Edited Transcript of 9434.T earnings conference call or presentation 11-May-20 10:59am GMT

Now I would like to go segment-by-segment in revenue. There was an increase of JPY 200 billion, and all segments had contributed by growing in revenue. Out of that, Yahoo and Enterprise business had grown double digits. The consumer business, in total, there was increase of JPY 16.2 billion. And if you look at the right-hand graph, for telecommunication, there — telecommunication service had grown more than JPY 70 billion. And as for the hand device sales that had gone down, and because of that, there was the decrease in revenue from sales of goods and others in the amount of JPY 50 billion. In broadband, there was an increase of 6%, mobile 3% increase. The broadband had contributed more in the ratio. And in terms of the value — absolute value, mobile had contributed more.

Next is our Enterprise segment, business solution and others. So this is a new business. We see nice growth there. Enterprises, we’re working on doubling our profit. What’s really supporting that is the growth of our new business, which is the business solutions; cloud, IoT, security, digital. All of these are the new things that are comprising this new business, and the contribution is now becoming outstanding. In the new year, we would like to continue to grow this business.

Let me introduce Yahoo. Yahoo has already announced their earnings result. Increase in revenue was above 10% and has exceeded JPY 1 trillion for the first time. The contribution in commerce is very large. ZOZO was also contributing by JPY 57 billion. So these 2 have driven overall growth. In the new year, they will accelerate this.

Next is operating income. Operating income have increased double-digit by plus JPY 93.5 billion. The right-hand side, you can see segment income, the breakdown. As you can see, the mainstay is consumer, is nearly plus JPY 20 billion in increase, but Yahoo has also been contributed by plus JPY 16.4 billion. So all segments have contributed to the operating income.

In here, if you look at others, PayPay has been consolidated on retrospectively. And Cybereason Japan had been switched to equity method, that’s a plus JPY 40 million — JPY 40 billion, excuse me. And there’s others that have achieved double-digit growth. So that is why we have seen a nice positive for operating income.

Now let’s look at the operating income. Year-on-year comparison, Yahoo, an externality factor, which is PayPay related, have been removed. And this is a summary of that. So if you look at it, the graph, you knew, this is approximately JPY 100 billion in increase, among which, and this is included in consumer business in the consumers sales of handsets. This is minus JPY 97 billion, which is very large. But otherwise, it is increasing significantly. Every time, this question about the trend in handsets. So we have given you a very detailed disclosure here. If you look at consumers sales, it’s nearly JPY 50 billion, but that’s because we’re also putting emphasis in power, as well electricity, so that’s additional JPY 40 billion. So you can see COGS on the right-hand side. So you can see the COGS is about JPY 97 billion, it’s about the same. So basically, you can see that we’re not making much margin here, at least in terms of number. But actually, in reality, this year, we had about 40-some percent decrease in inventory — excuse me, it should be 50% down. So in other words, 40% above, 40% to 50%. So there’s a significant reductions in inventory. This is improvement in reserve about more than JPY 110 billion. So the margin decrease there has been offset from that. So that’s what this number shows.

And, for example, telecom network charges because of Hikari, this is the impact on the cards. And also, with regards to the expenses, if you look at the expense line, and when we sell handsets, we book margin, but we’re also having acquisition cost. And so for the contract cost, acquisition cost, we levelize this between 2 to 3 years and book it. In that sense, until last September, so between 2018 to 2019, we have spent a lot of subsidies. And so that’s one of the reasons why it’s here. And also in the second half, subsidies were no longer able to spend more than JPY 20,000. And then we have a lot of promotions that we have enhanced, for example, advertisement, and that is why there’s about increase of JPY 24 billion in sales expenses.

With regards to depreciation, this is an increase of JPY 120 billion. This is the application of IFRS 16. This is the impact of that. And you can see the conventional expenses have been actually booked as depreciation and amortization. But if you actually exclude that impact, it’s almost flat.

