Summary of Financial Results for the Fiscal Year Ended March 31, 2010

Transcription

1 Summary of Financial Results for the Fiscal Year Ended March 31, 2010 From April 1, 2009 to March 31, 2010 May 17, 2010 Name of Company Listed: Dentsu Inc. Code Number: 4324 Stock Exchange Listing: First Section of the Tokyo Stock Exchange URL: Name of Representative: Tatsuyoshi Takashima, President & CEO Scheduled date of Ordinary General Meeting of Shareholders: June 29, 2010 Scheduled date for commencement of dividend payments: June 30, 2010 Scheduled date for filing of the Financial Report: June 29, 2010 Contact: Shusaku Kannan, Senior Manager, Corporate Communications Division (Tel.: ; 1. Summary of Consolidated Financial Results for the Fiscal Year Ended March 31, 2010 (from April 1, 2009 to March 31, 2010) (Figures are rounded down to the nearest one million yen) (1) Consolidated Financial Results (Percentages indicate the rate of increase or decrease compared with the previous fiscal year.) (Millions of yen) Fiscal year ended March 31, 2010 Fiscal year ended March 31, 2009 Net sales Operating income Ordinary income Net income (loss) 1,678,618 (11.1)% 37,323 (13.6)% 44,790 (16.1)% 31,130 1,887,170 (8.3)% 43,184 (23.1)% 53,363 (21.5)% (20,453) Net income per share (Basic) Net income per share (Diluted) Ratio of net income to equity Ratio of ordinary income to total assets Ratio of operating income to net sales Fiscal year ended March 31, yen yen 6.6 % 4.1% 2.2% Fiscal year ended March 31, 2009 (79.61) yen (4.0)% 4.6% 2.3% (Reference) Equity in earnings of affiliates Fiscal year ended March 31, 2010: 7,380 million yen Fiscal year ended March 31, 2009: 8,970 million yen (2) Consolidated Financial Position (Millions of yen, except percentages and Net assets per share figures) Total assets Net assets Equity ratio Net assets per share (Yen) As of March 31, ,118, , % 1, As of March 31, ,092, , % 1, (Reference) Equity As of March 31, 2010: 484,250 million yen As of March 31, 2009: 452,568 million yen (3) Consolidated Cash Flows (Millions of yen) Net cash provided by (used in) operating activities Net cash provided by (used in) investing activities Net cash provided by (used in) financing activities Cash and cash equivalents at end of period Fiscal year ended March 31, ,989 (9,251) (31,282) 92,854 Fiscal year ended March 31, ,359 (22,263) (27,748) 57,

2 2. Dividends Fiscal year ended March 31, 2009 Fiscal year ended March 31, 2010 Fiscal year ending March 31, 2011 (forecast) First Quarter Cash dividend per share Second Quarter Third Quarter Year-end (Yen, except Total cash dividends figures and percentages) Ratio of Total cash Dividend dividends to dividends for the payout ratio Toal net assets year (Consolidated) (Consolidated) 2, ,687 million yen 1.8% ,729 million yen 21.6% 1.4% % (Note) The stock split which became effective on January 4, 2009, has not been taken into consideration in connection with the cash dividend per share at the end of the second quarter of the fiscal year ended March 31, Please refer to (Reference) Cash Dividend per Share on page 4 for details. 3. Forecast of Consolidated Financial Results for the Fiscal Year Ending March 31, 2011 (from April 1, 2010 to March 31, 2011) (Percentages indicate the rate of increase or decrease compared with the same period of the previous fiscal year.) First half (cumulative basis) Fiscal year ending March 31, 2011 Net sales Operating income Ordinary income Net income 824, % 1,737, % 11, % 39, % 15, % 45, % 8, % 25,400 (18.4)% (Millions of yen) Net income per share (Yen) Others (1) Changes in significant consolidated subsidiaries for the year (change in specified subsidiaries involving changes in the scope of consolidation): None (2) Changes in accounting policies, procedures and methods of presentation for preparing the consolidated financial statements (which are stated in (7) Changes in Important Matters used as the Basis for Preparation of the Consolidated Financial Statements on pages ) a. Changes due to revisions of accounting standards: Yes b. Changes due to other reasons: None (3) Number of issued shares (common stock) a. Total number of issued shares at the year-end (including treasury stock) As of March 31, 2010: 278,184,000 shares As of March 31, 2009: 278,184,000 shares b. Number of shares of treasury stock at the year-end As of March 31, 2010: 29,026,278 shares As of March 31, 2009: 29,960,751 shares (Note) Please refer to Per Share Information on page 51 for the number of shares as the basis for the calculation of consolidated net income per share

