NTT Fiscal Year Operating Profit Down 7% Y/Y on Higher 3G Costs at Mobile Unit

For the fiscal year ending 31 March 2007, NTT today posted operating profit of ¥1.11 trillion (US$9.26 billion), down 7% from the previous fiscal year. Net profit dropped by 4.4% y/y to ¥476.9 billion, while operating revenue increased by a marginal 0.2% to ¥10.76 trillion. The country's largest telecoms group attributed its lower profitability to higher spending by NTT DoCoMo on the migration to FOMA (its 3G mobile phone service) and the increased cost for expanding B-FLET'S FTTH service at its fixed-line units. However, the company stated that these are necessary steps to maintain and even enhance its growth base in the future. For the current fiscal year ending March 2008, NTT expects a 0.6% decline in sales to ¥10.7 trillion and a flat operating profit of ¥1.11 trillion, while seeing a 3.5% fall in net profit to ¥460 billion. In the meantime, NTT also announced that it had decided to name executive vice-president Satoshi Miura as its new chief executive, replacing Norio Wada, who has been chief executive since 2002 and will become chairman. The proposed management change will take effect subject to shareholder approval at the annual general shareholders' meeting in late June, the company said.

Outlook and Implications

• Growing FTTH and IP Telephony Services: The market for conventional fixed-line telephone services in Japan continues to shrink due to the shift to IP telephony services. In the broadband market, the number of ADSL subscribers is undergoing a net decrease as the expansion of optical access accelerates and the market continues to grow. In an effort to offset the decline in revenue from its fixed voice communications services, NTT is spending heavily on winning more subscribers to its FTTH and IP telephony services. With respect to the FTTH business, the group's two regional units—NTT East and NTT West—expanded B FLET'S service areas, launched new services, and took measures to improve customer service in order to expand their subscriber bases. With regard to Hikari Denwa, a high-quality IP telephony service that makes use of optical access, NTT East and NTT West launched new services such as caller ID display, discount flat-rate plans, and Hikari Denwa Office Type, a service for small and medium-size businesses that makes up to eight phone lines and 32 phone numbers available. In the area of video distribution services, NTT East and NTT West have also formed tie-ups with broadcasters to promote and expand multi-channel broadcasting services using B FLET'S. As a result of these efforts, the group had 6.08 million users of its FTTH service and 3.17 million users of its IP telephony service at the end of March, which it aims to boost to 9.476 million and 6.274 million, respectively, by the end of March 2008. As it shifts towards high-speed fibre optical access, NTT expects to lower gradually the number of subscribers to its ADSL service, which has faced intense competition from Softbank Corp.
• Migration to 3G: In the Japanese mobile communications market, growth in the overall number of subscribers remains sluggish, but 3G mobile services are expanding steadily, and with the introduction of mobile number portability (MNP) in 2006, price competition remains fierce. NTT's mobile unit, DoCoMo, said last week (27 April) that its operating profit fell 7.1% in the fiscal year to March 2007 as operating costs surged 2.1% due to its efforts to encourage customer migration to its 3G FOMA service amid intense competition from smaller rivals KDDI and Softbank (see Japan: 27 April 2007: NTT DoCoMo Announces 25% Profit Fall). DoCoMo has worked to enhance its overall capabilities by providing user-friendly billing services, enhancing and expanding its handset line-up and services, raising network quality, and improving after-sales services. Thanks to such efforts, DoCoMo has seen the migration go rather smoothly, with subscribers to its FOMA 3G service standing at 35.53 million at the end of March, accounting for 67.5% of its total subscriber base. The company aims to have 80% of its subscribers using its FOMA service by the end of March 2008. In addition, DoCoMo's market share is now on a recovery trend after losing subscribers to KDDI and Softbank following the introduction of MNP last year (see Japan: 11 January 2007: A 2006 Snapshot of Japan's Mobile Market).