Any investment in our shares is subject to a number of risks. Prior to making an investment decision, you should carefully consider risk factors associated with any investment in our shares, our business and the industry in which we operate alongside the risks described below as well as all the other information, including our consolidated financial statements and related notes and other necessary financial information, The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties that we are unaware of, or that we currently believe are not material, may also become important factors that could adversely affect our business, financial condition and results of operations. If any of the following risks should occur, the price of our shares may decline and investors could lose all or part of their investment. You should consider carefully whether an investment in the shares of our common stock is suitable in the light of the information herein and your personal circumstances.
Our business, results of operations and financial condition could be materially and adversely affected by the factors discussed below. Moreover, our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including the risks faced by us described below and elsewhere.
We face intense competition, including from other large and established competitors and such competition may intensify.
We operate predominantly in the Japanese telecommunications industry, which is highly competitive. In particular, competition in the Japanese mobile telecommunications industry, where the main businesses of our Consumer and Enterprise segments operate, is intense and is expected to increase. The Japanese population, which we serve directly through our Consumer segment, is both aging and declining, resulting in decreases in the number of potential new subscribers and the overall number of potential consumers of mobile telecommunications services domestically. In addition, the mobile telecommunications market in Japan is considered to be approaching saturation in terms of subscriber numbers, with the total number of domestic mobile telecommunications service subscribers reaching 169 million as of December 31, 2017, according to Ovum, indicating ownership of more than one mobile phone per person on average when counting both consumer and enterprise subscriptions based on the total population of Japan. The home broadband market is also approaching saturation. As a result of the continued decrease in the overall number of potential consumers of telecommunications services, we expect that competition in the telecommunications industry for consumer subscriptions will continue to intensify. Our Enterprise segment customers are also affected by the changing demographics in Japan, and competition for their telecommunications business is also intensifying.
Our main competitors in the mobile telecommunications business are the other established MNOs, NTT DOCOMO and KDDI. Competition from lower-cost MVNOs has increased in recent years as a result of industry movements, such as the regulatory changes requiring carriers to unlock SIM cards on mobile devices, subject to requisite conditions. Furthermore, Rakuten, Inc. (“Rakuten”), which currently operates only as an MVNO, has stated that it intends to develop its own mobile telecommunications network and operate as an MNO, with plans to commence service as early as October 2019 through its subsidiary, Rakuten Mobile Network, Inc. (“Rakuten Mobile Network”). Rakuten Mobile Network received approval for the allocation of spectrum in the 1.7 GHz band used for 4G networks in April 2018 from the MIC, subject to certain conditions. Furthermore, on November 1, 2018, KDDI and Rakuten announced that they had formed a business alliance whereby KDDI will provide roaming services to Rakuten outside of the 23 Wards of Tokyo, Osaka City and Nagoya City areas and other densely populated areas from the time of the launch of its MNO until March 2026, while Rakuten builds out its own network, and Rakuten will provide payment and logistics services to KDDI.
Competition among carriers, particularly among the established MNOs, increased significantly following the introduction of the MNP system in 2006, which allowed subscribers to switch between carriers without changing their mobile phone numbers. Any potential technological, regulatory or other changes to simplify the MNP process, such as the adoption of “electronic SIM” technology allowing subscribers to switch carriers automatically without directly contacting their current or new carrier as is currently necessary, could further intensify competition with established and new MNOs and MVNOs if implemented. Furthermore, on October 31, 2018, without presenting further details on when and how such measures will be implemented, NTT DOCOMO announced that beginning in the fiscal year ending March 31, 2020, it would pursue reductions of approximately 20%-40% in its rate plans subject to customers' usage behavior, leading to “customer returns” per annum of up to approximately ¥400 billion. Any changes to the competitive environment stemming from these or other developments could subject us to increased competitive pressure, causing us to lose subscribers, or require us to make unexpected changes to our business, including our pricing plans or other aspects.
Our competitors in the mobile telecommunications business or in our other businesses may have, or in the future may develop, larger operations or other competitive advantages over us in terms of, for example, capital available to them for improving or maintaining their networks, services and products, including mobile device selection and network speed, quality or availability (or the amount of capital required to do so), price competitiveness, customer base, sales channels or capability, brand awareness or public recognition. If our competitors were to sell services or products that harness their competitive advantages to a greater extent than they currently do, we 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. Moreover, even if we introduce highly competitive services, products or sales methods ahead of our competitors, our competitive advantages may lessen if our competitors deploy equivalent or better services, products or sales methods. For example, if current or future competitors are able to develop and deploy 5G technologies more effectively than we are, we could be placed at a serious competitive disadvantage and be at risk of losing current or potential mobile subscribers.
In this intense competitive environment, we may not be able to maintain existing or capture new subscribers, and any measures we take to do so, such as revising our subscription plans, offering discounts, implementing capital expenditures to maintain or improve our network (including expected expenditures to build out our 5G network during the next three years) or any other initiatives could fail to have the expected effect or adversely affect our profitability or ARPU to a greater degree than expected. For example, we employ a multi-brand strategy, offering full-service traditional MNO service under our SoftBank brand, lower-cost MNO service under the Y!mobile brand and, beginning in April 2018, MVNO service under the LINE MOBILE brand. This multi-brand strategy is intended in part to expand our customer base by increasing our competitiveness with other MNOs and MVNOs and prevent loss of subscribers. However, this strategy may not prevent subscriber loss to our competitors if there are unexpected changes in the competitive environment or may lead to a greater decrease in ARPU than expected if a greater proportion of our subscriber mix shifts towards our Y!mobile service or LINE MOBILE service.
