DCM » Topics » Analysis of operating results for the year ended March 31, 2006 and comparison with the prior fiscal year

This excerpt taken from the DCM 20-F filed Jun 25, 2007.

Analysis of operating results for the year ended March 31, 2006 and comparison with the prior fiscal year

 

As of March 31, 2006, the number of our cellular (FOMA+mova) subscriptions reached 51.14 million and increased by 2.32 million (4.7%) from 48.82 million at the end of the prior fiscal year. We expect that the growth rate of our cellular subscriptions decelerate in the future as the growth rate of cellular subscriptions declines in Japan. The number of FOMA subscriptions increased by 11.96 million (104.0%) to 23.46 million as of March 31, 2006 from 11.50 million at the end of the prior fiscal year. On the other hand, the number of mova subscriptions, which has decreased since the year ended March 31, 2004, decreased by 9.64 million (25.8%) to 27.68 million as of March 31, 2006 from 37.32 million as of the end of prior fiscal year. Our market share decreased by 0.4 point to 55.7% as of March 31, 2006 from 56.1% as of the end of the prior fiscal year. The number of i-mode subscriptions increased by 2.34 million (5.3%) to 46.36 million as of March 31, 2006 from 44.02 million at the end of the prior fiscal year.

 

Aggregate ARPU of cellular (FOMA+mova) service decreased by 290 yen (4.0%) to 6,910 yen in the year ended March 31, 2006 from 7,200 yen in the prior fiscal year. While voice ARPU decreased by 300 yen (5.6%) to 5,030 yen in the year ended March 31, 2006 from 5,330 yen in the prior fiscal year, packet ARPU increased by 10 yen (0.5%) to 1,880 yen in the year ended March 31, 2006 from 1,870 yen in the prior fiscal year. This trend was attributable primarily to an increase in subscribers who subscribe to discount programs, further penetration of cellular phones into lower usage subscriber segments and a large number of subscribers using i-mode services instead of voice calls. The MOU (FOMA+mova) decreased by 2 minutes to 149 minutes from 151 minutes in the prior fiscal year.

 

Our churn rate for cellular subscriptions was 1.01% and 0.77% in the years ended March 31, 2005 and 2006, respectively.

 

In the year ended March 31, 2006, we implemented various measures to retain our subscribers, such as the introduction of simplified and easy to understand billing plans common to FOMA and mova services, the expansion of our “Family Discount” plan and our flat-rate billing plan for unlimited i-mode usage, upgrade of point loyalty programs, releases of attractive FOMA series handset lineups and the expansion of FOMA coverage area, both indoors and outdoors. These measures resulted in further decline of our low churn rate and contributed to net increase in the number of subscriptions. However, these measures have also had an adverse impact on ARPU.

 

Operating revenues decreased by 78.7 billion yen (1.6%) to 4,765.9 billion yen for the year ended March 31, 2006 from 4,844.6 billion yen in the prior fiscal year. While wireless service revenues maintained an equivalent level, at 4,295.9 billion yen from 4,296.5 billion yen in the prior fiscal year, equipment sales decreased by 78.1 billion yen (14.2%) to 470.0 billion yen from 548.1 billion yen in the prior fiscal year. As a result, wireless services accounted for 90.1% of operating revenues in the year ended March 31, 2006 compared to 88.7% in the prior fiscal year. Cellular (FOMA+mova) services revenues increased slightly from the prior fiscal year because the positive effect from the net increase in subscriptions exceeded the negative effect from the decline in ARPU. However, the decline in revenues from PHS services, which we already decided to terminate in the near term, offset the increased revenues from cellular (FOMA+mova) services, and kept total wireless services revenues at a level equivalent to that of the prior fiscal year. The slight increase in cellular service revenues was a combination of a decrease in voice revenues, by 47.6 billion yen (1.5%) to 3,038.7 billion yen from 3,086.3 billion yen in the

 

