SoftBank Group Corp. and its subsidiaries and associates (collectively, the “Group”), operate in a wide range of markets in Japan and overseas, and therefore face a variety of risks in its operations. The major risks envisaged by the Group as of June 22, 2016 that could significantly affect investors' investment decisions are outlined below. If any of these risks were to emerge, the securities issued by SoftBank Group Corp., such as shares and corporate bonds, could fall in value or otherwise be impacted. Moreover, these risks do not include all of the risks that the Group could face in the course of carrying out its future business operations. Forward-looking statements were determined as of June 22, 2016, unless otherwise stated.
(1) Economic conditions
Demand for services and products provided by the Group (including but not limited to telecommunications services and Internet advertising) is subject to economic conditions, mainly in Japan, the U.S., and China. Therefore, deterioration of the business climate in each country and changes in the economic structure attendant on demographic changes, such as the aging and decline of the population in Japan, could impact the Group's results of operations.
(2) Foreign exchange rate fluctuations
In the preparation of SoftBank Group Corp.'s consolidated financial statements, the local-currency based revenues and expenses of Sprint Corporation and other overseas Group companies are converted into Japanese yen at the average exchange rate for each quarter, and their assets and liabilities are converted at the exchange rate on the last day of the quarter. Consequently, fluctuations in the foreign exchange rate could impact the Group's results of operations and financial position.
The Group invests in overseas companies. If the Group sells its foreign currency-denominated assets when the yen has changed significantly in value from the time of investment, it may incur foreign exchange losses, which could impact the Group's results of operations.
(3) Management team
Unforeseen situations concerning key members of management – especially chairman & CEO of SoftBank Group Corp. and Group representative Masayoshi Son – could impede the Group's business development.
(4) Response to technology and business models
The Group's primary business domain is the information industry, which is subject to rapid changes in technology and business models. If for some reason, the Group is unable to develop or introduce outstanding, up-to-date technologies or business models, its service offerings will lose competitiveness in the markets, making it difficult to acquire and retain customers. This could impact the Group's results of operations.
In certain instances, the Group's competitors (including but not limited to mobile communications operators and Mobile Virtual Network Operators (MVNOs)) may have a competitive advantage over the Group in terms of capital, technology development capabilities, price competitiveness, customer base, sales capability, brands, or public recognition, for example. If these competitors were to sell services and products that harness these competitive advantages to a greater extent than at present, the Group may be placed at a disadvantage in sales competition, or may be unable to provide services and products, or acquire or retain customers as anticipated. This could impact the Group's results of operations.
Moreover, the Group's competitive edge may be diminished if the Group's competitors deploy equivalent or better services and products to those the Group had introduced ahead of its competitors or those which were highly competitive at the time of introduction by the Group. This could impact the Group's business development and results of operations.
(6) Capacity increases in telecommunications networks
To maintain and enhance the quality of telecommunications services, the Group must continuously increase the capacity of its telecommunications networks based on predictions of the amount of future network traffic. The Group thus plans to systematically increase network capacity. However, if the actual amount of network traffic were to drastically exceed the Group's predictions, or if the Group were not to carry out network capacity enhancement (including but not limited to securing the required spectrum), service quality could be adversely affected, making it difficult to acquire and retain customers. In this case, the Group would also need to execute additional capital expenditure. These outcomes could impact the Group's results of operations and financial position.
(7) Dependence on management resources of other companies
a. Use of facilities, etc., of other companies
The Group makes use of certain telecommunications lines and facilities owned by other operators when constructing the telecommunications networks required for providing telecommunications services. The Group's business development and results of operations could therefore be impacted if for some reason it became difficult to continue to use those facilities, or if utilization or connection rates for those facilities were to be increased.
b. Procurement of various equipment
The Group procures telecommunications equipment, network devices, and so forth (including but not limited to mobile devices and radio equipment for mobile phone base stations) from other companies. The Group may be unable to switch suppliers or equipment in a timely manner should problems occur with the procurement of equipment in a case where the Group relies heavily on a specific supplier. Such problems could include supply interruptions, delivery delays, order volume shortfalls, and defects. Suppliers may also cease providing the maintenance and inspection services required for telecommunications equipment to maintain performance. Either of these situations could impede the Group's provision of services, making it difficult to acquire and retain customers, or cause the Group to incur additional costs for changing a supplier, or cause a decline in sales of telecommunications equipment. This could impact the Group's results of operations.
c. Consignment of operations
The Group consigns sales activities, acquisition and retention of customers mainly for telecommunications services, and the execution of other related operations in whole or part to subcontractors. The Group's business development could therefore be impacted if for some reason these subcontractors are unable to execute operations in line with the Group's expectations.