And then if you look at outsources, the flip side of the coin is that we have been booking this as an expense, have been actually booked as depreciation. So actually, expenses have increased by JPY 50 billion. Maybe half of that you can say is cost, simply cost. Customer care or enterprise related, all the costs related are included in here. So that comprises half of this minus JPY 50 million. Otherwise, we are enhancing our network, and there are many structural reforms that we have implemented. We’re expanding data center, and there’s some accounting impact as well. And you build that up, and it’s about JPY 20 billion or so, that comprises about JPY 50 billion in total.

And then aside from that, okay, we have PayPay and Yahoo, which has already been disclosed already. So you can see an operating income of JPY 911.7 billion for this fiscal year.

So let’s look at KPI for the telecommunications business. Cumulative subscribers, this is an increase of 1.76, which is JPY 36.50 million. We have been focusing on smartphones. So please follow and watch over our trend in smartphones. We have increased by 2.05 million, which is JPY 24.1 million. We have been disclosing by quarter. First quarter was 173, but you can see acquisition is increasing steadily. So you can see that smartphone acquisition is accelerating. On the right-hand side, you can see the breakdown by brand.

You can see that 3 brands are playing its role, and you can see that it is growing as well. The 3 brands are contributing to better churn rates. So churn rate improved significantly due to our multi-brand strategy. The Telecom Business Act amendment in October was also a nice tailwind. And you can see that there’s an improvement of 0.13%. — excuse me, 0.72%. And smartphone is minus 0.35%. You can see that this is a significant improvement.

As Miyauchi said earlier, 1,200 stores are dual stores, so — it’s 1,800 are those stores. That’s about 60% of the overall 3,000 stores — 100, excuse me. So customer who wants to go large capacity or they want to switch to iPhone, and they’re most likely choosing SoftBank, and so if they’re coming from Y!mobile to SoftBank, and then if SoftBank customer wants to go to a lower rate iPhone or smartphones, then Y!mobile will be the best candidate. And again, this is improving the churn rates.

Let’s look at ARPU. You can see that this quarter, we have seen reductions by JPY 60 in total ARPU. If you look at the ARPU before discount, this is down by minus JPY 400. This is — we have implemented unbundling plan for the handsets and also Y!mobile, LINE MOBILE percentage have increased as well. And also when we did unbundling, we’re reinforcing a family discount as well, and we’re seeing increasing number of users with this family discount plan.

In addition to this, we have this first year discount as well. So for 1 year, they gave JPY 1,000 discount, which is basically a service giving away JPY 12,000 for the year. And in terms of how we book it, before the amendment of the law, it was 24-month effect. So every month, we are booking JPY 500 every month for 24 months. Now it’s been unbundled, so there’s no longer 2-year contract. So JPY 1,000 in cash is given to the customers as a benefit. So we’re not discounting them — treating them as a discount. So JPY 500, 24 months, we have the amortization of that. And at the same time, we’re also disclosing this JPY 1,000. So from Q3 until Q2 of the new fiscal year for 1 year, we will be doing this dual writing off, which is a big impact on our company. So that is why discount (inaudible) is increasing. In terms of discount, because of the unbundling plan, it’s improving. And also 4-year installment still remains, even though it’s decreasing. So as a result, this is an improvement of JPY 340. So offset is JPY 400.

So this first year discount, we believe that Q1 this year is the peak. So we believe that this will expand furthermore. So in the new fiscal year, in Q1, Q2, this is a pressure on ARPU. So in terms of projections, I would like to comment more on this.

Next is broadband service. In broadband, it is steadily growing. We have been able to increase 470,000. So we have been able to exceed 6 million. And as you can see on the right, there is home bundle discount Hikari set, and we have been able to get to the 10 million level. When it’s a set with Hikari, the figure is, as you see here, and the churn rate is 0.3 to 0.4 contribution. And this has contributed greatly to the overall reduction of the churn rate. We would like to expand the contribution from this area.