3 (Reference) Summary of Non-Consolidated Financial Results 1. Summary of Non-Consolidated Financial Results for the Fiscal Year Ended March 31, 2010 (from April 1, 2009 to March 31, 2010) (1) Non-Consolidated Financial Results (Percentages indicate the rate of increase or decrease compared with the previous fiscal year.) (Millions of yen) Fiscal year ended March 31, 2010 Fiscal year ended March 31, 2009 Net sales Operating income Ordinary income Net income (loss) 1,315,072 (9.1)% 26, % 33,702 (2.6)% 27,055 1,447,410 (8.7)% 23,870 (34.2)% 34,585 (26.9)% (32,771) Net income per share (Basic) Net income per share (Diluted) Fiscal year ended March 31, yen Fiscal year ended March 31, 2009 (127.55) yen (2) Non-Consolidated Financial Position (Millions of yen, except percentages and Net assets per share figures) Net assets Total assets Net assets Equity ratio per share (Yen) As of March 31, ,010, , % 1, As of March 31, , , % 1, (Reference) Equity As of March 31, 2010: 406,410 million yen As of March 31, 2009: 383,028 million yen 2. Forecast of Non-Consolidated Financial Results for the Fiscal Year Ending March 31, 2011 (from April 1, 2010 to March 31, 2011) (Percentages indicate the rate of increase or decrease compared with the same period of the previous fiscal year.) First half (cumulative basis) Fiscal year ending March 31, 2011 Net sales Operating income Ordinary income Net income 634, % 1,333, % 9, % 29, % 14, % 36, % 13, % 26,200 (3.2)% (Millions of yen) Net income per share (Yen) Disclaimer regarding appropriate use of forecasts and related points of note Since the forecast of financial results has been prepared based on certain conditions which were deemed reasonable at the time of preparing this summary, actual financial results may be substantially different from the forecast due to various factors. Please refer to 2) Outlook for the fiscal year ending March 31, 2011 on page 9 for information relating to the business forecasts above

4 (Reference) Cash Dividend per Share Dentsu implemented a stock split which became effective on January 4, 2009, at a ratio of 100 shares per share. The cash dividends per share for the fiscal year ended March 31, 2009, reflecting the assumption that such stock split was implemented at the beginning of the fiscal year (April 1, 2008), are as follows. Fiscal year ended March 31, 2009 Cash dividend per share First Quarter Second Quarter Third Quarter Year-end Total (Yen)

5 1. Financial Results and Financial Position (1) Financial Results 1) Summary of financial results for the fiscal year ended March 31, 2010 During the fiscal year ended March 31, 2010, despite a gradual recovery in the Japanese economy from the rapid global economic slowdown triggered by the U.S. financial crisis that began in the previous fiscal year, prevailing conditions for employment and income remained severe. In the advertising industry, according to 2009 Advertising Expenditures in Japan, an estimate for advertising expenditures in Japan for the 2009 calendar year compiled by Dentsu Inc. (hereinafter the Company ), advertising expenditures totaled 5,922.2 billion yen, an 11.5% decrease compared with calendar This marked the second consecutive year of decline, while the rate of decrease was the highest since the Company began estimating advertising expenditures in Japan in Looking at the breakdown of advertising expenditures by category, expenditures in the four traditional media fell below those in the previous year for the fifth consecutive year, recording a 14.3% decline, and promotional media advertising expenditures fell for the second year in a row, decreasing 11.8%. In contrast, Internet advertising expenditures continued to rise, recording an increase of 1.2%, and satellite media-related advertising expenditures grew 4.9% compared with the previous calendar year. Amid these difficult market conditions in which clients remained cautious about spending their advertising budgets, the Dentsu Group (hereinafter the Group ) faced a severe business environment which continued from the prior fiscal year. In July 2009 Dentsu announced its new Medium-term Management Plan for the entire Group, dubbed Dentsu Innovation 2013, and implemented a broad range of tangible measures. Furthermore, the Group pursued a diverse array of business opportunities, including those related to such major global events as the 12th IAAF World Championships in Athletics, Berlin 2009 (August 2009) and the XXI Olympic Winter Games, Vancouver 2010 (February 2010). In addition, the Group provided solutions based on its integrated communication design capabilities, which aggressively leveraged its comprehensive Group resources. As a result of these activities and also owing to a recovery in the market, the Group achieved an improvement in its business results during the second half of the fiscal year ended March 31, 2010 (hereinafter the fiscal year under review ). In the fiscal year under review, the Group posted consolidated billings (net sales) of 1,678,618 million yen, a decrease of 11.1% compared with the fiscal year ended March 31, 2009 (hereinafter the previous fiscal year ). The Group posted gross profit of 296,490 million yen, a decrease of 5.7%, operating income of 37,323 million yen, a decrease of 13.6%, and ordinary income of 44,790 million yen, a decrease of 16.1%. Net income for the fiscal year under review amounted to 31,130 million yen, compared with a net loss of 20,453 million yen in the previous fiscal year. Several factors contributed to the Group s achieving net income during the fiscal year under review, including the absence of a loss on valuation of investment securities of 51,116 million yen, which the Company posted in the previous fiscal year. Another significant factor was a decrease in the effective tax rate owing to deductions and deferred tax assets posted, which related to a portion of the loss on valuation of investment securities posted in past fiscal years. Financial results by business segment were as follows: <By Business Segment> a. Advertising In the Advertising segment, net sales of 1,620,130 million yen (-10.1% compared with the same period of the previous fiscal year) and operating income of 32,782 million yen (-3.4%) were posted. The non-consolidated results of Dentsu Inc. as well as the Group s major domestic consolidated subsidiaries in this business segment are as follows: Dentsu Inc. Dentsu posted non-consolidated billings (net sales) of 1,315,072 million yen (-9.1% compared with the previous fiscal year); operating income of 26,313 million yen (+10.2%); ordinary income of 33,702 million yen (-2.6%) and net income of 27,055 million yen (a net loss of 32,771 million yen was posted for the previous fiscal year). Several factors contributed to the Company s achieving net income during the fiscal year - 5 -