Any inability to effectively react to changes in usage of mobile and other telecommunications services, whether due to disruptions or volatility in the economy, technological advancement, changes in consumer preferences or enterprise needs or other reasons, may weaken our competitive position in the industry and our ability to capture new or maintain existing subscribers, leading to decreased revenue or requiring us to make greater capital or other expenditures.
Any of the above consequences could have a material adverse effect on our business, financial condition and results of operations.
Innovations in technology and business models, as well as alternative telecommunication technologies may make our services, technology or business models obsolete.
Our future success depends, in part, on our ability to anticipate and adapt in a timely manner to the fast-paced changes in technology and business models that characterize the technology industry in general and the telecommunications industry in particular. We expect that new services, technologies and business models will continue to emerge and that existing services, technologies and business models will also further develop, requiring significant capital expenditures in connection with the deployment of such new or improved technologies. For example, we are aiming to develop and deploy 5G high-speed mobile network technologies in selected locations in 2019, and adding further metropolitan locations in 2020, when the Olympics are scheduled to be held in Tokyo, with the other MNOs pursuing similar schedules. New or improved services or technologies may allow competitors to rapidly attract current or potential subscribers. If we fail to adapt to the rapidly changing technological development characterized by the introduction and proliferation of new or improved high-speed wireless data technology, including 5G or other related technologies, to upgrade or adapt our existing mobile and fixed-line telecommunications networks or other businesses in a timely and satisfactory manner, to prepare and invest enough capital required for such upgrade or to effectively introduce and market new services based upon such technological innovations, our businesses may become less attractive to consumers. Our ability to benefit from other new technologies could also be harmed if we are unable to rapidly and effectively deploy infrastructure. For example, a failure to effectively develop and deploy a viable 5G network could adversely affect our ability to participate in IoT-related businesses, which are expected to rely heavily on the higher speeds and connectivity expected to be inherent in new 5G technologies. This could limit our ability to acquire new customers and cause us to lose existing customers to competitors, which could have a material adverse effect on our business, financial condition and results of operations. We could fail to achieve these goals for a number of reasons, including insufficient or flawed technological research and development, the inability to recruit engineers or other technologically-skilled employees in a cost-effective manner or at all, insufficient cash on hand or a lack of ability to borrow or otherwise acquire sufficient funding to make the necessary capital expenditures or failures to make appropriate plans for or anticipate customer demands or expectations for new technologies. Even if we are able to roll out such new technologies, the total amount of expenditures required to do so successfully may significantly exceed our original expectations.
In addition, there can be no assurance that the new technologies we anticipate will be developed according to expected schedules, that they will perform according to expectations, that common standards and specifications will be achieved or that they will achieve commercial acceptance. Any failure of new technologies to meet our expectations, or the failure of any technology to achieve commercial acceptance, could place us behind our competitors in terms of technological development. Any such factors may adversely affect our business, financial condition and results of operations.
We depend on the satisfactory performance of our network systems and sufficient allocation of spectrum to operate our telecommunications services.
The quality of our telecommunications services depends on, among other things, our network systems and the spectrum that the government allocates to us. In order to remain competitive and retain and grow our customer bases, we must undertake continuous maintenance and upgrades to our mobile and fixed-line networks to ensure adequate network capacity and capability and to protect against disruptions.
Constraints on network capacity may cause unanticipated system disruptions and slower response times, adversely affecting data transmission. We are required to accurately predict our future capacity needs based on present and historical amounts of network traffic. If we underestimate the amount of capacity our business requires, or if we are unable to upgrade our network systems quickly enough to accommodate future traffic levels, avoid obsolescence, successfully integrate newly developed or acquired technology with our existing systems or accommodate the use of new or untested devices on our networks, we could experience issues with service, adverse consequences to our reputation, a reduction in our subscriber base, difficulties in acquiring new subscribers or the need to make unanticipated additional capital expenditures.
We are also heavily dependent on the availability of spectrum in order to provide our mobile telecommunications services. The level of traffic on our mobile telecommunications network continues to increase as subscribers increasingly adopt smartphones for data-intensive functions and applications and due to the implementation of IoT and other technologies. As a result, we need to secure additional spectrum as well as enhance the use of our existing allocations by further developing LTE technology. We use frequency bands that are allocated to us by the MIC, which has the authority to reallocate spectrum as it deems necessary to secure an appropriate and reasonable utilization of frequency spectrum, taking into consideration the effect that such actions may have on other spectrum users. In particular, spectrum in the 3.7/4.5 GHz and 28 GHz bands, which are expected to form the core of future 5G networks, is scheduled to be allocated during the fiscal year ending March 31, 2019. If we are unable to secure the required spectrum in the future, our service quality may decline relative to our competitors, or we may be unable to develop and enhance our network as planned, which could make it difficult to acquire or retain subscribers, and this may be exacerbated if our current or potential competitors receive more favorable spectrum allocations from the MIC than we do. Additionally, a commitment to pay fees for receiving allocations may be required in the future. Moreover, the MIC has considered, and may again in the future consider, the implementation of a spectrum auction system. If an auction system were to be officially implemented in Japan, or if the MIC were to place a greater emphasis on fees to be paid by network operators for spectrum usage or require payments for the receipt of allocations, we may be required to make considerable additional unexpected expenditures, which may adversely affect our business, financial condition and results of operations. Such a change in the spectrum allocation process could also enable new competitors to more easily enter the market.
We are subject to extensive laws, government regulations and licensing regimes that restrict and may impose new restrictions on our business.
