we don’t have net adds. That’s true, that the active users are not maybe increasing and spending market expenses, you say it’s a waste. I take your point. However, this, I believe, is a cost that is necessary. Then what about ARPU? As you saw on this slide, when people migrate to smartphones you find that there is boost to the Packet ARPU and also that benefit is much larger compared against other competitor. We have noticed we are efficient as our competitors and also smart ARPU is steadily gaining. Video market, for example, is contributing and this is boosting that. So, therefore, as far as ARPU boost is concerned, I believe our efforts have translated into specific results. So it’s a matter of gaining new subscribers. Of course, we should capture net adds without making wasteful marketing expenses, that is true, I take your point.