Financial Summary

Recent Updates

Highlights

On January 10, 2012, Bell-Park announced December monthly sales estimates: click here to go direct to the Monthly Trends section for sales estimates.

(For the original Japanese-language only data please click here.)

On December 6, 2011, the company announced November monthly sales estimates.

On November 7, 2011, the company announced October monthly sales estimates.

On November 1, 2011, the company released Q3 FY12/11 results:click here to go direct to the Q3 FY12/11 results section.

(For original PDF announcement in Japanese-language only please click here)

For corporate releases and developments more than three months old please refer to the News & Topics section.

Back to Top

Trends & Outlook

Monthly Trends

Q3 FY12/11 Results (Announced on November 1, 2011; please refer to the tables above).

The full year forecast was left unchanged. Total cumulative sales volume for Q3 FY12/11 was 488,815 units (+3.8% YoY): 284,185 units in new handset sales (+6.2% YoY) and 204,630 units in replacement sales (+0.7% YoY). Cumulative Q3 sales thus came to 73.0% of the company’s revised full year sales forecast of 670,000 units.

Total cumulative sales for Q3 FY12/11 came in at 47.8 billion yen (+7.3% YoY) driven by the increase in unit sales, however, operating profit declined 22.2% to 1.8 billion yen. The main reason behind the sharp fall in operating profit was a 16.7% YoY rise to 6.7 billion yen in SG&A expenses fueled by higher personnel expenses due to an increase in the ratio of full-time staff and increased sales promotion expenses due to intensified competition with other mobile-phone dealers.

Q3 unit sales came in at 161,550 units (-5.2% YoY): 90,498 units in new handset sales (-0.8% YoY) and 71,052 units in replacement sales (-10.3% YoY). As for lower mobile phone handset sales, expectations for the launch of an iPhone 4 replacement resulted in subdued purchasing of the iPhone 4 and thus September and August 2011 monthly sales were down YoY, the company commented.

Q3 FY12/11 sales dropped 3.4% YoY to 15.4 billion yen due to lower unit sales. In addition, the increase in personnel expenses due to an increase in the ratio of full-time staff and increased sales promotion expenses due to more competition with other dealers resulted in a 17.9% YoY rise in SG&A expenses to 2.3 billion yen. Consequently Q3 operating profit fell 20.5% YoY to 578 million yen.

The company commented that Q3 FY12/11 results were roughly in line with its forecast. However, sales during the first and second half of Q3 differed; in the first half of Q3 sales came in above expectations thanks to strong iPhone 4 and data-card sales. In the second half of the quarter though, expectations for the launch of an iPhone 4 replacement resulted in subdued purchasing of the iPhone 4 and sales thus trended marginally below company expectations.

The iPhone 4S’ October 14, 2011, launch resulted in unit sales increasing 37.3% YoY, a significant rebound from September 2011’s 13.0% YoY decline. (Pease refer to the Full Year (FY12/11) Outlook section for further details on the company’s forecast.)

Q2 FY12/11 Results

The company announced Q2 FY12/11 results on July 29, 2011 (see table above).

In addition, the company also announced a downward revision to its FY12/11 forecast.

Total sales volume for 1H FY12/11 was 327,265 units (+9.0% YoY): 193,687 units in new handset sales (+9.8% YoY) and 133,578 units in replacement sales (+7.7%YoY). 1H sales thus came to 48.8% of the company’s revised full year sales forecast of 670,000 units.

Looking at new sales by unit, type for FY12/10 mobile phones were 71.5% of sales; data cards were 7.8%; and PhotoVision digital photo frames were 20.7%. In 1H FY12/11 mobile phone were 78.9%; data cards: 10.9%; and PhotoVision digital photo frames were 10.3%. For 1H FY12/11 low- average revenue per user (ARPU) PhotoVision sales declined as a percentage of overall sales while cell-phones (usual ARPU handsets) increased their weight.

The company opened three new Softbank Shop during 1H FY11/12 (two directly operated stores and one franchise store) and moved another three stores to better locations. The company operated a total of 182 stores with 131 directly managed and 52 franchise stores as of end-June 2011. Moreover, the company took over management of some WILLCOM PLAZA stores in FY12/11, as of end-June 2011 it operated seven WILLCOM PLAZA stores.

Sales for 1H FY11/12 were up 13.3% YoY at 32.4 billion yen, however, gross profit only rose 4.4% to 5.6 billion yen. The company noted the sluggish growth in gross profit was due to a reduction in some of its fees that were not offset by an increase in other commissions and increased sales of accessories. Moreover, SG&A expenses rose 16.1% YoY to 4.4 billion yen fueled by higher personnel expenses due to an increase in the ratio of full-time staff and increased sales promotion expenses due to intensified competition with other mobile-phone dealers. Consequently, operating profit fell 23.0% YoY to 1.2 billion yen.

Benchmarked against the initial company forecast (i.e., pre-revision July 2011’s revision), sales came in at 98.3% of projections and operating profit at 92.1%.

Q1 FY12/11 Results

The company announced FY03/11 results on April 28, 2011.

The company said Q1 FY12/11 were essentially in line with projections and as a result, there would be no changes to the 1H FY12/11 forecasts.

Sales volume for Q1 FY12/11 was 165,095 units with 97,928 units in new handset sales (+1.9% YoY) and 67,167 units in replacement sales (-4.5% YoY). While replacement sales performance was disappointing the comparative strength of new handset sales kept total sales volume in line with projections, with the company achieving 23.6% of its full-year sales projections of 700,000 units in Q1.

The company opened two new Softbank Shops during Q1 FY12/11, (one directly managed; the other a franchise store) and relocated two other stores to better locations. At end-Q1 FY12/11 the company had a total 181 stores with 130 directly managed and 51 franchise stores.

Compared with Q1 FY12/10, which set a record high in terms of total unit sales and gross profit, Q1 FY12/11 sales and gross profit were roughly similar. However, operating profit was down 32.2% YoY due to a higher proportion of full-time labor costs, and an increase in SG&A expenses since Q1 FY12/10.

During Q1 FY12/11 the company temporarily shuttered two directly managed stores in Sendai due to March’s Tohoku Earthquake. By early May 2011 one of the stores had reopened. The company had 181 directly managed Softbank shops at end-Q1 FY12/11, so the percentage of temporarily closed stores, at just 0.6%, is low. For this reason, SR Inc. considers the company’s direct exposure to the Tohoku Earthquake to be limited. (The remaining store that was shuttered re-opened on June 4, 2011; since then all stores were operating again normally.)

One of the key drivers for the company’s performance over FY12/11 is likely to be the timing of the release of the next generation iPhone. Reuters reported on April 20, 2011, “Apple's next-generation iPhone… will begin shipping in September... production of the new iPhone will start in July/August” (for Reuters article please click here). However, Apple Inc. (USA AAPL) has not yet issued an official release on the launch date. SR Inc. thinks if new iPhones go on sale earlier than Reuters reported it will have a positive impact on the company’s FY12/11 performance. Conversely, a later launch will be a short-term negative.

At the same time, SoftBank Mobile Corp.’s product policy going forward will be important. As far as SR Inc. is aware, from January to April 2011, SoftBank Mobile had not invested in new products (handsets) to the same extent as other carriers, like NTT DoCoMo Inc. (TSE 9437) or KDDI Corp. (TSE 9443). So this may mean SoftBank has surplus capacity to invest in new devices in the future and if the carrier was to invest in a large numbers of new devices going forward this could have a favorable effect on the company’s performance.

For details on previous quarterly and annual results please refer to the Historical Financial Statements section.

Full Year (FY12/11) Outlook

Cumulative Q3 FY12/11 results were roughly in line with the company’s forecast, which was revised on July 29, 2011.

The forecast is based on assumptions that new mobile phone models, particularly those for smartphones, would be launched in fall 2011. Given the launch of the the iPhone 4S on October 14, 2011, this looks to have been a correct assumption.