The Group also has networks of subcontractors responsible for the sale of the Group's services and products. Damage to the credibility or image of these subcontractors would also have a negative impact on the Group's credibility or corporate image. This could hinder business development and the acquisition and retention of customers, which could impact the Group's results of operations. Furthermore, if these subcontractors should fail to comply with laws and regulations, the Group could receive a warning or administrative guidance from the regulatory authorities, or be investigated for non-fulfillment of its supervisory responsibility, and the Group's credibility or corporate image could deteriorate as a result, making it difficult to acquire and retain customers. These could impact the Group's results of operations.
d. Business alliances and joint ventures
The Group develops its business in Japan and overseas through business alliances, joint ventures and so forth with other companies. If an alliance partner or joint venture partner should have a significant change of business strategy or experience a deterioration in its results of operations or financial position, it is possible that adequate results may not be obtained from the business alliance, joint venture, and so forth or that it may become difficult to continue the business alliance or joint venture. In addition, it is also possible that execution of a business alliance or joint venture with a particular third party could preclude the execution of business alliances, joint ventures and so forth with other parties. Such events could impact the Group's business development and results of operations.
e. Use of brands belonging to Yahoo! Inc.
In Japan, the Group makes use of brands belonging to U.S. company Yahoo! Inc. in certain service names such as Yahoo! JAPAN, Y!mobile, Yahoo! Keitai and Yahoo! BB. If the Group were to become unable to use these brands due to a drastic change in its relationship with Yahoo! Inc. or other reasons, the Group may be prevented from developing businesses as anticipated.
(8) Online games provided by the Group
In the Group's online game-related business, the majority of sales are dependent on certain game titles. If the Group is unable to maintain the interest of its existing customers in these titles, or if a competitor launches a title that is more appealing than these titles, or if some other event occurs that reduces the competitiveness of these titles, it may become difficult to acquire and retain customers. This could impact the Group's business development and results of operations.
The Group also makes use of content distribution services operated by other companies (including but not limited to Apple Inc.'s App Store*1 and Google Inc.'s Google Play*2) to provide content such as online games to its customers, and to charge them. If the companies operating these services were to increase their commission rates, there could be an impact on the Group's business development and results of operations.
- *1 Apple is a trademark of Apple Inc., registered in the U.S. and other countries. App Store is a service mark of Apple Inc.
- *2 Google and Google Play are trademarks or registered trademarks of Google Inc.
(9) Renewable energy business
In renewable energy business, the amount of power generated could be lower than anticipated due to weather conditions such as sunlight and wind force. Moreover, if power generation facilities or facilities for connecting with power company transmission lines become faulty such as being damaged due to a natural disaster or other event, the amount of power generated and the amount of power sold could decline dramatically. These could impact the Group's results of operations.
(10) Information leaks, etc.
In its business operations, the Group handles customer information (including personal information) and other confidential information. This information could be leaked, lost, or involved in a similar incident, either intentionally or accidentally by the Group (including officers and employees of the Group and people related to subcontractors), or through a malicious cyber-attack by a third party or other means. Such an occurrence could damage the Group's competitiveness, and incur significant costs to the Group for payment of damages and modification of security systems, in addition to having an adverse impact on the Group's credibility or corporate image and making it difficult to acquire and retain customers. These outcomes could impact the Group's results of operations.
(11) Service disruptions or decline in quality due to human error and other factors
In its provision of various services, including telecommunications services, there is a possibility that a major problem could occur if the Group became unable to continuously provide the services, or suffered a decline in the quality of the services, due to human error, serious problems with equipment or systems, or other causes. If such disruptions or declines in quality were to become widespread and/or significant time were required to restore services, the Group's credibility or corporate image could deteriorate, making it difficult to acquire and retain customers. This could impact the Group's results of operations.
(12) Natural disasters, accidents and other unpredictable events
The Group constructs and maintains telecommunications networks, information systems, and other systems necessary for the provision of various services, including Internet and telecommunications services. Natural disasters, such as earthquakes, typhoons, hurricanes, flooding, tsunamis, tornadoes, heavy rainfall, snowfall, or volcanic activity, other unexpected disruptions such as fires, power outages or shortages, or incidents such as terrorist attacks, cyber-attacks, unauthorized access or infection by computer viruses could interfere with the normal operation of telecommunications networks and information systems and others. This could hinder the provision of various services by the Group. If these impacts were to become widespread and/or significant time were required to restore services, the Group's credibility or corporate image could deteriorate, making it difficult to acquire and retain customers. Moreover, significant costs may be incurred by the Group for recovery and repair of the telecommunications networks, information systems, and others. This could impact the Group's results of operations.
