July 30 (Bloomberg) -- NTT DoCoMo Inc., Japan's largest mobile-phone operator, said first-quarter profit rose 41 percent after it reduced handset subsidies to customers.

Net income increased to 173.5 billion yen ($1.6 billion) in the three months ended June 30, from 122.8 billion yen a year earlier, Tokyo-based DoCoMo said today. Sales slipped 1.1 percent to 1.17 trillion yen in the quarter.

``These results will probably dispel concern that tougher competition would cause profit to nosedive,'' said Masayuki Kubota, a senior fund manager at Daiwa SB Investments Ltd. in Tokyo, who oversees $1.7 billion in assets including DoCoMo shares. ``Investors may come to think of the company as a stable cash cow, even though profit isn't likely to grow from now on.''

DoCoMo offered free calls to family members and halved monthly fees in November to fend off Softbank Corp. and KDDI Corp. DoCoMo, facing shrinking market share, may face increased competition after Softbank won the right to be the Japanese carrier for Apple Inc.'s iPhone 3G, which is selling twice as fast as the original in the U.S.

``Acceptance of the monthly handset payment plan by our users helped bolster profit in the quarter,'' President Ryuji Yamada said at a press briefing in Tokyo. ``A considerable decline in the cancellation ratio was also a major contributor to earnings.''

Operating profit, or sales minus the cost of goods sold and administrative expenses, rose 45 percent to 296.5 billion yen, the company said.

Profit Beats Estimates

The profit beat a JPMorgan Chase & Co. forecast this month for income of 170.9 billion yen. The brokerage said operating profit may be 276.5 billion yen on sales of 1.16 trillion yen.

Daisaku Masuno, an analyst at Nomura Holdings Inc., in a July 28 report projected operating income would rise between 20 and 30 percent in the period, citing the reduction in subsidy payments and increasing revenue from data services.

``The increase in profit was merely caused by the change in the accounting,'' said Kenji Nishimura, a Tokyo-based analyst at Deutsche Bank AG with a ``hold'' rating on the company. `` Given revenue per user is likely to continue dropping at the current pace for the time being and the effect of the installment plan only lasts this business year, the company can't avoid seeing its profit fall next fiscal year.''

Average revenue per user, or ARPU, fell 10 percent to 5,890 yen in the quarter from a year earlier, the company said, citing the introduction of cheaper voice plans. Data ARPU gained 9.9 percent to 2,330 yen in the period.

Subsidies Cut

Operating expenses dropped 11 percent to 873.8 billion yen as the company sold 1.3 million fewer handsets, resulting in lower sales incentive payments to retailers, DoCoMo said. The ratio of subscriber cancellations decreased to 0.5 percent from 0.85 percent.

The plan introduced on Nov. 26 charges more for handsets in exchange for a cheaper monthly phone bill, helping it cut payments for subsidies. The company said today 8.9 million people had subscribed to the service as of June 30, helping boost revenue in the quarter by 111.8 billion yen.

Under the old system, Japanese carriers sold handsets for as little as 1 yen and recouped the full cost of the phone through monthly charges to users. DoCoMo's subsidy payments were equivalent to 20 percent of its sales, it said in October.

Market Share Slipping

DoCoMo's share of the Japanese market slipped 4 percentage points to 52 percent in the two years to June 30, according to data compiled by the Telecommunications Carriers Association. Softbank's share increased 2 percentage points and KDDI, the nation's second-biggest mobile-phone operator, added 1.3 percentage points to 18 percent and 29 percent respectively.

In the past year, Softbank, Japan's third-largest wireless carrier, added three times as many new subscribers as DoCoMo, with KDDI attracting twice as many users. DoCoMo added a net 783,000 subscribers in the 12 months ended June 30, compared with 2.7 million for Softbank and 1.6 million for KDDI, according to the association.

DoCoMo maintained its forecast from April for net income to increase 2.4 percent to 503 billion yen in the 12 months ending March 31, as sales climb 1.2 percent to 4.77 trillion yen. It expects operating profit to rise 2.7 percent to 830 billion yen.

Shares of DoCoMo rose 3.2 percent to close at 171,700 yen on the Tokyo Stock Exchange, before earnings were reported. The stock has fallen 7.7 percent this year, adding to a 1.1 percent decline in 2007.

To contact the reporter on this story: Pavel Alpeyev in Tokyo at palpeyev@bloomberg.net; Masaki Kondo in Tokyo at mkondo3@bloomberg.net.

Last Updated: July 30, 2008 05:23 EDT