However, it is unlikely the company anticipated KDDI Corp. (TSE 9433) would also start offering the iPhone 4S. Looking at the Telecommunications Carriers Association’s (TCA) Mobile Telephone Subscriber Data by Carrier for October 2010, the net changes in carrier subscriber numbers due to mobile number portability (MNP) were as follows:

• KDDI +69,000 subscribers (+9,000 subscribers in September)
• Softbank Mobile +7,000 subscribers (+36,000 subscribers in September)
• NTT DoCoMo Inc. (TSE 9437) -75,000 subscribers (-45,000 subscribers in September)

The carriers’ overall net change for subscriber numbers in October was as follows:

• Softbank Mobile +248,000 subscribers (+276,000 subscribers in September)
• KDDI +197,000 subscribers (+125,000 subscribers in September)
• NTT DoCoMo +90,000 subscribers (+201,000 subscribers in September)

It appears that KDDI’s commencement of offering iPhones on its network affected the number of new subscribers Softbank Mobile was able to acquire through MNP. Nonetheless, Softbank Mobile continues to hold the top spot in terms of net increase in subscriber numbers. SR. Inc. considers that Softbank Mobile’s latest campaign played a significant part in this performance (please refer to note at end of this section for further details).

The effect of Softbank’s campaign was also reflected in Bell-Park’s October 2011 unit sales; sales of new handsets increased 1.2% YoY while sales of existing-model upgrades rose 82.7% YoY. Thus, while the sale growth rate for new handsets was below the company’s forecast, the rate of sales growth for existing-model upgrades surpassed its expectations. Ultimately though, unit sales increased a substantial 37.6% YoY and exceeded the company’s forecast.

As mentioned earlier, the iPhone 4S’ October launch date corresponded with the company’s own expected launch date and the model sold steadily during its launch month. As of end-2011, it seemed potential problems with the iPhone 4S, such as inventory shortages, had not materialized and SR. Inc. believes it highly likely the company will achieve its FY12/11 full-year forecasts.

Figuring out the company’s performance for FY12/12 though is not so easy. It is possible that Softbank Mobile’s current sales campaign has been cannibalizing future demand and concerns have been raised that demand will decline going forwards. Nonetheless, given current performance, it is highly likely Softbank Mobile will carry out some kind of demand-stimulus measure during 2012. SR Inc. thus believes the two key variables for assessing the company’s FY12/12 performance will be the timing of any new iPhone model and by extension Softbank Mobile’s strategy.

Note: In a campaign that ran until the end of October 2011, Softbank Mobile allowed owners of an iPhone 3G/3GS to upgrade their handset to an iPhone 4S for free, while the remaining installment payments for their previous handset were deducted from their monthly fee. It also introduced a new data-fee plan that ran until the end of November. This allowed owners or purchasers of an iPhone to get the first 100MB of data for their iPad 2 for free and never pay more than 4,743 yen per month (excluding tax).

Future Outlook

Bell-Park’s future prospects are linked Softbank Mobile’s performance. However, Bell-Park is also affected by internal changes at the company, separate from its relationship with Softbank Mobile. Such changes include improving the efficiency of store operations, increasing stores’ market share, and achieving external growth through M&A. Discussions with the company reveal a consolidation trend in the mobile phone retail sales business – the number of players is gradually shrinking as smaller competitors are absorbed by larger firms. In this context, SR Inc. considers Bell-Park’s growth by acquisition strategy to be well suited.

The company does not publish a medium term management plan, but in an interview with Morning Star (published on October 22, 2010), President and CEO Nishikawa said that “Our rough image for the company is for us to have 300 stores in three years time.”

Back to Top

Business

Business Description

Bell-Park operates SoftBank Mobile-branded retail stores; the company’s primary business activity is selling mobile phones and subscription plans along with related content, service, and related accessories such as the PhotoVision picture frame. The company is an agent for SoftBank Mobile exclusively.

Bell-Park’s store network covers major metropolitan areas of the Honshu Island (Tokyo, Osaka, and Nagoya) and is comprised of both directly-managed stores and franchisee stores. The company has grown its store network to a total of 179 stores (as of December 2010), with a substantial contribution from M&A activities.

There are currently no business segments reported. Bell-Park is a ‘pure-play’ mobile phone sales company.

SB Ageo Station – storefront (Source: Company Data Processed by SR Inc.)

SB Takashimadaira – store interior (Source: Company Data Processed by SR Inc.)

Business Model
Bell-Park’s business model is centered on selling handsets and subscriptions for SoftBank Mobile. Revenue earned by the company is comprised of sales of mobile handsets to subscribers, commissions on the sale or modification of subscription plans, sales of accessories, processing commissions, and “stock commissions” (commissions based on actual monthly usage fees by subscribers which Bell-Park has signed up for SoftBank Mobile).

The key variable in Bell-Park’s revenue stream is the number of phones sold. The number of subscribers determines the amount earned when the contract is signed, and the recurring stock commission for new and modified contracts. The stock commission is based on the amount of revenue that each referred subscriber generates for SoftBank Mobile (based on the Average Revenue Per User, ARPU), and is paid over a 60-month period. The ARPU is determined by SoftBank Mobile (exact ARPU percentage figures are not disclosed), and the company does not release the precise ARPU commission percentage; however from discussions with the company, SR Inc. estimates the percentage figure to be in mid single digits.

• The churn rate (cancellation rate) for Bell-Park is not disclosed by the company; however SR Inc. notes the following data: SoftBank Mobile’s median quarterly churn rate for 3G contracts (postpaid) has been about 0.99% (over the six quarters ending December 31, 2010 – note SoftBank Mobile uses a March year-end; source document is here). Given the fact Bell-Park stores are staffed with experienced full-time staff, a feature unique for mobile retailers, SR Inc. estimates that the churn rate for the company is at least as good as the average for SoftBank Mobile.
  
• Although the broad terms of Bell-Park’s agency agreement with SoftBank Mobile are renewed yearly, the commission schedule is adjusted on a quarterly basis.

SoftBank Mobile is concerned not only with quantity of new subscribers Bell-Park generates, but also that those are quality customers. SoftBank Mobile enforces a penalty if a subscriber cancels the contract within the first 6 months; the commission for such a subscriber must be repaid.

The ‘quality’ of subscriber that retailers brings to SoftBank Mobile is likely a bargaining point in commission negotiations, and part of Bell-Park’s strategy to improve performance is an investment in its sales teams to deliver the high-margin customers that SoftBank Mobile wants. Bell-Park has emphasized personnel development in the reasons for its success, both past and future.

The need for specialist retail skill in SoftBank Mobile’s sales channel is reflected in the change of ARPU composition as the market has matured. Data is provided below:

(Source: Softbank Data Processed by SR Inc)

(Source: Softbank Data Processed by SR Inc)

Earlier data includes handset prices in the total ARPU (regulations from 2006 require a clear explanation of communication and handset purchase charges be made available to consumers; handset sales are no longer included in ARPU data provided by SoftBank Mobile), however the trend in of voice and data ARPU seems apparent – data charges are becoming a more important part of total ARPU.

Increasing data ARPU is a function of higher data charges, enhanced functionality requiring more data traffic, or changing subscribers’ usage frequency. Price increases are unlikely, leaving more robust functionality and increased usage as the alternatives for increasing ARPU. Research has indicated that enhanced functionality is of limited benefit to the carrier if subscribers don’t know how to properly use the new functions, and that usage behavior changes little without instruction of new handset capabilities. Teaching subscribers how to use handsets is the key to increasing ARPU, increasing the importance of single-carrier focused sales company like Bell-Park.

The company discloses two categories of handset sales: new plan subscriptions and replacement (upgrade) units. The proportion of new phones to replacement phones has stabilized in recent years from FY12/07-FY12/10 (as shown in Handset Sales Trends).

The economics for new handset contracts are slightly complicated. When a subscriber purchases a phone from the retailer and opts for an installment payment plan (the majority of cases), the sales agent receives payment for the handset from the carrier, on behalf of the subscriber.

SR Inc. understands that the company purchases handsets from SoftBank Mobile (recognized as CoGS). When a customer purchases a handset, Bell-Park effectively sells the handset back to SoftBank Mobile, making a small profit. Bell-Park effectively acts as an agent between the carrier and new subscriber. Bell-Park also acts as an intermediary for its franchise clients, taking payments from SoftBank Mobile that it then pays to franchisees.