I would like to move on to talk about the net income. Last year was JPY 462.5 billion, and there was a difference of JPY 10 billion. There was a huge improvement in operating income, the financing income and cost. When IFRS 16 is applied, the interest rate is also recognized. And if we exclude that, the substantive — the interest rate is improving. And the SoftBank has gotten the rating, which is good. And so the improvement is being clearly seen. So it is in the positive. And as for the shares of profit and losses of associates, and this is the — from the investment impact. And there are some sales of the equity method investments. And also there are some depreciation made — excuse me, the impairment made, so the offset amount is put here.

And income taxes, there are 2 points I would like to mention. One point is what you can see in the box in the upper right-hand side. The LINE integration, the upfront posting of tax payment of JPY 19.5 billion. And last year, we were able to use the deferred use of loss carryforwards in the amount of JPY 12 billion. So that is the impact here.

And as for the net income attributable to noncontrolling interest, and ZOZO is now included in our consolidation.

Next, I would like to talk about the CapEx. You see JPY 369.8 billion. The plan was JPY 380 billion, and some of the investments were postponed. There hasn’t been change in the plan, and we have been steadily been preparing, especially 5G.

As for free cash flow, it’s JPY 524.2 billion. The target was JPY 520 billion at the onset of the year. So there was an increase. This — the relationship of free cash flow with the dividend is very important. So we want to have more than JPY 100 billion, and we want to keep it at that level at least.

Supplementary comments about the adjusted free cash flow. The operating activities cash flow is JPY 891.2 billion, and the securitization of installment sales receivables is JPY 31.1 billion (sic) [JPY 30.1 billion], and it’s off-balance on the Japanese standards. So from the IPO, we had been making adjustments. And from here, I would like — so subtracting the CapEx was JPY 576.4 billion. And we have made investments to various new businesses, which is a little over JPY 70 billion. And there was a profit of around JPY 20 billion of the gain on sales of investments. So offsetting that with the investment cash flow, it’s about JPY 50 billion. And the adjusted free cash flow was JPY 524.2 billion.

And now I would like to talk about the additional investments to PayPay. As of May of last year, SBG, the parent company, decided to invest 50%. And I talked about that in the presentation then. In the second quarter, there was an investment in preferred stocks, and I would like to explain about that. Who will be paying for the financing going forward? We have decided that Z Holdings and SoftBank will be doing so. This is a finance business. So we need to have — we need to have healthy amount of equity, and we decided to take the option of preferred stocks. This business is also depending on Paytm, from a technological perspective. So relationship with Paytm is very important. And SBG’s involvement is also critical because PayPay is still growing. So we decided to keep the voting rights as is. So the Board of Directors’ structure did not change. So if you look at the left-hand side, you see 25%, 25%, 50% as of the end of March. And after the conversion of preferred stock to common stock, after fiscal year 2022, Z Holdings and SoftBank KK will have 36%, respectively. So that is the change made.

Next is net interest-bearing debt. From third quarter to the fourth quarter, there has been decrease. And the first quarter and the third quarter JPY 100 billion was paid to the corporate taxes. So these are the quarters where there would be a cash out. The first quarter and third quarter, very severe; second quarter, fourth quarter, a little better. So because of that, the interest-bearing debt has decreased. And if you look at the net leverage ratio, it’s 2.3x. The last quarter was 2.5x.

In the last briefing session, we have disclosed 2.6x further than 2.5x when ZOZO had come to our group, although ZOZO is not — which included the interest debt. But they were booking only 2 months so we decided — we decided to put 12 months, and when LINE is integrated, we will be disclosing it in a similar manner.

So let’s look at the major financing activities. Over this 1 year, just in terms of funding, we funded about JPY 3 trillion. We have arranged a syndicated loan. So this is to acquire Z Holdings shares, which was about JPY 450 billion. So we have finances on a syndicated loan. Restructured ECA financing. This is sweetish financing scheme with — and a guarantee that we have used. We have now actually — the time period is actually from May 2020. So — and also, we have securitized the telecom service fee receivables and other installment receivables through self settled trust. And then we have done other issues of corporate bonds. And at the end of the fiscal year, we have not used this facility. But from April, cash on hand is actually ample. And also with regards to corporate bonds, in addition to issuance of short-term corporate bonds, we did this for the first time, in terms of credit ratings, we’re finally able to utilize it. So we have about JPY 40 billion, but for the issuance of the bond, but we would like to expand this going forward. So that was our actual.

