NEC Corp

TSE:6701

Earnings Call Transcript 2020-Q1

[Takayuki Morita, executive]

Good afternoon. This is Morita, CFO of NEC Corporation. Thank you for gathering together to attend our financial results briefing for the first quarter of fiscal year ending on March 31, 2020, which has just been disclosed today.

Here is the agenda of today's briefing. We will cover the financial results for the first quarter, financial forecast for the full year and key topics.

In view of the organizational change implemented in April this year, we have made some changes to our business segmentation, starting in Q1. Consequently, the presentation today will follow the new segmentation, meaning past financial results are restated for the new segments.

Let me begin my presentation of the financial results. Here is the overview of the segment review and organization. The slide shows major changes implemented as a result of the organizational change in April this year. Page 5 is a reference material. It shows an overview of FY March '18 actual, March '19 actual and March '20 forecast.

Page 6 shows a summary of adjusted net profit and loss results.

Please turn to Page 7. For the first quarter, revenue was JPY 653.9 billion. Adjusted operating profit was JPY 7.6 billion. Income before income taxes was JPY 5.8 billion. Adjusted net profit was JPY 5.8 billion. Revenue increased year-on-year in all segments, except for Public and Others. It is up JPY 15.9 billion from the previous year. Adjusted operating profit increased year-on-year in all segments, except for Others. It has increased JPY 15.9 billion over the previous year. Despite the deterioration of Japan Aviation Electronics by [ JPY 1.5 billion ] and NESIC by JPY 3 billion year-on-year caused by temporary factors, the performance was driven by the outcome of the business structure improvement initiative of JPY 7.5 billion and operational improvement effect of JPY 13 billion.

Page 8 shows the details of adjustments to operating profit and losses. Please refer to it at your leisure time.

Page 9 shows the impact of business structure improvement implemented in fiscal March '19. The outcome of the program for the first quarter of fiscal year '20 -- March '20 totaled JPY 7.5 billion, meaning the initiative is steadily realizing tangible benefit.

Page 10 shows the first quarter order book trends for the domestic business. Public, Enterprise and Network Service business all demonstrated favorable trends during the first quarter. Public secured My Number-related intermediate server projects and others with central and local governments, hospitals and the broadcasters. Enterprise showed consistently steady growth in the IT services market, mainly with the financial sector. Network Service increased fixed-line infrastructure development in preparation for 5G with domestic telco carriers.

From next page, I will give you the details of each segment. Page 11 is the Public business. Revenue was JPY 180.3 billion, down 3% year-on-year, due to the decline of JAE canceling out the increase from the IT systems for central, local governments and other products for broadcasters. Adjusted operating profit was JPY 5.2 billion, up JPY 2.2 billion year-on-year, thanks to the increased sales of government office IT systems and the broadcaster systems.

Page 12 shows Enterprise business. Revenue exceeded JPY 10 billion, including the licensing revenues of Office 365 and others, which was reclassified into this segment from another segment, starting in Q1. Excluding this special factor, however, the revenue was already up 5% year-on-year. As for the breakdown, financial services is up more than 10%, and the manufacturers, retailers and service sectors are flat. Operating profit was JPY 6.7 billion, up JPY 2.9 billion year-on-year, mainly due to the higher revenue. The positive effect of the segmentation change is rather limited in operating income. Profitability of SI service business is improving compared with the previous year.

Page 13 is our Network Services business. Revenue increased due to a stimulated fixed network area demand in light of 5G implementation, along with an increase in our subsidiary NESIC. IT service area also grew. This resulted in an 11.6% increase versus the same period last year, landing at JPY 100.1 billion.

Rakuten Mobile business also contributed to first quarter growth. Although there was a onetime loss of approximately JPY 3 billion at NESIC due to revenue increase, there was a JPY 3.7 billion improvement versus the same period last year, and operating profit loss was a positive, JPY 1.2 billion.

Next is System Platform business. Hardware and maintenance services grew, especially centered around business PCs, and revenue grew 14% versus same period last year, resulting to JPY 114.3 billion. For operating profit and loss, we enjoyed a JPY 2.3 billion effect from structural reform, revenue grew as well. And in accordance with new product launches last fiscal year, promotion fees were incurred which shrank this year. And all in all, an improvement of JPY 7.4 billion, resulting in a positive JPY 4.7 billion.

Page 15 is our Global business. For revenue, KMD has been newly consolidated and versus same period last year increased 27.2%, resulting in JPY 114.2 billion. Safer Cities service provider solutions, wireless solutions and submarine systems improved. And as a result, operating profit and loss improved by JPY 6 billion compared to the same period of the previous year. The result, a loss of JPY 700 million. The actuals for first quarter Global business has improved as anticipated.

Moving on to Page 16. Let me further detail Global business. The left bar chart shows major businesses included in Global and the scale of revenue.

With KMD being newly consolidated, Safer Cities grew substantially in comparison to the same period last year. Existing business growth was flat. But for second quarter and onwards, we expect an upswing from airport IT systems. Submarine systems and energy grew due to order increase from the last fiscal year.

As for the full year profit and loss forecast, when we consider the profitability improvement status of energy as well as the display market environment, we are anticipating risks.

Page 17 depicts free cash flow. First quarter free cash flow has improved greatly since the same period last year. So allow me to explain why.

One of the major factors was cash flow from operating activities. Adjusted operating profit was approximately JPY 16 billion. And there were improvements in working capital due to the collection of receivables at year-end of approximately JPY 18 billion. There was also an impact of approximately JPY 13 billion due to the application of IFRS 16.

All in all, compared to the same period last year, free cash flow improved by JPY 47.3 billion. By applying IFRS 16 lease, the impact on our first quarter and balance sheet was an increase in interest-bearing debt by approximately JPY 175 billion.

And next, allow me to outline our financial forecast for fiscal year ending March 2020. Please refer to Page 19. The full year financial forecast remains unchanged since our announcement on April 26. The breakdown by segment reflects what was announced on July 10.

Lastly, allow me to highlight management topics. Today, we signed a contract with NAJ Holdings regarding a tender offer for Nippon Avionics. If this succeeds, Nippon Avionics will no longer be a consolidated company of NEC. However, the impact on NEC's financials will be minimal. Through this initiative, our hope is that Nippon Avionics will further expand their business outside of the NEC Group and realize further growth.

I would like to outline our business topics on this page. We have started a collaboration with Star Alliance to develop an identification platform utilizing facial recognition. We will further promote collaboration with Star Alliance and plan to launch services by March 2020.

At the EU Summit held in May, we provided a facial recognition system for administration control, and initiatives fueling the expansion of Safer Cities are increasing.

Here in Japan, we have received orders from 6 major airports for electronic customs procedure systems, and we would like to position this as a springboard for business expansion both domestically and globally.

For health care business enhancement, we have acquired a Norwegian biotech company. We will utilize OncoImmunity's software that applies machine learning to create synergy between cancer antigen prediction services and NEC's drug discovery business.

This will conclude my presentation. Thank you very much for your attendance.

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