Financial Summary

Recent Updates

Highlights

On June 6, 2013, Bell-Park announced May monthly sales estimate: click here to go directly to the Monthly Trends section for sales estimates.

On May 8, 2013, the company announced April monthly sales estimate.

On April 26, 2013, the company released Q1 FY12/13 results and revised its 1H and full-year FY12/13 forecasts: click here to go directly to the Q1 FY12/13 results section.

On April 4, 2013, the company announced March monthly sales estimate.

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

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Trends & Outlook

Monthly Trends

Q1 FY12/13 Results (Announced on April 26, 2013; please refer to preceding tables)

Sales volume was 273,386 (+19.3% YoY): 163,891 units in new handset sales (+14.4% YoY) and 109,495 units in replacement sales (+27.4% YoY). The company focused on sales that capitalized on promotional campaigns by SoftBank Mobile Corporation (a subsidiary of Softbank Corp.; TSE1: 9984), including those promoting smartphone purchases and replacement handset sales. The company raised its ratio of sales utilizing the Mobile Number Portability (MNP) system and increased its sales of replacement handsets. However, it was unable to achieve its stated goal of increasing the sales ratio of high-margin new units.

The company opened six new SoftBank directly operated shops, relocated three shops, and renovated four shops. As of the end of March 2013, 2,701 SoftBank shops operated nationwide. Of these, the company operated 213 shops: 159 directly operated and 54 franchise operations.

Sales were 22.5 billion yen (+15.1% YoY) due to large increases in sales of replacement handsets and accessories. Gross profit was 4.5 billion yen (+16.2% YoY) due to higher replacement handset sales and accessory sales as well as to higher new-subscription commissions (particularly MNP sales) and stock commissions. SG&A expenses increased 16.1% YoY to 3.3 billion yen due to ongoing increases in the number of shops, leading to higher personnel and rent expenses, and an increase in equipment expense through the introduction of a new sales management system. These SG&A increases were more than offset by the growth in gross profit, resulting in operating profit of 1.2 billion yen (+16.5% YoY).

Both new handset sales and replacement sales exceeded target. However, the company was unable to increase sales of highly profitable products as a percentage of overall new handset shipments. The company also said it was unable to improve its work environment and reduce staff turnover.

According to the company’s monthly sales reports, the percentage of products with relatively low average revenue per user (ARPU), such as Mimamori Mobiles (mobile phones with an anti-crime alarm function), PhotoVision digital photo frames, and USIM cards, rose to about 49% in Q1, compared with about 23% from a year earlier. This percentage is also an increase from 4Q of FY12/12. Even so, the percentage of such products fell to about 44% in April, according to preliminary data, in part because Softbank Mobile changed the way in which it pays commissions. Bell-Park also took measures to reduce sales of products with low average revenue per user.

As for working conditions and staff turnover, there is still room for improvement. The company plans to increase staff to cope with this situation. Labor costs for FY12/13 are likely to exceed forecasts as a result.

Upward Forecast Revisions

Revised 1H FY12/13 Forecasts

Sales: 40.1 billion yen (vs. previous forecast of 38.1 billion yen)

Operating profit: 1.7 billion yen (vs. previous forecast of 1.3 billion yen)

Recurring profit: 1.8 billion yen (vs. previous forecast of 1.3 billion yen)

Net income: 960 million yen (vs. previous forecast of 690 million yen)

The company gave the following reasons for the 1H FY12/13 forecast revisions:

• Both new handset sales and replacement sales were ahead of forecast in Q1. Since the immediate outlook is similar, the company has raised its total sales volume forecast for Q2, resulting in higher sales and gross profit forecasts than anticipated at the start of the period.
• In Q1, the company was unable to improve the working environment and retention rate for shop staff to the extent planned. Consequently, the company increased its workforce more than originally planned with the aim of achieving an early improvement in the working environment and employee satisfaction. As a result, it anticipates higher personnel expenses than originally forecast.
• In Q1, the yen weakened against other currencies compared with the end of December 2012, leading to foreign currency gains.

Revised Full-Year FY12/13 Forecasts

Sales: 84.4 billion yen (vs. previous forecast of 82.8 billion yen)

Operating profit: 2.9 billion yen (vs. previous forecast of 2.6 billion yen)

Recurring profit: 2.9 billion yen (vs. previous forecast of 2.6 billion yen)

Net income: 1.6 billion yen (vs. previous forecast of 1.4 billion yen)

In addition to those stated above for 1H, the company gave the following reasons relating to its FY12/13 full-year forecast revisions:

• There are no changes to total sales volume forecasts for Q3 or Q4.
• The company anticipates higher personnel expenses in Q3 and Q4 than originally forecast.