Then let’s look at the forecast for FY 2020. So with regards to the guidance, it has already been published, so this is just for your clarification confirmation. Revenue were JPY 4.9 trillion; adjusted EBITDA JPY 1.630 trillion, operating income JPY 920 billion, net income JPY 485 billion, CapEx JPY 400 billion, adjusted free cash flow JPY 550 billion, dividends per share is JPY 86 per share. So we would like to be positive on all sides.

With regards to the impact from COVID, Mr. Miyauchi explained, so let me just supplement. With regards to consumer business, so we see significant decrease in shop traffic, and of course, decrease in handset sales. So that margin is diminishing. Meanwhile, churn is decreasing as well. So in terms of subscription itself, it’s but stable. But we’re net — we’re company that is focusing on net additions. So in that sense, it’s negative impact on us. I would say there is an impact. And also, we see increasing data traffic, so we want to continue to explore business opportunities.

With regards to Enterprise business, we see delay in new contract conclusions. This is because of the counterparty issues of our customers, also our sales side as well because of some difficulties, you could say this is slow. Meanwhile, likewise, for the consumers, in terms of number of subscribers, in terms of cumulative, it remained stable. Now again remote work is increasing drastically. So this is, again, a big business chance.

With regards to Yahoo, as Yahoo has already published already, but there’s uncertainties in the ad placement. In particular, travel and restaurant, the impact is significant. So this will be offset by e-commerce growth. E-commerce is continuing to grow nicely. So there’s negative and positive elements. I think it’s important for Yahoo to manage both. In terms of Yahoo’s financial business, they are planning to expand. So we would like to continue to work with them together on this.

Now if you look at our operating income, we have already given the guidance that we will be positive, but there’s one characteristic in this new fiscal year. Something that’s different from the previous year. So I need to explain this to you beforehand. If you look at the left-hand side, you see FY ’19 results. This is the breakdown in revenue. Now in terms of revenue, even if you look at it from the first half and second half or on a quarterly basis, there’s not that much volatility. In fact, the second half is slightly larger revenue. In the past, I said that Q4, there’s a lot of acquisition and acquisition costs, but now it’s been levelized to 2 to 3 years. So just because there’s increased acquisition, it doesn’t mean that there’s increasing cost and less profit. In light of the situation, in the previous year, so in FY ’19, we have generated 61% in OI, operating income. Second half was only 39%. So this is a big gap from the revenue. You can see the balance between first and second half or quarterly basis is not quite balanced. And we have not seen the strength in the past. But because of the amendment in the act, because of the unbundling of the assets, and because of the first year discount, in Q3, Q4, there’s accumulation of expenses. In the first 3 months, it’s only about 1.5 months, so it’s not that much in Q3, but in Q4, the impact continues to get bigger. And also handset sales is decreasing. So the margin is decreased. So the levelized impact will come out very — will be squeezed out very slowly, but gradually. So that will be impact on the second half. And so the first half, this is the peak. That will continue. So if you look at the 61% from the operating income, you will see — feel as though FY ’20 will seem very small. It will seem as though — it will appear as though it’s low. But you can see that that’s the impact on a full-year basis.

Now I mentioned about the — there’s a question about coronavirus impact, but impact of the COVID-19, we’re not thinking just in 1 scenario, we could have an impact on Q1 only, maybe Q2, maybe if it’s prolonged, then we will have — with be different impacts. So we are looking at different cost reduction measures. Now maybe if it settles down quickly, then we can maybe spend more expenses on the second half or after corona. So it’s not just 1 single scenario that we’re working with.

