Intense Competition, 5G Rollout on Tap for NTT DOCOMO

Michael Wu: I’m here at the 2018 Management Behind the Moat Conference. I’m joined here by Curtis Schenck from NTT DOCOMO.

Welcome, Curtis.

Curtis Schenck: Yeah. Thanks for having me. I'm happy to be here representing NTT DOCOMO at Management Behind the Moat 2018. It's a great thrill for me.

Wu: Curtis, the second-quarter result was in line with expectations, but what really shocked the market was the plan to return 400 billion yen to customers. Can you tell us a little bit more about that? Obviously, it's great for customers, but not from an investment perspective.

Schenck: Yes. Looking at NTT DOCOMO's installed base, we do have some customers who are price sensitive. They have been asking us to be a little bit more flexible on pricing. We are going to be rolling out plans in Q1 of fiscal 2019. Through those plans and the offerings it would be about 400 billion yen per year returned to customers. It all depends on how many people go over to the plans and what their data usage is and what kind of plans that they have.

Secondarily, within the current pricing environment competing against our main competitors or the MVNOs and the sub-brands. We also have Rakuten which is scheduled to launch in October 2019 as the fourth player in the market. So, in some respects, we are preparing for their entry into the market.

Wu: So, timing-wise, it's kind of interesting because there was a lot of rhetoric between the government about lowering prices. Why now this time that DOCOMO is acting? Is it what you mentioned Rakuten coming into the market?

Schenck: It's more driven by our customers' voices, their requests and our desire to compete in the market, then the comments that were made by chief cabinet secretary Suga that started in Hokkaido in August and have continued since then. So, we are concentrating on running our company and moving forward and trying to make ourselves more appealing and trying to find more content in services for our customers.

Wu: And how would that 400 billion yen be distributed? Is it for newer customers, existing customers? What are the plans there?

Schenck: Right now, the details are not there, and those details will probably be available when the new plans are launched in the first quarter of 2019.

Wu: And at the same time, the 5G network is going to be rolled out. Pre-commercialization you look at 2019, the year after it's full commercialization. Is the time a little bit ambitious in the context of what DOCOMO did previously with the 3G and the 4G network?

Schenck: Actually, this has been our technological road map. We've had 2020 in mind for several years, and then we have been preparing our network for that. Apparently, a lot of our equipment for LTE advanced will be applicable to 5G. We have adequate network densification. And so, it will just be a matter of bringing the network up to speed for 5G. The next big step would be when the MIC, the Ministry of Internal Affairs and Communications, allocates the spectrum in March of 2019.

Wu: And once this 5G network is rolled out, one of the strategies to monetize it is the Internet of Things. Can you tell us a little bit more about what that involves? How that helps enterprises and the retail customers?

Schenck: Initially, it's going to be more enterprise-focused and it's going to be a very focused launched. First of all, it's going to be Tokyo only and in business districts. And then, it will be also in various areas, very specific areas for our enterprise customers. What we've been doing through, what we call the 5G open partner program, is working directly with companies, going to them, asking them what can we do to help them improve their business, improve their productivity. They have come back with requests and ideas.

One example is, Komatsu, the construction equipment company, they came up with an idea. And so, we ran a proof-of-concept test with them, where our controllers were in Tokyo. There was a 50-ton bulldozer in Chiba, about 75 miles away or so. And we controlled the bulldozer from that distance. It performed various tasks that Komatsu asked us to perform, including moving around actual earth. So, it passed that test. So, with each enterprise, it's going to be a different challenge and a different solution. And that's another way that that revenue stream will be affected by the customer returns, because that's a different category and those are all individual contracts.

Wu: Right. And with DOCOMO's very strong capital position, strong cash flow generation, how would this roll out be financed? Is it internal cash and a little bit of debt? And how would that impact the capital policy for DOCOMO?

Schenck: We really haven't talked about how it will be financed. But chances are it will be our free cash flow will finance that. Our CapEx is expected to be flat from here at least until 2020 with the 5G component of CapEx increasing as we go along. The dividend is very important to DOCOMO. For years, the mantra has been to maintain a stable sustainable dividend. So, each year, when the books close on March 31 at the end of each fiscal year the CFO and other board members get together and look at how much free cash flow we've generated, how much we expect to generate in the next year. They make a decision to raise it by a yen amount that they see as sustainable in the long-term. And so, we've never suspended or cut our dividend. Theoretically, if we got into a situation where there was a free cash shortfall, we would take on a little debt because we have very low debt level and we have positive cash right now.

Wu: That should be reassuring for investors to say close to 4% yield on our forecast. Thanks very much for sharing the interests in terms of the 5G roll out and also, the intense competition that DOCOMO is going to be subjected to going forward. Thanks for being here, Curtis.

Schenck: Thanks for having me here. I've enjoyed this.

Wu: It’s Michael Wu from Morningstar. Thanks for watching.