The company upwardly revised its annual forecasts; 1H earnings forecasts were revised upward to reflect increasing sales, while 2H estimates were revised downward due to an expected increase in labor costs.

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

Full-Year (FY12/13) Outlook

Note: The following discussions are based on company forecasts prior to their revisions on April 26, 2013.

The table above shows the company’s forecasts for FY12/13.

The company on April 26 revised its forecasts for Q2 and full year for FY12/13. For reasons for the revisions, please see the Q1 FY12/13 section.

For FY12/13, the company assumes total handset sales of 960,000 units (+8.2% YoY from about 890,000). The company’s other assumptions are: (1) the launch of new smartphone models in 2H; (2) lower sales volume YoY for feature phones and data cards; (3) a higher weight YoY of low ARPU products (i.e., relatively low gross profit margins); (4) more users switching to smartphones. On top of increasing total handset sales, the company intends to better control the weight of low ARPU products to improve profitability. In revising its annual forecasts, the company commented that it raised sales target for Q2 because new handset sales and replacement sales in Q1 exceeded estimates and that sales remained strong. However, the company declined to reveal its new sales target.

In February 2013, the company signed a distributor agreement with KDDI Corporation (TSE1: 9433). Going forward, the company plans to sell KDDI’s au-branded handsets and services as a distributor. As of April, however, the company said that it had no clear plans for new au shop openings. Accordingly, the company’s FY12/13 forecasts did not factor in au shop openings.

The company expects no significant changes in stock commissions for individual products. Still, the company intends to maximize stock commissions (variable) by improving customer satisfaction and acquiring new customers through the Mobile Number Portability (MNP) system, which enables customers to use the same phone numbers even after switching to another carrier.

The company expects higher SG&A expenses YoY due to plans to: (1) accelerate personnel investments (about 1.2 billion yen higher labor costs, compared with about 1 billion yen initially planned); (2) introduce sales management systems to reduce overtimes (about 100 million yen higher depreciation costs, etc.; actually introduced in January 2013); (3) step up new shop openings (i.e., higher rent); and (4) strengthen customer acquisitions through the MNP system (i.e., higher sales promotion costs).

Recently, mobile phone dealers in general were seeing the increasing number of staff leaving their jobs. The spread of smartphones has required shop staff to have knowledge on more complex devices, work longer per customer and consequently longer hours, and handle more complaints from customers. In response, the company launched various initiatives in FY12/12 to take better care of its shop staff. These included: (1) My Holiday system to encourage shop staff to use their paid holidays or consecutive days off; (2) mental health checkups and mental health seminars; and (3) strengthening of human resource-related training for those promoted to shop manager posts.

Despite these initiatives, the company was seeing more staff leaving each month during FY12/12. This is why the company decided to spend more in personnel and labor affairs. Specifically, in April 2013, the company hired 98 new college graduates (49 in April 2012), and plans to recruit about 100 in April 2014. Also, the company plans to increase the total number of shop staff by 50 in a bid to reducing their workload, improving their skill sets, and subsequently enhancing customer satisfaction. The company also plans to work more closely with telecom carriers to provide more worker-friendly environments at its shops (e.g., shorter business hours, simplified shop processes) while it itself strives to improve working conditions for its staff. In 2H of FY12/13, the company expects operating profit to decline 17.0% YoY to 1.2 billion yen. However, the company believes that industry winners will inevitably have better staff over the medium term and was accordingly seeing staff management as an important management issue.

For FY12/13, the company plans an interim dividend of 20 yen and a year-end dividend of 20 yen per share. These dividend projections consist of a 15 yen ordinary portion and a 5 yen portion commemorating the company’s 20th founding anniversary in February 2013. In addition, the company on April 18 completed its latest buyback program that called for the repurchase of 200,000 shares for 400 million yen. Considering all these planned activities, the company projects a payout ratio of 42% (around 10% in the past three years).

Future Outlook

Bell-Park announced rough numerical targets—“B-5 Targets” and “F-10 Targets”—at the FY12/12 results meeting on February 14, 2013. B-5 Targets call for sales of 120 billion yen and operating profit of 5 billion yen, while F-10 Targets call for sales of 200 billion yen and operating profit of 10 billion yen.

• B-5 Targets

These targets are for FY12/17. The company intends to meet the 5 billion yen operating profit target through: (1) M&A; (2) growth due to handling handsets and services of several telecom carriers; and (3) organic growth (i.e., better staff, better customer satisfaction, better sales mix, shop network expansion at an appropriate pace).