In any case, Mr. Miyauchi said that he will be very much sticking with the JPY 920 billion. So I hope you will see us be committed to that number. With regards to free cash flow, in the new year, we will be looking at JPY 550 billion — JPY 552 billion, excuse me. And we think we can be a little more bullish than this number, but at least we will at least achieve 550 — excuse me, correction, JPY 550 billion. And we would like to have that for dividends as well. And we will have — LINE is onetime event, so we would like to do this with borrowings. So shareholder return — we’ll achieve both growth and shareholder returns. That’s our core. And after 3 years since IPO, even in our year 3, whether it be EPS or DPS, we will continue to increase. Our payout policy or dividend policy will be announced at the beginning of the year, and we will watch this and provide you with an update and make sure that we achieve it. And if there is a downward revision, there was a question about whether we would be reducing our dividend. No, we will not — I want you to know that we will not be reducing our payout.

So that is all from me.

We would like to take questions from you. So thank you very much. Continue to listen to us. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) I would like to designate from SMBC Nikko, Mr. Kikuchi?

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Satoru Kikuchi, SMBC Nikko Securities Inc., Research Division – Senior Analyst [2]

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This is Kikuchi. In the earnings briefing…

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Unidentified Company Representative, [3]

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Mr. Kikuchi, your sound is a bit small, if you could speak closer to the microphone.

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Satoru Kikuchi, SMBC Nikko Securities Inc., Research Division – Senior Analyst [4]

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Can you hear me?

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Unidentified Company Representative, [5]

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Yes.

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Satoru Kikuchi, SMBC Nikko Securities Inc., Research Division – Senior Analyst [6]

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In the earnings briefing…

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Unidentified Company Representative, [7]

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I am not able to hear you. Sorry about that, please continue.

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Satoru Kikuchi, SMBC Nikko Securities Inc., Research Division – Senior Analyst [8]

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In the earnings briefing, I have not been able to listen to some of the Q&A because of the communications issues and telecommunication issues. So there may be some overlap. But forgive me for that. So there are 2 things. One is your thinking towards dividend? I asked a similar question every time. This time, I think you have a very conservative plan. And that’s what Mr. Miyauchi has said. I believe that you have had a very conservative forecast for operating income. On the other hand, for the free cash flow, as you have explained, there would be — you would be able to control the cash and there would be increase in the cash. But the dividend growth is only JPY 1. If the operating income had been better than you had expected, in line with that, would you be reviewing your plan for the dividend? If it seems that you have a rich amount of free cash flow, and I think that you still have room for providing more dividend. If you are not changing the dividend, even if you have a better operating income, I would like to know about that. So what’s your view on this?

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Unidentified Company Representative, [9]

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Let me respond to your question. In terms of the dividend, we have to look at the quality of the income and other elements so at the beginning of the fiscal year, I am not able to make assertions of what we will do. But what I can say is that there are some uncertainties, but we will be delivering what we have promised you. So the stable dividend and high dividend are our policies. That will remain unchanged. Also, acquisition of Z Holdings, acquisition of LINE. These are 2 events, which have occurred. And if we exclude that, we would have had stronger free cash flow, but we did have those 2 major events. So we need to comprehensively think about our policies. But in any case, it’s the original meeting point of the fiscal year. So we would like to commit to the figures that we have set out today.

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Satoru Kikuchi, SMBC Nikko Securities Inc., Research Division – Senior Analyst [10]

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Supplementary comment. Your previous policies, I think that rather than not changing the dividend, your intention is to thoroughly implement what you have promised about the dividend?

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Unidentified Company Representative, [11]

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That’s correct. We have to think about the following years. And we need to carefully consider what the dividend would look like.

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Satoru Kikuchi, SMBC Nikko Securities Inc., Research Division – Senior Analyst [12]

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My second question. Next fiscal year on, your forecast for that. The telecommunication revenue is not growing so rapidly. So you’re Beyond Carrier strategy, I think, is going steadily, but income wise, you have not been able to see the contribution from the new fields yet. So the dividend is not growing, and you’re considering that operating income will stay flat. So the elements which would contribute to the increase in the operating income or negative elements towards your operating income, what are you expecting? If you could briefly explain about the elements that you have in mind that I would appreciate it.