A number of upfront commission payments and option purchase-related incentives mean that the profitability of individual handsets varies. For both parties involved more revenue is earned through the recurring ARPU; a loss on the handset provides incentives to acquire quality customers. Replacement handset sales typically have lower overall profit margins for mobile retailers, unless additional services are purchased. However, the retailer can earn a reasonable margin on the combination of a handset sale and the additional commission on the ARPU.

The process for signing up a new customer takes just under one hour. A salesperson discusses specific customer usage needs and suggests appropriate calling plans and handsets available. Once the customer makes a selection, the contract is completed and the sale is finalized, and relevant information is entered into the point of sales system (provided by SoftBank Mobile). At first glance, the time required could be interpreted as a limiting factor to increasing sales because the number of salespeople limits the number of customers than can be served. Such a conclusion overlooks the fact that the decision on the amount of commissions from SoftBank Mobile to Bell-Park is based on the total ARPU, including voice and data charges, Bell-Park is thus incentivized to be certain that a new subscriber has had the opportunity to review all available options before finalizing a purchase.

• The Point of Sale (POS) system provided by SoftBank Mobile warrants additional discussion. Due to regulatory changes related to consumer data protection in 2006, SoftBank Mobile can no longer share POS transaction information with affiliates. Access to this information is highly relevant to Bell-Park’s specialist retailing model, and Bell-Park has taken steps to develop a proprietary POS system to enhance sales and marketing efforts.

Gross profit is largely determined by handset sales volumes; the more handsets are sold the greater commission volumes and thus sales are.

Bell-Park’s business may appear to be a variable cost business; the ratio of SG&A to sales has historically been 15.7% (FY12/06 through FY12/10). A closer examination of components reveals that the personnel expenses have been the largest component (historically about 60.0% of SG&A); however these costs are more appropriately called semi-variable. Legal complications associated with terminating employees in Japan mean that personnel expenses are more similar to fixed costs than variable.

Elements of the cost structure which are variable include rent expenses and spending for advertising and promotions. Rent has been relatively stable at 14.8% of SG&A expenses over the past several periods, and advertising and store promotion expenses have been a smaller component, averaging 7.1% of SG&A during the period from FY12/04 to FY12/09.

The relative lack of fixed costs in the cost structure means that operating profit is largely determined by gross margins. From discussions with the company, SR Inc. understands that the highest gross profit margins are associated with new customers acquiring new model handsets. An examination of the ratio of new to replacement sales can help explain some of the variations in Bell-Park’s operating profit. A higher proportion of new handset sales indicates a likely future increase in levels of stock commissions (assuming a constant churn rate); with limited marginal cost. Also, the company comments that the users buying new model handsets are likely to become higher ARPU customers.

Handset Sales Trends

(Source: Company Data Processed by SR Inc.)

Store Locations
Bell-Park had 179 stores (as of December 2010; including both directly managed and franchise stores). Opening new store locations is largely controlled by SoftBank Mobile. Bell-Park’s store facilities are mostly rented; opening a new store is relatively inexpensive (according to the company – approximately 50 million yen including the initial deposit, refurbishment costs, and 1-month worth of handset inventory).

With respect to the division between directly managed and franchise stores, directly-owned stores would be the preferred choice in the ideal circumstances. Bell-Park has developed expertise in efficient store operation, and stores under direct ownership are more easily controlled than the relationship afforded through a franchise agreement.

Bell-Park will likely continue to use franchise agreements. In FY12/09 the company acquired Panasonic Telecom, adding 33 new franchise stores. According to the company, a number of franchise stores saw handset sales improve “dramatically” following acquisition.

It can be said that expanding the store network is a strategic decision, while the decision to acquire existing stores under a franchise scheme is often a necessary tactical one. See History for a further discussion of the issue.

Source: Company Data Processed by SR Inc.

Bell-Park’s stores are concentrated in urban areas surrounding Tokyo, Nagoya, and Osaka. This means that stores are typically located in areas where consumers have higher discretionary income and are more interested in new technological gadgets. This might be a contributing factor to the company’s claimed success in selling the Apple iPhone (specific sales figures not disclosed).

Differentiated Personnel Policy

Bell-Park’s personnel policy for its store network differs from many of its larger competitors. The company’s stores are staffed largely by Bell-Park employees, in contrast to temporary and part-time staff (“arubaito”). The average store has 3 to 4 full time employees managing the store, with 3 to 4 contract employees and 1 or 2 part-time staffers. New employees undergo a training program with annual update training.

• Bell-Park believes that its staffing and training practices and the resulting quality of its employees are a key factor differentiating Bell-Park from its peers.
• It can be argued that an increase in the quantity and quality of sales resulting from relying on full-time and contract employees offsets the risks associated with this strategy (the labor costs become semi-fixed rather than truly variable due to the realities of the Japanese labor laws and prevailing employment practices, reducing management’s ability to adjust the number of people employed).

A way to measure the effectiveness of the company’s staffing policy is to compare results between other companies. SoftBank Mobile held a sales award ceremony in February 2010; the criteria were total units, profitability, customer feedback, and other quality metrics. Of the 85 awards for the Kanto region, 41 were given to Bell-Park employees. Of the top 15 individual salespeople given further recognition, 9 were from Bell-Park. The top salesperson was also from Bell-Park. To the extent that such awards truly recognize talent and skill, it seems reasonable to conclude that the company’s emphasis on staff can deliver tangible results.

Apple Store

Apple Store Kichijoji - store front (Source: Company Data Processed by SR Inc.)

Apple Store - store interior (Source: Company Data Processed by SR Inc.)

An interesting development was announced by the company at the end of FY12/09 – the opening of an Apple store in the Kichijoji shopping district in Tokyo. Bell-Park has retail experience selling the iPhone as a part of SoftBank Mobile’s handset portfolio; but the products sold through the Apple Store format extend beyond handsets to include a full range of computers, printers, and other electronics items.

Profitability Snapshot, Financial Ratios

Bell-Park’s management appears to have been successful in terms of profitability when considering ROE as a measure of management effectiveness (noting a single incidence of a net loss in FY12/04; the main reason was a goodwill write-off of the two M&A transactions).

DuPont Analysis relies on accounting relationships to break down the ROE figure into multiple components which can then be analyzed to determine the main factor driving ROE. The basic formula consists of three factors that can multiplied together to arrive at ROE (net income / equity). These factors are: net profit (net income / sales), asset turnover (sales / assets), and leverage effect (assets / equity).

The usefulness of this exercise is illustrated by comparing the Bell-Park and T-GAIA DuPont Analyses. Note that although the ROE figures are similar for FY12/09 (T-GAIA: FY03/10), Bell-Park has higher net profit. T-GAIA achieves higher levels of ROE through leverage, which could introduce risk.

If analyzing only Bell Park, it seems that its higher net profit margin and increased financial leverage contributed to its ROE improvement between FY12/06 and FY12/09. The principal reason why ROE decreased in FY12/10 was the fall in the net profit margin.

Strengths, Weaknesses

Strengths:

• Service expertise. A key component of Bell-Park’s business model is the commitment to its sales staff. The investment in intangible ‘soft skills' should emerge as a strength relative to competitors as greater proportions of ARPU are generated from differentiated data services.
• Financial Strength. Bell-Park has ready access to equity and debt capital - the company is listed and has been cultivating relationships with major banks. The ability to combine available financing sources with a reputation as a preferred acquirer is a strength that can help shape the “growth through acquisition” strategy.
• Business integration. The company has increased store-count 2.53x over the period between FY12/00 and 1H FY12/09 and increased ROE nearly 2x over the same period. Bell Park appears to have a skill infusing acquired stores with its expertise – a likely advantage in a period of market consolidation.
• SoftBank Mobile specialist approach. SoftBank Mobile has been growing its market share aggressively following entrance into the market in 2006. Bell-Park benefits from SoftBank Mobile’s growth through ARPU commissions and a growing supply of potential after-sales service customers.

Weaknesses:

• SoftBank Mobile specialist approach. SoftBank-branded handsets, accessories, and phone plans are 100% of Bell-Park’s sales. Bell-Park’s performance is closely related to the popularity of SoftBank Mobile handsets, accessories, and plans; distributors that carry multiple carriers have a broader product offering for potential customers in terms of phone plans and handset models.
• Relatively small size. Bell-Park is a relatively small distributor for SoftBank Mobile (compared to diversified distributors), representing 6.9% of total SoftBank Mobile outlets (Bell-Park: 179 outlets, SoftBank Mobile: 2,588 outlets (as of December 2010)). Competing distributors have more handset share and will be able to achieve larger economies of scale (volume discounts for handsets).