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prior fiscal year, and an increase in packet communications revenues, by 58.8 billion yen (5.5%) to 1,119.5 billion yen from 1,060.7 billion yen in the prior fiscal year. This result demonstrated an increase in revenues from packet usage due to a large number of subscribers using i-mode services instead of voice calls, and the introduction of new services such as “i-channel”, through which we intend to promote i-mode usage. Voice revenues from FOMA services doubled to 1,169.9 billion yen, inclusive of international service revenues, from 514.7 billion yen in the prior fiscal year and packet communications revenues also more than doubled to 613.3 billion yen, inclusive of international service revenues, from 260.7 billion yen in the prior fiscal year. PHS services revenues decreased by 19.3 billion yen (32.1%) to 40.9 billion yen from 60.3 billion yen in the prior fiscal year and represented 1.0% of total wireless services revenues. Equipment sales decreased by 78.1 billion yen (14.2%) to 470.0 billion yen for the year ended March 31, 2006 from 548.1 billion yen in the prior fiscal year because of a decline in the number of handsets sold. We believe that the decline in the sales of handsets arose from the decrease in our number of newly acquired subscriptions, as well as from our campaign to slow down the handset upgrading cycle and to improve customer services such as providing members of “DoCoMo Premier Club” with free-of-charge battery packs.

 

Operating expenses decreased by 127.2 billion yen (3.1%) to 3,933.2 billion yen in the year ended March 31, 2006 from 4,060.4 billion yen in the prior fiscal year. This decrease resulted mainly from a decrease in sales, general and administrative expenses, including sales commissions, of 66.2 billion yen (4.7%) due to a decline in the number of handsets sold as well as the effect of an impairment loss, of 60.4 billion yen, of PHS related assets recorded in the prior fiscal year. Cost of services increased by 5.7 billion yen (0.8%), due to an increased number of cellular base stations installed. Depreciation and amortization increased by 1.6 billion yen (0.2%) to 737.1 billion yen for the year ended March 31, 2006 from 735.4 billion yen in the prior fiscal year owing to the effect of shortened useful lives of assets associated with the renewal of our internal IT systems.

 

The percentage of operating expenses to operating revenues improved to 82.5% in the year ended March 31, 2006 from 83.8% in the prior fiscal year. Although a decrease in equipment sales owing to a decline in the number of handsets sold exceeded the decrease in sales, general and administrative expenses, the effect of an impairment loss of PHS related assets recorded in the prior fiscal year contributed to the improvement in operating income margin.

 

As a result of the foregoing, our operating income increased by 48.5 billion yen (6.2%) to 832.6 billion yen in the year ended March 31, 2006 from 784.2 billion yen in the prior fiscal year.

 

Other income (or expense) includes items such as interest income, interest expense, gains and losses on sale of marketable securities and other investments, and foreign exchange gains and losses. We accounted for 119.7 billion yen as other income in the year ended March 31, 2006. In June 2005, we completed the sale of all of our 20% holding of H3G UK shares based on the Sales and Purchase Agreement signed with Hutchison Whampoa Limited (“HWL”) in May 2004 and recorded “Gain on sale of affiliate shares” of 62.0 billion yen, including a reclassification of foreign currency translation of 38.2 billion yen. In October 2005, we also sold all of our 2.2% holding of KPN Mobile shares to Koninklijke KPN N.V. (“KPN”), its parent company, and recorded a gain on a sale of investment securities of 40.0 billion yen, including a foreign currency translation adjustment of 25.6 billion yen, as a gain on sale of other investments. As part of the sale of our remaining interest in KPN Mobile, we also recognized a non-cash charge of 14.1 billion yen to operating expenses for the excess of fair value of KPN Mobile shares over the actual amount of cash received which we regard as the consideration of the benefits from the arrangement. Other income in the year ended March 31, 2006 decreased by 384.4 billion yen (76.3%) from 504.1 billion yen in the prior fiscal year, during which we sold the shares of AT&T Wireless for 501.8 billion yen.