6 under review, including the absence of a loss on valuation of investment securities, which was posted in the previous fiscal year owing to an impairment of investment securities, and the absence of a loss on valuation of stocks of subsidiaries and affiliates, posted in the previous fiscal year both of which amounted to 55,516 million yen. Another significant factor was a decrease in the effective tax rate owing to deductions and deferred tax assets posted, which related to a portion of the loss on valuation of investment securities posted in past fiscal years. DENTSU TEC INC. By strengthening its ties with the Group companies and taking thorough measures to lower the cost of sales and reduce operating expenses, Dentsu Tec endeavored to ensure profits in the sluggish economic environment. However, affected by the severe business environment in which advertisers refrained from spending their advertising budgets as well as the intensified price competition, Dentsu Tec s net sales fell to 129,985 million yen (-11.3% compared with the previous fiscal year). Operating loss of 610 million yen was posted (operating income of 861 million yen was posted in the previous fiscal year). Ordinary loss of 21 million yen was posted (ordinary income of 1,286 million yen was posted in the previous fiscal year). As a result, net income was 235 million yen (-32.6%) for the fiscal year under review. cyber communications inc. With the growth of the Internet advertising market centered on mobile advertising, the non-consolidated net sales of cyber communications showed a 12.0% year-on-year increase. However, due to the decline in net sales of its subsidiaries as a result of restructuring and changes in the business trend for listing advertising, consolidated net sales fell by 0.8% year-on-year to 67,698 million yen. On the other hand, owing to such factors as the one-time amortization of goodwill for subsidiaries in the previous fiscal year and the curtailment of selling, general and administrative expenses in the fiscal year under review, operating income of 546 million yen (+92.2% compared with the previous fiscal year) and ordinary income of 645 million yen (+97.1%) were posted. As a result, net income of 305 million yen was posted for the fiscal year under review compared with a net loss of 1,121 million yen for the previous fiscal year. b. Information Services For the Information Services segment, net sales fell to 61,155 million yen (-18.6% compared with the previous fiscal year) and operating loss of 868 million yen was posted, compared with operating income of 3,893 million yen in the previous fiscal year. The non-consolidated results of Information Services International-Dentsu, Ltd., the major consolidated subsidiary in this business segment, are as follows: Information Services International-Dentsu, Ltd. Information Services International-Dentsu principally engages in the provision of IT solutions such as the development of information systems. Since corporations restrained their IT investment throughout the fiscal year under review, on a consolidated basis, Information Services International-Dentsu s net sales decreased to 61,155 million yen (-18.6% compared with the previous fiscal year). Operating loss of 295 million yen (operating income of 4,481 million yen for the previous year) and ordinary loss of 238 million yen (ordinary income of 4,628 million yen for the previous fiscal year) were posted. Consequently, net loss of 137 million yen was posted for the fiscal year under review (net income of 1,357 million yen for the previous fiscal year). c. Other Businesses Net sales in this segment, which covers diverse business fields other than Advertising and Information Services, fell to 21,879 million yen (-43.0% compared with the previous fiscal year), whereas operating income increased to 2,018 million yen (+17.1%). Financial results by geographic segment were as follows: <By Geographic Segment> a. Japan In Japan, net sales of 1,541,552 million yen (-10.6% compared with the previous fiscal year) and operating income of 35,828 million yen (-8.7%) were posted. b. Overseas In other countries, net sales of 142,969 million yen (-19.9% compared with the previous fiscal year) and operating income of 1,535 million yen (-62.2%) were posted

7 Consolidated financial results are greatly affected by non-consolidated financial results. Non-consolidated financial results by industry and business category for the fiscal year under review were as follows: <By Industry Category> For the fiscal year ended March 31, 2010, among the Company s top ten contributing industry categories, net sales increased in Foodstuffs (+5.9% compared with the previous fiscal year). Meanwhile, sales decreased in the following nine industry categories: Information/Communications (-10.3%), Beverages/Cigarettes (-3.3%), Cosmetics/Toiletries (-3.2%), Finance/Insurance (-17.4%), Automobiles/Related Products (-27.7%), Pharmaceuticals/Medical Supplies (-4.7%), Distribution/Retailing (-4.4%), Hobbies/Sporting Goods (-7.8%) and Food Services/Other Services (-2.0%). <By Business Category> Category Net sales (Millions of yen) Composition ratio (%) Change (%, compared to the previous year) Newspapers 122, (16.7) Magazines 43, (27.7) Radio 19, (11.7) Television 626, (9.6) Time (289,464) (22.0) (15.7) Spot (336,810) (25.6) (3.6) Interactive Media 34, OOH Media 39, (6.7) Creative 164, (7.0) Marketing/Promotion 167, (2.1) Content Services 75, (8.1) Others 22, (17.6) Total 1,315, (9.1) (Note 1) Major business categories are as follows: Newspapers: Newspaper advertising Magazines: Magazine advertising Radio: Radio advertising Television: Television advertising Television (Time): Television time advertising (program sponsorship) Television (Spot): Television spot advertising (in between programs) Interactive Media: Internet and mobile-related media advertising OOH Media: Out-of-Home (transit, outdoor and flyers) media-related advertising Creative: Creative planning, production and related services Marketing/Promotion: Strategic planning and implementation of activities such as branding, marketing, communications, sales promotions, events, PR, e-promotions and direct marketing as well as management consulting Content Services: Licensing sales, planning and production in the sports marketing and entertainment fields and other content services Others: Satellite and other media, including media planning (Note 2) The composition ratio of each business category is rounded to the nearest tenth. For the fiscal year under review, net sales for all four mass media decreased from the previous fiscal year, and the Company posted net sales of 811,366 million yen (-12.0% compared with the previous fiscal year). For businesses other than the four mass media, Interactive Media showed growth whereas - 7 -