Although the single-supplier arrangement between Bell-Park and SoftBank Mobile could be interpreted as both a strength and a weakness, a consideration of the mutual benefits for a each party suggest that the relationship could more accurately be considered symbiotic if unequal.

SoftBank Mobile’s benefit from Bell-Park as a dedicated supplier is mainly market intelligence. Bell-Park’s feedback is important to SoftBank Mobile because Bell-Park is the largest independent distributor for the carrier (proving a trustworthy test marketing environment). It is plausible to presume that the value of the information provided by Bell-Park would translate into at least equal treatment with other SoftBank Mobile distributors, a relative advantage given the company’s size.

To a certain extent, the nature of the relationship seems comparable to major soft drink companies and regional bottlers. Soft drink companies are clearly more powerful in the relationship, but the arrangement benefits both parties.

The importance of Bell-Park to SoftBank Mobile can be more easily understood when examining the percentage of SoftBank Mobile stores that are operated by Bell-Park and the percentage of unit sales they generate. Bell-Park’s network of 179 stores (as of December 2010) represented about 6.9% of the total SoftBank Mobile shops (2,588 as of December 2010). SoftBank Mobile recorded a total of 10.2 million unit sales during Q4 FY03/10 to Q3 FY03/11 while Bell-Park over the same period (i.e. the company’s FY12/10) recorded total unit sales of 630,117 units, which was equivalent to 6.2% of SoftBank Mobile’s total unit sales and slightly lower than the proportion of shops it operates. However, electronics retailers, general cell-phone retailers, and corporate sales also contribute to total unit sales for SoftBank Mobile and when these sales channels are factored into the picture the company’s unit sales contribution is not low. Indeed, Bell-Park is arguably a greater contributor to SoftBank Mobile than the size of its store network would suggest due to its operating efficiency.

Group Companies

Bell-Park liquidated its remaining subsidiaries and from FY12/09 consists of only the main company. Bell-Park has a single business focus, mobile phone retailing, following the divestiture of Japan Pro Staff in 2008. The strategy is to further develop as a key operator of SoftBank Mobile retail stores.

Market & Value Chain

Market Overview

The mobile phone retail market in Japan is highly competitive. Mobile phone retailers can’t compete on price; handset and subscription plan prices are set by the network carriers, which leaves service and store convenience as avenues available for competing over the few new customers available.

The mobile phone market in Japan is saturated; comparing the number of mobile phone subscriptions to the total Japanese population, the market penetration rate is about 95% (Source: January 2011 Population Estimate, TCA subscriber data). The market is also relatively young – the market got its first real boost after the 1995 Kansai Earthquake when fixed-line communications were temporarily unavailable and the virtues of the mobile phone were brought into light. The market quickly gained momentum in the late 1990s; total mobile phone subscribers grew from 2 million users in 1995 to 27 million in 1997. To capture this explosive growth, early store networks were designed to maximize exposure to consumers with the goal of quickly growing subscribers (an example being a “kiosk”-type location that offers few services other than handling new sign-ups).

(Source:Ministry of Internal Affairs and Communications)

Growth of total subscribers has since slowed. Data collected by the Ministry of Internal Affairs and Communications shows that the median YoY growth since 2000 is about 7.0%, but the trend has been slowing (see the graph below).

(Source:Ministry of Internal Affairs and Communications)

Market Development

The first service provider of mobile phone service was NTT (later renamed NTT DOCOMO), which began service in 1979 in Tokyo and Osaka. Competitors DDI Cellular and IDO entered the market in the late 1980s, planting the seeds for the modern landscape.

Deregulation in the mid-1990s brought the creation of New Common Carriers (NCCs) and increased competition; a key change being carriers’ ability to subsidize handset sales as opposed to the legacy rental model. NCCs entering the market in 1994 included Digital Phone, Digital Tsuka, and Tsuka Cellular. A wave of M&A activity reshaped the industry in the late 1990s: Digital Phone and Digital Tsuka combined to create J-Phone in 1999; DDI Cellular acquired Tsuka Cellular in 1999, which then merged with IDO to become KDDI in 2000. J-Phone became part of the Vodafone group in 2001, and officially changed its name to Vodofone in 2003. SoftBank would acquire Vodafone in 2006 and subsequently change the name.

Market share between the present-day “big three” has shifted over the past 10 years; NTT DOCOMO’s 57% share in January 2002 has declined to 47% (December 2010) while SoftBank has increased from 16% to 20% over the similar period and KDDI over 5%, from 22% to 27%. Notably, Softbank has seen market share increase since acquiring the company from Vodafone in 2006. The shift is illustrated by subscriber data collected by the Telecommunications Carriers Association (presented below):

(Source:Telecommunications Carriers Association)

Japanese Mobile Phone Milestones
1979
The first mobile phone technology (1G) introduced in Japan. This technology used analog radio signals, and early phones were both heavy and cumbersome.

1993
Digital technology (2G) brought to market, which quickly became the standard choice over 1G due to technological superiority and less cumbersome handsets.

2001
3G launched (the first use of the new technology), which brought increased data rates and enhanced network functionality.

2009
3.9G deployment plans approved, laying the groundwork for the technology to be available for carrier use in 2010.

Future Market Growth

The market size is showing signs of stabilization in terms of total subscriber growth, increasing competition for existing subscribers. Considering the possibility that relative market share between carriers has reached a steady-state, the only avenues for profit growth are expansion into new adjacent areas such as smart phones and data communication-centered data cards, higher spend per user, or reduced costs. Carriers’ business models have evolved to focus on sales of non-voice services to boost overall subscriber usage (data and other content such as ringtones, horoscopes, and comic books being examples).

• This importance of the shift away from voice service as a profit driver is highly relevant for companies who operate at the retail level, due to their direct interaction with users. Research has indicated that mobile users won’t automatically change their habits to use enhanced features once they become available. Users won’t use data-rich functionality without some form of training. The need for customer education is important for mobile carriers and creates a way for sales agents to add value to the process through training users how to use new functions.

Competitive price pressures at the carrier level have put pressure on sales companies to remove costs from the overall system, reflected in recent consolidation in the market:

• Bell-Park’s acquisition of Panasonic Telecom (2009)
• T-Gaia (TSE 3738) was created between the merger of Telepark and MS Communications
  
• ITC’s (TSE 9422) acquisition of Hitachi’s retail arm

Competition at the carrier level is unlikely to abate, and the prospects of mobile phone sales companies will become more determined by economies of scale and sales expertise that they can offer. The focus on cost eliminations in the value chain will remain, and therefore M&A trends at the sales agent level will continue.

Customers

Bell-Park’s customers are reached through three channels: retail shops (SoftBank branded), agents and other stores, as well as corporate sales.

Retail buyers – retail operations have been the main sales channel for Bell-Park; the sales composition has increased from 74.2% of FY12/05 sales to 80.1% in FY12/10. Bell-Park’s target retail customer is essentially SoftBank Mobile’s – a price-conscious subscriber.

With respect to specific demographics, Bell-Park’s and other sales companies’ capabilities for understanding their ‘typical’ customer have been diminished significantly following regulatory changes in 2006. The company has been working with a large system integrator to implement a proprietary POS system to capture sales data to enhance their understanding of consumers and improve sales activities.

Corporate clients – sales to corporate clients have been shrinking since SoftBank Mobile itself started focusing on direct corporate sales. Bell-Park indicates that it will maintain existing relationships (to keep the handset volume), however due to the intense competition between the carriers and sales agents and the resulting declining gross margins per handset, a meaningful future expansion is unlikely.

Wholesale buyers – Bell-Park has a supplier relationship to franchisee stores and some GMS outlets. This channel had been on a decreasing trend in terms of the company’s sales mix (from 20.0% in FY12/05 to 3.8% in FY12/08), but became the second largest distribution channel in FY12/09 following the acquisition of Panasonic Telecom (18% in FY12/10).