In Japan, the head offices and business offices of various Group companies are concentrated in the Tokyo Metropolitan Area. The possibility therefore exists that a major earthquake or other force majeure event in the area could incapacitate these business locations, impeding the continuity of the Group's business.
(13) Fund procurement and leasing
The Group procures the funds it requires for developing its business by borrowing from financial institutions, issuing corporate bonds, and other sources. The Group also executes capital expenditure utilizing leases. The cost of procuring funds could increase because of rising interest rates or a decline in the Group's creditworthiness stemming mainly from a downgrading of the credit ratings of SoftBank Group Corp. or its Group companies. Such an increase in fund procurement costs could impact the Group's results of operations. Furthermore, depending on the financial market conditions and the credit standings of SoftBank Group Corp. or its Group companies, the Group may be unable to procure funds or structure leases as planned. This could impact the Group's business development, results of operations, and financial position.
In addition, various covenants are attached to the Group's borrowings from financial institutions, corporate bonds, and other transactions. If the potential arises for any of these covenants to be breached and the Group is unable to take steps to avoid breaching them, the Group could forfeit the benefit of term relating to the obligation concerned, and in conjunction with this loss the Group could be requested to repay other borrowings in one lump sum as well. As a result, the Group's financial position could be impacted.
Moreover, the Group plans to allocate cash flow from its domestic telecommunications business as a source of cash to repay funds procured for the acquisition of Sprint Corporation. If the Group is unable to generate cash flow from its domestic telecommunications business as anticipated, it may sell some of its assets or take other measures to secure resources for repaying the acquisition funds. This could impact the Group's results of operations and business development.
(14) Investment activities
The Group conducts investment activities for the purpose of setting up new businesses (including but not limited to a robotics business), and expanding existing businesses. Such activities include corporate acquisitions, establishment of joint ventures and subsidiaries, and acquisitions of interests in operating companies or holding companies (including companies that effectively control other companies through various contracts) and funds. Recent examples include an investment in Social Finance, Inc., which provides consumer finance services such as student loan refinancing service in the U.S. If an investee is included in the Group's scope of consolidation in conjunction with these investment activities, this could impact the Group's results of operations and financial position, for example by having a negative impact. In addition, if an investee is unable to conduct business as anticipated at the time of investment, SoftBank Group Corp.'s results of operations and financial position could be impacted, for example, through write-downs on goodwill, property, plant and equipment, intangible assets or financial assets such as shares recognized in conjunction with the investment activities. Furthermore, the Group may also recognize valuation losses and other charges in the event of a decline in the value of equity interests and other assets acquired through such investment activities. This could impact the Group's results of operations and financial position. For example, SoftBank Group Corp. recorded a loss on sale of shares of affiliated companies of JPY 345.3 billion as special loss in its non-consolidated financial results for the fiscal year ended March 2016, following the sale of 70.4% of the shares of Starburst I, Inc., and all of the shares of Galaxy Investment Holdings, Inc., which are the holding companies of Sprint Corporation, to the global operations management company SoftBank Group International GK.
In addition, an investee may be facing internal control problems or may be conducting unlawful activities. If such issues cannot be corrected at an early stage after the investment, the Group's credibility and corporate image may be impaired, and there could be an impact on the Group's results of operations and financial position.
Moreover, if the Group is unable to secure sufficient human resources and other management resources for the start-up of new businesses and other projects, or to allocate sufficient management resources to the investees and the Group's existing businesses, it could impact the Group's results of operations and business development.
(15) Support for subsidiaries and others
The Group occasionally provides subsidiaries and others with financial assistance through loans, guarantees, and other means, when it deems such assistance to be necessary. For example, if Sprint Corporation and Brightstar Global Group Inc. are unable to conduct business as anticipated at the time of the acquisition, or are unable to create sufficient synergies with other Group companies, or require more funds than anticipated to develop their businesses, the Company may provide them with financial assistance such as loans. If the supported subsidiaries and others are unable to conduct business as the Group expects, it could impact the Group's results of operations and financial position.
(16) Country risk
The Group conducts business and investment overseas in the U.S., China, India, Europe and Central and South American countries, and other countries and regions. The enactment of or revisions to the laws or regulations of these countries or regions that differ from Japan, or a change in their enforcement as practiced by prior or existing administrations, could prevent the Group from conducting business activities as anticipated, or delay or prevent the recovery of its investments or have other effects with a consequent impact on the Group's results of operations and financial position. In addition, such enactment of and revision to laws or various regulations or changes in their implementation by governments, could also restrict the Group from engaging in new businesses or investments, or prevent the Group from carrying out its strategy as anticipated.
