UPDATE 2-NTT DoCoMo Q2 profit rises 37 pct, keeps forecast

*Q2 operating profit up 37 pct on lower subsidies, costs

*Keeps operating profit forecast below market view

*Cuts net profit forecast on lower value of shareholdings

*Aims for operating profit over Y900 bln in 4 yrs, up 8 pct

*Shares lose 8.2 pct ahead of results vs Nikkei's 5 pct fall (Adds details, comments, byline)

By Sachi Izumi

TOKYO, Oct 31 (Reuters) - NTT DoCoMo Inc, (9437.T) Japan's top wireless carrier, reported a 37 percent rise in quarterly profit on Friday on lower mobile phone subsidies and procurement costs, and kept its full-year outlook below market expectations.

But it still took a hit from the plunging domestic stock market and trimmed its net profit target by 2 percent due to the lower value of its shareholdings.

DoCoMo's (DCM.N) profit rose after it introduced a new business model last November because it lowered costly handset subsidies paid to retailers and helped slash procurement costs of devices.

It also locked in customers for longer with instalment plans as higher phone prices have made switching carriers more expensive, though it caused mobile phone sales to tumble and forced DoCoMo to lower its annual sales forecast.

The industry leader also laid out plans to improve services and networks, and said it aims to increase profit by more than 8 percent in the next four years.

"First-half earnings were generally satisfactory because they are showing progress in the business model change that lowered the churn rate and shrank subsidies," DoCoMo chief executive Ryuji Yamada told a briefing.

"In the second half we need to implement measures to build a base for our future earnings growth," he said, adding that one step would be to encourage 2G services users to upgrade their phones. About 14 percent of its subscribers are still using the older-generation services.

DoCoMo said its operating profit rose to 280.5 billion yen ($2.85 billion) in the three months to Sept. 30, from 204.6 billion yen a year earlier. Quarterly sales slipped 4 percent to 1.1 trillion yen.

For the full year to next March 31 it kept its operating profit forecast at 830 billion yen, against an 866 billion yen projection in a poll of 15 analysts by Reuters Estimates.

It lowered its annual sales estimate by 3.6 percent to 4.6 trillion yen and trimmed its net profit forecast by 1.6 percent to 495 billion yen. It stuck to its capital investment plan of 719 billion yen for the current business year.

Smaller rivals have also shifted to the new sales model. Second-ranked KDDI Corp (9433.T) last week reported a 27 percent rise in quarterly profit and No.3 Softbank Corp's (9984.T) profit grew 7 percent in July-September.

GROWTH PLAN

Although DoCoMo still holds just below half of Japan's mobile industry, its once-dominant market share has been eroded by smaller rivals in a saturated market of more than 109 million mobile users, or about 85 percent of the population.

For future growth, the company said it would try to increase per-user income by expanding video services, personalise services and mobile phone functions, and offer services that link mobile and fixed-line communications.

DoCoMo would also seek more business and capital tie-ups globally, following its recent investment in Bangladesh's TM International (Bangladesh) Ltd. Sources had also said last month it was in talks to buy a stake in India's Tata Teleservices.

With that, DoCoMo said it targets an annual operating profit of more than 900 billion yen in the year to March 2013, up 8.4 percent from its projection this business year.

"The instalment payment plans just mean that profit contributions show up early, so they would have to lift profits later on by using measures like hiking per-user income," Deutsche Securities analyst Kenji Nishimura said.

DoCoMo said it plans to keep its capital investment at around 700 billion yen a year, including those for the next-generation networks.

While the financial crisis and economic worries have battered global markets, telecom shares have mostly outperformed other stocks, appearing recession-proof and free from the effects of the stronger yen that has hurt exporters.

Shares in DoCoMo gained more than 11 percent in April-September, outperforming a 10 percent slide in the Nikkei average. .N225

Ahead of the results, the shares closed down 8.2 percent at 155,000 yen, while the Nikkei lost 5 percent. ($1=98.46 Yen) (Editing by Michael Watson)