Bell-Park has been investing in its sales agency channel through M&A, and SR Inc. thinks that additional investment into other channels (corporate and wholesale) is unlikely, leaving these segments to grow organically.

Suppliers

The most dominant link in the value chain in the mobile telephone business is at the carrier level. Carriers leverage their role as network operators to dictate terms both to suppliers (the handset manufacturers) and to a lesser extent, customers (subscribers). The largest carriers in the market are NTT DOCOMO, KDDI (under the “au” brand), and SoftBank Mobile, collectively controlling over 90.0% of the mobile communications market. The relative share controlled by each of the big three has changed over the past decade as NTT DOCOMO has lost share (discussed in the Market Development).

Bell-Park’s key supplier is SoftBank Mobile. The agency agreement between Bell-Park and SoftBank Mobile is automatically renewed each year. The company, which interacts with SoftBank Mobile customers on a daily basis, believes that SoftBank Mobile recognizes its role as an independent dedicated retail channel for SoftBank Mobile, and is dealing with it openly and fairly despite Bell-Park’s agent role. Indeed, SoftBank Mobile sees Bell-Park’s position as important in SoftBank Mobile’s retailing effort, a benchmark against which SoftBank Mobile can measure the effectiveness of other distributors, and validate the effect of specific marketing campaigns.

Barriers to Entry

The barriers to entry into mobile phone retailing are superficially few. However, a practical current limitation is the store opening policy of mobile phone carriers. SoftBank Mobile, for example, appears to use a target store count which could limit new entrants.

Other possible barriers to entry that could deter potential entrants include the technological expertise to successfully compete with incumbents. Existing store networks are already in place and competition between the different retail channels is high; a potential entrant would need to rapidly traverse the experience curve to be able to earn margins similar to those earned by current market participants. For this reason, arrival of new large entrants is probably exceedingly unlikely.

Competition

Bell-Park’s direct competition include other companies that operate SoftBank Mobile-branded shops (2,588 total stores, as of December 2010) as well as other distribution channels where consumers can purchase SoftBank Mobile phones and service (e.g. electronics mass retailers such as Yodobashi Camera and Yamada Denki).

Operators of SoftBank Mobile branded shops:

• TELECOM EXPRESS Co., Ltd. - a SoftBank Subsidiary, has 36 store locations.
• Telecom Service (a joint venture between SoftBank Mobile and electronics retailer Hikari Tsushin (TSE 9435)) total store network of 1,402 shops.
• T-Gaia (TSE 3738) – operates carrier shops for a number of carriers and has the largest sales agent network; the company has 65 directly managed SoftBank Mobile shops. Its main shareholders are Mitsubishi Corp (TSE 8058), Mitsui and Co Ltd (TSE 8031), and Sumitomo Corp (TSE 8053).
• ITC Networks (TSE 9422) – operates shops for the main carriers, mostly for NTT DOCOMO (TSE 9437), and has 184 shops in total. It manages 6 SoftBank Mobile shops.
• ITX Corporation (Jasdaq 2725) – main business segment is engaged in operation of carrier shops; reported 481 total stores in its FY03/10 result material.

Other retail sales channels for SoftBank Mobile Phones:
Electronics Retailers – Yamada Denki (TSE 9831), Bic Camera (TSE 3048), Yodobashi Camera (unlisted), being examples. Stores of this type usually have lower service levels than dedicated shops, with limited after-sale service options.

Manufacturer-related shops – handset manufacturers’ subsidiaries often act as sales agents and manage branded shops for the major carriers. Examples include NEC Mobiling (TSE 9430) and Diamond Telecom (Unlisted, 100% subsidiary of Mitsubishi Electric (TSE 6503).

Substitutes
Substitutes for retail shops are few; possibilities include direct channels from the carrier to the customer, either online or over the phone, but retail shops have thus far been consumers’ dominant purchasing channel in the industry.

Back to Top

Strategy

Bell-Park’s approach to the market has been to focus on one particular segment of the mobile phone market, namely SoftBank Mobile. Bell-Park maintains that is has a unique skill in its sales agent operations; differentiation achieved through a focus on human resource development and unique personnel policy at the store-level.

Bell-Park’s strategy for growth is to increase store count, either through opening new stores or acquisitions. M&A has been a key theme in the past, and given that SoftBank Mobile imposes maximum limits on total stores, this trend is likely to continue.

Back to Top

Historical Financial Statements

Summary

Sales growth: Bell-Park’s sales have increased 4.8x over the period from FY12/01 to FY12/10.

Balance sheet expansion: The balance sheet has grown 4.2x from FY12/01 to FY12/10. This increase has been has been funded through an increase of debt in the capital structure; the equity ratio (equity / assets) has declined from 60.0% in FY12/01 to 53.2% in FY12/10.

Cash flows: Operating cash flow has been on an increasing trend from FY12/01 through FY12/10, with limited volatility. Free cash flow has been largely resilient over the period under review, reflecting investment in the business and expansion of operations.

Earnings Results Discussion for the Year Preceding Current Fiscal Year (For Reference Purposes)

Full Year FY12/10 Results

On February 14, 2011, the company announced FY12/10 full year results.

FY12/10 Results Report Card

Sales

Target: 56.0 billion yen (+19.4% YoY)

Result: 60.2 billion yen (+28.3% YoY)

Operating Profit

Target: 2.8 billion yen (-21.7% YoY)

Result: 2.8 billion yen (-18.8% YoY)

Recurring Profit

Target: 2.8 billion yen (-21.1% YoY)

Result: 2.9 billion yen (-18.5% YoY)

Net Income

Target: 1.5 billion yen (-26.7% YoY)

Result: 1.7 billion yen (-18.9% YoY)

Both handset unit sales and sales were record-highs. However, due to lower commission levels from Softbank Mobile compared to FY12/09 and a change in the product mix (a higher proportion of low-margin “Photo Vision” frames), the percentage of sales from handset units decreased. Moreover, Photo Vision sales as a percentage of sales of all new handset units increased from 6.4% in FY12/09 to 20.7% in FY12/10; as a result, gross profit increased only +4.5% YoY. SG&A grew 16.8% YoY due to expenses related to aggressive recruitment and an increase in the number of stores (increased at an annual rate of 27 stores per year since FY12/09) and as a result operating profit declined 18.8% YoY. However, sales, operating profit, recurring profit, and net income were all above forecasts. The main reason why sales exceeded expectations was that handset unit sales were about 630,000, more than the forecast of 570,000.

Q3 FY12/10 Results

The company announced Q3 FY12/10 results on October 29, 2010 (see table above). As a percentage of the full year company forecast, the cumulative Q3 numbers were as follows:

• Sales: 79.5% (vs. full year forecast of 56.0 billion yen )
• Operating profit: 83.7% (vs. full year forecast of 2.8 billion yen)
• Recurring profit: 83.4% (vs. full year forecast of 2.8 billion yen)
• Net income: 90.0% (vs. full year forecast of 1.5 billion yen)

According to the company, SoftBank’s commissions remained lower YoY, and the change in product mix mentioned in Q2 persisted (a higher proportion of low-margin “Photo Vision” frames). Lower gross profit combined with higher SG&A expenses (continued aggressive staff recruiting) meant that operating profit declined 40.8% YoY.

Two directly managed stores were added and three stores were moved to better locations during the quarter, for a total of 178 (128 directly managed and 50 franchise). SoftBank Mobile selected 400 stores (as of October 1, 2010) as “SoftBank Premium Shops”, meaning most advanced and sophisticated stores for the smartphone era. Bell-Park had 56 of its stores selected as SoftBank Premium Shops. Considering that Bell-Park runs a fraction of SoftBank Mobile’s total stores (Bell-Park operated only 7% of SoftBank Mobile’s total stores as of September 2010), the number might indicate Bell-Park’s effectiveness operating SoftBank Mobile stores. As a related factoid, 14 of Bell-Park’s stores received approval to begin selling iPads in October 2010.

In Q3 FY12/10, the company sold 170,467 handsets (+31.0%, YoY); 91,272 were new units (+46.9%, YoY) and 79,195 were replacements (+16.5%, YoY).