 

Income before income taxes, equity in net losses of affiliates and minority interests in earnings of consolidated subsidiaries decreased by 335.9 billion yen (26.1%) to 952.3 billion yen in the year ended March 31, 2006 from 1,288.2 billion yen in the prior fiscal year.

 

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Income taxes were 341.4 billion yen in the year ended March 31, 2006 and 527.7 billion yen in the prior fiscal year, representing effective tax rates of approximately 35.9% and 41.0%, respectively. We are subject to a number of different taxes in Japan, including corporate income tax, enterprise tax and inhabitant income taxes, which, in the aggregate, amounted to a statutory tax rate of approximately 40.9% for both the years ended March 31, 2006 and 2005. The Japanese government introduced special tax allowances such as R&D investment tax incentive. The government also introduced IT investment promotion tax incentive for the three years started April 1, 2003. The difference between our effective tax rate and statutory tax rate arose primarily from such special tax allowances. The difference was limited in the year ended March 31, 2005, because of a decrease in our taxable income due to the tax loss generated by the realization of the impairment of our investment in AT&T Wireless. In the year ended March 31, 2006, our effective tax rate became lower than our statutory tax rate as we were able to realize the tax benefits of R&D investment tax incentive and IT investment promotion tax incentive generated during the year ended March 31, 2006, and a portion of those carried forward from the prior fiscal year which had previously been reserved.

 

Equity in net losses of affiliates decreased to 0.4 billion yen for the year ended March 31, 2006 from 12.9 billion yen for the prior fiscal year. We recorded an impairment charge of 8.6 billion yen, related to our evaluation of Hutchison Telephone Company Limited (“HTCL”) for the year ended March 31, 2005.

 

As a result of the foregoing, we recorded net income of 610.5 billion yen in the year ended March 31, 2006, a decrease of 137.1 billion yen (18.3%) from 747.6 billion yen in the prior fiscal year.

 

This excerpt taken from the DCM 20-F filed Jun 27, 2006.

Analysis on operating results for the year ended March 31, 2006 and comparison with the prior fiscal year

 

As of March 31, 2006, the number of our cellular (FOMA+mova) subscriptions reached 51.14 million and increased by 4.7% from 48.82 million at the end of the prior fiscal year. The growth rate of our cellular subscriptions is expected to be decelerated in the future as the growth rate of cellular subscriptions declines in Japan. The number of FOMA subscriptions increased to 23.46 million as of March 31, 2006 from 11.50 million at the end of the prior fiscal year. On the other hand, the number of mova subscriptions, which had started to decrease since the year ended March 31, 2004, decreased by 25.8% to 27.68 million as of March 31, 2006. It is expected that the migration of mova subscribers to FOMA services will continue hereafter. Our market share decreased by 0.4 points to 55.7% as of March 31, 2006. The number of i-mode subscriptions increased by 5.3% to 46.36 million as of March 31, 2006 from 44.02 million at the end of the prior fiscal year.

 

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Aggregate ARPU of cellular (FOMA+mova) service decreased by ¥290 (4.0%) to ¥6,910 in the year ended March 31, 2006 from ¥7,200 in the prior fiscal year. While voice ARPU decreased by ¥300 (5.6%) to ¥5,030 in the year ended March 31, 2006 from ¥5,330 in the prior fiscal year, packet ARPU increased by ¥10 (0.5%) to ¥1,880 in the year ended March 31, 2006 from ¥1,870 in the prior fiscal year. This trend was attributable primarily to an increase in subscribers who subscribe to discount programs, further penetration of cellular phones into lower usage subscriber segments and a large number of subscribers using i-mode services instead of voice calls. The MOU (FOMA+mova) decreased by 2 minutes to 149 minutes from 151 minutes in the prior fiscal year.