Regarding M&A, the company signed a distributor agreement with KDDI Corp. in February 2013. At the Q2 FY12/12 results meeting, the company announced partial revisions to its M&A policy and said that it would flexibly consider acquisitions of multi-carrier distributors through negotiations with application telecom carriers. Behind this decision were: (1) greater momentum toward the mobile phone dealer industry reorganization; and (2) many of mobile phone dealers handling handsets and services of several telecom carriers. More specifically, these industry movements suggested that the company could lose business opportunities if it only focused on acquiring dealers that handle products and services of a single carrier. Acquisitions actually drove the company’s growth to date, and the company appears to be seeing the current industry situation as a pivotal point for industry reorganization.

With the tie-up with KDDI Corp., the company now has an option to grow through new au shop openings, in SR Inc.’s view. As of February 2013, the company said that its au shop opening plan has yet to be formulated.

SR Inc. believes that the success of the company’s organic growth rests on plans for personnel investments, which the company was accelerating to enhance its competitiveness going forward. If the company successfully generates a positive cycle of personnel investments, lower staff turnover, better service quality, and greater customer satisfaction, SR Inc. thinks that the company will likely grow through higher customer numbers. SR Inc. notes, however, that the company has yet to prove the effectiveness of its initiatives in FY12/13.

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Business

Business Description

Bell-Park mainly operates Softbank Group mobile phone stores.

Its core business is the sale of mobile phone handsets, digital photo frames/picture-viewers, mobile phone accessories, and after-sales services.

The company’s store footprint covers Japan’s major urban centers (Tokyo, Osaka, and Nagoya) through a network of 226 stores as of the end of December 2012, which included both directly operated and franchise stores. Breaking the store count down, Bell-Park operated 208 SoftBank shops (of which 154 were directly operated stores and 54 were franchise operations), 14 WILLCOM Plaza (11 directly operated and 3 franchise stores), and 4 Apple stores. M&A had been a significant driver behind the expansion of its store network.

Softbank Kishiwada CanCan Bayside Mall – store interior (Source: Company data processed by SR Inc.)

Softbank Nohkendai – 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 Corporation (a subsidiary of Softbank Corp.; TSE 9984). 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 and other carriers (based on the Average Revenue Per User, ARPU), and is paid over a 60-month period. The ARPU is determined by carriers (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.

• Bell-Park does not disclose the churn rate (cancellation rate); however SR Inc. notes the following data: SoftBank Mobile’s median quarterly churn rate for 3G contracts (postpaid) has been about 1.10% (over the six quarters ended December 31, 2012—note SoftBank Mobile uses a March year-end). 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.

Carriers are concerned not only with quantity of new subscribers Bell-Park generates, but also that those are quality customers. For example, 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 carriers 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. In reality, hiking charges is 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 mobile phone dealers 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 (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 carriers (recognized as CoGS). When a customer purchases a handset, Bell-Park effectively sells the handset back to an applicable carrier, 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 carriers 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.

Through the process for signing up a new customer, 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 carriers). 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 that can be served. Such a conclusion overlooks the fact that the decision on the amount of commissions from carriers 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 warrants additional discussion. Due to regulatory changes related to consumer data protection in 2006, carriers 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.

The SG&A-to-sales ratio has historically been 14.9% (FY12/07 through FY12/12). A closer examination of components reveals that the personnel expenses have been the largest component (historically about 56% of SG&A; FY12/07 through FY12/12); 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 and advertising and promotion expenses. Rent has been relatively stable at around 14% of SG&A expenses on average between FY12/07 and FY12/12. Advertising and promotion expenses have been a smaller component, around 10% of SG&A during the period from FY12/07 to FY12/12.

Handset Sales Trends

(Source: Company data processed by SR Inc.)

As of FY12/13, the weight of smartphones was growing in handset sales—an important factor for the company—while the cumulative share of the advanced devices was also on a rise. The company believes that the growth in the cumulative share of smartphones means positive impact on its profitability. One downside is staff’s longer work hours (due to longer times required for product explanations for customers). However, a greater volume of data communication on smartphones means higher ARPU for data communication and probably higher stock commissions—a portion of ARPU that dealers receive from carriers. As carriers near the completing their handset lineups, new handset sales (an earnings driver) will likely slow down going forward. On the other hand, more users will likely switch from feature phones to smartphones. Unlike new handset sales, replacement sales do not require sales promotion costs, suggesting the possibility of better profitability for dealers. Also considering an increase of stock commissions, SR Inc. thinks that the profitability in the mobile phone distribution industry should continue to improve. SR Inc. notes, however, that mobile phone dealers must survive industry reorganization first and manage their human resources right to taste the real fruit of smartphone penetration.

