Q&A for FY2014.3

Q&A for the Fiscal Year Ended March 2014

Date	Wednesday, April 30, 2014, 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; Yuzo Ishikawa, Senior Vice President; Tsutomu Fukuzaki, Associate Senior Vice President; Hidehiko Tajima, Associate Senior Vice President; Yoshiaki Uchida, Associate Senior Vice President; Takashi Shoji, Vice President; Hiroki Honda, General Manager, Corporate Management Division; Kenji Aketa, General Manager, Investor Relations Department (MC)

Questioner 1

Your ARPU forecast for the year ending March 31, 2015, is for growth of around 1.2%, despite the fact that year-on-year growth for 4Q of the fiscal year ended March 31, 2014, was 2%. Doesn't this forecast seem conservative? Are there any significantly negative factors underlying this conservative forecast? Conversely, you have set a relatively high target for net increases. Could you explain current-term initiatives, background and your thoughts in this regard?

The forecast ARPU increase is in truth somewhat conservative. In the last fiscal year, the ratio of iPhone sales was high. We expect that high rate to continue in the current fiscal year, which means that the ARPU growth rate will level off in year-on-year comparison.
Rather than getting into price competition in response to the new plans that competitors have announced, we plan to pursue value offerings. Instead of ready-made plans, we will pursue overall value through carrier aggregation and by combining "VoLTE" and "au WALLET."
Concerning ARPU forecast value, we may be undershooting the situation. Data ARPU is moving along robustly, but although this fiscal year we have held down the amount of discount applied as much as possible, this figure tends to rise in the second half of the fiscal year. We have strongly emphasized this trend. We are not planning any major rate changes.
You awarded a relatively high dividend for the fiscal year ended March 31, 2014. Going forward, will your dividend growth rate outpace your rate of income growth?

Going forward, our use of cash will concentrate strongly on allocations aimed at investment in growth, and this year we will pursue M&A activities. We will award dividends in line with EPS growth. Now that our customer base and networks are relatively well established, we will aggressively pursue M&A and other approaches to take us to the next stage of growth.

Questioner 2

DOCOMO's new rate plan shows that DOCOMO has undergone a major change in its thinking. It seems to me that this shift could undermine the effectiveness of "au Smart Value." Could you please explain the impact this will have on the superiority of "au Smart Value?"

DOCOMO's new rate plan breaks down into two parts: fixed-rate voice communications and family sharing. The market is broadly aware of the former. The market's thoughts on the latter, however, indicate that awareness is low. We will need more time to consider this.
From a service provider's viewpoint, a subscriber to "au Smart Value" represents a type of linked contract acquisition or chain reaction among people in the subscriber's household. In this respect, we believe that "au Smart Value" is different from, and superior to, family sharing. "au Smart Value" is also superior in terms of the sales activity required. Ultimately, the choice is up to our customers, so we will need to stand by a while longer.
Will you launch a plan to counter DOCOMO's new rate plan?

I believe we will at some point. Given the diversity of rate plans, ours may not compete directly.
You have mentioned that you want to direct your use of cash toward growth, but now that your operating performance trends are solid I think it is time to state your policy clearly, and particularly your thoughts regarding the balance sheet.

Our management style is one of making sure all commitments we make to outside parties, and this approach covers all types of numeric commitments we have made to date. I would like to state clearly that, going forward we plan to shift our use of cash toward investing in growth.

Questioner 3

You indicate plans to invest toward growth, including in M&A activities, but what fields will you invest in? Will your investment be in traffic-related fields? Or, like SoftBank will you acquire overseas carriers? Or will you invest in areas that are unrelated to your core business, as DOCOMO has done?

Our growth framework is designed to maximize ID and ARPU multipliers. We also will consider ways to increase the global percentage of our business. We do not expect to make "island-type" investments that do not relate directly to our core business. At this point, however, we can be no more specific than this. After we have announced M&A projects, the reasons why we have made these investments will become clear upon your reflection.

Questioner 4

I understand that your level of cash and deposits is at a record high. At your current pace, I believe you are generating free cash flow of ¥200-300 billion per year. The Company has also increased its dividend. When you talk about investing in growth, are you referring to investment at a level that slightly exceeds the free cash flow you generate or are you planning large-scale investments that involve taking on some degree of financial risk?

We are planning investments at around the level of the free cash flow we generate. We are not planning to plump for large-scale investments that would mean taking on debt. We will not be making any investments in the neighborhood of ¥1 trillion, for example.

Questioner 5

Out of all of your forecasts for this year—such as for net additions, ARPU and income—what KPIs do you see as being at the greatest risk of not being achieved?

Unless something truly unexpected occurs, which should be able to meet all our KPIs.
J:COM is boosting "au Smart Value," but is that generating any results? Also, you are broadening applicable contract conditions—will TV-only subscribers also become eligible for "au Smart Value?"

No major changes are afoot at the moment, but J:COM is also working on initiatives to attract subscribers as one of its "au Smart Value" growth strategies. We are concentrating on the expansion of Internet + TV subscriptions with initiatives for increasing Internet usage. At present, we are not considering making "au Smart Value" available to TV-only subscribers.

Questioner 6

Is M&A during the current term part of your commitment to achieving double-digit profit growth? Or rather, will you adjust this commitment if a reasonably large-scale investment opportunity arises?

Last spring, we committed ourselves to achieving a 10% increase in consolidated operating income over three consecutive fiscal years. We will respond flexibly with regard to business investment. At the moment, no large-scale investments are on the horizon, and we see no reasons for not reaching our income targets. In the event of a business investment that made meeting our income commitment questionable, we would cut costs in order to meet our commitment.
When making overseas investments, do you account for country risk by using country-specific discount rates?

We review a variety of risk factors related to overseas investments. We evaluate specific risks when they become evident.