 

Our churn rate for cellular subscriptions was 1.01% and 0.77% in the years ended March 31, 2005 and 2006, respectively. We believe that due to various factors, such as the availability of i-mode, the implementation of competitive billing arrangements, customer confidence in our network and services and the introduction of new services, our churn rate has been lower than that of other operators. However, no assurance can be given that our churn rate will continue to decline or remain low.

 

In the year ended March 31, 2006, we implemented various measures to retain our subscribers, such as the introduction of simplified and easy to understand billing plans common to FOMA and mova services, the expansion of our “Family Discount” plan and our flat-rate billing plan for unlimited i-mode usage, upgrade of point loyalty programs, releases of attractive FOMA series handset lineup and the expansion of FOMA coverage area, both indoors and outdoors. These measures resulted in further decline of our low churn rate and contributed to net increase in the number of subscriptions. However, these measures have also had an adverse impact on ARPU. It is expected that the trend of declining ARPU will continue for the near term. We expect that these implementations will contribute to migrating current mova subscribers to and acquiring new subscriptions for our FOMA services, which in turn will promote packet usage or the usage of video-calling services, which we expect to have a positive effect on revenues from FOMA services in the future.

 

Operating revenues decreased by ¥78.7 billion (1.6%) to ¥4,765.9 billion for the year ended March 31, 2006 from ¥4,844.6 billion in the prior fiscal year. While wireless service revenues maintained an equivalent level, at ¥4,295.9 billion from ¥4,296.5 billion in the prior fiscal year, equipment sales decreased by ¥78.1 billion (14.2%) to ¥470.0 billion from ¥548.1 billion in the prior fiscal year. As a result, wireless services accounted for 90.1% of operating revenues in the year ended March 31, 2006 compared to 88.7% in the prior fiscal year. Cellular (FOMA+mova) services revenues increased slightly from the prior fiscal year because of the positive effect from net increase in subscriptions exceeded the negative effect from decline in ARPU. However, decline in revenues from PHS services, which we already decided to terminate in the near term, offset the increased revenues from cellular (FOMA+mova) services, and kept total wireless services revenues at a level equivalent to that of the prior fiscal year. The slight increase in cellular service revenues was a combination of decrease in voice revenues, to ¥3,038.7 billion from ¥3,086.3 billion in the prior fiscal year, and increase in packet communications revenues, to ¥1,119.5 billion from ¥1,060.7 billion in the prior fiscal year. This result demonstrated an increase in revenues from packet usage due to a large number of subscribers using i-mode services instead of voice calls, and introduction of new services such as “i-channel”, through which we intend to promote i-mode usage. Voice revenues from FOMA services doubled to ¥1,169.9 billion, inclusive of international service revenues, from ¥514.7 billion in the prior fiscal year and packet communications revenues also more than doubled to ¥613.3 billion, inclusive of international service revenues as well, from ¥260.7 billion in the prior fiscal year. PHS services revenues decreased by 32.1% to ¥40.9 billion from ¥ 60.3 billion in the prior fiscal year and represented 1.0% of total wireless services revenues. Equipment sales decreased by 14.2% because of decline in the number of handsets sold. We believe that the decline in the sales of handsets arose from the decrease in our number of newly acquired subscriptions, as well as from our campaign to slow down the handset upgrading cycle and to improve customer services such as providing members of “DoCoMo Premier Club” with free-of-charge battery packs.

 

Operating expenses decreased by ¥127.2 billion (3.1%) to ¥3,933.2 billion in the year ended March 31, 2006 from ¥4,060.4 billion in the prior fiscal year. This decrease resulted mainly from a decrease in sales, general and administrative expenses, including sales commissions, of ¥66.2 billion due to a decline in the number of handsets

 

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sold as well as the effect of an impairment loss, of ¥60.4 billion, of PHS related assets recorded in the prior fiscal year. Cost of services increased by ¥5.7 billion, due to an increased number of cellular base stations installed. Depreciation and amortization increased by ¥1.6 billion owing to the effect of shortened useful lives of assets associated with the renewal of our IT systems.