There was no change to the full year company forecast. But SR Inc. speculates that there is a strong possibility that the results may exceed the company’s forecast based on the following points:

• First, the mobile phone unit sales forecast is 600,000 and Q3 cumulative numbers were 470,822. As a percentage of full year handset forecast, Q3 numbers were 78.5%.
• Secondly, after receiving additional iPhone inventory, the company can fill iPhone orders in October, avoiding opportunity losses (not selling what it could have sold due to shortages).
• Finally, although the company does not comment on specifics related to commission levels, SR Inc. speculates that SoftBank Mobile has increased commission levels with effect from October 2010 (based on the commission discussion in Q2 FY12/10 Results).

SR Inc. thinks that the year-end sales levels closing 2010 are important indicators of the near-term performance. Competitors such as NTT DOCOMO (TSE 9437) and KDDI (TSE 9433) are pushing multiple smartphone models into the market beginning in November 2010. Bell-Park mentioned earlier that it sees the proliferation of smartphones as a net positive for their business as opposed to a potential threat (see Q2 FY12/10 Results discussion).

Q2 FY12/10 Results

The company announced Q2 FY12/10 results on July 30, 2010 (see table above). As a percentage of the full year company forecast, the cumulative Q2 numbers were as follows:

• Sales: 51.1% (vs. full year forecast of 56.0 billion yen )
• Operating profit: 57.7% (vs. full year forecast of 2.8 billion yen)
• Recurring profit: 57.7% (vs. full year forecast of 2.8 billion yen)
• Net income: 62.4% (vs. full year forecast of 1.5 billion yen)

According to the company, the decline in gross profit margin was due to lower commission levels from SoftBank, and changes in the product mix (the proportion of low profitability “Photo Vision” increased). SG&A grew due to aggressive recruitment and operating profit declined 41.2% YoY.

The number of stores was unchanged from Q1 (176 stores), with one store relocated to a better location.

There was no change to the full year company forecast. However, the company indicated in the Q2 result meeting held on August 2, 2010 that it had revised assumptions behind the forecasts. The mobile phone unit sales forecast was revised upward from 570,000 to 600,000. Expected commissions from Softbank for 2H were revised lower than the initial plan.

Q2 cumulative unit sales for mobile phones were approximately 300,000, better than initially expected. Expected full year commissions were revised lower due to lower commission levels in Q2. As a result of lower commissions, distributors such as Bell-Park are seeing deteriorating profitability. During the result meeting, the company mentioned that it expects commissions to improve in the future.

SR Inc. thinks that the probability of a revision in commissions is high. If falling commissions continue to pressure revenue, stores will not be able to make investments in future growth in areas such as human resources. Furthermore, prominent distributors like T-Gaia may focus on selling handsets produced by telecommunications providers other than Softbank Mobile, a negative for Softbank Mobile.

Operating profit margin fell from 4.3 percent in Q1 to 2.4 percent in Q2, a result of deteriorating commissions. SR Inc. thinks that commissions may improve going into Q3 and Q4. However, since commissions declined recently, it is difficult to predict whether commissions will return to previous levels.

All things considered, SR Inc. thinks that the full year plan is achievable. Advance sales for the iPhone 4 support this conclusion: there were more orders for Q3 than the company can fill based on expected iPhone deliveries. On the other hand, it’s possible that demand could level off; however, SR Inc. thinks that the probability is low. The company has not announced any specific assumptions related to commissions, but an upward revision could make full year estimates easier to reach.

The company thinks that there will be more releases of smart phones that use the Android operating system. Additionally, it expects a new type of phone will be released: conventional feature phones that use Android (called “Converoid” from “conventional” + “Android”). Consequently, handsets will be differentiated into smart phones (iPhone, Desire, etc.), “Converoids,” and feature phones.

Rather than viewing smart phones using Android as a liability (because they compete with iPhone), the company sees their increasing share in the market as beneficial. The increase in ARPU (average revenue per user) from data usage will raise revenues both for mobile carriers and distributors. Furthermore, as smart phones become the norm, demand for more processing power in handsets will likely shorten the replacement cycle, currently over 40 months.

The company is working on expanding store sizes to display new products and make shopping easier. SoftBank isn’t very vocal with respect to store size, but Bell-Park thinks that increasing store sizes in metropolitan areas is necessary to continue improving the brand image. As of August 2010, 70% were 100 m2 or larger and 10% of stores were 165 m2 or larger (remaining stores were smaller than 100 m2).

Q1 FY12/10 Results

The company announced Q1 FY12/10 results on April 30, 2010 (see table above). As a percentage of the 1H company forecast, Q1 numbers were as follows:

• Sales: 53.7% (vs. 1H forecast of 30.0 billion yen)
• Operating profit: 71.9% (vs. 1H forecast of 1.5 billion yen)
• Recurring profit: 72.0% (vs. 1H forecast of 1.5 billion yen)
• Net income: 76.6% (vs. 1H forecast of 800 million yen)

According to the company, results were broadly in-line with expectations. Sales increased significantly YoY (see table above) in part due to continued popularity of the iPhone 3GS, strong response to SoftBank Mobile marketing campaigns, and replacement demand related to SoftBank Mobile’s March 31, 2010 discontinuation of 2G service (see Monthly Trends for sales figures).

SG&A/Sales ratio declined YoY (11.6% vs. 14.9% in Q1 FY12/09) but rose in absolute terms (1.9 billion yen vs. 1.4 billion yen in Q1 FY12/09). The increase in costs was largely due to higher labor expenses, matching company expectations. Strong sales drove profit margins higher for the quarter.

One store was added during the quarter, for a total of 176 (126 directly managed and 50 franchise). On January 9, 2010, the company also opened an Apple Premium Reseller KICHIJOJI STORE selling Apple products.

There was no change to the cumulative Q2 (1H) company forecast.

Q2 Outlook

The company indicated that the 2G switchover (SoftBank Mobile discontinued 2G service on March 31, 2010) is an important variable for Q2 performance. The level and duration of the impact 2G services termination on sales remains unclear. While replacement sales fell 37.1% in April vs. March (see Monthly Trends above), the company expressed cautious optimism regarding May and June. The company suggested however that if sales momentum continues to slow at the same pace, that reaching Q2 sales targets could become an issue. SoftBank Mobile estimated that there were approximately 600,000 2G subscribers as of FY12/09 (300,000 were pre-paid plans).

(Please note that Bell-Park does not comment on any specifics related to the commissions and the discussion that follows is based entirely on speculation by SR Inc. unless events are stated as a fact) SoftBank Mobile has reduced commissions in taking effect in April 2010, deeper cuts compared to those already made in October 2009. While in itself this was expected, SR Inc. feels that the new level of commissions may be somewhat lower than the phone resellers hoped for. Bell-Park would probably have some margin of safety in its forecasts to anticipate such a development. Indeed, looking at the historical company forecast accuracy (see Income Statement), it appears that sudden changes in commission levels did not prevent Bell-Park from beating initially set OP targets on all but two occasions from 2001-2009. It is probably fair to imply that the margin of safety became smaller and FY12/10 is more likely to be very close to the company official forecast than beat it substantially. Specifically for Q2, it appears that combined with uncertainty related to the above-mentioned 2G termination, the quarter may be soft and there is some possibility of missing the 1H forecast both for sales and operating profit. (See also discussion of the full year FY 12/10 estimates below).

New iPhone 4G

It has been widely speculated in multiple sources on the Web that the new iPhone 4G will be released by Apple Corporation in June 2010 (June 27th mentioned most frequently). The details of the new phone were also leaked online. Bell-Park does not comment on any rumors or speculations related to the matter.

Full Year (Q4) Results

The company announced full year (non-consolidated) earnings results on February 10, 2010.

Please note that the discussion of YoY figures compare FY12/09 (non-consolidated) against FY12/08 (non-consolidated) results.

FY12/09 was a year of strong growth for the company, measured both in financial and strategic terms. Sales grew to 46.9 billion yen (+44.6% YoY), operating and recurring profit both grew to 3.6 billion yen (+153.7%, and 154.5% YoY, respectively), and net income grew to 2.0 billion yen (+82.3% YoY). The company’s store network expanded by 65 stores through the acquisition of Panasonic Telecom (52 stores) and other M&A; a nearly 60% increase YoY.