8 Creative and Marketing/Promotion decreased. Net sales of 503,706 million yen (-4.2%) were posted for the non-mass media category in total. As a result, the net sales composition ratio of the non-mass media category was 38.3% (+2.0%). The summary of each business category is as follows: a. Newspapers Net sales for industry categories such as Beverages/Cigarettes (+23.3% compared with the previous fiscal year) and Pharmaceuticals/Medical Supplies (+6.7%) improved but were not able to offset the declines in net sales for Information/Communications (-35.2%) and Finance/Insurance (-25.4%). b. Magazines Although net sales for Energy/Materials/Machinery (+16.6%) and Household Products (+10.9%) increased, those for Apparel/Fashion, Accessories/Personal Items (-26.9%), Information/Communications (-30.2%) and Cosmetics/Toiletries (-28.3%) decreased considerably, resulting in a year-on-year decline in the category s net sales. c. Radio Net sales for Food Services/Other Services (+57.1%) increased, whereas those for Automobiles/Related Products (-52.5%) and Government/Organizations (-24.1%) decreased, resulting in a year-on-year decline in the category s net sales. d. Television Both Time and Spot were sluggish, with net sales declining from the previous fiscal year. Time: Although net sales for Government/Organizations (+22.7%) and Education/Medical Services/Religion (+16.0%) increased, those for Automobiles/Related Products (-49.7%) and Finance/Insurance (-33.2%) decreased considerably, resulting in a year-on-year decline. Spot: Net sales for Cosmetics/Toiletries (+11.4%) and Foodstuffs (+8.4%) increased, whereas Hobbies/Sporting Goods (-19.1%) and Information/Communications (-9.5%) decreased, resulting in a year-on-year decline. e. Interactive Media Net sales for Information/Communications (+28.6%), Finance/Insurance (+49.8%), Food Services/Other Services (+45.0%) and Automobiles/Related Products (+24.5%) improved, resulting in a considerable year-on-year increase of 32.0% in the category s net sales. f. OOH Media Although net sales for Beverages/Cigarettes (+19.7%) and Pharmaceuticals/Medical Supplies (+70.2%) increased, those for Finance/Insurance (-52.6%) and Information/Communications (-14.4%) decreased, resulting in a year-on-year decline. g. Creative Although net sales for Foodstuffs (+27.2%) and Distribution/Retailing (+16.4%) increased, they were not able to offset the declines in net sales for Information/Communications (-13.7%) and Automobiles/Related Products (-25.5%), thus resulting in a year-on-year decline in the category s net sales. h. Marketing/Promotion Net sales for Government/Organizations (+89.1%), Foodstuffs (+29.8%) and Food Services/Other Services (+18.2%) improved but were not able to offset the declines in net sales for Distribution/Retailing (-20.5%) and Transportation/Leisure (-42.2%), resulting in a year-on-year decline. i. Content Services Although net sales for Hobbies/Sporting Goods (+46.3%) and Precision Instruments/Office Supplies (+ 28.5%) improved, they were not able to offset the declines in net sales for Information/Communications (-13.5%) and Government/Organizations (-35.3%), thus resulting in a year-on-year decline in the category s net sales

