UPDATED 15/5: SoftBank announced its fiscal 2017 results last week, with the telecoms, venture capital and chip technology company reporting a very healthy net profit of $9.5 billion for the full year.
The performance of its underlying telecoms businesses, however, was largely overlooked as most media outlets focused on the heady returns of its Vision Fund and plan to offload two-thirds of its stake in mobile operator Sprint to rival T-Mobile US.
Walmart announced it will take a contolling stake in India-based e-commerce site Flipkart for $16 billion, with the Vision Fund looking to sell its interest in the online retailer (acquired in August 2017) for a 60 per cent gain.
Meanwhile, SoftBank founder Masayoshi Son last month finally persuaded T-Mobile US to acquire a majority interest in Sprint for $26.5 billion in stock. SoftBank is set to hold a 27.4 per cent stake and Son will have seat on the board of the merged entity. Regulators are certain to look closely at that deal, which will bring the US down to three major mobile players. Some analysts reckon the merger won’t be approved, a fact reflected in the companies’ stock prices.
To get a pulse on the health of SoftBank’s telecoms business, you need to strip out its many investments, as well as Vision Fund, Arm and Yahoo Japan. As Atul Goyal, MD of equity research with Jefferies in Singapore, said in a recent research note, SoftBank’s complex structure doesn’t lend itself to determining true expectations or to make decent year-on-year comparisons.
In fiscal 2017 (the year to end-March), its telecoms operations in Japan reported a 0.7 per cent year-on-year drop in revenue to JPY2.4 trillion ($21.9 billion), with mobile turnover falling 4 per cent to JPY1.8 trillion. ARPU was stable and it added 775,000 mobile subs.
SoftBank’s only forward looking comment in the latest earnings report simply said it expects to increase telecoms service revenue in the next fiscal year by leveraging its growing customer base.
The business did generate 52 per cent of the group’s operating profit (compared to 23 per cent from Vision Fund and Delta Fund). Its market share by subscribers, which peaked in 2015 at nearly 26 per cent, recently slipped below 20 per cent for the first time.
Those revenue numbers aren’t exactly exciting for potential investors – SoftBank said in February it is considering listing its domestic telecoms business, although it suggested it may not go ahead with a listing after a thorough review.
A detailed look at Sprint clearly shows why Son will be glad to pull back on the US market.
Sprint may have recorded its first full-year profit in more than a decade, but the gain was due to a one-off income tax decrease, which contributed to 66 per cent of SoftBank’s total net profit. Revenue fell 2.8 per cent to $32.4 billion, while overall ARPU slid nearly 7 per cent due to a rise in uptake of low-rate plans offered to acquire new customers. The operator managed to add nearly 1 million subs in the year to end-March with the incentives.
The fact is that much of SoftBank’s attraction is due to its investments (including Arm, which is making major long-term R&D investments to drive future growth). Goyal believes the many taxi booking companies SoftBank has invested in could enjoy significant investor interest and that listing them will “provide the next catalyst for upside” for SoftBank. But he noted that after listing, there is the potential downside: SoftBank’s shares rose 260 per cent between October 2012 and September 2014 as it priced in an Alibaba IPO. SoftBank’s shares are still below the level of the day the e-commerce giant was listed.
As the company wisely opts to sell Sprint, it is unlikely to move aggressively on a local telco IPO anytime soon – particularly with a fourth mobile operator preparing to enter Japan in 2019. E-commerce operator Rakuten, which currently offers mobile service as an MVNO using NTT Docomo’s network, received approval to operate 4G service and is expected to invest $2 billion in its network.
The competitive threat may not be significant in the short term, unless Rakuten opts to boost its capex budget drastically. But, as the third ranked player in Japan facing anemic mobile sales in a mature market, stripping away SoftBank’s other investment activities and leaving its telecoms core separate could expose its shortcomings with greater clarity.
The editorial views expressed in this article are solely those of the author and will not necessarily reflect the views of the GSMA, its Members or Associate Members.