NTT H1 Operating Profit Down 9.4% Y/Y on Lower Earnings from Mobile and Fixed-Line Telephony

NTT's group revenue increased by 0.3% year-on-year (y/y) to ¥5.249 trillion (US$44.7 billion) in the first half of its current fiscal year. The operating profit declined by 9.4% to ¥691.5 billion, while net profit fell by 11.9% to ¥291.5 billion. For this fiscal year ending 31 March 2007, NTT has maintained its group net profit outlook of ¥500 billion on group revenue of ¥10.800 trillion, which compares with the result of ¥498.7 billion net profit on ¥10.74 trillion in sales in the previous year.
Operating profits at its two regional fixed-line subsidiaries fell in the first half from a year earlier as income from voice services fell. Its mobile unit NTT DoCoMo, which accounts for about 75% of the group operating profit, also delivered weaker earnings in the first half, partly due to increased costs of migrating customers to 3G services and lower call charges in the face of stiff competition with two local rival carriers (see Japan: 27 October 2006: NTT DoCoMo H1 Operating Profit Down 7.4% Y/Y as 3G Costs Rise). However, NTT Data, a computer system integration service subsidiary, helped limit a fall in earnings at NTT. NTT Data's operating profit more than doubled, helped by higher sales of data communications systems to Japan's public sector and financial, manufacturing and logistics firms.

Outlook and Implications

• Japan's Changing Telecoms Market: The telecoms market in Japan is experiencing dramatic changes amid intense competition. The conventional fixed-line segment continues to shrink in conjunction with the shift towards the use of IP telephone and mobile services. In the broadband market, which continues to grow, the number of ADSL subscribers is now in a slight decline, but optical access services, the mainstay of the broadband business, are spreading at an accelerating pace. In the mobile market, where growth in total subscriptions has slowed, the number of subscribers to the 3G mobile communications service is increasing, with more than half of the mobile customers in the country being 3G users. With the introduction of the mobile number portability (MNP) system, rate plans and discount services are diversifying and applications are being enhanced to maintain customer loyalty.
• FTTH to Drive Growth: As it seeks to offset falling revenue from its voice communication service, NTT is also spending heavily to win more subscribers to its B FLET'S FTTH service and IP phones. Having acquired more than four million of B FLET'S customers, NTT has said that it will, in the second half, increase market campaigns and enhance service quality and coverage to further increase this customer base. The telco aims to gain six million users for its FTTH service and three million IP phone customers by the end of March 2007. This is part of its business plan to “shift 30 million customers to optical fibre access and next-generation network services by 2010” (see World: 17 October 2006: FTTx Status in Asia, Europe and North America). NTT is seeking to deploy optical networks for several reasons. These include; the bringing of higher bandwidth to residential and business users; the offering of new multimedia and converged services, such as VoIP and IP-TV and; the enablement of device interoperability over a common IP platform for its fixed and mobile networks (connecting different services over any devices, such as email access on mobile handsets or TV, or TV control via mobile handsets). The carrier's plan is also being driven by the need to differentiate itself from its competitors, such as Softbank, and a desire to cut future capital expenditure (capex) and operating expenses, which is inherently necessary when migrating to a common IP platform.
• Mobile Unit under Serious Competition: In the mobile segment, DoCoMo, the country's largest mobile operator, has been gradually losing market share to its key rival KDDI, particularly in the 3G foray. From 24 October to 31 October, the first week after mobile number portability (MNP) system was introduced, DoCoMo lost a net of 73,000 mobile customers. In contrast, KDDI, the second-largest player, gained a net of 98,300 new subscribers to its mobile services during the period, clearly establishing itself as the top company in the early stages of the battle to attract customers under MNP. In addition to its popular music download services, KDDI has also unveiled new handsets for the autumn and winter season before DoCoMo (see Japan: 9 November 2006: KDDI Early Winner under Mobile Number Portability). To turn around this situation, DoCoMo has said that it is taking measures to strengthen its overall service offerings, such as speeding up FOMA network expansion and enriching handset line-up. The operator also aims to enhance music-related services, including the launch of "Chaku Uta Full", a service that enables the download of a full piece of ringtone music using i-mode, and "Music Channel", a service for downloading full-length, high-quality music programmes. In addition, commencing in metropolitan Tokyo in August 2006, NTT DoCoMo is progressively expanding the service area for HSDPA, which offers data downlink speeds up to 10 times faster than current 3G services (a maximum of 3.6 Mbps). Although such measures are expected to help DoCoMo increase customer royalty and data revenues, Global Insight believes heavy network investment and high marketing costs will continue to put pressure on the company's short-term earnings.