We are subject to various laws, regulations and licensing regimes pertaining to our telecommunications and other businesses as well as to general corporate business activities. In particular, the Telecommunications Business Act of Japan (Act No. 86 of 1984, as amended) and the Radio Act of Japan (Act No. 131 of 1950, as amended), which govern our telecommunications businesses in the Consumer and Enterprise segments, the relevant guidelines under each Act formulated by the MIC and the regimes that govern the spectrum allocated to us by the MIC, govern the way we are able to conduct our mobile telecommunications businesses, including the services we provide and the ways in which we market and price these services. Many of the licenses and permits that we require to provide telecommunications services are subject to various conditions and other requirements and there is no assurance that we will be able to satisfy such conditions or other requirements. Our businesses are also subject to laws, regulations and regulatory oversight, relating to the environment, unfair competition, consumer protection, privacy protection, prohibition of bribery, labor, intellectual property rights, taxes, accounting, currency exchange and the import and export of goods. Additionally, we have been subject to administrative guidance in the past and any future breaches of relevant regulations may subject us to further administrative guidance or administrative sanctions by government agencies, which could hinder our business development, harm our reputation or create financial burdens that could negatively affect our business, financial condition and results of operations.
As mobile phones increasingly become integral to modern society, Japanese mobile telecommunications service operators have come under stricter supervision by regulatory authorities in recent years, and both we and our competitor MNOs have revised our service offerings in part in response to such supervision. For example, the Japan Fair Trade Commission (the “JFTC”), which is responsible for enforcing the Act on Prohibition of Private Monopolization and Maintenance of Fair Trade of Japan (Act No. 54 of 1947, as amended) (the “Antimonopoly Act”), released a study in June 2018 that viewed negatively the competitive impact of two-year consumer subscriber contracts on the Japanese mobile telecommunications industry. Likewise, in June 2018, the MIC issued administrative guidance to the three established MNOs, including us, requiring reform of two-year consumer subscriber contracts to enable subscribers to cancel their subscriptions and switch providers more easily, in response to which we and our competitor MNOs expanded the period in which contract subscribers can cancel their contracts without incurring a cancellation fee. In August 2018, a committee of the MIC began a review of the Japanese mobile telecommunications industry. Furthermore, in October 2018, the MIC held a meeting of experts to discuss various topics relating to the competitive environment of the telecommunications industry, including the status of competition among telecommunications service providers, facilitation of the subscribers' understanding of the fee structure, choice of telecommunications service provider by subscribers and fee structure. The MIC plans to review input from major telecommunications service providers and consumers' rights organizations and issue an interim report by June 2019. Moreover, in October 2018, the Japanese government's Regulatory Reform Promotion Council of Cabinet Office of Japan resumed its regular meetings, with a number of topics relating to the mobile telecommunications industry on its discussion agenda. These topics include competition in the mobile telecommunications industry and the benefit thereof to consumers, a review of spectrum regulation, including spectrum allocation policies and pricing in the industry, and the establishment of a regulatory framework allowing for new business models to thrive. A report from the committee was issued in November 2018. Any new policies or recommendations proposed as a result of such activities by regulatory authorities may materially and adversely affect our business, results of operations or financial condition.
Furthermore, in August 2018, the Japanese Chief Cabinet Secretary expressed his personal view that usage fees in the Japanese telecommunications industry could be significantly lowered. Such statements by public officials, as well as speculation about the potential direction of any government regulations, policies or other actions with respect to the mobile telecommunications business, have had and may in the future have an impact on share prices of publicly traded companies involved in the Japanese mobile telecommunications industry, including our competitor MNOs, as well as share prices of our ultimate parent company or, following the Global Offering, us.
If new laws and regulations are introduced in a form we do not expect, or if existing laws and regulations are amended or subject to changes in interpretation or application, the services and products that we are able to offer to our customers, or our ability to set prices for those services and products, could be limited. We may not be able to accurately predict, prevent or effectively react to new laws and regulations, or new amendments to or interpretations and applications of existing laws and regulations, which could have a material adverse effect on our business, financial condition and results of operations.
Our financial results may be significantly affected by the cost of funding and leasing and we may become subject to various restrictive covenants on borrowings that could affect our ability to execute our strategy and build our business.
Historically, we used intercompany loans from SoftBank Group Corp. to meet funding needs not otherwise met by our cash flows from operating activities or cash on hand. We use leasing arrangements when undertaking capital expenditures and also have continuous programs for the securitization of receivables. In August 2018, we entered into a senior loan agreement (the “Senior Loan Agreement”) with certain third-party financial institutions under which we borrowed an aggregate of ¥1,600.0 billion to refinance all of our previously outstanding intercompany loans. We may in the future raise funds required to develop and administer our business through leasing arrangements, through existing or additional securitization programs, by incurring additional borrowings from financial institutions or through other sources. The cost of procuring funds could increase because of changes in economic or financial market conditions, such as rising interest rates, or any adverse changes to our creditworthiness. An increase in funding costs could impact our business, financial condition or results of operations. Furthermore, depending on the financial market conditions and our creditworthiness, we may be unable to raise funds or structure leases or programs for the securitization of receivables on favorable terms or at all, which could impact our business development, results of operations and financial position, particularly if we are unable to make necessary capital expenditures to upgrade or maintain our network, acquire additional spectrum or build or maintain base stations. In addition, our borrowings from financial institutions or financing transactions include various restrictive covenants. If any of these covenants are breached and we are unable to take steps to remedy such breaches within applicable grace periods, our access to capital could become limited or we could be required to repay some or all of our outstanding indebtedness, potentially all at once. As a result, our business, financial position and results of operations could be materially and adversely affected.
