NEC Corp

TSE:6701

Earnings Call Transcript 2019-Q1

[Takayuki Morita, executive]

Hello, everybody. This is Takayuki Morita, CFO for NEC Corporation. I'm so happy to have so many of you. I'm quite happy to go through the highlights of the first quarter for the FY March 2019, which we announced today.

First, I would like to go through the outline of the actual numbers for the first quarter. Then in the second half, I'd like to share some of the highlights of the forecast we're making.

For your further information, my explanation today is going to be based upon a new segmentation, which was affected by the organizational change effective of April of this fiscal year.

First, I'd like to go through the outline of the first quarter for the current fiscal year.

First, I'd like to go through the changes of the segment. We have newly created a Global segment. We wanted to actually concentrate the global overseas activities in order to centralize the business responsibilities and the management authorities. Actually, we wanted to have this global segmentation change, being more specifically as you see here.

On the Telecom Carriers side, we have all the overseas service providers and software and services, wireless solution business as well as submarine and cable systems.

On the System Platform services, we have all the overseas unified communications, display business, and also in other, we have energy and operations.

And furthermore, with all these changes in place, actually, we have changed name of the Telecom Carrier business unit. It's now referred to as Network Service.

As shown in this name change, we do believe that we have a strength and out of the experiences in the Telecom Carrier activities, we are now moving into the new 5G era, and we'd like to leverage on our core strength in order to further grow and run our business operations.

Allow me to now go through the summary of the numbers for the first quarter. First quarter revenue, year-over-year basis actually up 2.5%, and becoming JPY 613 billion. As for the operating profit, regular basis up JPY 3.7 billion, a negative JPY 10.7 billion. As for the income before income taxes as well as the net income, last year for your information, we had a special situation, Tokin and Renesas, the stocks transfer. However, we're not having these special situations in the fiscal year.

So all in all, income before income taxes actually went down JPY 11.9 billion and becoming JPY 4.8 billion. As for the net income, actually went down JPY 13 billion, becoming JPY 5.8 billion.

As shown on the right-hand side, we have those -- the numbers by the segment. And I would like to go through the highlights of new changes. First, revenue. In Public and Enterprising operations actually, we're the major drivers, giving us good results. As I mentioned actually, we're able to grow by 5.2% in revenue.

On the side of the profit and operating profit in Public and the other activities actually improved, giving us an impressive number of JPY 3.7 billion.

Then I'd like to go through the details of the segments. In the first, Public. In Public infrastructure, namely in aerospace and defense actually grew firmly. And also in Public on our solutions actually, we're able to have a good growth in the small- and medium-sized businesses.

All in all, actually, we're able to increase our number by an 8.7%, becoming JPY 195.5 billion. As for the operating profit, thanks to the increase in the sales, Y-o-Y basis actually it is up JPY 3.3 billion, becoming the profit of JPY 2.5 billion.

Next, I'd like to move on to Enterprise. Yes, the first revenue in the retail and services actually have been the major drivers. We're able to actually grow in all the domains and including the financial services and the manufacturing. Y-o-Y basis actually, we're up 9.5%, becoming JPY 96.2 billion, retail and service actually specifically around the convenience store businesses and also the financial services on insurance business actually was the major driver.

Then we go to operating profit. Thanks to the increase in our core business, we actually have good growth and profit, but due to the fact that IoT and infrastructure is now moving into the commercial phase. So far, corporate was responsible for the development cost, but now starting from this current fiscal year, the cost will be borne by the business units. Because of that, Y-o-Y basis the segment operating profit actually came down by JPY 1.4 billion, becoming JPY 3.6 billion profit.

Next, Network Service. Network Service on the revenue actually -- due to the fact that there has been sluggish in CapEx among new carriers, so this segment sales actually became flat. As for the operating profit, on top of the sluggish CapEx among the carriers, and also due to the ongoing investment into the 5G and capacity actually, it came down by JPY 1.6 billion, becoming a loss of JPY 2.2 billion Y-o-Y basis.

Next, System Platform. Revenue first. Though the system device revenue came down, but the service and the storage as well as the enterprise network growth, so we're able to actually be on par to previous year. As for the operating profit, there has been some temporary deteriorations in the hardware business due to the strategic operations. But we do believe that going forward, starting from the second quarter, we should be able to make a good recovery, so we believe. As for the current quarter actually, it came down by JPY 2.1 billion, giving us a loss of JPY 3.6 billion.

Next, Global side. The revenue, well, we are now in the so-called large, among large initiatives and projects. And submarine cable systems actually came down, but at the same time in the safety side due to the Northgate acquisition actually, safety side actually was growing. So revenue grow by 0.8%. As for the operating profit, as I explained, thanks to the submarine cable systems, deterioration actually it is declining, but we do believe that we are already starting receiving orders in this segment, actually we're trying to expand our factory and capacity, we should be able to make a good recovery starting from the second quarter and onward.

