INTERVIEW: Vodafone Japan 3Q Performance Below Forecast

TOKYO -(Dow Jones)- The financial performance of Vodafone K.K. (9434.TO) is below expectations so far this quarter, and new handsets will be key to the company meeting its full-year forecasts, the new chief executive of Vodafone Group Plc's (VOD) Japanese unit said Wednesday.

"If we keep performing like we have in the last two months, we will fail to meet our annual projection," Shiro Tsuda, president and chief executive of Vodafone K.K., told Dow Jones Newswires. He declined to provide specifics of the financial performance this quarter, which is the fiscal third quarter.

"But whether the users in Japan will accept these (new) models will be a key to whether we will be able to meet our annual financial goal," said Tsuda, who took the helm of the Japan unit Dec. 1 .

Vodafone K.K. is forecasting group net profit of Y110 billion for the year ended March 31, 2005, on revenue of Y1.531 trillion.

The company's market share has been in decline since early this year, as it struggled to attract customers because of delays in releasing new and attractive handset models and its slow response to price competition.

Operating profit for the six months ended Sept. 30 fell 30.2% year-on-year to Y87.5 billion, while revenue fell 18.4% to Y736.8 billion during the same period.

Tsuda said seven new phone models, made by firms including Nokia Corp. (NOK), Motorola Inc. (MOT), Sharp Corp. (6753.TO) and NEC Corp. (6701.TO), will be the first step in regaining popularity and meeting its fiscal-year forecast. The first of these models went on sale Wednesday.

At the end of November, Vodafone had 15.21 million total subscribers, while larger rivals NTT DoCoMo Inc. (9437.TO) boasted 47.67 million subscribers and KDDI Corp. (9433.TO) had 18.52 million.

Vodafone added net users - calculated by subtracting cancellations from the number of new contracts - of only 9,900 in November from the previous month, while DoCoMo added 135,000 subscribers and KDDI gained 167,100 additional users.

The number users of Vodafone's new third-generation service in Japan rose on a net basis by 22,500 to 296,900, slightly accelerating from October. But it was still far behind KDDI, which had 16.45 million 3G users. DoCoMo's 3G users came to 7.57 million in November.

"The time has neared for us to make a recovery," Tsuda said. "Our battleground is in 3G... We are going to fight hard in 3G."

In light of its recent failure to expand market share, Vodafone Japan has supported the government's tentative plan to give extra bandwidth in the sought-after 800 megahertz spectrum to DoCoMo and KDDI, as that would thwart possible new entrants such as Softbank Corp. (9984.TO) in their efforts to snap up customers from existing mobile operators.

Three big operators serving about 70% of a population around 128 million "looks like a good number," said Tsuda, an engineer by training and one of the driving forces for the rapid growth of DoCoMo's i-mode data service during his tenure there.

He said that too many operators crowding the market would not only limit the 3G growth of each operator, but could also cause technical problems like interference, given the available spectrum for 3G services.

Competition is expected to intensify in fiscal 2006, when mobile phone users in Japan will be allowed to keep their phone numbers when they switch operators.

Japanese mobile phone users are some of the most advanced and experienced in the world, having had ample opportunity to experiment with the functions of high-speed 3G phones.

Japan's early adoption of 3G technology resulted in many subscribers using more expensive, high-end handsets, but Tsuda said user preference for 3G handsets will become more diverse in coming months.

For that reason, he said Vodafone will be releasing both high-end and low-end handsets for its 3G users in Japan. Some of the phones, such as NEC's "802N" model, will only be made for the Japanese market, while others will be sold worldwide, Tsuda said.

Tsuda reiterated that the company "is not considering tie-ups" with potential new entrants to the market such as Softbank Corp. (9984.TO), in contrast to recent media reports.

Observers have speculated that Vodafone would seek a wholesale arrangement under which it, a telecom operator, would offer infrastructure to an Internet service provider like Softbank, and this in theory would bring the telecom company more users and more stable revenue.

Such an arrangement, known as a Mobile Virtual Network Operator relationship, would also enable the mobile operator to boost market share with reduced marketing costs.

But Tsuda openly doubted whether such a scheme would be viable.

"Who would take the risk of investing the money on infrastructure to make an MVNO viable long-term?" he asked.

Such an arrangement would be attractive only if the operator owning the infrastructure has idle capacity to fill in order to recoup the heavy investment costs of building the network, he said.

-By Michele Yamada, Dow Jones Newswires; 813-5255-2929; Michele.Yamada@dowjones.com

(END) Dow Jones Newswires"

Posted to the site on 8th December 2004