NTT Docomo (NYSE: DCM), Japan's largest wireless carrier, is trying valiantly to boost a weak signal. Despite a respectable balance sheet and steadily increasing net income over the past four years, Docomo's stock today trades at 2010 levels. Management has been tinkering with the company's business model recently to spark share appreciation and increase shareholder value. Will 2013 be the year that the market hears Docomo's story?
Undervalued, but the market has a legitimate gripe
Docomo's market capitalization is $61.75 billion, and at a current price of $14.84, it trades below book value at $16.20 per share. The company posted $54 billion of trailing-12-month revenue as of its last reported quarter, and generated $6.0 billion and $11.0 billion of net income and operating cash flow, respectively, from this revenue. Docomo is very slightly leveraged, with a debt to equity ratio of just under 5%. Like other multinational telecomm companies, Docomo provides a rich dividend, currently yielding 4.4%.
DCM's recent flat-footed performance in the Japanese mobile phone market is the primary constraint on its stock price. As the leading Japanese mobile carrier, Docomo missed the importance of Apple's (AAPL -0.81%) iPhone when it was introduced in Japan in 2008. Additionally, Docomo offers its own content and services, and was averse to becoming merely a conduit for Apple's app store, from which it would see no revenue. Consequently, competitors SoftBank and KDDI signed on with Apple and benefited from appreciable upticks in iPhone-driven subscriptions. As Fool contributor Evan Niu explains, Docomo is the only major carrier that does not carry the iPhone, and has finally entered fledgling talks with Apple to offer the iPhone.
But the carrier is hedging against the possibility that it will continue to be locked out of Apple's platform. This month Docomo announced a partnership with Samsung to develop and market "Tizen" mobile phones. Tizen is an open-source, Linux-based operating system that is being shepherded through the standards process by Samsung and Intel. Samsung, a hardware provider, would like to lessen its dependence on Google's Android system. Thus, Docomo and Samsung have a mutually beneficial interest in partnering up.
Smarter revenue, smarter profit?
The Apple misstep illuminates a challenge for Docomo. Even if the company starts selling the iPhone, the revenues and associated profits may be incremental. With 60 million active subscribers, Docomo owns a subscription for nearly one out of every two Japanese persons. With such saturation, it's time for the company to ascertain new ways to drive revenue from a user base that can hardly be expected to grow much from here.
Docomo's awareness of this challenge and its ambition to be more than a "dumb pipe" carrier are manifest in its approach to future earnings, which will rely less on increasing subscriptions and instead focus on growing revenue per user. A key metric Docomo has historically tracked is average revenue per user, or ARPU. Formerly, the company measured ARPU within two major categories: voice and data subscriptions. In fiscal year 2012, Docomo created a third category, "smart" ARPU, to measure revenue on digital content and cloud services delivered to smartphones.
The company has introduced numerous services that stream content or provide retail purchase opportunities directly to subscribers' mobile phones. Smart revenues exist in three major categories: shopping, "life support" (health care), and digital content. Docomo wants to embed its services into customers' lifestyles, so that subscribers will do everything from ordering groceries to checking personal health symptoms online from Docomo-provided resources. In the past two years, Docomo has launched both a general video store and anime video store, as well as a gaming platform to attract younger subscribers. Docomo projects over $1 billion of revenue from these newer smart services by 2015.
Smart push should surpass Docomo's first effort at diversifying revenue
Docomo has tried to alter its business model before, with disappointing results. In the early 2000s, it appeared that the company might expand through equity investments in carriers in major developed markets in the model of Britain's Vodafone. Vodafone has undergirded its earnings potential through investments and partnering: the company has equity stakes in telecoms in over thirty countries. Docomo could not replicate this success; after pouring $10.2 billion in the company then known as AT&T Wireless in 2001 and 2002, it ended up writing off most of the investment. It now invests mostly in developing markets in the Pacific Rim region, with a notable 26% stake in Tata Teleservices in the fast-growing Indian mobile phone market.
Heeding the signal
At the end of the day, the company has a stable business, attractive profits, and is entrenched enough in the Japanese market to realize considerable "smart" revenue per user. Long-term investors may want to consider purchasing Docomo while this Japanese giant is still strengthening its signal to the market -- there's a nice dividend to collect and reinvest while you wait.