We may be unsuccessful in implementing our “Beyond Carrier” strategy of pursuing growth through the development and deployment of new businesses.
As part of our “Beyond Carrier” strategy, we plan to pursue growth opportunities by developing and deploying new businesses in Japan, including the pursuit of synergies with the other members of the SoftBank Group, including investees of the SoftBank Vision Fund. However, the development and deployment of these businesses is subject, for example, to regulatory approvals and our ability to agree on terms with such other members of the SoftBank Group or their respective stakeholders, and we may not be able to develop or deploy such businesses or realize the expected synergies if the relevant approvals are not received or if we are unable to agree on terms with our business partners. Moreover, our success in implementing this strategy will depend in part on the ability of the SoftBank Group to successfully identify and invest in potential new business partners. In addition, these businesses, which are in rapidly developing new industries such as e-commerce, FinTech, cybersecurity, cloud computing services, artificial intelligence, IoT products, self-driving automobiles and robotics, are subject to a number of risks and uncertainties, and we may not be able to achieve the expected synergies and growth in a timely and efficient manner or at all. These risks and uncertainties include the following:
- The technologies involved in these new businesses are complex and still in development, and in some cases are being implemented commercially for the first time. These new technologies may present unexpected challenges or ultimately be unsuccessful or unsustainable.
- Certain competitors in these new businesses have advantages over us or the businesses in which we invest, such as greater experience in implementing these business models either in Japan or in overseas markets, support from overseas affiliates that have already successfully developed these new businesses, or greater name recognition that place us or such investee companies at a relative disadvantage.
- Business models and customer expectations for these new businesses are also subject to rapid change and development, and we may not be able to successfully respond to such changes.
- These new businesses may also lead to unexpected or novel legal, regulatory, operational or reputational risks, the realization of which could harm not only our new business initiatives but also our traditional domestic telecommunications business or other existing businesses.
- We may be required to make additional investments in these new businesses beyond our original plans, decreasing the returns we are able to realize from them.
- The financial and other benefits from the joint ventures vary based, among other factors, on our ownership interest and management rights, and some of the joint ventures, especially when we have minority interests in them, may result in limited benefits for us.
- Even if we are able to successfully develop and market these new businesses, their contributions to our overall results of operations may be smaller than expected.
Furthermore, we plan to realize efficiency gains by allocating resources from our telecommunications businesses to the new businesses that are part of our “Beyond Carrier” strategy. It is possible, however, that we will not be able to allocate resources as intended and thus our new businesses that are part of our “Beyond Carrier” strategy will lack the resources needed to sustain their growth, or that our existing businesses will have excess capacity that is not deployed effectively.
Security breaches and illegal or inappropriate use or improper operation of our services could adversely affect our reputation and expose us to claims from customers and penalties from authorities.
We collect, handle and maintain customer information, including personal information and other confidential information, in the course of our business operations. In some cases we also rely upon third-party subcontractors to handle customer information. Information handled by us or our subcontractors may include a customer's name and email address, date of birth, address, contact information, bank account information, credit card information, credit history and other information. In addition, we are subject to various regulations regarding the storage and protection of customer information, and we are required to exercise care in protecting the confidentiality of personal information and to take steps to ensure the security of our services.
Any material leak of personal information, due to cyberattacks, hacking or other unauthorized access to one of our or our subcontractors' databases, or due to the willful misconduct or inadvertent mistake of one of our own employees or subcontractors or otherwise, could result in claims or lawsuits against us, and we could be held legally responsible for any damages sustained by the affected persons. Such events could also result in reputational damage even if we are not ultimately held legally responsible. Furthermore, we could incur additional expenses associated with security system upgrades or updates, conducted either voluntarily or in response to administrative guidance or other regulatory initiatives from the government, or in connection with public relations campaigns designed to prevent or mitigate damage to our corporate image or reputation. Any related reputational damage could lead to a decline in new customers or an increase in cancellations for any of our services.
Similarly, cyberattacks, hacking or other unauthorized access may affect the operation of our networks overall, our proprietary technical, marketing, employee-related or other information or any other aspect of our business, causing interruptions to our business and potentially harming our brand and reputation among current and potential customers. As incidents of cyberattacks, hacking or other attempted unauthorized access to our systems increase in number and sophistication, the cost to defend against such attacks has increased and is expected to continue to increase. Moreover, as we increase initiatives related to IoT including sales and support for a wide range of devices, such as home appliances, automobiles, industrial, healthcare and robotics, we may suffer greater exposure to such attacks to an increased number of devices connected to our networks, not all of which may meet the same security standards as our approved mobile phones or other devices.
Any of the above consequences could harm our ability to maintain or grow our subscriber base, causing a decrease in revenue or requiring us to make unexpected expenditures, which could have a material adverse effect on our business, financial condition and results of operations. These could also expose us to claims from customers and penalties from authorities.
We purchase and lease various equipment, products and services from suppliers, and our inability to procure such equipment, products and services or defects therein could adversely affect our business.
We procure telecommunications equipment, network devices, mobile phones, other mobile devices and various other hardware, software, support and services from a variety of vendors. In particular, we rely upon certain key vendors such as Apple Japan, G.K., Sharp Corporation (“Sharp”), Sony Mobile Communications Inc. (“Sony”), Huawei Technologies Japan K.K. (“Huawei”), Nokia Solutions and Networks Japan G.K. (“Nokia”) and Ericsson Japan K.K. (“Ericsson”) to supply the network equipment, mobile phones, other mobile devices, software, content and services that we require in our businesses. With respect to our Consumer segment's mobile telecommunications business in particular, the ability to provide popular and in-demand mobile phones or other mobile devices has been and will continue to be critical to our ability to acquire and retain subscribers.