Sales were driven by successful marketing campaigns by SoftBank (such as the student discount plan White Gakuwari), the introduction of a new iPhone by Apple, and sales of the PhotoVision picture frame. Handset sales increased to 462,282 units (+40.1% YoY), led by strong replacement demand.

SG&A expenses as a proportion of sales declined approximately 3.5% YoY, the operating profit margin increased to 7.6% vs. 4.4% in FY12/08. Operating profit grew to 3.6 billion yen (vs. 1.4 billion yen in FY12/08), a +153.7% gain YoY. There were minimal non-operating expenses; recurring profit grew to 3.6 billion yen (vs. 1.4 billion yen in FY12/08); a 154.5% gain YoY. The balance of extraordinary items was negligible.

Net income grew to 2,046 million yen during the year, increasing by 82.3% YoY. Net profit margin increased to 4.4%; continuing a growth streak which began in FY12/05.

Q3 Results
Bell-Park announced Q3 FY12/09 (non-consolidated) results on October 30, 2009. Results were as follows: sales 33.9 billion yen, operating income 2.6 billion yen, recurring income 2.6 billion yen, and net income of 1.5 billion yen.

Q2 (1H) Results
Q2 (1H) Results were announced on July 30, 2009. Results were as follows: sales 20.3 billion yen, operating income 1.4 billion yen, recurring income 1.4 billion yen, and net income of 743 million yen.

Sales were supported by two marketing campaigns undertaken by SoftBank Mobile – the “White Plan Student with Family Discount” and a discounted price for the Apple iPhone 3G along with a reduction in data rates. The company also commented that replacement demand for new 3G handsets driven by the 2G service termination and the installment contract maturity switchovers were helping top-line sales.

There was no change to the full year forecast.

Q1 Results
On April 30 2009, Bell-Park announced Q1 non-consolidated earnings results. Reported figures were: sales 9.4 billion yen, operating income 488 million yen, recurring income 478 million yen, and net income of 259 million yen.

• Note: this earnings release reflects the first non-consolidated earnings release since the company divested a substantial interest in Japan Pro Staff.

Back to Top

Income Statement

Sales have grown an average of 16.7% YoY from FY12/01 through FY12/10.

Sales growth in FY12/09 and FY12/10 was largely due to the overwhelming success of the Apple’s iPhone series.

The sales decline in FY12/02 was a result of weak consumer spending as well as a reduction in subscription growth; the YoY growth rate in 2002 slowed to 8.4% from 12.0% in 2001 (discussed in the Market Overview). Against this context the company maintained cost control (note the SG&A to sales ratio) and slight reduction in store count.

The 48.0% YoY increase in sales during FY12/05 was a result of increased store count (added 7 stores) and an increase in average sales per store (443 million yen, vs. 343 million yen for FY12/04). The per store sales increase was described by the company as a result of a change in sales tactics, focusing on maximizing revenues earned through after-sales activities. Sales increased 40.2% in FY12/09, reflecting strong handset sales and store growth through acquisition.

Gross profit margins have been mostly stable during the period; observing a range between 16.3% and 22.1%. Considering the six years including FY12/09, the gross margin has been on an upward bias (an increase of 2.8% since FY12/03), perhaps reflecting volume-related cost savings as the store network has grown.

Net non-operating gains and losses have been largely negligible during the period under examination.

The extraordinary losses recognized during FY12/04 was a result of goodwill amortization associated with two acquisitions - 51 million yen from Tokai regional operations of Tanaka Commerce Co., Ltd. and 467 million yen associated with Nikka Co., Ltd. (in the Kanto region).

With respect to net income, the notable figure was the net loss reported for FY12/04. The loss was a result of the extraordinary loss in the period (mentioned above).

A comparison of the company’s initial forecasts with its actual results does not reveal any clear patterns, like consistent over or under-estimation. Although operating profits exceeded full year plan forecasts between FY12/08 and FY12/10, the popularity of the Apple Corporation’s iPhone was also a significant factor behind this.

Operating profit forecasts prior to FY12/08 were not released by the company.

Back to Top

Balance Sheet

Assets

Bell Park’s assets are dominated by its current asset accounts; a fact not surprising for a mostly retail sales agent. The company has maintained a net cash position (defined as cash minus interest bearing debt) throughout the nine years from FY12/01 through FY12/10, and maintained cash on the balance sheet in excess of working capital requirements (working capital being accounts receivable and inventories less accounts payable). Inventory levels are maintained at between 1 to 2 months stock.

Accounts receivables are handset revenues from SoftBank. Turnover is relatively short: payment is typically received within two months.

Debt

The company’s had virtually no interest bearing debt up to FY12/07. It raised 2.86 billion yen from borrowing in FY12/08, but by FY12/10 its interest bearing debt had fallen to 975 million yen. At first glance, this financing seems unnecessary; the company had 1.6 billion yen of cash in FY12/08. Including the context of overall market conditions, it is likely that had global economic conditions continued to deteriorate access to credit would have been sharply curtailed as the financial crisis spread. By securing long-term financing, Bell-Park was taking a conservative approach to ensure that it would have access to capital to run its business.

Shareholder’s equity

Changes in shareholder equity have largely reflected the net profit and loss and dividend payments. There have been some minor deviations, but nothing substantial.

Per Share Data

The company has taken steps in the past to increase share liquidity and to increase the breadth of shareholders of company stock. Bell-Park executed a 3-for-1 split on February 20, 2002, and again on February 20, 2004.

Back to Top

Cash Flow Statement

Operating Cash Flows

Operating Cash Flows have been on an increasing trend since FY12/01 but have been lumpy. The negative operating cash flow reported in FY12/05 was a result of cash being used for increased inventories (227 million yen) and a decrease in payables. Operating cash flow was below trend growth in FY12/07 due to a substantial increase in inventories (1.5 billion yen) which would largely reverse the next year (inventory levels would decline by 1.1 billion yen in FY12/08). The operating cash flow reported in FY12/09 was mostly the result of strong net income during the year (2.0 billion yen).

Investment Cash Flows

Investment Cash Flows have been mostly outflows from FY12/01 to FY12/10. Most of these cash flows directly pertain to the business operations; there have been some investments in securities, but the size of these transactions have been relatively minor. The large cash outflows in FY12/07 and FY12/09 were related to the business expansion (either purchases involving subsidiaries, expansion of fixed assets, or M&A activity). The FY12/05 498 million yen of cash outflow was split between fixed asset purchases (183 million yen), investment securities (100 million), and the remainder allocated to unspecified investment activities. The FY12/09 815 million yen of cash outflow was related to the purchase of Panasonic Telecom.

Financial Cash Flows

Financial Cash Flows have been mostly minor, with the exception of FY12/01 and FY12/08. The 449 million yen outflow in FY12/01 was to extinguish long-term debt (the company had nearly 400 million yen of debt at the beginning of FY12/01 resulting from M&A activities in 2000); the remaining 51 million yen was dividend payments. The positive cash flow of 2.5 billion yen in FY12/08 is mainly due to an increase in bank debt (approximately 2.9 billion yen) with the balance consisting of dividends paid and cash used for a share buyback.

Simple Free Cash Flows have been on a generally increasing trend since FY12/01 (for this analysis, working capital considered was accounts receivable and inventory, less accounts payable). The charges which pushed FCF into negative territory in FY12/05, FY12/07, and FY12/09 were all related to working capital related to store expansion.

The overall cash conversion cycle has been increasing somewhat during the eight years from FY12/01 to FY12/09; days of cash in inventory levels have increased since FY12/01, while cash in the receivables and payables portion have marginally increased. Analysis is presented below:

Bell-Park has been growing its store network aggressively during the period in question, and it appears that the increased inventory levels could be associated with the expansion activity. The ratio of inventory to stores is presented below. Drawing clear conclusions from the data is difficult due to fact that yearly data is used; timing differences between inventory measurement and store additions could introduce a degree of error. It would appear, however, that the inventory on hand per store has increased. Extending the inventory comparison to sales (to eliminate any effects of prices increasing with handset evolution) is included.

• Note: this analysis used end of period inventory figures for comparison with stores, and average inventory levels when compared against sales.