9 2) Outlook for the fiscal year ending March 31, 2011 According to the economic outlook released by the Japanese government on January 22, 2010, Japan s real GDP is forecast to increase by approximately 1.4% during the fiscal year ending March 31, 2011, which would mark the first increase in three years. Nominal GDP is also forecast to return to growth, at a rate of approximately 0.4%. The economic outlook report also highlighted such potential future risk factors as a further deterioration in the employment situation, sluggish demand owing to a rise in deflationary pressures, and weak economic growth among Japan s trading partners. With regard to the Japanese advertising market, the Japan Center for Economic Research forecasts advertising expenditures in Japan to decrease 0.1% year-on-year during the fiscal year ending March 31, 2011 (forecast as of March 2010). Although the fiscal year ending March 31, 2011 includes such events as the 2010 FIFA World Cup South Africa and Japan s 22nd Elections to the House of Councillors for the upper house of Japan s legislature, which are likely to have a positive impact on the advertising market, Dentsu anticipates the continuation of difficult operating conditions. The Group will continue to strive for an improvement in its business results through the implementation of a wide range of reforms based on its new Medium-term Management Plan, Dentsu Innovation 2013, which was announced in July For the fiscal year ending March 31, 2011, on a consolidated basis, Dentsu forecasts billings (net sales) of 1,737.9 billion yen (+3.5% year-on-year), operating income of 39.7 billion yen (+6.4%), ordinary income of 45.9 billion yen (+2.5%), and net income of 25.4 billion yen (-18.4%). On a non-consolidated basis, for the fiscal year ending March 31, 2011, Dentsu forecasts billings (net sales) of 1,333.9 billion yen (+1.4% year-on-year), operating income of 29.5 billion yen (+12.1%), ordinary income of 36.4 billion yen (+8.0%), and net income of 26.2 billion yen (-3.2%). 3) Fundamental policies on dividend distribution Dentsu considers the return of profits to shareholders to be one of its key policies. In response to changes in the business environment, the Company strives to improve its capital efficiency in combination with long-term growth in corporate value through the expansion of its operations, stable dividends, and expeditious acquisition of treasury stock. The goal of these measures is to facilitate a comprehensive return of profits to shareholders. The dividend for each fiscal year will be determined by taking into account such factors as the internal reserves necessary for sustainable investment in order to respond to market changes, business results for each fiscal year, the financial outlook for the medium-to-long term, and the Group s funding situation, with emphasis placed on stability. 4) Cash dividends applicable to the fiscal year ended March 31, 2010 With regard to the economic downturn triggered by the global financial crisis and the slump in advertising demand, some signs of improvement have recently begun to appear. However, the recovery in domestic demand, including consumer spending, is still insufficient, and the medium-term outlook for the market environment faced by the Dentsu Group remains uncertain. Consequently, Dentsu sees a continued uncertainty in the market. Under these circumstances, the Company recognizes the importance of focusing on stability and the soundness of its management position from a medium- to long-term point of view. Such a management focus is considered vital by Dentsu in order to realize a sustainable improvement in corporate value and respond to shareholders expectations. Dentsu also recognizes the need to respond appropriately to rapid structural changes in the business environment, including technological advances and the globalization of corporate activities. For these reasons, the Company is working steadily to build a business foundation for the next generation. Dentsu has carefully considered the dividend applicable to the fiscal year ended March 31, 2010, based on its recognition of the circumstances outlined above, while also taking a comprehensive view of such factors as business results for the fiscal year under review, the medium- to long-term results outlook and the Group s funding situation. As a result, cash dividends per share of common stock are expected to be yen, including an interim dividend of yen and a year-end dividend of yen. Cash dividends per share of common stock applicable to the fiscal year ending March 31, 2011, are expected to - 9 -

10 be yen, including an interim dividend of yen and a year-end dividend of yen. (2) Financial Position As of March 31, 2010, total assets increased from the previous year to 25,692 million yen, which reflected increases in cash and deposits as well as investment securities. Total liabilities declined by 6,714 million yen, owing to decreases in loans payable. Net income of 31,130 million yen was posted for the fiscal year under review. As a result, net assets increased by 32,407 million yen from the previous year. (Cash flow status for the fiscal year under review) As of March 31, 2010, cash and cash equivalents (hereinafter cash ) increased to 92,854 million yen from the 57,271 million yen posted at the end of the preceding fiscal year. As net cash provided by operating activities exceeded net cash used in investing and financing activities, cash at the end of the fiscal year increased by 35,583 million yen from the previous year. Net cash provided by (used in) operating activities Net cash provided by operating activities amounted to 74,989 million yen compared with 42,359 million yen in the previous fiscal year. This was due to an increase in other current liabilities posted for the current fiscal year, whereas in the previous fiscal year a decrease was posted. As a result, net cash provided by operating activities increased by a total of 32,630 million yen compared with the previous fiscal year. Net cash provided by (used in) investing activities Net cash used in investing activities decreased to 9,251 million yen from the 22,263 million yen used in the preceding term. The reason for the decrease of 13,012 million yen was due in part to the decline in payments for purchases of consolidated subsidiaries stock. Net cash provided by (used in) financing activities Net cash used in financing activities amounted to 31,282 million yen compared with 27,748 million yen in the preceding term. The decline in proceeds from long-term loans payable was smaller than the decline in purchase of treasury stock. On the other hand, proceeds from an increase in commercial papers in the previous term turned to payments due to a decrease in commercial papers for this term. As a result, net cash used in financing activities increased by 3,534 million yen from the previous year. Trends in cash flow indicators Fiscal year ended March 31, 2006 Fiscal year ended March 31, 2007 Fiscal year ended March 31, 2008 Fiscal year ended March 31, 2009 Fiscal year ended March 31, 2010 Equity ratio (%) Equity ratio at market value (%) Years of debt redemption (years) Interest coverage ratio (times) (Notes) 1. Equity ratio = Equity/Total assets Equity ratio at market value = Aggregate market value/total assets Years of debt redemption = Interest-bearing debts/operating cash flow Interest coverage ratio = Operating cash flow/interest payment 2. Each indicator is calculated based on the consolidated financial figures. 3. Operating cash flow represents the Net cash provided by (used in) operating activities in the consolidated statements of cash flows. Interest-bearing debts refer to all liabilities with obligations to pay interest posted on the consolidated balance sheets