Store Locations
Bell-Park had 226 stores (as of the end of December 2012), of which 208 were Softbank stores; 14 were WILLCOM Plaza; and four were Apple stores. Opening new Softbank 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 Co., adding 33 new franchise stores. According to the company, a number of franchise stores saw handset sales improve “dramatically” following acquisition. The company comments that the performance of individual franchise stores tends to improve substantially after the acquisition as the franchisees benefit from Bell-Park’s sales know-how.

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 2 to 3 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).

The company believes future performance will be underpinned by the ability of its staff and was accordingly pushing shop staff training. For example, it was focusing on Softbank Mobile store staff certificate exams in order to raise the skill set of its employees. The certificates are classified as follows: CA (chief advisor), SA (senior advisor), and JA (junior advisor), with CA being the highest certificate level in the Softbank Mobile certificate system. At 77%, the passing rate of the company’s staff is high, and among those who pass the break down was CA - 21.4%; SA - 37.9%; and JA - 40.1% (as of the end of FY12/12). SR Inc. believes the passing rates of the company’s staff - both generally and for CAs - are probably higher than those of other Softbank Mobile stores.

In FY12/12, the company was seeing the increasing number of shop staff leaving their jobs. The spread of smartphones meant greater skill sets required for these staff. Tough duties in shops (e.g., knowledge on advanced devices, longer times for product explanations per customer, longer overtimes, increased customer complaints) have driven up the number of staff leaving shops. According to the company’s analysis, many mobile phone dealers were seeing their job posting costs rapidly increase. Accordingly, the company thinks that dealers who care more about their shop staff will likely be survivors in the long run. Therefore, the company intends to spend aggressively on personnel (i.e., hiring more, strengthening training, allowing staff to take more holidays, providing mental healthcare programs) while better controlling other costs by closely monitoring their efficiencies.

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.

In FY12/12, the company opened a repair service counter at the Apple Kichijoji store. In addition, the company has officially provided repair services for Apple products through three “Smart Aid” outlets in Shinjuku, etc.

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).

Comparing Bell-Park’s ROE with T-Gaia Corp’s (TSE1: 3738), T-Gaia has higher figures. Using DuPont analysis to break down ROE further shows T-Gaia’s higher leverage was the driver behind the higher ROE and looking at ROA Bell-Park scores higher. Indeed, the company’s higher ROA versus T-Gaia is due to its higher net income margin.

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 and FY12/11 was the fall in the net profit margin. In FY12/12, the net profit margin and ROE both improved somewhat.

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 4.6x over the period between FY12/00 and FY12/12 and significantly increased ROE 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.
• Main focus on SoftBank Mobile. 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:

• Main focus on SoftBank Mobile. SoftBank Mobile-branded handsets, accessories, and phone plans are the majority 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 7.6% of total SoftBank Mobile outlets (Bell-Park: 208 outlets, SoftBank Mobile: 2,744 outlets; as of December 2012). Competing distributors have more handset share and will be able to achieve larger economies of scale (volume discounts for handsets).

Although the main focus on SoftBank Mobile could be interpreted as both a strength and a weakness, a consideration of the mutual benefits for each party suggests that the relationship could more accurately be considered symbiotic if unequal.

SoftBank Mobile’s benefit from Bell-Park as a supplier is market intelligence. Bell-Park’s feedback is important to SoftBank Mobile because Bell-Park is the distributor with the main focus on 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 208 stores (as of December 2012) represented about 7.6% of the total SoftBank Mobile shops (2,744 as of December 2012). SoftBank Mobile recorded a total of 12.7 million unit sales during Q4 FY03/12 to Q3 FY03/13 while Bell-Park over the same period (i.e. the company’s FY12/12) recorded total unit sales of 886,883 units, which was equivalent to 7.0% 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 operating efficiency.

In February 2013, the company signed a distributor agreement with KDDI Corporation (TSE1: 9433). Therefore, SR Inc. expects that Bell-Park will likely open au shops (“au” is KDDI’s brand) from FY12/13, though the shop opening plan has yet to be decided as of the beginning of FY12/13. Bell-Park added that the tie-up with KDDI Corp. would not change its relationship with SoftBank Mobile.

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 104% (Source: Ministry of Internal Affairs and Communication; Telecommunications Carriers Association, as of the end of December 2012). 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 data processed by SR Inc.)

Growth of total subscribers has slowed up until 2009. Data collected by the Ministry of Internal Affairs and Communications shows that the median YoY growth since 2000 is about 6%, but the trend has been slowing up until 2009 (see the graph below). From 2010, the growth has accelerated with the spread of smartphones.

(Source: Ministry of Internal Affairs and Communications data processed by SR Inc.)

