Q&A at Earnings Results Briefing for Q1 FY2020

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Date Tuesday, August 4, 2020 4:00 pm - 5:20 pm
Speakers SoftBank Corp.:
Ken Miyauchi (President & CEO)
Jun Shimba (Representative Director & COO)
Yasuyuki Imai (Representative Director & COO)
Junichi Miyakawa (Representative Director & CTO)
Kazuhiko Fujihara (Board Director, Executive Vice President & CFO)
  • The progress rate for Q1 FY20 operating income was over 30% the full-year forecast, as it was last year. Operating income appears to remain strong despite the impact of COVID-19. Is this as anticipated? Mobile device-related sales costs were 12 billion yen. Will costs continue at this level after Q2 FY20?

    In Q1 FY20, mobile device shipments declined by 160,000 units. Operating income declined in the Consumer segment, owing to the state of emergency being declared in April and May, and we responded by the number of sales staffs in half. However, growth in the Enterprise segment limited the decline to 160,000 units in total. We expect volume to increase in the second half. Despite COVID-19, operations have returned to normal since the end of June, from July, and numbers have come back up. If this pattern holds, we think we can achieve annual operating income of 920 billion yen. As for mobile device-related sales costs, the reversal of reserves had an impact last fiscal year, but this impact will disappear from Q2 FY20. Operating income got off to a strong start in Q1 FY20, but we do not view this figure as problematic.

  • Can you explain in more detail the 5.4 billion yen in year-on-year gains on the sale of equity method investments, and the 3.6 billion yen in losses of associates accounted for using the equity method for the year? Will this arise again after Q2 FY20?

    Last year, there were some major factors related to evaluations and the sale of shareholdings, but they were one-off factors that will not occur again this year. The 3.6 billion yen in losses was largely related to PayPay Corporation, and the losses are near their peak and unlikely to increase much on a year-on-year basis.

  • The other day, the Liberal Democratic Party said it would consider regulating apps made in China. Are there any problems at DiDi?

    I do not think there are any problems. DiDi Mobility Japan Corp.’s servers are all located in Japan, carefully managed to prevent data leaks and the like. So far, there has been no talk about services becoming unavailable.

  • What will happen with brands in the future after Z Holdings Corporation (“ZHD”), which owns Yahoo Japan Corporation, merges with Line Corporation? Could the brands be eliminated?

    Yahoo Japan has strong brand recognition in Japan. Instead of answering this question myself, I think President Idezawa and President Kawabe of the merging companies should discuss brands.

  • Revenue and profits were solid in Q1 FY20, and free cash flow was up 49%. What factors were in play?

    We did not expect COVID-19 to quickly end and took various actions to increase cash on hand. The biggest factor was the securitization of receivables and turning them into cash. The Company’s adjusted free cash flow includes the securitization of installments receivable, owing in part to covenants. In Q4 FY19, we cut down on securitization transactions with the intention of improving the balance sheet, so they rebounded a little, and look higher than the actual value. We took steps to improve the situation by reducing inventories and cutting costs, and these initiatives showed up in results, including at subsidiaries.

  • SoftBank targets operating income of 1 trillion yen in FY2022. Does this target include the merger with Line Corporation? If it does, I understand that Line Corporation is posting losses.

    Our target does not reflect the merger with Line Corporation. We believe that by working together, we can add to the numbers if we can increase group synergies, like the numbers that have improved at ZHD.

  • “PayPay” is a great app and platform, so how does “LINE” fit in?

    This is a hard question to answer right now, so please wait a while longer until we can talk in more detail. “LINE” is a blockbuster app with 80 million users already. How this plays out will depend on President Kawabe and the other managers of the company.

  • How many subscribers do you target for 5G? You said that SoftBank targets at 60% ratio of 5G smartphones by FY2023. Would it be correct to understand this as 60% of total smartphone contracts are 5G, and not new sales? Also, how do you plan to achieve this?

    This 60% figure is the percentage of all smartphone subscribers. We expect subscribers to switch to 5G in droves. Our 5G network will cover 90% of the population in about two years, by the end of FY2021, making 5G services available everywhere. We therefore think subscribers will switch over to 5G. 5G smartphone sales volume is in line with targets. We believe the switchover will gain momentum from the second half FY2021. We expect 5G models to hit the market from Google and Apple, triggering the shift to 5G. For this reason, we must rapidly roll out our 5G network.

  • Have 5G smartphones sales been affected by COVID-19?

    Our original target did not assume many 5G smartphones would be initially sold in the beginning, so we have not seen a major impact from COVID-19. Overall, business activities shrank notably in May, causing a minor impact, but in total, sales have been in line with our forecast. All upcoming smartphones will be compatible with 5G, and we plan to put them in our lineup from the second half, which should accelerate sales.

  • Mobile devices shipments decreased by 160,000 units, a far lower number than declines at other carriers. What was the cause of difference with other carriers? At other companies, profits grew as costs declined along with lower sales. Why did profits decline in SoftBank’s Consumer segment?

    Debut plans were brisk for the SoftBank brand and Y!mobile brand. Although shops switched to shorter business hours and appointment-only services, consumers shifted to digital services. We believe the Consumer segment did well, despite declining year-on-year. In the Enterprise segment, mobile devices inventories almost dried up. In total for both segments, the decline was 8% year-on-year. Shipments have improved since June and should steadily increase after July when new mobile devices come out. The profit decline in mobile devices includes some temporary factors related to reserves.

  • In the U.S., the government will soon prohibit transactions with companies that handle products made by five Chinese companies including Huawei Technologies Co., Ltd. (“Huawei”). I understand that SoftBank’s base stations use some communications equipment made by Huawei, and these components are being replaced by products made in Europe. Is progress being made on this front? Also, SoftBank has smartphones made by Huawei and ZTE. As more models come out from this autumn, what will the impact be on new smartphone model uptake?

    For communications equipment, SoftBank has completely transitioned to Nokia and Ericsson for 5G. Some 4G systems use components from these companies, but we are steadily switching out core components. We are in talks with the government and Ministry of Internal Affairs and Communications (MIC) about guidelines and see no issues with communications equipment. We are also talking with MIC about smartphones, and at this stage, guidelines do not call for discontinuing the handling of smartphones made by Huawei. While consulting with the government, we are on the verge of making a decision about handling new mobile devices from Huawei.

  • I understand that more employees are working remotely. Has there been an impact on, or changes to, plans for the new head office?

    Nothing noteworthy. We are encouraging our employees to work remotely and think more group companies will follow suit. While most employees work remotely, we are allowing some employees to work in the office at 30-40% capacity. The new Takeshiba building is a smart office, and we intend to experiment with different work styles while collaborating with the Tokyo Metropolitan Government.

  • A communications business study group at MIC has recently been discussing a variety of topics, including fees for mobile phone number portability. What are your thoughts on this? How will you deal with the risks that communications fees will have to be reduced, or that fee income will decline?

    Regarding mobile phone number portability, we are in talks with MIC. Our stance is that fees are appropriate for this service to cover associated costs at retail stores and call centers. Based on surveys that have come out recently, these fees appear to be around the middle of the spectrum compared with fees in foreign countries, also taking into consideration network quality. Prices vary by plan, and customers are free to choose a plan they like. We intend to continue providing this service at a reasonable price, taking cost efficiency into account.

  • Do you expect the competitive landscape to change once Rakuten Mobile, Inc. (“Rakuten”) enters the market?

    We do not know how far Rakuten will build out its network, but at this juncture, we do not view its incursion as a major threat.