11 (3) Operating and Other Risks The operating results, share price and financial position of Dentsu, and by extension, the Dentsu Group are subject to various risks, as described below. Any forward-looking statements in the following discussion are based on the judgment of management as of the date of submitting the Financial Results. 1) Overall industry-related risk a. Risk related to fluctuations in the economic and business environments The financial results of the Dentsu Group and other companies in the advertising industry are highly susceptible to changes in the market and business conditions because many advertisers consider advertising a variable cost to be adjusted in response to changes in these conditions. Management has taken steps, such as diversifying the types of services the Group provides, to reduce exposure to the impact of fluctuations in the economic and business environments. Nonetheless, since net sales in Japan account for approximately 90% of the Dentsu Group s consolidated net sales, the Group s financial results may be influenced by domestic macroeconomic trends and fluctuations in the operating environment of key domestic industry sectors that have significant advertising expenditures. b. Risk related to structural changes in the media According to 2009 Advertising Expenditures in Japan, issued by Dentsu, Internet advertising expenditures have continued to grow since the first survey in 1996, surpassing radio advertising expenditures in 2004, magazine advertising expenditures in 2006 and newspaper advertising expenditures in 2009, capturing an 11.9% share. On the other hand, although advertising expenditures for the four traditional mass media (i.e., newspapers, magazines, radio and television) declined for the fifth consecutive year since 2005, they still accounted for a significant 47.8% combined market share in Management believes that the development of an Internet-based advertising method should contribute to expanding the overall advertising market by raising synergies between advertising in the four traditional mass media and Internet advertising. As of May 2010, the Dentsu Group has already secured a leading position not only in advertising in the four traditional mass media but also in Internet advertising, and we areseeking to explore and expand further business opportunities. However, if the Group cannot cope appropriately with these structural changes, financial results could be adversely affected. According to a survey on people s contact with the media (the number of hours people spend in contact with the media each day), contact with TV is overwhelming at minutes compared with 43.4 minutes for the Internet (source: Video Research; MCR 2009; Tokyo area). Nevertheless, if consumers media contact behavior changes drastically in the future, demand for advertising in the four traditional mass media, which accounts for more than half of the Group s net sales, could change and financial results could be adversely affected. c. Risk related to common business practices The common practice in Japan is for advertising agencies to purchase time and/or space from media companies on their own behalf, rather than on behalf of advertisers. Accordingly, Dentsu Group companies are liable for payment to media companies regardless of whether they receive payment from their advertiser clients. This practice exposes the Group to the risk of default should an advertiser client s business fail. The nature of the advertising business is such that sudden changes in advertising proposals and actual advertisements are frequent. The Dentsu Group strives to preclude problems related to work for clients by encouraging the conclusion of basic written contracts with them, but unforeseen incidents or disputes with clients might arise. Overseas, especially in Europe and the Americas, relationships between advertisers and advertising agencies are usually exclusive within a particular industry. In Japan, however, these relationships are typically less exclusive. Accordingly, the Dentsu Group, like other advertising agencies in Japan, handles multiple clients in

12 a single industry. If the practice in Japan were to change in favor of exclusive relationships, however, and if the Dentsu Group s efforts to respond to this change were ineffective, its financial results could be adversely affected. 2) Competition-related risk a. Risk related to competition among advertising agencies Competition among Japan s advertising agencies is intense. Reorganization and mergers among domestic companies and the entry into the market of multinational advertising companies could alter the structure of Japan s advertising industry. Going forward, the Dentsu Group s financial results could be adversely affected by increased competition to secure clients if the Group is unable to respond appropriately to changes in the structure of the industry or standard business practices prompted by the entry of multinational advertising companies. b. Risk related to competition from new market entries and from adjacent industries The rapid expansion and diversification of the advertising field is giving rise to competition from an increasing number of companies in adjacent industries, including general trading and consulting companies. The Internet advertising field is also seeing a sharp increase in the number of new market entrants companies with which the Dentsu Group competes in the development and expansion of new businesses. If the Group is unable to respond appropriately to client needs in such business domains from either a service or a cost perspective, or if the entrance of new companies into these new markets suddenly causes rapid changes in customary advertising business practices, the Dentsu Group s financial results could be adversely affected. 3) Risk related to advertisers and media companies Dentsu has formed business ties with major advertisers in Japan and has maintained stable, long-term relationships with a large majority of its current clients. In the fiscal year under review, net sales to the Company s top ten clients (in terms of billings) accounted for approximately 20% of total net sales. Dentsu has established a solid foundation for business development through the operations and sales activities of Japan s mass media companies. This underpins the Company s ability to coordinate issues with advertisers and media companies and facilitate transactions. However, if the Company is unable to provide services that match the needs of existing or new advertisers or media companies, business relationships may be ended, accounts may shrink and the terms of business may change. This could adversely affect the Group s financial results. In recent years, advertisers have become increasingly keen to consolidate their media service activities with one advertising agency to boost advertising efficiency and reduce costs. As a result, a decrease in the profitability of advertising in the mass media can be seen. If this trend persists, the Dentsu Group s financial results could be adversely affected. 4) Risk related to efforts to reinforce domestic service capabilities a. Risk related to the development of systems and databases The Dentsu Group is currently involved in research and development on computer systems and databases that verify the effectiveness of clients advertising activities and marketing budgets. Through these efforts, management seeks to bring latent demand to the surface and increase the Group s share of the domestic advertising market. However, it is unclear when the results of these efforts will be marketable and put to practical use. Moreover, even if that time comes, the Group s R&D activities may not produce the desired services, especially if the needs of clients have changed significantly or technological difficulties preclude widespread use. b. Risk related to investments in media and Internet advertising businesses To reinforce its position in the media markets, the Dentsu Group has made investments in the four traditional mass media, OOH media (billboard, transit and other out-of-home media) and satellite broadcasting media (broadcast and communication satellite), as well as in related research and business development programs. However, if demand for media advertising becomes stagnant or competition in the media advertising market intensifies, profits and business results might not be commensurate with investments in R&D and commercialization. In the Internet advertising domain, as advertising methods diversify and demands from clients expand, the