Market Development

The first service provider of mobile phone service was Nippon Telegraph & Telephone Corp. (TSE 9432) better known as NTT, which later spun out its mobile operations as NTT DOCOMO Inc. (TSE 9437), 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 Corp. 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 significantly; NTT DOCOMO’s 53% share in December 2006 had declined to 46.0% as of December 2012, while SoftBank Mobile has increased from 16% to 23% over the similar period while KDDI’s share has essentially been flat at 27% (as of December 2012). Notably, SoftBank Mobile has seen market share increase since acquiring a business from Vodafone in 2006. The shift is illustrated by subscriber data collected by the Telecommunications Carriers Association (presented below):

(Source: Telecommunications Carriers Association data processed by SR Inc.)

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

Mobile phone subscriber data suggested that every person in Japan now has at least one mobile phone. Approaching the point of full saturation, competition among carriers to get subscribers is expected to intensify further, fueled by the Mobile Number Portability (MNP) system, which enables users to use the same phone numbers after switching to another carrier. Also, the rapid spread of smartphones, growing data traffic, and advanced terminal functions will likely lead into demand growth for mobile phones.

In particular, the spread of smartphones has required mobile phone shop staff to know better about devices, work longer to serve each customer, work overtime, and handle increasing customer complaints. These situations have caused more shop staff to leave their jobs. High staff turnover generally lowers service quality at these shops. Accordingly, Bell-Park believes that shops who care more about their staff will likely survive in the long run.

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
  
• ITX Corporation expanded presence through the acquisition of mobile phone sales businesses of Panasonic Corporation (TSE1: 6752) and Sony Corporation (TSE1: 6758).
• ITC (TSE1: 9422) acquired Hitachi’s retail arm and merged with Panasonic Telecom Co.

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: own shops (carrier shops run by Bell-Park), agents and other stores, as well as corporate sales.

Own shops – retail operations have been the main sales channel for Bell-Park; new handset sales composition increased from 74.2% of FY12/05 sales to 81.8% in FY12/12. 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 sales – 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.

Agents and other stores – 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 (18.4% in FY12/11).

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. SR Inc. considers the relationship between Softbank Mobile and Bell-Park to be symbiotic. Bell-Park’s position as a sales agent for Softbank Mobile is important for the network operator given Bell-Park’s strong sales performance and its large store network. Indeed, for SoftBank Mobile getting feedback from Bell-Park in order to gauge the effectiveness of their marketing campaigns is critical.

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 (2,744 total stores, as of December 2012) as well as other distribution channels where consumers can purchase SoftBank Mobile phones and service (e.g. electronics mass retailers etc.).

Operators of SoftBank Mobile branded shops:

• TELECOM EXPRESS Co.- a SoftBank Subsidiary
• Telecom Service (a joint venture between SoftBank Mobile and electronics retailer Hikari Tsushin Inc. (TSE 9435)).
• T-Gaia Corp. (TSE 3738) – operates carrier shops for a number of carriers and has the largest sales agent network. Its main shareholders are Mitsubishi Corp (TSE 8058), Mitsui and Co Ltd (TSE 8031), and Sumitomo Corp (TSE 8053).
• ITX Corp. (Jasdaq 2725) – main business segment is engaged in operation of carrier shops.

Other retail sales channels for SoftBank Mobile Phones:
Electronics Retailers – Yamada Denki Co. (TSE 9831), Bic Camera Inc. (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 Ltd. (TSE 9430) and Diamond Telecom (Unlisted, 100% subsidiary of Mitsubishi Electric Corp. (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.

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Strategy

The company had essentially operated a strategy of focusing on a single product area (i.e. SoftBank Group) up until FY12/12. But in FY12/12, the company partially revised its strategy and now aspires to sell products and services of several carriers.

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 this trend is likely to continue.

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Historical Financial Statements

Summary

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

FY12/12 Results (Announced on February 13, 2013)

For the full-year, sales volume was 886,883 units (+17.9% YoY): 500,414 units in new handset sales (+25.7% YoY) and 386,469 units in replacement sales (+9.1% YoY). The full-year sales volume was 104.3% of the company’s estimate (850,000 units).

During FY12/12, the company opened 13 new SoftBank directly operated shops, relocated three shops, and renovated 26 shops. As of the end of December 2012, 2,744 SoftBank shops operated nationwide. Of these, the company operated 208 shops: 154 directly operated and 54 franchise operations.

Full-year sales were 74.5 billion yen (+5.5% YoY) due to higher sales volume. Gross profit was 13.9 billion yen (+14.7% YoY) due to higher new handset sales and accessory sales as well as to higher stock commissions. SG&A expenses increased 16.2% YoY to 10.8 billion yen due to an increase in sales promotion costs (i.e., harsher competition) and to higher personnel and rent in connection with new store openings. Still, gross profit growth offset these cost increases, resulting in operating profit of 3.1 billion yen (+9.6% YoY).