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Unidentified Company Representative, [13]

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Next fiscal year on, it’s very difficult to say because of the COVID-19 impact, but I would like to give you the — our concept of direction. So in terms of the smartphones, we are not satisfied yet. We believe that we can still grow. We believe that the 5G business will be our foundation of the business. There is more penetration of telework. And because of that, the value of smartphones will improve drastically. The consumer business, we will stick to growing that business. And as for the Enterprise business. From fiscal year ’18 figures, we would like to double that amount to around JPY 150 billion in several years’ time. And as for Yahoo, in fiscal year 2022, we have the target of JPY 225 billion. So those 3 pillars of the business, we will work to grow all of those 3. When the COVID-19 situation calms down, we will be informing you more about what we will do. But amid the various changes that we are facing now, we would like to deliver firm results to you.

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Satoru Kikuchi, SMBC Nikko Securities Inc., Research Division – Senior Analyst [14]

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In the past, you talked about JPY 1 trillion. How do you position the JPY 1 trillion target?

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Unidentified Company Representative, [15]

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Could you repeat your question again?

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Satoru Kikuchi, SMBC Nikko Securities Inc., Research Division – Senior Analyst [16]

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So you talked about JPY 1 trillion in the past. And how is that number positioned now?

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Unidentified Company Representative, [17]

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It has not changed. And if there is an opportunity, we would like to get there. JPY 1 trillion is just a passing point. We always have that in our minds.

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Operator [18]

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The next question is Mr. (inaudible) from Nomura Securities.

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Unidentified Analyst, [19]

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So I believe that industry as a whole is falling, both in terms of churn and new subscription. So I think the demand itself has been pushed back as our industry as a whole. So do you want to restore this in the second half in terms of subscription? And in terms of ARPU, you had this first year discounts. What is the impact of that? In terms of — if you compare that to an actual value yen amount, how much would that be? And also this year that just finished, you have seen increase in sales promotion, and I think you have launched a lot of sales promotional activities. So the first half, is this the same? I believe that probably it will decrease because of the situation, but you have been spending a lot in the first half and then — I am sorry, second half, and you always try to catch that up. So what is your KPI? Would you be willing to explain?

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Unidentified Company Representative, [20]

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With regards to the scenario, there’s multiple scenarios, which we have in mind. So as this will be a case for one kind of scenario, so let’s say, in second half, there’s an opportunity for sales, whether it be 5G sets? And also the 5G environment is probably advancing. So there’s a lot of topics we can really work on. So depending on the environment at that time, we’ll be having a lot of expectations, and maybe we’ll be utilizing benefits. Of course, that will be scenario.

And the second point about first year discount, it’s actually surprisingly big in at least JPY 100. And up until October, that will be applying pressure on us. So after Q3, I think that the impact of that will wear off. So I think you can generate more profit in the second half. With regards to margin, what — if there’s less acquisition, there’s less depreciation monetization write off, so the benefit will be in the — later on, so this portion that has decreased from last October and also a decrease from cash flow — corona, but this is becoming like a savings for us. So I think in the second half it will be much easier. But the first half, we have the margin, and we have the first year discount squeezed in. Also in accounting treatment, I said that we are levelizing acquisition costs. And that started from FY ’18. ’18 — this is pre-IPO. So in terms of accounting, Q1 looks very difficult. But before IPO, we wanted to be profitable, and we worked very hard. So our cost tends to be heavier in the second half. And in FY ’19, after the deal, we are still in the process of dealing with all the different issues. So the Q1 profit, we wanted to make sure that we control our costs. So the last 2 years, Q1, Q2, the way the profit is generated, the way we spend cost, compared to normal circumstances, it’s slightly higher. So I think that will be rectified in this new year. In any case, we’re looking at multiple scenarios. So our aim is to achieve increasing profit on a full-year basis. So, we will look at the situation carefully and deal with that accordingly.

And the third point, expectations for the second half? Yes, that’s a lot of expectations in the second half structurally and also corona impact. It could come back in the winter again. We can’t deny that scenario, so we have to be prepared for all sorts of scenario.

