NTT Data Group Corp

DUS:NT5

Earnings Call Transcript 2021-Q2

[Yo Honma, executive]

Ladies and gentlemen, my name is Honma, Representative Director. Thank you very much for attending this session despite your busy schedule. And because we're live in times with COVID-19, please allow us to hold these briefings online. Thank you very much for your attendance.

Now today's session comprises, as you can see here, the second quarter results, followed by the latest business overview, key topics. And finally, I will cover progress in the structured transformation outside Japan. First of all, let me talk about the overview of the second result -- second quarter results. Following the first quarter's trend, due to the further spread of novel coronavirus infection, North America, EMEA, Latin America and domestic enterprise solutions segments were affected by such impact negatively. However, towards achieving the full year guidance, we are making solid progress. First, new orders received domestic and also the overseas business was affected by the drawback in the previous fiscal year, leading to year-on-year decline. As for net sales, following the first quarter trend, especially the backlog were turned into net sales stably and we secured about the same level as the previous fiscal year. As for operating income, in addition to the impact of COVID-19, incremental structural transformation costs outside Japan were incurred. However, we had red projects in the previous fiscal year, which was controlled this year. So we landed at about the same level as the previous fiscal year.

And hereafter, please allow me to shorten the phrase, impact of novel coronavirus to COVID-19 impact. Now against each measure, let me explain various breakdown. First of all, let me talk about new orders received in the public and social infrastructure. During the second quarter, it -- won the projects for the central governments and agencies. There was a drawback from the previous fiscal year, leading to the negative performance. As we explained in the first quarter's session, the financial segment won projects for the financial institutions, leading to positive performance. Enterprise & Solutions segments won projects for retail and services, leading to positive performance despite a relatively large amount of COVID-19 impact. Overseas, still see the lingering COVID-19 impact. In North America, like the first quarter, in the second quarter as well, there was a drawback from the mega projects acquired in the previous fiscal year. EMEA and Latin America segment, as we explained in the first quarter briefings, there was a drawback from the large projects in the previous fiscal year, leading to the minus negative performance. Firstly, public and social infrastructure follows the first quarter trend, larger scale of services for central government and agencies led to increased net sales.

In the Financial segment, likewise, the larger scale contributed to larger net sales. As for Enterprise & Solutions, the larger scale for retail services and payment-related services, which led to larger sales. But because of the reduction and also suspension of the projects due to COVID-19, it landed at the same level as previous fiscal year. North America, because of acquisition in the previous fiscal year, they consolidated more. However, due to COVID-19 impact and the FX factor, it was the same level as the previous fiscal year. EMEA and Latin America, especially in Italy, solid progress was made, but the reduced projects due to COVID-19 and also suspension of such projects led to negative performance. Finally, operating income. Public & Social infrastructure segment larger sales led to larger operating income. And also, we controlled [ red ] projects, which happened in the previous fiscal year. So as a result, there was a larger profit.

Financial segment also posted large operating income because of the larger sales, but some subsidiary companies reduced sales as well as profit landed at negative operating income. So Enterprise & Solutions, same as the first quarter due to COVID-19, SG&A ratio deteriorated leading to negative performance.

North America due to COVID-19 impact and also incremental structural transformation costs led to lower operating income.

As for EMEA and Latin America, the previous year's structural transformation started to yield results, but incremental costs in COVID-19 led to negative results.

The next slide and onwards will describe the breakdown by segment. Therefore, I just would like to finish for the highlight of the second quarter results.

Next topic is COVID-19 impact on NTT Data business. Please turn to Page 13. In general, compared to initial expectation, negative impact was small. Existing businesses and digital-related projects, in particular, made solid progress. Yet, in Europe, there's another spike in COVID-19 cases. Therefore, we still need to be vigilant. We will continuously closely monitor impact on regional businesses and business activities. As for public segment, the local business related projects were impacted partially but the impact was relatively smaller in telecom, and also projects for businesses for central government agencies made solid progress.

In the Financial segment, some suspension and cancellation were observed. However, more projects for financial institutions were actually making progress and original expectation. In the enterprise segment, the negative impact has been seen in the manufacturing sector, but payment areas saw larger demand. And also digital projects are increasing in retail services, and we are making solid progress and original expectation.

Next, North America. There were impact in manufacturing and medical institutions. But in the public sector, larger projects are coming back. And also digital-related projects are vibrant. Therefore, impact is smaller than our initial expectation.

As for EMEA and Latin America, there is a new lockdown and mobility restrictions affecting Spanish financial institutions and German automakers. Also currency value drop in Latin America led to FX impact. However, mainly in Italy, digital-related projects are vibrant, and the impact is smaller than our initial expectation.

Next, let me cover major topics so far. First of all, this is a blockchain technology powered trade information platform, cold trade wallets. We launched 6 -- we launched this with 6 partner companies. By leveraging digital technology, we will promote the overall DX in the sector, engaging in trade operations. At the same time, there's reference to Snowflake, which had strength in cloud-based data platform. The capital business alliance is in place through that. And through AI and the use of data, we are supporting acceleration of DX. For your information, Snowflake went IPO in September this year, recording the largest software IPO ever.

In order to realize new society with COVID-19 and after COVID-19, here are DX solutions. Next, as initiatives to realize digital society on the seventh of August and the first quarter briefings, we explained this. So in order to realize new society with COVID-19. And after COVID-19, we've started various initiatives. As of the 29th of October, we have newly created social design office. Going forward, services by administration, financial institutions and enterprises will be collaborated, and such DX will be further accelerated across all business segments, including financial, public, enterprise, overseas and R&D. We will collaborate solidly so that we can contribute to DX for the entire society. At the same time, for society, we will send talent and teams to the market, equivalent to CDOs. At the same time, we will be aggressively working on nurturing digital talent at the client side.

So this is the progress in the structural transformation in North America and EMEA and Latin America. First, North America. The region implemented is informed ahead of the schedule, and it is on track. To be more specific, enhancing digital talent and rescaling them, optimizing resources and consolidation of office facilities and data center.

Next, EMEA and Latin America. As a result of structural transformation, they received more digital projects, and they will continue to reinforce digital capabilities for this fiscal year.

In North America, a consulting firm specializing in ServiceNow called Acorio was acquired, enhancing digital offering, and we will contribute to DX promotion in North America and globally. As for our ServiceNow, we are now promoting strategic use even within NTT Data.

In Europe, a major Italian energy company called Eni, which operates across 70 countries in the world, awarded NTT Data digital transformation project. Well, this is the case in Portuguese with medical institutions, everis owns medical solution. everis provides such solution to contribute to improving efficiency in new medical operations. Appendices explain topics and numbers in detail. So I would like to just keep those details.

This concludes my presentation. Thank you very much for your listening.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]