Versus full-year company estimates, sales were 98.0%; operating profit, 99.1%; recurring profit, 101.0%; and net income, 101.3%.

The company highlighted the following points for FY12/12.

1. Record-high sales volume and sales amount

FY12/12 sales volume, sales, and operating profit were better than in FY12/11, and sales volume and sales were the highest ever. The operating profit was the second-highest ever following the 3.6 billion yen posted in FY12/09.

2. The operating profit margin 0.2 percentage point higher YoY

The operating profit margin was better than in FY12/11 despite an increase in SG&A expenses, helped by a rise in stock commissions and robust accessories sales.

3. Unfavorable changes in the mix of products sold

As discussed above, new handset sales were strong. However, the weight of relatively low average revenue per user (ARPU) products (e.g., Mimamori Mobiles, mobile phones with an anti-crime alarm function; PhotoVision digital photo frames) increased from 15.7% in FY12/11 to 33.3%. The company commented that it must improve the mix from FY12/13.

Q3 FY12/12 Results (Announced on October 31, 2012)

The company maintained its full-year FY12/12 forecasts, but revised up its dividend forecasts.

Q3 sales volume came in at 601,838 units (+23.1 YoY): 363,230 units in new handset sales (+27.8%) and 238,608 units in replacement sales (+16.6% YoY). New handset sales were strong. Looking at the company’s monthly sales data, there was an increase in the weight of relatively low average revenue per user (ARPU) products (e.g., general mobile terminals including iPad; Mimamori Mobiles, mobile phones with an anti-crime alarm function; PhotoVision digital photo frames) to 21.9% from 14.3% in cumulative Q3 FY12/11. This resulted in higher sales volume growth but lower sales growth. Also, the late-September 2012 release of new Apple smartphones (previous models released in mid-October 2011) meant September 2012 sales volume rising 43.7% YoY.

In cumulative Q3, the company opened 6 new SoftBank directly operated shops and renovated 18 existing shops. As of the end of September 2012, 2,742 SoftBank shops operated nationwide. Of these, the company operated 201 shops: 148 directly operated and 53 franchise operations.

Cumulative Q3 sales were up 6.0% YoY to 50.7 billion yen, mainly thanks to higher sales volume. Higher new handset sales, accessory sales and stock commissions led to a 20.2% YoY rise in gross profit to 10.2 billion yen. SG&A expenses climbed 19.4% YoY to 8.0 billion yen, due to a significant rise in sales promotion expenses from harsher competition with other mobile-phone dealers and to higher labor costs and rent in connection with new store openings. However, gross profit growth offset these cost increases, resulting in 2.2 billion yen operating profit, up 23.1% YoY. Recurring profit was up 27.8% YoY at 2.2 billion yen thanks to lower foreign exchange losses YoY. Net income was up 34.1% YoY at 1.3 billion yen thanks to lower extraordinary losses YoY (i.e., the company booked a 47 million yen loss in cumulative Q3 FY12/11 in connection with the application of the Accounting Standards for Asset Retirement Obligations).

In line with Q3 results announcement, the company revised up its full-year dividend forecast, from the initial 2,600 yen to 3,000 yen per share on the back of strong Q3 results.

Q2 (1H) FY12/12 Results (Announced on July 31, 2012)

The company maintained its forecasts.

1H sales volume came in at 412,648 units (+26.1% YoY): 257,866 units in new handset sales (+33.1% YoY) and 154,782 units in replacement sales (+15.9% YoY). New handset sales were strong, increasing 64,179 units YoY. Looking at the company’s monthly sales data, general mobile terminals sales (including iPad) increased 12,431 units YoY, Mimamori Mobiles (mobile phones with an anti-crime alarm function) sales up 17,514 units, data-card sales up 22,033 units YoY, and PhotoVision digital photo frames sales up 12,201 units YoY, all contributing to robust results.

In 1H, the company opened 4 new SoftBank directly operated shops and renovated 7 existing shops. As of the end of the period, 2,723 SoftBank shops operated nationwide. Of these, the company operated 200 shops: 147 directly operated and 53 franchise operations.

1H sales were up 8.1% YoY to 35.1 billion yen, thanks to higher sales volume. Higher new handset sales, accessory sales and stock commissions led to a 27.6% YoY rise in gross profit to 7.2 billion yen. SG&A expenses climbed 25.0% YoY to 5.5 billion yen, due to a significant rise in sales promotion expenses from harsher competition with other mobile-phone dealers, a greater staff number after new shop openings in FY12/11, and higher personnel expenses on securing capable staff for medium- to long-term hiring. Higher gross profit offset these cost increases, resulting in 1.7 billion yen operating profit, up 36.8% YoY.