If Bell-Park’s is able to use a comprehensive POS system, the potential impact on inventory levels could be positive. If the company could reduce inventory levels, free cash flow could potentially be less volatile (working capital changes have been a factor in historic free cash flow levels).

Back to Top

Other Information

History

Bell-Park was founded in 1993 with the mandate of selling mobile communication and networking equipment. The company’s start was rocky – following the collapse of the asset price bubble in Japan, operations were reduced to only one store, two full time employees, and almost no remaining capital. Cash flows were tight, and the product line (mostly pagers) only had a few profitable items. President Nishikawa attributes the company’s turnaround to the commitment of the core team.

Nishikawa bought the company in 1996 (please see discussion in Top Management). When Nishikawa took over the company, the store network was all franchisees; the first directly-owned store wasn’t opened until September, 1998. Directly-owned stores would be the preferred model for the company going forward.

The store network began rapid expansion in 1999 following the acquisition of West Link Co., Ltd., when the number of stores in 1999 grew by 400.0% from 9 locations to 49 (FY12/00). Growth through M&A would become the preferred means of expansion.

Bell-Park listed on the Jasdaq stock market in May, 2000.

Bell-Park’s expansion effort was put on hold from FY12/00 until FY12/03; store count decreased slightly and the company changed its store branding strategy slightly. Bell-Park branded stores were targeting new subscribers only, and as the market became saturated the company proceeded to gradually close them and instead switched to carrier brand shops which were capable of providing the carrier switchover as well as repair & maintenance services (initially J-Phone shops and later Vodafone shops).

The company restarted store network expansion from 2006 - franchise agreements signed in early 2007 with the Kansai-based agents, would increase the store network to 105 stores by the end of FY12/07 from 62 at FY12/06 year end. Although the company has indicated that its preferred way to increase store count is through direct acquisition, Bell-Park found the opportunity to expand into Kansai and increase the store network by 70.0% too compelling to resist. Bell-Park gained additional handset volume, creating the potential for scale-related cost reductions.

In June 2008 the company sold 50.0% of Japan Pro Staff Co., Ltd, which was a wholly-owned subsidiary at the time, to P&P Corporation (Jasdaq 2426). Japan Pro Staff was a legacy business (originally called J-Phone Service) originally created as a specialist recruitment and staffing service for mobile phone store operators. Achieving persistent profitability was difficult, and the company decided to divest its holdings to refocus on core operations.

Bell-Park acquired Panasonic Telecom on June 1, 2009 for 520 million yen. The acquisition increased store count by 52; 22 were direct owned shops and 30 were franchise stores.

Back to Top

News & Topics

Company News & Topics

July 2011

On July 29, 2011, Bell-Park announced Q2 FY12/11 results: click here to go direct to the Q1 FY12/11 results section.

(For original PDF announcement in Japanese-language only please click here)

The company also announced a downward revision to its FY12/11 forecast.

(For original PDF announcement of downward revision in Japanese-language only please click here)

April 2011

On April 28, 2011, the company released Q1 FY12/11 results: click here to go direct to the Q1 FY12/11 results section.

(For original PDF announcement in Japanese-language only please click here)

March 2011

On March 14 2011, the company made an announcement regarding the March 11 Tohoku earthquake.

Damage situation report:

• In some stores in Tohoku (northeastern Japan) and Kanto (around Tokyo), store equipment and fixtures were damaged. In addition, some stores were temporarily closed in areas without essential utilities such as electricity and water.
• The company expected operating hours of some stores would be shortened in response to scheduled electricity outages.

Impact on financial performance:

The company was assessing the effect of the earthquake on its operations and said it would release details as necessary if it became clear that earnings would be impacted.

Note: The company has a dedicated page for donations to disaster victims on its website.

February 2011

On February 14, 2011, the company announced FY12/10 results.

December 2010

On December 27, 2010, the company announced that it would start selling Willcom’s Personal Handy-phone System (PHS) from January 2011. (PHS was developed to compete with 3G, but had limited success due to relatively smaller coverage areas offered by base stations). The company made the decision in a board meeting a day before the announcement. Bell-Park commented that the impact of this new business on its FY12/11 results would be relatively small.

October

On October 29, 2010, the company released Q3 FY12/10 results. The company also announced an upward revision to its expected dividend payment for FY12/10 from 2,600 yen to 3,600 yen. The dividend commemorates its 10th year as a listed company.

July

The company released Q2 FY12/10 results on July 30, 2010.

According to an article published in the morning edition of the Nikkei newspaper on July 7, 2010, NTT DOCOMO Inc. is planning to remove the SIM lock on handsets released after April. The SIM lock prevents using other communication companies SIM cards in handsets. According to the article, NTT DOCOMO is trying to influence a reluctant SoftBank Corp. to follow suit so iPhone users could use the NTT DOCOMO network.

April

The company announced Q1 FY12/10 earnings on April 30, 2010.

December 2009

News released on December 11, 2009 announced (source, Japanese only) that the company would be opening an Apple Store in FY2010, in the popular shopping district of Kichijoji in Tokyo.

November

News released in late November, 2009 indicated that SoftBank Mobile could be considering acquiring Willcom, which would bring an additional 4.3 million PHS subscribers into its network. Such a move would give SoftBank mobile an estimated 25 million subscribers (increasing share to 23.0% of the total market, according to TCA data from November, 2009).

October

Bell Park announced an upward revision of earnings and dividend forecasts on October 5, 2009. Details of the revision:

Sales: upward to 44.4 billion yen (+5.8% over the previous forecast of 42 billion yen)

Operating income: 3.0 billion yen (+43.1% over the previous forecast of 2.1 billion yen)

Recurring income: 3.0 billion yen (+43.0% over the previous forecast of 2.1 billion yen)

Net income: 1.7 billion yen (+58.9% over the previous forecast of 1.1 billion yen)

The dividend forecast was increased to 2,600 yen per share, +100% over the previous forecast of 1,300 yen.

The reasons for the upward revision were as follows:

• Strong adoption of the iPhone 3GS (released on June 26, 2009)
• Increased subscriptions related to SoftBank Mobile’s “Norikae Switchover Discount” (a waiver of the basic monthly fee for 15 months for subscribers leaving competing carrier)
• Strong replacement demand driven by installment contracts reaching maturity, and the termination of 2G service stimulating a switch to 3G phones (see Market Overview)

Back to Top

Top Management

Takeru Nishikawa - President & CEO, born 1956. Nishikawa graduated from University of Tokyo, Faculty of Law in 1979 and joined Sumitomo Corporation, where he was involved in the automobile export business. After an offer from a fellow University of Tokyo alumnus, Nishikawa left Sumitomo to join a portable phone venture, Japan Portable Phones (日本携帯電話株式会社). In 1993 the company started a subsidiary (which would later become Bell-Park) involved in reselling portable phones, where Nishikawa would be appointed as an auditor. He would later lead a successful restructuring and buy-out of the company in 1996, commenting that “the proposed price was cheaper than I expected.”

Nishikawa controls slightly under 50.0% of Bell-Park stock and is the key person involved in setting the company’s strategy.

Back to Top

Employees

Bell-Park has 609 full-time employees, and 396 part-time staff (data from the FY12/10 annual report).

The average employee age is 28.4 years old, earning an average salary of 4.48 million yen, and has been with the company for 3.4 years (data collected from FY12/10 annual report).

Back to Top

Major Shareholders

Bell-Park’s largest shareholder is Takeru Nishikawa, who effectively controls about 50.0% of company stock through direct holdings and shares owned by Japan Business Development, Inc. (a company wholly owned by Nishikawa)

Back to Top

Dividends and Shareholder Benefits

The payout ratio for dividend distributions (dividend per share / earnings per share) does not form a discernable pattern. The company has stated that the dividend payment policy balances capital needs of the business with maintaining a stable dividend payment rate.

As a shareholder benefit, the company distributes a QUO card (2,000 yen value) to each shareholder of record on the last day of the fiscal year (December 31). A QUO card is a prepaid debit card that is accepted as cash at many stores in Japan, including restaurants, book shops, convenience stores, and some entertainment facilities.

Back to Top

Investor Relations

The company holds bi-annual results analyst meetings.

The IR website is: http://www.bellpark.co.jp/ir.

Back to Top

By the Way

Latest Q&A

Back to Top