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Unidentified Analyst, [21]

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So that means my last question. So FY ’21 March, the balance between first half and second half, and you have the peak of first year discount. The service income, you have to be — I guess, you don’t know, you have to — it’s somewhat uncertain, the revenue projection is somewhat uncertain, I believe. But in the earlier session, you talked about cost structure and cost reform. So what is the impact of cost efficiency? What would be the scale? This magnitude of that efficiency, which you expect to realize? So that’s my last question.

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Unidentified Company Representative, [22]

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So in short term, marketing and sales promotion are very big in terms of expense item. Meanwhile, sales infrastructure, including our distributors and sell staff, shop staff, we need to make sure that they are maintained. So we do need to spend the necessary cost there, but I think we can still achieve efficiency.

With regards to structural reform, this is not so much this fiscal year, but this is more long term, 3-year, 5-year. So if you look at it from the long term, this year, I’ve mentioned that costs have increased from FY ’19. But if you include depreciation and amortization, we would like to keep costs flat. So that will be our next maybe theme or topic that maybe we can discuss. I’m sure there’s opportunity. So please be patient with us.

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Operator [23]

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We would like to designate Mr. Tsuruo from Citi Securities.

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Mitsunobu Tsuruo, Citigroup Inc., Research Division – Director & Analyst [24]

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Can you hear me? I would like to ask about LINE. The commitment that you’re making for operating income and the net income after taxes, do you think that you would be able to accomplish it?

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Unidentified Company Representative, [25]

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We have clearly stated that the figures that we have shown you is excluding the impact of integration with LINE. But if you talk about net income, we have 65% with NAVER, meaning that we have about 33%, so the net income impact will be very limited. So the dividend policies and the overall policies, it would not be impacted by integration with LINE. So when we have clear picture of the integration with LINE, we would be able to disclose more, and we are waiting for the review to be completed. So I would like to refrain from commenting further.

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Mitsunobu Tsuruo, Citigroup Inc., Research Division – Director & Analyst [26]

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There is one additional question I would like to ask about LINE. There was a change in the shares that you have for PayPay. So when you have integration with LINE and NAVER will have 1/3 of Yahoo, and they will have the interest in PayPay for around 12%. Is my understanding correct?

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Unidentified Company Representative, [27]

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So economically speaking, the shares is, as you say, they will have 1/3 of the holdings. They will become a stakeholder, as you have said.

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Mitsunobu Tsuruo, Citigroup Inc., Research Division – Director & Analyst [28]

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My second question, briefly about balance sheet. EBITDA multiple has come down slightly. But this fiscal year and in the mid-term, what will be the acceptable level of the net debt ratio. And you have the COVID-19, what is your situation for the access towards the financial market?

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Unidentified Company Representative, [29]

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In terms of the ratio that we have, net leverage ratio, I think that it is sound. Unless there is something that’s significant issue, we would like to improve it little by little each year. Through doing this, I think that we would be able to have more options for the company. From our rating perspective, the same rating company has around net leverage ratio of around 2.5x. So I think that this is reasonable fourth quarter at 2.3x. And the first quarter, it will deteriorate a little slightly from that. And second quarter will improve slightly. But overall, we would like to improve gradually in terms of the net leverage ratio.

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Mitsunobu Tsuruo, Citigroup Inc., Research Division – Director & Analyst [30]

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I think there would be no big problem with that. But if you conduct significant borrowing, with the COVID-19 issue, there would be no problem in accessing the financial market?

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Unidentified Company Representative, [31]

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Well, our business engine is having more subscribers, and we will have more receivables from the subscription, and we will securitize it. And — but this is distributed towards many subscribers. So it’s sound, and we have not been impacted by it. And as for the lease, we have had various cooperation from our stakeholders, and the movement has been sound. So in terms of the CP and CB, this is not something that we have to do right away, but we want to have cash at hand. That would help us. And when we need to access, we will move very flexibly.

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Operator [32]

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From Daiwa Securities. We did not get your name.

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Yoshio Ando, Daiwa Securities Co. Ltd., Research Division – Research Analyst [33]

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This is Ando speaking. I have 2 questions. First question, your strategy beyond carrier. Maybe your — I think you mentioned slightly about recovering your investment and maybe generating profit. And but you put your minority shares in equity method, what is your view? What is your policy on that?