13 Dentsu Group has been actively establishing alliances with leading, specialized agencies as well as investing in specialized companies and technologies. These moves support the Group s efforts to further promote and propose cross-media campaigns that are aimed at creating effective synergies among multiple media and creatives that are in sync with target consumers behavior patterns. Another prominent advertising method on which the Group is focusing is search engine advertising, in which an advertiser s ad appears on the PC/mobile phone display when a consumer searches for a keyword that has been purchased by the advertiser on the Internet. However, if the Group s responses fail to adequately address the rapid progress in technologies and services associated with the Internet advertising domain, the business results might not be commensurate with initial expectations at the time of investment. c. Risk related to e-solution development As part of its diversification program, the Dentsu Group endeavors to take steps to expand its e-solution businesses, such as customer relationship management (CRM), e-marketing, systems design and other services. However, if demand for these services falls short of expectations, or if the Group is unable to respond appropriately to orders from clients or maintain competitiveness against other e-solutions providers, the business results achieved might not be commensurate with expectations held at the time of the initial investment. d. Risk related to expansion of the promotion business The importance of promotional activities has been rising for advertisers, and the market is expanding. Taking advantage of this opportunity, the Dentsu Group has established several specialized companies in promotion-related fields such as point-of-purchase marketing, flyer production, direct business and client access in order to expand future promotion business. However, if demand for these services falls short of expectations, or if the Group is unable to maintain competitiveness against other solutions providers, the Group s investments might not expand business as planned. 5) Risk related to content business The Dentsu Group actively invests in the acquisition of rights to, and in the production of, films, television programs, sporting events and music, and generates profits from the production, distribution, sale and licensing of films and other content as well as from the sale of sponsorships, broadcasting rights and content-related advertising. However, projects may extend over several fiscal years and require a considerable amount of acquisition costs and financial commitment. In addition, media that provide content have been diversifying in recent years. Moreover, the success of the Group s content business depends on general public reaction, which can be difficult to predict. Therefore, if these business efforts do not develop as planned or do not realize the benefits expected, the Group s financial results might be adversely affected. 6) Risk related to global businesses a. Risk related to expansion of overseas businesses The Dentsu Group conducts its business activities outside Japan through its own network and through alliances with other companies. In the fiscal year under review, sales in markets outside Japan accounted for approximately 8.6% of the Dentsu Group s consolidated net sales. Management recognizes that building a global business portfolio is essential to the Group s future growth and is thus working to expand operations in overseas markets. Concerted efforts are directed toward the localization of human resources and planning systems to increase earnings and sharpen the Group s competitive edge. However, the development of a stronger overseas presence may require considerable financial investment, and competition among advertising companies has intensified. Therefore, if the Group s overseas businesses fail to progress or are unsuccessful, financial results might be adversely affected. The BRICs and Asian countries where the advertising market has shown remarkable growth are the primary targets of the Dentsu Group s focus on expanding operations through its original network. These markets, however, remain underdeveloped in terms of the advertising business. If political and economic conditions, legal restrictions, business practices and other factors in these regions do not develop as predicted, the Group s financial results might be adversely affected. b. Risk related to capital and business alliance with Publicis Groupe At present, the Company holds an equity stake in Publicis Groupe that underpins a business alliance in the advertising services and other fields. However, this capital and business alliance may not deliver the business results anticipated at the time of the initial investment. Also, because the Company is a minority shareholder in Publicis Groupe, with approximately 15% of voting