Moreover, the occurrence of political, social, or economic turbulence in such countries and regions, due to the outbreak of wars, conflicts, and terror attacks, the enactment of economic sanctions, the outbreak of communicable diseases, and other events, could prevent the Group from carrying out its business activities as anticipated, or delay or prevent the recovery of its investments.
(17) Laws regulations, systems, and so forth
The Group conducts its business and investments under laws, regulations, systems, and so forth in various fields in each country, and is affected by these both directly and indirectly. Specifically, these range from laws, regulations, systems, and so forth pertaining to the telecommunications business (including but not limited to the Telecommunications Business Act and Radio Act in Japan, and similar corresponding laws in the U.S.) to various laws, regulations, systems, and so forth pertaining to businesses such as Internet advertising, e-commerce, online games, energy, robotics, finance and settlement services, and other general corporate business activities (including but not limited to laws, regulations, systems, and so forth related to the environment, product liability, fair competition, consumer protection, privacy protection, anti-bribery, labor affairs, intellectual property, prevention of money laundering, taxation, foreign exchange, business and investment permits, and import and export activities).
If the Group (including officers and employees) conducts activities in breach of those laws, regulations, systems, and so forth the Group may be subject to sanctions or guidance by government agencies (including but not limited to deregistration, revocation of licenses and fines), or may face cancellation of business agreements by business partners, regardless of whether the violation was deliberate or not. As a result, the Group's credibility and corporate image may be impaired, or its business development may be hindered. In addition, the Group may incur a financial burden and it could impact the Group's results of operations. Furthermore, revisions to such laws, regulations, systems, and so forth or the enforcement of new laws, regulations, systems, and so forth or new interpretations and applications of laws, regulations, systems and so forth (including amendments thereof) could create a hindrance to the Group's business development or incur or increase a financial burden on the Group. This could impact the Group's results of operations.
(18) Measures to protect U.S. national security
SoftBank Group Corp. and Sprint Corporation and Sprint Communications, Inc.; in (18) “Both Sprints”) have entered into a National Security Agreement with the United States Department of Defense (DoD), the United States Department of Homeland Security (DHS), and the United States Department of Justice (DOJ). Under the National Security Agreement, SoftBank Group Corp. and Both Sprints have agreed to implement certain measures to protect U.S. national security. Implementing these measures could increase costs, and limit control over certain U.S. facilities, contracts, personnel, vendor selection, and operations. This could impact the Group's results of operations.
(19) Regulations about health risks associated with electromagnetic waves
There have been some research results that have indicated the possibility that electromagnetic waves emitted from mobile devices and base stations have adverse health effects, such as increasing the risk of cancer. The International Commission on Non-Ionizing Radiation Protection (ICNIRP) has prescribed guidelines relating to the amplitudes of these electromagnetic waves. The World Health Organization (WHO) has issued an opinion that there is no convincing evidence that electromagnetic waves have adverse effects on health when their amplitude is within the reference values in the ICNIRP's guidelines, and recommends that all countries adopt them.
The Group complies with a policy for protection from electromagnetic waves based on the ICNIRP guidelines in Japan, and complies with the requirements of the Federal Communications Commission (FCC) in the U.S. However, the WHO and other organizations continue to conduct research and investigations, the results of which may lead to regulations being revised in the future, or new regulations being introduced. Complying with such revision or introduction of regulations may incur costs, or may restrict the Group's business operations, which could impact the Group's results of operations.
Moreover, regardless of the presence of such regulations, concerns over the adverse effects on health associated with use of mobile devices could make it difficult for the Group to acquire and retain customers, which could impact the Group's results of operations.
(20) Intellectual property
If the Group were to unintentionally infringe on intellectual property rights held by a third party, it may be prevented from using the intellectual property or subjected to claims for compensatory damages or license fees from the third party. Such actions could impact the Group's results of operations.
On the other hand, if intellectual property held by the Group, such as the SoftBank brand or the Sprint brand, were infringed upon by a third party, such an infringement might have a negative impact on the Group's credibility or on its corporate image.
The Group faces the possibility of lawsuits by third parties claiming compensatory damages for the alleged infringement of rights or benefits. These third parties may include customers, business partners, shareholders (including shareholders of subsidiaries, affiliates, and investees), and employees. Such lawsuits could hinder the Group's business development or may impair the Group's corporate image, as well as create a financial burden that could impact the Group's results of operations.
(22) Administrative sanctions and other orders
The Group may be subject to administrative sanctions and guidance by government agencies. Such administrative actions may hinder the Group's business development and may create a financial burden that could impact the Group's results of operations.