Although we generally expect vendors to supply products and services in a timely manner and in sufficient volume, in accordance with the specifications contained in our agreements with such vendors, we may be unable to switch suppliers or equipment in a timely or cost-efficient manner in case problems occur. Similarly, we expect products and services to be delivered free of defects to our reasonable satisfaction, and to be replaced in case of defects; however, there can be no assurance that this will be the case. We do not have direct operational or financial control over these key vendors, and there can be no assurance that such vendors will continue to provide equipment and services at attractive prices or that we will be able to obtain such equipment and services in the future from those or other providers, on the scale and within the time frames that we require, if at all. Moreover, our vendors and their ability to supply us with our required products and services may be negatively affected by political, economic or other outside factors, including uncertainty about or negative developments involving global trade or security policy.
Our contractual arrangements with these counterparties also expose us to certain risks. We may not be able to reach commercially reasonable agreements on the procurement of mobile phones, installation and maintenance of telecommunications equipment or other key aspects of our business, or maintain acceptable commercial terms to such agreements over time.
Supply interruptions, delivery delays, order volume shortfalls, defects and the cessation of installation, maintenance and inspection services, or any other similar problems could impede our provision of services, making it difficult to acquire and retain customers, or causing us to incur additional costs, such as additional maintenance-related capital expenditures or equipment replacement costs. Suppliers may also cease providing the installation, maintenance and inspection services necessary to maintain performance of their supplied equipment.
Any of the above consequences could have a material adverse effect on our business, financial condition and results of operations.
Our operations may be significantly affected by natural disasters such as earthquakes or other unexpected disruptions.
We construct and maintain telecommunications networks and information systems necessary for the provision of various services, including telecommunications and Internet services and other ICT-related products and services. Japan, which is our main market, is particularly susceptible to natural disasters, such as earthquakes, tsunamis, typhoons, floods and volcanic eruptions. Such natural disasters or other unexpected disruptions, such as fires, power outages or shortages, wars or use of military force, terrorist attacks, human errors, computer viruses, cyberattacks, hacking or other unauthorized access to our systems or servers or system malfunctions could affect the normal operation of our telecommunications networks and information systems and hinder our provision of services to consumers, and any resulting decline in the quality of service or damage to our network on a widespread basis or for an extended period of time could result in loss of our reputation or brand and make it difficult to retain or attract customers. Further, remedying such disruptions or damage could require significant unanticipated capital expenditures, and we could become subject to legal claims for damages or administrative or regulatory actions. For example, Japan is an earthquake-prone country and has historically experienced numerous large earthquakes that have resulted in serious human casualties and extensive infrastructural damage and destruction. In the aftermath of the Great East Japan Earthquake, which struck Japan on March 11, 2011, we, as well as other major mobile telecommunications companies, experienced a temporary but widespread decline in the quality of our mobile services due to the sudden influx of text messages and phone calls. We also experienced store closings, widespread damage to our equipment and facilities and other effects due to the structural damage caused by the earthquake. As a result, our ultimate parent company recorded a loss on disaster of ¥14.4 billion in the fiscal year ended March 31, 2011.
Additionally, our head office and many of our business offices are concentrated within the Tokyo metropolitan area. Therefore, a major earthquake or other catastrophic natural disaster or attack in the Tokyo metropolitan area could significantly affect our operations or impede the continuity of our business. Any of the foregoing may have a material adverse effect on our business, financial condition and results of operations.
To the extent that it is reasonably available, we carry insurance for losses, with policy specifications and insured limits that we believe are adequate and appropriate for our business. However, we do not carry earthquake insurance. Additionally, given, for example, the widely distributed nature of our network equipment and our disaster preparedness measures, we do not carry comprehensive property or fire insurance over our base stations or network centers. In the event of widespread damage or other serious events, our insurance coverage may not completely cover repair or other costs or any other losses, and we may experience higher-than-expected losses relating to our uninsured assets, which could affect network quality or availability or require us to make unexpected additional capital expenditures.
Any adverse change, or any perceived adverse change, in our relationship with the SoftBank Group, or any negative developments affecting the SoftBank Group, could have an adverse effect on our results of operations.
Our relationship with the SoftBank Group is central to our business. We believe our identification with the SoftBank Group and its brand has contributed to our brand awareness and our growth. If the SoftBank Group were to, or were to be perceived to be likely to, weaken its ties with us, for example, by decreasing its equity ownership in us or pursuing new domestic businesses (whether on its own or through other members of the SoftBank Group, including the SoftBank Vision Fund and its investees) with unrelated third parties instead of with us, or if any other actual or perceived adverse change in our relationship with the SoftBank Group occurs, it could adversely affect our business operations, the effectiveness of our marketing, our financial condition and our results of operations. Moreover, on March 31, 2018, we paid a one-time fee of ¥350.0 billion (excluding consumption and other taxes) to SoftBank Group Corp. in exchange for an exclusive license to use the SoftBank trademark for certain of our core businesses. The SoftBank Group retains rights with respect to, among other things, any use of the SoftBank trademark for purposes other than those expressly provided for in the license, and could decline to extend to us the right to use the SoftBank trademark beyond the scope of the license. Although the license has no expiration date, the license agreement provides that, in the event that SoftBank Group Corp.'s ownership of our voting rights falls to 50% or less due to a decision by SoftBank Group Corp., we and SoftBank Group Corp. will discuss whether the license should continue and the level of license fees to be paid by us. In the event SoftBank Group Corp.'s ownership of our voting rights falls to 50% or less due to an action on our part, such as an issuance of new shares or a transfer of treasury shares to a third party, SoftBank Group Corp. will have the right to cancel the license agreement without consulting with us. Accordingly, if SoftBank Group Corp's ownership of our voting rights falls to 50% or less, we may be unable to continue to use the SoftBank brand on current terms or at all, and we may incur impairment losses in the trademark usage right that we currently recognize as an asset.