14 rights, its ability to influence the management of Publicis Groupe is limited. Consequently, there may be instances in which the Publicis Groupe s business directions and strategies are not favorable to the Dentsu Group. Moreover, if the price of shares in Publicis Groupe were to decline sharply, the Company would be required to write down the value of the investment. 7) Risk related to maintaining and developing human resources The growth potential and competitive edge of the Dentsu Group are highly dependent upon attracting, keeping and developing excellent human resources. Therefore, companies under the Group umbrella strive to bring in the necessary talent by hiring a stable number of new graduates and by recruiting mid-career professionals with expertise and experience that will make an immediate impact. At the same time, the Group endeavors to promote development by offering training opportunities according to the position and ability of each individual. However, these efforts could be sidetracked for all sorts of reasons, making it difficult to attract exceptional people or keep them within the Group. If this were to occur, the Group s growth potential and its competitive edge might be adversely affected. 8) Risk related to legal or regulatory changes Advertising companies in Japan, including those under the Dentsu Group umbrella, are subject to a number of laws and regulations, including laws to prevent delays in payments to subcontractors and to protect personal information. At the current time, management does not anticipate that these laws and regulations will have any material impact on the Group s business. However, the financial results of the Dentsu Group and other advertising companies could be adversely affected if existing laws or regulations governing the advertising activities of advertisers or the format or content of advertisements are strengthened, if new laws or regulations are introduced, or if existing laws and regulations are reinterpreted. Members of the Group handle personal and other advertiser information in the course of doing business. The Dentsu Group s information security system is certified to international standards, and the utmost care is given to safeguarding information entrusted to the Group. However, in the unlikely event of an information leak or other such incident occurring, the Group s credibility could be severely compromised. This could adversely affect its financial results. 9) Risk of litigation As of the end of the fiscal year under review, no company in the Dentsu Group was subject to any litigation that could have a significant impact on the Group s financial results. However, the Dentsu Group could become involved in litigation brought against it directly or indirectly in association with the execution of business by members of the Group, including claims by clients, organizations, consumers or owners of intellectual property. Such claims may relate to the content or creative aspect of advertisements. 2. Status of the Corporate Group Since there have been no significant changes in the descriptions of the Schematic diagram (Business lines) and the Subsidiaries and affiliates in the latest Financial Report submitted on June 26, 2009, information disclosure is omitted

15 3. Management Policy (1) Basic Management Policies The business environment in which the Dentsu Group operates is extremely difficult. During the fiscal year ended March 31, 2010, despite a gradual recovery in the Japanese economy from the rapid global economic slowdown triggered by the U.S. financial crisis that began in the previous fiscal year, prevailing conditions for employment and income remained severe. According to 2009 Advertising Expenditures in Japan, a report compiled by Dentsu, the estimate for advertising expenditures in Japan for the 2009 calendar year was 5,922.2 billion yen, an 11.5% decrease compared with calendar This marked the second consecutive year of decline, while the rate of decrease was the highest since the Company began estimating advertising expenditures in Japan in Looking at the breakdown of advertising expenditures by category, expenditures in the four traditional media fell below those in the previous year for the fifth consecutive year, recording a 14.3% decline, and promotional media advertising expenditures fell for the second year in a row, decreasing 11.8%. In contrast, Internet advertising expenditures continued to rise, recording an increase of 1.2%, and satellite media-related advertising expenditures grew 4.9% compared with the previous calendar year. The Group faces a number of challenges as the business environment remains uncertain, and must therefore anticipate changes in the environment and change to reflect the times. The condition of the Japanese economy is still severe, however, and from a global point of view the longstanding power structure has begun to change with the rise of emerging countries such as the BRICs nations. It is inevitable that the global power structure in a few years from now will clearly differ from the current reality. With the very structure of business itself undergoing dramatic changes, from manufacturing to distribution to media and advertising, the Group will strive to make full use of its abundant creativity and dynamically build a corporate group that embraces the new era. To this end, the Dentsu Group, as a continually evolving team of professionals, will confidently pursue further reforms. In January 2009, the Dentsu Group introduced a new Groupwide corporate philosophy of Good Innovation., and subsequently in July 2009, developed a new Medium-term Management Plan dubbed Dentsu Innovation Under the slogan of its new Medium-term Management Plan, Taking on the New Platform Era, the Group will pursue Good Innovation. in client services, with media companies, for consumers, and within its own mindset. At the same time, the Group will continue to proceed with various projects aiming to connect the diverse values brought forth in moving forward with this approach and to become a corporate group that delivers greater synergy to society at large. (2) Targeted Management Indicators The Dentsu Group, based on its corporate philosophy and the new Medium-term Management Plan described above, will strive to accomplish the management objectives shown below by the end of the fiscal year ending March 2014, by making an all-out effort to drive reform of its business structure and engaging aggressively in activities befitting the new era. Consolidated operating income 70 billion yen Operating margin 20% or higher (Operating margin = operating income / gross profit x 100) ROE 8% (3) Tasks to Be Addressed by the Company and Management Strategy While gradually recovering from the global economic slowdown triggered by the U.S. financial crisis that began in the previous fiscal year, advertising expenditures in Japan declined for the second consecutive year, resulting in a significant impact on the domestic advertising industry. In Japan, the social structure and societal awareness are changing considerably with the falling birthrate, aging population and growing concerns about the environment. Meanwhile, continuing advances in digital technology are dramatically transforming the lifestyles of consumers. While markets in developed countries are said to be nearing maturity, emerging nations are increasing their presence in the world economy. All this has encouraged corporations at home and abroad to accelerate the pace of their global business operations. In this rapidly changing business environment, the Dentsu