 

A percentage of operating expenses to operating revenues was improved to 82.5% in the year ended March 31, 2006 from 83.8% in the prior fiscal year. Although decrease in equipment sales owing to decline in the number of handset sold exceeded the decrease in sales, general and administrative expenses, the effect of impairment loss of PHS related assets recorded in the prior fiscal year contributed to the improvement of operating income margin.

 

As a result of the foregoing, our operating income increased by ¥48.5 billion (6.2%) to ¥832.6 billion in the year ended March 31, 2006 from ¥784.2 billion in the prior fiscal year.

 

Other income (or expense) includes items such as interest income, interest expense, gains and losses on sale of marketable securities and other investments, and foreign exchange gains and losses. We accounted for ¥119.7 billion as other income in the year ended March 31, 2006. In June 2005, we completed the sale of all of our 20% holding of H3G UK shares based on the Sales and Purchase Agreement signed with Hutchison Whampoa Limited (“HWL”) in May 2004 and recorded “Gain on sale of affiliate shares” of ¥62.0 billion, including reclassification of foreign currency translation of ¥38.2 billion. In October 2005, we also sold all of our 2.2% holding of KPN Mobile shares to Koninklijke KPN N.V. (“KPN”), its parent company, and recorded a gain on a sale of investment securities of ¥40.0 billion, including a foreign currency translation adjustment of ¥25.6 billion, as a gain on sale of other investments. As part of the sale of our remaining interest in KPN Mobile, we also recognized a non-cash charge of ¥14.1billion to operating expenses for the excess of fair value of KPN Mobile shares over the actual amount of cash received which we regard as the consideration of the benefits from the arrangement. Other income in the year ended March 31, 2006 decreased by ¥384.4 billion (76.3%) from ¥504.1 billion in the prior fiscal year, during which we sold the shares of AT&T Wireless for ¥501.8 billion.

 

Income before income taxes, equity in net losses of affiliates and minority interests in earnings of consolidated subsidiaries decreased by ¥335.9 billion (26.1%) to ¥952.3 billion in the year ended March 31, 2006 from ¥1,288.2 billion in the prior fiscal year.

 

Income taxes were ¥341.4 billion in the year ended March 31, 2006 and ¥527.7 billion in the prior fiscal year, representing effective tax rates of approximately 35.9% and 41.0%, respectively. We are subject to a number of different taxes in Japan, including corporate income tax, enterprise tax and inhabitant income taxes, which, in the aggregate, amounted to a statutory tax rate of approximately 40.9% for both the years ended March 31, 2006 and 2005. For the three years starting April 1, 2003, the Japanese government introduced special tax allowances, which enabled us to deduct from our taxable income a part of our investments in certain IT related assets and investments for research and development. The difference between our effective tax rate and statutory tax rate arose primarily from the special tax allowances. The difference was limited in the year ended March 31, 2005, because of decrease in our taxable income due to the tax loss generated by the realization of the impairment of our investment in AT&T Wireless. In the year ended March 31, 2006, our effective tax rate became lower than our statutory tax rate as we were able to realize the tax benefits of the special tax allowances generated during the year ended March 31, 2006, and a portion of those carried forward from the prior fiscal year which had previously been reserved.

 

Equity in net losses of affiliates decreased to ¥0.4 billion for the year ended March 31, 2006 from ¥12.9 billion for the prior fiscal year. We recorded impairment charge of ¥8.6 billion, related to our evaluation of Hutchison Telephone Company Limited (“HTCL”) for the year ended March 31, 2005.

 

As a result of the foregoing, we recorded net income of ¥610.5 billion in the year ended March 31, 2006, a decrease of ¥137.1 billion (18.3%) from ¥747.6 billion in the prior fiscal year.

 

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EXCERPTS ON THIS PAGE:

20-F
Jun 25, 2007
20-F
Jun 27, 2006
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