In addition, negative developments affecting the reputation or financial condition of any member of the SoftBank Group or affecting our relationship with the SoftBank Group could cause damage to our own corporate image or reputation and have an adverse effect on our results of operations. Such negative developments could be caused by external factors, such as the effect of market, political or economic disruptions, or by employee misfeasance or malfeasance or other factors affecting conditions within the SoftBank Group. Furthermore, the SoftBank Group relies on its founder, chairman and CEO of our ultimate parent company, Masayoshi Son, who is also our non-executive chairman. Furthermore, our CEO, Ken Miyauchi, is also a director of SoftBank Group Corp. A sudden departure of Mr. Son from the SoftBank Group could negatively affect the SoftBank Group's business, prospects and reputation, or a sudden departure of Mr. Miyauchi from SoftBank Group Corp. could negatively affect our relationship with them, either of which could in turn have a negative effect on our business and on our strategies for the future. Moreover, the SoftBank Group is engaged in a wide variety of businesses around the world, and we may compete for investment opportunities with other members of the SoftBank Group. It is possible that other members of the SoftBank Group may pursue investments that conflict with our interests, or that we may lose investment opportunities to other members of the SoftBank Group, which could harm our ability to develop our service or product offerings or otherwise grow our business.
Trademarks related to the Yahoo! and LINE MOBILE brands are important to our business, and our business could be materially and adversely affected if we cannot continue to use them.
Yahoo Japan, whose results of operations are consolidated into the results of our ultimate parent company, SoftBank Group Corp., and with whom we have entered license agreements over the Yahoo!-related brand names (including the Y!mobile and Yahoo! BB brand names) as part of our multi-brand strategy, licenses the use of the Yahoo! brand from a company owned by Verizon Communications Inc. (“Verizon”). The licensing agreement between Yahoo Japan and such Verizon subsidiary and our licensing agreement with Yahoo Japan are critical to our business as they are required for our use of certain service names such as Y!mobile and Yahoo! BB. We have benefited from the strong brand recognition and existing user base of a wide range of Internet services offered by Yahoo Japan and its portal site, Yahoo! JAPAN. In particular, the Yahoo! JAPAN brand name, popular portal site and existing user base have contributed significantly to the expansion of our Y!mobile and Yahoo! BB subscriber base. Any damage to the corporate image or reputation of Verizon, Yahoo Japan, or other Yahoo!-related businesses could harm the Yahoo! brand. This could adversely affect our business and results of operations for services provided under the Yahoo! brand and also our reputation generally. Moreover, if we become unable to continue to use the Y!mobile, and Yahoo! BB brand names under the relevant licensing agreements, our ability to effectively market and sell our services could be damaged. We do not have direct control over Yahoo Japan. If Yahoo Japan's relationships with the relevant subsidiary of Verizon or with us were to deteriorate or be dissolved for any reason, we may not be able to continue using the Yahoo! brand, which could significantly damage our Y!mobile or Yahoo! BB offerings or otherwise have a material adverse effect on our business, financial condition and results of operations.
In March 2018, we entered into an agreement with LINE Corporation whereby we acquired 51% of the voting rights of its subsidiary LINE MOBILE Corporation in order to bring the LINE MOBILE service into our brand portfolio beginning in April 2018 as part of our multi-brand strategy. Any damage to the corporate image or reputation of LINE Corporation or the LINE social networking and messaging service or other related businesses could harm the LINE MOBILE brand, adversely affecting our business and results of operations for services provided under the LINE MOBILE brand and also our reputation generally. If our relationship with LINE Corporation were to deteriorate, our capital alliance with LINE MOBILE Corporation were to deteriorate or be dissolved or we become otherwise unable to use the LINE MOBILE brand, our ability to effectively market and sell our services could be damaged, leading to a decrease in our revenue and materially and adversely affecting our business, financial condition and results of operations.
We depend on the telecommunications lines and facilities of other companies in certain circumstances and could be materially and adversely affected if our access was restricted or terminated or if related utilization or connection fees were increased.
We utilize certain telecommunications lines and facilities owned by other operators when providing our telecommunications services. For instance, we have interconnection agreements and agreements with respect to optical broadband services with Nippon Telegraph and Telephone Corporation (“NTT”) group companies, including Nippon Telegraph and Telephone East Corporation (“NTT East”) and Nippon Telegraph and Telephone West Corporation (“NTT West”), under which we resell FTTH service under the SoftBank Hikari brand. The potential failure of such third-party operators to comply with relevant interconnection agreements or to properly maintain networks or interconnection facilities may create interruptions or quality problems for our telecommunications services. In addition, if relevant agreements with such operators are not extended or are extended on less favorable conditions, for example if utilization or connection rates were to be increased, we could experience a material adverse effect on our business, financial condition and results of operations.
We rely on subcontractors and other third parties for certain of our operations.