1H sales fell short of company estimate (36.0 billion yen). According to the company, lower-than-expected sales were due to a higher percentage of sales from relatively low average revenue per user (ARPU) products (e.g., PhotoVision, Mimamori Mobiles), resulting in lower sales per customer. On the other hand, operating profit was better than company estimate (1.6 billion yen) thanks to higher-than-expected new handset and accessories sales.

The company noted inventories declined 298 million yen from end-December 2011. SR Inc. believes the lower inventories were thanks to the company accelerating inventory reductions for handsets incompatible with SoftBank Mobile Corp.’s new Platinum Band mobile services (scheduled for launch in late-July 2012). The Platinum Band refers to the 900-megahertz radio frequency band with high reception quality.

Q1 FY12/12 Results (Announced on April 27, 2012)

On April 9, 2012, the company announced upward revisions to its 1H and full year FY12/12 forecasts.

Q1 FY12/12 sales volume came in at 229,238 units (+38.9% YoY): 143,263 units in new handset sales (+46.3% YoY) and 85,975 units in replacement sales (+28.0% YoY). New handset sales grew 45,335 units YoY. Looking at the company’s monthly sales data, general mobile terminals sales (including iPad) increased 15,662 units YoY; Mimamori Mobiles (mobile phones with an anti-crime alarm function) sales up 9,850 units; and data terminals compatible with the “ULTRA SPEED” data communication up 13,621 units YoY.

In Q1 FY12/12, the company opened 2 new SoftBank directly operated shops and renovated 6 existing shops. As of the end of the period, 2,702 SoftBank shops operated nationwide. Of these, the company operated 198 shops: 146 directly operated and 52 franchise operations.

Q1 sales were up 19.3% YoY to 19.6 billion yen, thanks to higher sales volume. Higher new handset sales, accessory sales and stock commissions led to a 33.2% YoY rise in gross profit to 3.9 billion yen. SG&A climbed 30.3% YoY to 2.9 billion yen, due to a significant rise in sales promotion expenses from harsher competition with other mobile-phone dealers, a greater staff number after new shop openings in FY12/11, and higher personnel expenses on securing capable staff for medium- to long-term hiring. Higher gross profit offset these cost increases, resulting in 1.0 billion yen operating profit, up 41.9% YoY.

The company upwardly revised its 1H and full year forecasts on April 9, 2012, except for sales. 1H sales forecast was at 36.0 billion yen (+11.0% YoY), and Q1 sales were at 19.6 billion yen (+19.3% YoY). These figures clearly show that the Q1 sales grew at a higher-than-expected rate.

FY12/11 Results (Announced on February 14, 2012)

FY12/11 sales volume came in at 752,334 units (+19.4% YoY): 397,999 units in new handset sales (+11.3% YoY) and 354,335 units in replacement sales (+30.0% YoY). Total FY12/11 sales thus came in 12.3% above the company’s revised full year sales forecast of 670,000 units. In addition, total unit sales exceeded not only that of the revised plan (which had been revised downward), but also the initial plan, which had targeted 700,000 units.

As for quarterly trends in total unit sales, the company sold 165,095 handsets in Q1; 162,170 in Q2; 161,550 in Q3; and 263,519 in Q4. Q3 sales took a hit as consumers delayed purchases in expectation of the iPhone 4S release in October 2011, however sales then staged a significant recovery in Q4. The ratio of replacements to new purchases was 0.69 throughout　1H and 0.79 in Q3. It then surged to 1.32 in Q4 as the release of the iPhone 4S boosted the percentage of replacements.

FY12/11 sales were up 17.3% YoY at 70.6 billion yen, however, operating profit actually dropped by 1.9% to 2.8 billion yen owing to a 17.7% YoY rise to 9.3 billion yen in SG&A expenses fueled by higher personnel expenses on the back of new store openings as part of mid/long-term growth initiatives and increased sales promotion expenses due to intensified competition with other mobile-phone dealers.

Sales for the FY came in 3.8% above the company’s revised forecast and operating profit came in 7.5% above forecast. The company cited the iPhone 4S’ release as the reason behind sales coming in better than planned: its release prompted total unit sales to exceed plan. Operating profit also exceeded forecast, the company pointed to increased sales and the higher percentage of replacements sales driven by the the iPhone 4S’ release enabling it to spend less on marketing expenses than planned as the main factors behind this.

As of end-December 2011, the company operated a total of 197 of the 2,677 stores SoftBank stores nationwide; of which 145 were directly operated and 52 were franchise stores (including WILLCOM Plaza stores run by the company the total store count came to 206 stores). During FY12/11, the company opened 11 directly managed stores and two franchise stores, and closed one directly managed store. In addition, one store was acquired through M&A and five stores expanded their floor space.

