Q&A at Earnings Investor Briefing for Q1 FY2020 | About Us

Date	Tuesday, August 4, 2020 6:00 pm - 7:00 pm
Speakers	SoftBank Corp.: Kazuhiko Fujihara (Board Director, Executive Vice President & CFO) Takashi Naito (VP, Head of Finance and Accounting Division) Koichi Hirono (VP, Head of Strategic Finance Division)

Regarding the 2.7% decrease in mobile telecom revenue, although ARPU has decreased by 3%, the number of main subscribers has increased by 5%. When we multiply this ARPU and number of main subscribers, the result does not match up with actual recorded revenue, even accounting for PHS. Also, profit decreased by 12 billion yen in relation to mobile devices. Since sales promotion expenses in the Consumer segment are an increase factor for profits, it seems like there should have been a positive overall impact on mobile device-related results. Please explain the backgrounds of these factors.: The difference between recorded revenue and the result of multiplying ARPU and the number of main subscribers reflects the impact of a decrease in cancellation fees, a decrease due to change in the accounting treatment of long-term discounts (PayPay Bonus), and the valuation of used handsets, which is accounted for as a counter-revenue. Though the impact of the first year / half year discount will continue until Q2, it will finish in Q3. The number of subscribers is trending strongly, and other factors are likely to be close to what we saw in autumn of last year, we expect the revenue to rebound in the second half. With regard to mobile devices, since the device revenue is separated from the communications revenue, depending on how to look at the sales promotion and incentive expenses, the one-time impact from device reserves and the incentive expenses are net off each other, because their figures are about the same.

Regarding the target of 1 trillion yen operating income, considering that Z Holdings Corporation (“ZHD”) is aiming for operating income of 225 billion yen in FY2023, we should assume that operating income of telecom business is not going to increase much. Please explain the overall picture of target of 1 trillion yen operating income.: ZHD’s 225 billion yen operating income target is for FY2023, and they haven’t guided a target for FY2022. However, if ZHD are able to maintain the pace of profit growth, and if telecom business is able to grow appropriately, we should be able to easily reach operating profit of 1 trillion yen. We want to achieve the 1 trillion yen target as early as possible by FY2022, and internally we are working on a slightly higher target.

Under your medium-term plan, the Consumer segment is to increase profits in the current fiscal year. Considering Q1 FY20 results and that telecom revenues will not improve immediately, the barriers to achieving this profit increase seem high. If there are any profit increasing factors for the Consumer segment from Q2 onward, could you tell us about them?: The 12 billion yen decrease factors related mobile devices includes about 6 billion in reserves, which will disappear as it is an one-time factor. The valuation of used mobile devices shows some rebound from the impact of a good evaluation last year. Under the present situation, we don’t see any negative factors in Q2. Rather, we see the situation as positive. There were special factors in Q1, but since we can assume these will disappear form Q2 onward, we should be able to increase profit without difficulty.

Under the medium-term plan, you are anticipating profit growth in FY2021 and FY2022. In the Consumer segment, mobile service has the highest marginal profit ratio. It looks like mobile service revenue is starting to enter a downward trend. Could you tell us if it is possible to create a growth trend for profit in FY2021 and FY2022?: It depends on our initiatives in FY2021 and FY2022, but on a year-on-year basis, Q1 FY20 and Q2 hit the bottom. Considering the impact of the first year / half year discount, we should see an improvement in Q3 FY20 and begin to flatten out the trend in Q4 FY20. From FY2021 onward, we aim to stabilize the trend. Meanwhile, the number of subscribers is growing strongly, and we don’t expect service revenue to go negative.

What impact will the business integration of ZHD and LINE Corporation (“LINE”) have on profits?: Since it will be consolidated, LINE’s operating income will be added. We also intend to pursue synergies between the two companies going forward. In terms of net income, currently SoftBank Corp. owns 44.6% of ZHD, after the business integration, SoftBank Corp. and NAVER Corporation will jointly own 65%, in which SoftBank Corps’ ownership becoming 32.5%, so the non-controlling interest becomes bigger, and the contribution to net income becomes smaller. However, with the two companies work together, we expect the business to grow larger. We intend to generate synergies between ZHD, LINE, and SoftBank Corp.

Will there be any one-time valuation gains from the business integration of ZHD and LINE?: I think the emergence of any one-time effects from the integration process is a subject for future discussion, but at this point we are not anticipating any.