We consign sales activities, product servicing, acquisition and retention of customers and the execution of other related operations in whole or in part to subcontractors, including dealers and third-party sales agents such as large retailers. In particular, we rely heavily on dealers and the third-party sales agents with whom such dealers contract for a majority of the sales of our services and products. We also use subcontractors for network construction and maintenance service. Our business development could therefore be impacted if these subcontractors, including dealers and third-party sales agents, are unable to execute their duties in line with our expectations. Damage to the credibility or reputation of these subcontractors could also have a negative impact on our credibility or corporate image. This could hinder business development and the acquisition and retention of customers. Furthermore, if these subcontractors fail to comply with laws and regulations, we could receive a warning or administrative guidance from the regulatory authorities, or be investigated or sanctioned for non-fulfillment of our supervisory responsibility, and our credibility or corporate image could deteriorate as a result, making it difficult to acquire and retain customers. Although we have agreements which provide us with recourse to such parties for losses and which allow us to monitor some (but not all) of these third parties, such as our dealers and their third-party sales agents, our agreements may not prevent damage to us, including to our reputation or brand image, caused by the actions of such third parties. Any of these outcomes could have a material adverse effect on our business, financial condition and results of operations.
Any adverse conditions in the Japanese economy could adversely affect us.
We operate predominantly in Japan and are therefore affected by the general condition of and trends in the Japanese economy. The base of existing and potential subscribers for our consumer businesses, including our Consumer segment's mobile and fixed-line telecommunications businesses, is the overall Japanese population, which is both aging and declining. As a result of this demographic shift, our ability to maintain and grow our subscriber base may be harmed. Major downturns in the economy may also affect consumers' ability and willingness to spend, leading them to limit their usage of our services by, for example, decreasing smartphone data usage or cancelling subscriptions for multiple devices, or to switch to lower-cost options or services offered by competitors. This could lead to decreases in mobile subscribers, ARPU and revenue for our telecommunications businesses as well as diminished demand for mobile device accessories offered by our Distribution segment's consumer business. Furthermore, our Enterprise segment and the ICT businesses of our Distribution segment serve the Japanese enterprise market. Due to downturns or volatility in the economy, enterprise customers may decrease or delay spending on telecommunications, networking or other services, or on the purchase and installation or implementation of hardware, software or other products sold by us, leading to decreases in revenue from these businesses.
The loss of key senior management personnel could negatively affect our business.
Our performance is substantially dependent on our senior management and other key personnel. These individuals have acquired specialized knowledge and skills with respect to our corporate group companies and our businesses. This familiarity, in addition to their managerial and financial experience as well as their decision making abilities, makes them especially critical to our success. If one or more members of our key personnel were unable or unwilling to continue to remain in their positions with us, our business and operations could be disrupted and our growth potential could be impaired.
Our business may be adversely affected by actual or perceived health risks associated with mobile telecommunications devices and the location of base stations and antennas.
Mobile telecommunications devices have been alleged to have adverse health effects or to interfere with medical devices due to radio frequency emissions. Similarly, the location of base stations and antennas used in our mobile telecommunications and wireless broadband businesses has become a health-related concern as the radio frequency emissions from these structures are continuous. The actual or perceived risk of using mobile telecommunications or other wireless devices could adversely affect us through a reduction in subscribers, network usage per subscriber, financing available to the mobile telecommunications industry, the introduction of new regulations or restrictions or litigation. These adverse effects are similarly possible based on the perception of the locations of our base stations and antennas (i.e., whether surrounding locations are highly populated or not) and the impact our base stations and antennas have on those locations. We cannot provide assurance that there is no relationship between radio frequency emissions and health risks.
We face additional risks arising from our Distribution segment.
The businesses in our Distribution segment, including hardware and software sales and service and support for the implementation of ICT products and services for enterprise customers and sales of a wide variety of products, such as mobile phone and PC peripherals, including mobile phone accessories, software and IoT products, to consumers, are dependent on the state of our businesses in our Enterprise and Consumer segments and other businesses and thus are indirectly subject to risks of the businesses in our other segments. Additionally, as the businesses in our Distribution segment resell hardware, software licenses, mobile phone accessories and other products acquired from third-party vendors, if we are unable to acquire such products at competitive pricing and reasonably free of defects, the profitability and reputation of these businesses could be significantly damaged. Moreover, if we are unable to respond to rapidly changing technologies in a timely manner, leading to our inability to sell inventory, we may be required to recognize a valuation loss on such unsold inventory. Furthermore, we may record losses on trade receivables if the business or financial condition of our customers deteriorates and they are unable to make payment on agreed-upon terms.
The acquisition of other companies, businesses or technologies, or the entrance into joint ventures, strategic alliances or other transactions, could result in operating difficulties, dilution or other harmful consequences, or we may not be able to pursue investment opportunities as desired.
We may pursue acquisitions and investments, including through the establishment of joint ventures and subsidiaries or by other means. For example, in March 2018, we entered into an agreement with LINE Corporation whereby we acquired 51% of the voting rights of its subsidiary LINE MOBILE Corporation in order to bring the LINE MOBILE service into our brand portfolio beginning in April 2018. We may acquire other assets which we believe are strategically important, any of which could be material to our business, financial condition and results of operations. If a company in which we invest is unable to conduct its business as anticipated at the time of investment, or we are unable to successfully integrate its business into our existing businesses, our results of operations and financial position could be impacted, for example, through write-downs on assets recognized in conjunction with the investment activities, including goodwill, property, plant and equipment, intangible assets or financial assets such as shares. Furthermore, if an alliance or joint venture partner has a significant change of business strategy, experiences deterioration in its results of operations or financial position or is subject to negative publicity, the business alliance, joint venture or other arrangement in question may not produce the expected results, or it may become difficult to continue such business alliance, joint venture or other arrangement. 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 similar arrangements with other parties, causing the loss of potential business opportunities. The realization of any of these risks could have a material adverse effect on our business, financial condition or results of operations.
