KDDI Operating Profit for FY 2006/07 Up 16.2% on Strong Mobile Subscriber Growth

For the financial year ending 31 March 2007, KDDI posted operating revenues of 3.335 trillion yen (US$28.1 billion), up by 9.0% year-on-year (y/y). The company's operating profit grew by 16.2% y/y to 344.7 billion yen, representing an operating margin of 10.3%. The growth of the company's mobile business absorbed losses from the fixed-line business, which is in the middle of expanding new services. For the mobile business, operating revenues increased by 6.7% y/y to 2.677 trillion yen and operating income rose by 8.8% y/y to 385.7 billion yen. Operating revenues from the fixed-line services rose by 15.3% y/y to 714.4 billion yen, while operating loss from the business was reduced by 12.3 billion yen to 49.0 billion yen. KDDI's net profit for the year, however, dropped by 2.0% y/y to 186.75 billion yen. The company attributed the lower profit to the absence of tax benefits it enjoyed in the preceding year for merging with then-loss-making Poweredcom. For the current financial year to March 2008, KDDI said it expects its operating profit to rise 13.1% to 390 billion yen and operating revenue to climb 4.9% to 3.50 trillion yen, while net profit is expected to expand by 17.8% to 220 billion yen.

Outlook and Implications

• Strong Mobile Business Growth: KDDI, Japan's second-largest mobile phone operator, ended 2006 with the largest net increase in subscriptions for the third year in a row. During the course of 2006, KDDI added a net of 5.6 million new mobile subscribers, compared to the figure of 1.8 million held by its larger rival NTT DoCoMo. KDDI ended 2006 with a subscriber base of 27.2 million, bringing its market share to 28.7% from 24.8% at end-2005. In light of this, DoCoMo and the third-placed Softbank Mobile saw their market share drop to 55.0% (from 57.9% a year earlier) and 16.3% (from 17.4% a year earlier) at end-2006, respectively. KDDI's market share gain has particularly intensified since the introduction of the mobile number portability (MNP) system in October last year, which allows mobile users to switch operators while keeping their phone numbers. KDDI has clearly established itself as the top beneficiary in the early stages of the battle to attract customers under the MNP system (see Japan: 11 January 2007: A 2006 Snapshot of Japan's Mobile Market). For the current financial year ending March 2008, KDDI aims to maintain “Customer Satisfaction No. 1” by boosting its all-round product attractiveness (infrastructure, handsets, charges, content and applications). The operator is aiming to reach a total of 30 million subscribers with a 30% market share by the end of the financial year. The operator will also promote Tu-Ka (personal digital cellular) user migration to its CDMA-based "au" services and it plans to terminate the Tu-Ka service smoothly by end-March 2008.

• Efforts to Grow Fixed-Line Business: In addition to its success in the mobile segment, KDDI is also actively expanding its fixed-line services, particularly the fibre-optic telecoms services. Its efforts were shown through a series of acquisitions. At the beginning of 2006, KDDI acquired utility firm Tokyo Electric Power Co (TEPCO)'s telecoms unit, PoweredCom. In January this year, it further absorbed TEPCO's fibre-optic business (see Japan: 13 October 2006: KDDI to Acquire TEPCO Fibre-Optic Business). Furthermore, KDDI now plans to make Japan Cablenet Ltd, known as JCN, into a subsidiary by purchasing a roughly additional 28% stake in the cable TV firm's holding company from Fujitsu Ltd for an estimated 20 billion yen. KDDI now controls some 47% of the holding company, following a 33-billion-yen purchase of shares from Marubeni Corp and Secom Co in March 2006. Once the purchase from Fujitsu is completed, KDDI will have a 75% stake with the remainder held by TEPCO. JCN, the second-largest cable TV company in Japan, provides TV broadcasts as well as internet connection and IP phone services via 12 group companies in Tokyo and Chiba Prefecture. By acquiring the fibre-optic infrastructure and customer base of utility and cable TV companies, KDDI hopes to achieve a 30% share in the Tokyo-Metropolitan area. The company is also aiming to tap into the growing market for fast download of multimedia data services, such as video-on-demand (VoD).