Regarding the approach of the medium-term plan, what is included and what is excluded in this new forecast for net income of 530 billion yen? Could you tell us about three factors, namely fluctuations in share of losses of associates accounted for using the equity method, LINE’s earnings, and improvement in earnings of PayPay Corporation (“PayPay”).: LINE’s earnings are not directly incorporated but we plan to manage the impact to be absorbed. As for PayPay, we have assumed that the loss will peak out in this fiscal year and will begin to improve going forward. I think it is still too early to disclose specific figures.

The growth rate of net income in the plan is 5% per year. Could you tell us what is your thought on dividends? You’ve said you want to achieve operating income of 1 trillion yen as quickly as possible; what are the essential conditions for achieving it in FY2021? What scale to you intend to conduct share buybacks at? Also, are you planning to make borrowings when conducting share buybacks?: It is not our intention to achieve operating income of 1 trillion yen before FY2022, but neither are we aiming to only just manage it. The meaning of the target is to exceed 1 trillion yen in FY2022, and we plan to apply an appropriate level of effort accordingly. Regarding our thoughts on dividends and share buybacks, basically we will treat 85% of the 530 billion yen as resources for shareholder returns. However, looking at this over a three-year period, while we won’t lower the dividends, we plan to make share buybacks flexibly at the best timing while deciding on our policy each year. No concrete decisions have been made at this point, so we will refrain from commenting on borrowings.

Regarding the impact of the first year / half year discounts, what are the respective proportions for the impact of accounting change and the discounts?: The accounting change for the discounts has a significant impact because we changed from recording 500 yen per month over 24 months to recording 1,000 yen per month over 12 months. However, this will gradually disappear.

In the earning announcement for FY2019, you gave the guidance that the first half were having pressure, the second half would recover, and the full year profits were expected to increase. Looking at Q1 FY20 results, can we assume that there is an underlying upward trend?: We announced our outlook in May during the state of emergency, when the extent of the impact of the COVID-19 was unknown. We took a conservative view on all our businesses, including ZHD. In particular, we saw profits increase in Q1 FY19, so we recognized Q1 FY20 would be tough from in year-on-year point of view. Since then, we have taken many measures to mitigate the impact from the COVID-19, and demonstrated our strength overall. Even said so, we want to keep the flexibility, such as investing for future business growth. We should be able to give a clearer indication at the end of Q2.

Regarding share buybacks, you’ve said you would execute them flexibly over the three-year period. Could you tell us what you are thinking about timing?: We intend to consider it in response to the situation. Our overall approach is to conduct dividend payments from free cash flow and improve our financial position. Our basic position is that we will allocate whatever remains after paying out 85% each year to improving our financial position. However, while retaining this basic approach, whether we will make a special decision to conduct share buybacks will depend on the situation at the time.

In the three-year medium-term plan, you do not expect a significant increase in profits for FY2020. Do you intent to accelerate the rate or profit growth in the following two fiscal years?: I think we have a pretty clear framework for profit growth — with an increase in segment income in the Consumer segment, double-digit increase in the segment income of the Enterprise segment, while ZHD has a target for FY2023. We believe that share of losses of associates accounted for using the equity method will also hit bottom and begin to improve, so overall our plan is to accelerate the growth. Currently, our increase in net income from FY2019 to FY2020 is expected to be 12 billion yen, and over two years from FY2021 to FY2022 we have indicated a growth of 45 billion yen. I think this also shows our intention to accelerate the growth.

Could you explain the assumptions and the level of your commitment to the target of 30 million cumulative smartphone subscribers?: We are very committed to achieving 30 million cumulative smartphone subscribers. In communicating this as we have, we are demonstrating SoftBank Corp’s commitment to making a full effort to achieve our goal as we have until now. Profits and dividend policies are also important, but the great driver of these is smartphones, therefore our level of commitment is high. Regarding our assumptions, we have declared that of the 30 million smartphones in FY2023, 180 million will be 5G smartphones. We are certain that 5G will be a major driver. The 300 million smartphones include subscribers from enterprise customers, where we believe there is room for further growth.

What is included in the “Other” business segment, and what is the future direction for this segment?: One of the distinctive aspects of Q1 FY19 is that for April only, we included the profit and loss of PayPay as a consolidated subsidiary. This was an one-time factor. There were no other material figures need to mention. The background of the figure in “Other” is an accumulation of the small improvements in the earnings of subsidiaries, and we are happy for them to make incremental gains.