And Global segment, this is a newly created segment. And as you see, we are making comparisons starting from FY '17 for the past 3 fiscal years, in the first quarter basis. As for Others, we have energy and display in our operations, and also, we have overseas unified communications, they are included in Others. Right-hand side shows that the highlights of the first quarter and the business activities. Safety first. We're now consolidated with the Northgate and Public Services, so year-on-year basis actually, sales actually grew 2x. U.K. has the largest police. The Metropolitan Police Service and also the U.K's third largest police, the West Midlands Police actually giving us orders, one after another. So now we're getting good synergy out of the NPS. As for the submarine cable systems, we are receiving good orders. So on the full year basis, we should be able to be on par to the previous years' performance.

This shows changes in net profit. As I said earlier, operating profit improved JPY 3.7 billion year-on-year, however, due to the absence of the gain from the affiliate stock sales this year, unlike last year, namely for NEC Tokin and Renesas Electronics, financial income has deteriorated compared with the previous year. As a result, net profit for the first quarter of fiscal year March 2019 is negative JPY 5.8 billion.

This shows the trends in free cash flow. Let me explain why free cash flow declined significantly during Q1. As I explained, due to the absence of gain from the sales of stocks of NEC Tokin and Renesas Electronics, cash flow from investing activities deteriorated from JPY 39 billion to a negative JPY 15.4 billion. And cash flow from operating activities deteriorated from JPY 75.4 billion to JPY 51.2 billion, by JPY 24.2 billion due to an increase in receivables, caused by higher sales as well as the payment received ahead of schedule in Q4 last year. As a result, free cash flow deteriorated by JPY 78.6 billion year-on-year. However, this is in line with the initial plan that the company has internally.

Next, let me take you through the full year forecast. The full year forecast is unchanged from the announcement on April 27.

As we mentioned, at the announcement of the annual plan, the operating income guidance of JPY 50 billion represents a year-on-year decline. And it reflects restructuring expenses of JPY 40 billion, which is a one-off factor.

NEC has revised the operating segments, let me take you through each segment one by one highlighting the changes. Starting with the Public business, there is no change from the previous announcement, revenue guidance is up 1.3% and operating profit JPY 61 billion, up JPY 7.8 billion.

The Enterprise business revenue forecast is JPY 410 billion, up 0.3%. As for the operating profit, for the same reason mentioned earlier, the guidance is deteriorating due to the reallocation of AI and IoT-related investment expenses, while profitability in system construction services improves.

Next is Network Services business. We expect a sluggish capital investment by Telecommunication Carriers, and that is likely to continue through the next fiscal year. And because of that, the revenue guidance is minus 4.7% year-on-year, JPY 360 billion.

Operating profit for the same reason is expected to go down by JPY 6.3 billion to JPY 11 billion.

System Platform business. In Q3 last year, we had a large-scale project, excluding that, we are expecting a positive growth, however, year-on-year, revenue is projected to go down by 4.1% to JPY 510 billion. On the other hand, operating profit is expected to go up by JPY 2 billion to JPY 32 billion by the improvement in cost efficiency.

Global business. Revenue is expected to go up in Safety as well as in software services for the service provider. Operating profit is expected to improve due to a sales increase and the business structure improvement.

For the Global business, let me explain the revenue forecast. Safety is projected to increase in revenue due to the consolidation of Northgate Public Services, contributing JPY 25 billion and organic growth contributing JPY 10 billion. So the expected growth is JPY 35 billion year-on-year, was 60%.

As for software and services for service providers, this is -- revenue is expected to increase due to expansion of SDN/NFV deployment. We are seeing progress in commercialization with global Tier 1 players. So we will make sure to realize these opportunities.

Wireless solutions and submarine cable systems. Revenue is expected to decrease due to a change in strategy to focus on profitability for wireless solutions. And then we will realize breakeven by Q4 this year to make a good start for next fiscal year.

Submarine cable systems is performing well in orders, so we would like to exceed the previous year results.

Lastly, I'd like to discuss some of the management topics. During the first quarter, we have already announced, as a new mechanism to commercialize NEC's technologies as soon as possible, we have established a company called dotData, Inc in the United States. This should allow us to commercialize our businesses faster using external talent and funds. As a vehicle to commercialize other seas, we have established a company called NEC X in Silicon Valley. With this, we will tackle new types of value creation going forward.

The second point is culture transformation. For this purpose, we have hired Chika Sato as an executive officer. And introduced a new evaluation system, mainly for the management personnel to hold them accountable for the business results, and defined responsibilities clearly. And we will commit ourselves to achieving the targets for this fiscal year as well as for the medium term and deliver on the commitment.

With this, I would like to conclude my presentation. Thank you.