NEC Corp

TSE:6701

Earnings Call Transcript 2022-Q1

[Takayuki Morita, executive]

Good afternoon, ladies and gentlemen. Thank you for your participation today. I would now like to explain the financial results for Q1 fiscal year ending March 31, 2022, announced today. This will be the contents I will explain today.

Page 5 is a summary for Q1. Revenue was JPY 651.9 billion, a year-on-year increase of 10.9%. Both Japan domestic and international business increased. There was market recovery domestically and IT and 5G are in good shape. Globally, Avaloq was newly consolidated and expanded, especially in Digital Government and Digital Finance.

Adjusted operating profit was JPY 10.5 billion, an improvement of JPY 16.3 billion year-on-year, a massive improvement because we were able to solidly embrace the market recovery. I will later explain the fluctuation factors.

Adjusted net profit was JPY 6.5 billion due to the improvement of adjusted operating profit. Please refer to Page 6. The major indices are as you see here, and we were able to improve year-on-year. Free cash flow was JPY 65 billion, which I will explain later. As for the segment breakdown for all reported segments, revenue and profit improved.

On Page 7, we show adjusted operating profit change compared to FY '21 March Q1. I would like to start off with the last fiscal year's minus JPY 5.8 billion. We acknowledged a onetime profit minus impact of JPY 11 billion. This year, we are acknowledging a onetime profit of JPY 8 billion through sales of real estate, et cetera.

Operations improved JPY 25.3 billion year-on-year. The contributing factor allowing us to recoup the negative impact imposed by COVID-19 last year was market improvement, amounting to JPY 17.5 billion. Business improvement gave us another JPY 7.8 billion.

For the first quarter, strategic expenses of JPY 6 billion were injected as planned. This is JPY 3 billion for 5G; JPY 1.5 billion for Core DX; internal DX, JPY 1 billion; human resources, et cetera, JPY 500 million. All in all, first quarter profit for FY '22 March was JPY 10.5 billion.

Next on Page 8 is quarterly orders. Overall, a minus 2%. However, if we exclude major quarterly fluctuating large projects, Submarine Systems and display business that was not consolidated last year November, we see a year-on-year increase of 9%.

By segment, though there are differences in trends, we see recovery signs for corporate IT and enterprise.

In Network Services, 5G base stations contributed to order growth. For Global, if we exclude the impact of Submarine Systems and display business, we saw a 3% increase of solid progression. Q1 public infrastructure saw an order decrease of 4% versus the same period last year, but market trends showed steady increase in upgrade demands for central government systems, and there will be no issue in reaching our annual plan.

Page 9 and onwards shows segment results. Public infrastructure increased due to health care and local government. On the contrary, recovery of demand for mid- to small-sized and local businesses remained slow. Operating profit is improving due to revenue increase.

Page 10 shows Public Infrastructure business. NEC Corporation increased revenue due to an HPC project for University. Consolidated subsidiary, Japan Aviation Electronics Industry Limited, saw a major uplift due to recovery. Because of these increases in revenue, NEC Corporation and Japan Aviation Electronics Industry Limited improved profit.

Page 11 is Enterprise business. Revenue varies by industry, but retail shows steady recovery along with finance sectors. Manufacturing sector showed signs of recovery but remains at the same level as last year. Operating profit has increased due to increase in revenue.

Next, on Page 12, is Network Services. Revenue increased greatly due to the expansion of 5G base stations. Operating profit has improved regardless of increasing strategic expenses by JPY 3 billion versus last year due to revenue increase. In this arena, for 2 years since 2019, we have increased our 5G-related strategic expenses by JPY 6 billion, but our overall profit is at the level of 2019.

Page 13 is Global business. Revenue increased year-on-year, mainly in Digital Government and Digital Finance and in all of the other areas, including service provider solutions, submarine and wireless, with the addition of Avaloq Group in the consolidated account. Adjusted operating profit improved by JPY 8 billion, half of which was attributable to portfolio reform and the other half to improved sales and cost efficiency.

Page 14. Free cash flows. Operating cash flow is down JPY 26.1 billion year-on-year as we try to secure inventory to meet the increasing demand. Increase in adjusted operating profit of JPY 16.3 billion was more than offset by the increase in tax and other payments of JPY 7 billion and the increase in working capital of JPY 35 billion. Investing cash flow is up JPY 6.9 billion year-on-year. As a result, free cash flow is positive JPY 65 billion.

Next is financial forecast for fiscal year March 2022. As shown on Page 16, fiscal March 2022 forecasts are kept unchanged. For Q1, performance trends were favorable, even compared with the internal expectations. Nevertheless, in view of the continuously unclear macroeconomic outlook as well as supply chain bottleneck for the semiconductor and other parts, we will stay cautious in managing to deliver the annual target.

Finally, I would like to introduce some topics focusing on growth businesses in the midterm management plan 2025. First, we are working on the business development of global 5G. The first example is for Vodafone. NEC is participating in the Open RAN project of the U.K. government, and is now selected as a partner to supply 5G stations to Vodafone's commercial projects in the U.K.

The second example is for Deutsche Telekom. NEC is awarded the 5G base stations business for their Open RAN project. In next 2 years, this year and next year, we would like to establish a leading position as an Open RAN vendor in overseas markets.

Next is Core DX. Our key initiatives to grow Core DX is collaboration with hyperscalers on a global basis. In November last year, the first corporate level strategic alliance was signed with AWS in Japan. And on the 13th of this month, another agreement was signed with Microsoft to strengthen our global strategic partnership. This is based on our IT and the network expertise, including Microsoft Azure and 365 as well as proprietary NEC 5G technology. By leveraging each other's IT and IoT solutions, we will help various enterprises and public institutions accelerate their cloud adoption, digital transformation and business growth.

Next is internal DX. A transformation office has been established directly under myself, CEO, to promote our own DX. We are continuing to promote smart work to achieve greater job satisfaction and productivity. These efforts are not limited only to our own internal activities, but services are to be offered to customers based on our own use cases and help achieving business growth in collaboration with Core DX.

Next is DG and DF. First, Avaloq has completed the 100-day PMI plan. We are working to expand the synergies by sharing NEC's offshore resources and switching to joint procurement, we were able to win the very first SaaS project in Asia. After a series of bolt-on acquisitions, NPS in the U.K. has acquired Vantage Health, a DX software company tailored for hospitals to strengthen health care business.

In addition, KMD succeeded in winning a large project for the Danish Ministry of Taxation, and NEC Australia also closed an IT service project for the Federal Tax Ministry steadily building up a track record to expand business.

Page 22 shows our credit ratings by credit agencies. Since March of this year, our credit ratings have been upgraded. First, R&I raised it to single A flat, for the first time in 10 years. We have achieved our goal of higher credit ratings as part of the medium-term management plan 2025. We will continue to maintain our financial health and balance it with business growth.

Finally, I would like to inform you about NEC IR Day. This is an event dedicated to participants of the Capital Markets. This year, it will be held on September 15 and 16. The speakers are as shown here, heads of business units as well as managers responsible for growth businesses will take you through major initiatives of the Midterm Management Plan 2025. We hope you can all join us.

This concludes my presentation. Thank you for your attention.