We may suffer from unauthorized use of our intellectual property by third parties and incur costs associated with protecting our intellectual property.
We regard our proprietary products, brands, domain names, trade names, copyrights, trademarks, trade secrets and similar intellectual property as critical to our business. However, policing the unauthorized use of our intellectual property is difficult and expensive. Although we have taken steps to prevent the misappropriation of our intellectual property, such protective measures may not be adequate to prevent the unauthorized use of our intellectual property. Any misappropriation of intellectual property that is used in our business, whether licensed to us or owned by us, could have a material adverse effect on our business, financial condition and results of operations. Further, the laws and enforcement procedures in some countries do not protect intellectual property rights to the same extent as the laws and enforcement procedures of Japan or the United States. Legal protection of our rights may be ineffective in such countries, and we may be unable to protect our intellectual property rights in such countries. In the future, we may need to resort to court proceedings to enforce our intellectual property rights, which might result in substantial costs and diversion of management attention and resources away from the operation and growth of our business.
We may be subject to intellectual property claims.
We generally operate our business in a way that we believe is reasonably designed to avoid infringing the intellectual property rights of third parties. However, particularly as there are many companies that develop and provide online technologies and broadband products, the features and content of which continue to overlap, there is an increasing possibility that we may be subject to litigation involving claims of patent, copyright or trademark infringement, or other violations of intellectual property rights of third parties. In particular, the patent field covering online and related technology is rapidly evolving and surrounded by a great deal of uncertainty, and our technologies, processes or business models and methods may infringe the intellectual property rights of third parties either now existing or to be issued in the future. Existing or future infringement claims against us, whether valid or not, may be time consuming, distracting to management and expensive to defend.
Intellectual property litigation or claims could force us to take the following measures, any of which could result in additional costs:
- cease operating or using products or services that incorporate the intellectual property subject to such claims;
- modify the products or services to avoid infringing upon the intellectual property rights of third parties;
- obtain a license from the holder of the infringed intellectual property, which may not be available on commercially favorable terms, or at all; or
- change our business practices.
Additionally, in the event that there is a determination that we have infringed the proprietary rights of any third party, we could incur substantial liabilities.
Impairment of the carrying value of our tangible and intangible assets could materially and adversely affect our financial condition and results of operations.
As of March 31, 2018, the carrying amounts of property, plant and equipment, intangible assets and goodwill on our consolidated balance sheet were ¥1,700.4 billion, ¥1,044.9 billion and ¥186.1 billion, respectively. Under IFRS, property, plant and equipment (other than land and construction in progress) are depreciated over their estimated useful lives, and intangible assets with finite useful lives are amortized over their estimated useful lives. Goodwill and intangible assets with indefinite useful lives, on the other hand, are not subject to depreciation or amortization. At the end of each fiscal year, or more frequently as necessary, we determine whether there is any indication that property, plant and equipment and intangible assets may be impaired. If such indication exists, we estimate the recoverable amount of the relevant asset and, if such amount is less than the carrying amount, record an impairment loss in respect of such asset. Goodwill and intangible assets with indefinite useful lives, on the other hand, are tested for impairment annually regardless of any indication of impairment.
A significant level of judgment is required in determining if an impairment should be recorded. Among other factors, a significant decline in the expected future cash flows of the assets in question (such as network equipment, software, trademarks or other assets) or a significant adverse change in legal factors or in the business climate could lead to the recording of an impairment loss. Any adverse change in these factors could have a significant impact on the recoverability of these assets, which may require us to recognize an impairment loss and negatively affect our financial condition and results of operations. We cannot accurately predict the amount and timing of any impairment of assets. Should the value of our assets become impaired, there could be a material adverse effect on our financial condition and results of operations.
From time to time, we may become involved in legal proceedings, which could adversely affect our business.
From time to time, we may become subject to legal proceedings, claims, litigation and government investigations or inquiries, which could be expensive, lengthy or disruptive to normal business operations or affect our corporate image. For example, on April 30, 2015, we instituted a lawsuit against JAPAN POST INFORMATION TECHNOLOGY Co., Ltd. (“JPiT”) seeking the payment of approximately ¥24.0 billion (the amount of the claim as increased on September 7, 2017) in damages for work performed outside of the scope of a contract related to the installation of fixed telecommunications lines. Also on April 30, 2015, JPiT filed a countersuit against us and our co-defendant, Nomura Research Institute, Ltd., claiming damages of approximately ¥16.2 billion. The outcome of this and any other legal proceedings, claims, litigation, investigations or inquiries may be difficult to predict. We may incur significant expenses in defending against such proceedings, claims, litigation, investigations or inquiries. In addition, we may be required to pay significant awards, settlements or penalties. Any of these outcomes could have a material adverse effect on our business, financial condition and results of operations.
Our internal controls may not be effective in preventing future misstatements of our financial condition and results of operations.
While we have established a system of internal controls over financial reporting, there can be no assurance that our internal controls will be effective in preventing misstatements, errors or fraud in our financial reporting. If our internal controls over financial reporting are found to have material weaknesses as a result of our evaluation or the audit conducted by our independent auditor for the current fiscal year or in the future, our ability to produce reliable financial reports on a timely basis could be adversely affected, resulting in a loss of confidence in our financial reporting by investors, which could materially and adversely affect the price of our shares. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met and thus are subject to inherent limitations. We cannot be certain that our internal controls over financial reporting will have the effect of preventing the risk of misstatements, errors and fraud, and the presence of material weaknesses in our internal controls would further heighten such risk.