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.

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.

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Income Statement

Sales have notched up a compound annual growth rate (CAGR) of 15.7% between FY12/01 and FY12/12.

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 growth since FY12/09 has largely been due to the overwhelming success of the Apple’s iPhone series 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.

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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) from FY12/01 through FY12/12, 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 carriers. 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 FY12/12 its interest bearing debt had fallen to 425 million yen. 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. Bell-Park executed a 3-for-1 split on February 20, 2002, and again on February 20, 2004. On January 1, 2013, the company executed a 100-for-1 split.

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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.

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

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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.

In December 2009, the company signed an Apple Authorized Premium Reseller agreement with Apple Japan, Inc. In January 2010, the company began operating as an Apple Premium Reseller.

In December 2010, the company signed a distributor agreement with WILLCOM, Inc. In February 2011, the company opened its first official WILLCOM Plaza shop in Kyodo, Tokyo.

In February 2013, Bell-Park signed a distributor agreement with KDDI Corp.

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News & Topics

Company News & Topics

February 2013

On February 13, 2013, the company announced a change of its dividend policy (beginning of interim dividends) and a 20th founding anniversary dividend.

The company decided to begin the payout of interim dividends (previously only year-end dividends) from FY12/13.

Also, to commemorate its 20th founding anniversary on February 2, 2013, the company decided to pay 40 yen per share (30 yen ordinary portion; 10 yen commemorative portion) for FY12/13, buy back 200,000 shares for 400 million yen, and issue stock options.

On the same day, the company announced that it had signed a distributor agreement with KDDI Corporation (TSE1: 9433) and decided to launch a new business.

To date, the company has been an exclusive distributor for SoftBank Group products and worked to expand its sales network, increase unit sales, and improve performance. For further corporate growth, the company decided to work with KDDI. Through this new partnership, the company plans to handle KDDI’s mobile handsets and provide new services.

November 2012

On November 29, 2012, the company announced a stock split and the adoption of a stock trading unit.

According to the release, the company’s board of directors made decisions on the stock split and stock trading unit in a meeting held on the same date. Brief details are as follows:

• Stock Split

With December 31, 2012 (actually December 28 due to the shareholder registry administrator’s holiday) set as the record date and January 1, 2013 as the effective date, the company will execute a 1-to-100 stock split. With this, the number of the company’s outstanding shares will increase from about 67,000 to roughly 6,710,000.

• Adoption of Stock Trading Unit

On January 1, 2013 (effective date for the above stock split), the company will adopt the trading unit of 100 shares.

October 2012

On October 31, 2012, the company revised its annual dividend forecasts.

April 2012

On April 9, 2012, the company announced upward revisions to its 1H and full year FY12/12 forecasts.

The upward revisions were as follows:

1H FY12/12 forecast

• Sales: 36.0 billion yen (unchanged vs. previous forecast)
• Operating profit: 1.6 billion yen (vs. previous forecast of 1.3 billion yen)
• Recurring profit: 1.6 billion yen (vs. previous forecast of 1.2 billion yen)
• Net income: 900 million yen (vs. previous forecast of 690 million yen)

The company revised up its 1H forecasts due to better product mix. As a result of SoftBank Mobile’s special campaigns and the company’s sales promotion in Q1, new handset sales were better than the company’s plan while the handset upgrades did not meet its expectation. As the margin for new handsets is high, gross profit came in above company plan. Despite the expected increase of promotion and labor cost due to competition and extended store hours respectively, the company revised up its operating profit forecast due to improved gross profit driven by better product mix. The store hours were extended from April 2012.

FY12/12 forecast

• Sales: 76.0 billion yen (unchanged vs. previous forecast)
• Operating profit: 3.2 billion yen (vs. previous forecast of 3.0 billion yen)
• Recurring profit: 3.2 billion yen (vs. previous forecast of 3.0 billion yen)
• Net income: 1.8 billion yen (vs. previous forecast of 1.7 billion yen)

Full year forecasts were revised in line with the upward revision to the 1H forecasts. The company expects higher promotion and labor costs in 2H due to competition and extended store hours.

July 2011

On July 29, 2011, the company announced a downward revision to its FY12/11 forecast.

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.

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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.

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Employees

Bell-Park has 651 full-time employees, and 562 part-time staff.

The average employee age is 30.0 years old (data as of the end of FY12/12).

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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)

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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 (1,000 yen value) to each shareholder of record holding at least one trading unit (100 shares) on the last days of the interim period and fiscal year. 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.

As part of shareholder returns, the company intends to repurchase its shares and raise its projected payout ratio in FY12/13.

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Investor Relations

The company holds bi-annual results analyst meetings.

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

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By the Way

Latest Q&A

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