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Unidentified Company Representative, [34]

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With regards to the equity methods, PayPay — Z Holding was saying that maybe this level — the same level as this year. So I think all sorts of investments have kind of picked out. So I think I’m not too worried about PayPay. But even for other equity methods, we’re seeing gradual improvements. And in fact, breakevens, profitability. I think we need to be a little more conscious about that in terms of business model-wise. So we have to discuss what is our business model when it breaks even. So we’re working with the individual companies from that level. And in that sense, it’s on an improvement trend. Now there are things that we have sold off on a one-time basis. So I don’t know if you look at it on a net basis. So if you could be a little patient about how we do this. So we invest and anything that’s been generating a lot of losses, I think, have come to the peak, and it’s not yet to improvement.

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Yoshio Ando, Daiwa Securities Co. Ltd., Research Division – Research Analyst [35]

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Now my second question going back to the corona, I apologize for that. But so for example, in April — you must understand the business situation for April already. In terms of increase in revenue, and also, you mentioned about the impact of first year discount, and you’re already looking at the top line. And I’m sure you understand how much cost reductions you need to make. So as a telecom business, on operating income level, do you think you can project a slightly positive number structurally?

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Unidentified Company Representative, [36]

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Well, cash is positive. I can be very clear about that. Because handset sales, there’s a lot of cash spending. And I can say that we’re positive in cash. But in terms of write-offs, acquisition is about 24 months, 36 months, we treated already. So impact, if the sales decrease, margin decrease and that benefit will be recovered in 2 or 3 years. And then in terms of write-offs first year discount, I’d mentioned that it’s JPY 1,000, and we also had the legacy for JPY 500 and you have to do this double treatment. But even without them, Q1 and Q2, I think it’s somewhat challenging. That’s the basis of the foundation. So in year 1 and year 2 of IPO, we were — admit that we are Q1, Q2 profitable. But I think more so than that, I think we want to have a full year for our view. And wherever we need to spend, we will do so. Wherever we save, we save. We want to be flexible. So as you can see from the diagram, in terms of year-on-year comparison, I think first half’s, so I guess, second half more bullish, upside. And I think if you look at this, the second half, the sales revenue is balanced. And acquisition cost is levelized. So the volume fluctuation will be reduced. And if you think about that, maybe at this timing, the reason why I display this is that the fact that we’re 61% in operating profit for the first half was a little bit strong in terms of numbers. And we want to make sure that we finish well at the end of the year. But I repeat again, but if you take corona, for example, we don’t know how long it will last. It could come back again, relapse, the impact is big. And also, we have to look at the area, which will be impacted. There’s different cases, scenarios. We can’t just draw 1 scenario for 1 situation. So this is the minimum JPY 920 billion. That’s the bottom that we will be targeting, and we want to be flexible, otherwise. So that’s a direction of disclosure. In that sense, Q1 acquisition decreased and marketing effect is diminishing. So we will work on cost reductions for sure. Z Holding placement is difficult. In light of that, they are also working on cost reductions. They have already made that clear. So we have the same line of thinking on our side.

So with regards to the cost, I think you can say that we’re in the phase of strengthening cost reductions.

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Yoshio Ando, Daiwa Securities Co. Ltd., Research Division – Research Analyst [37]

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And one more thing, clarification. Traffic, mobile traffic, you mentioned that there’s a slight growth. Would this lead to increasing operating income? I guess from a third-party point of view, maybe not — it might be marginal, but can I assume that there will be a positive impact on operating income?

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Unidentified Company Representative, [38]

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Well, a lot of it is fixed price. So — and it’s also — there’s some discounting as well. So this is not leading directly to increasing revenue. But I think it’s offsetting some of the negative factors. That’s that element of that, for sure.

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Operator [39]

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(Operator Instructions) Thank you very much. We would like to conclude the investor briefing for the earnings results for the fiscal year ended March 31, 2020.