NEC Corp

TSE:6701

Earnings Call Transcript 2023-Q1

[Unidentified Company Representative]

Thank you very much for joining us today. I will explain the Q1 results of FY March 2023, which was announced today. This is the table of content that I will be explaining to you today. Firstly, financial results of Q1 FY March 2023.

Page 5 shows the major financial indicators by segment. Revenue was flat year-on-year. Adjusted operating profit decreased due to the deterioration of Public Solutions and Network Services segments. Details are given on the next page.

Page 6 illustrates the adjusted operating profit/loss change. The baseline is Q1 FY March 2022's operating profit of JPY10.5 billion. While the onetime profit of Q1 FY March 2022 was negative JPY8 billion, onetime profit of JPY5 billion was posted in Q1 FY March 2023. Component shortages and currency impact was negative JPY1 billion and negative JPY500 million, respectively.

Regarding business operations, while Enterprise posted an increase in profit, Network Services and Public Solutions recorded a decrease of JPY6.9 billion and JPY4.1 billion, respectively. As a result, the business operation was down by JPY13 billion. Consequently, in Q1 of FY March 2023, an operating loss of JPY5 billion was recorded.

I will explain Page 7, which is on the impact of macro environment changes. Given the shortages of components across the board, we have factored in a certain amount of risk for the full year. By implementing countermeasures, we will minimize impact on our earnings results.

In Q1, we succeeded in managing the financial impact within the range of our initial assumption. The actual impacts are shown on this slide. Given the continuous depreciation of yen, component procurement was negatively impacted. However, starting in July, the increase in cost has been passed on to the sales price, and we believe that the negative impact on our earnings will be lessened going forward. Furthermore, we expect our global businesses' FX impact to contribute to the improvement of our profit.

Page 8 shows the order trend. Excluding the Submarine Systems that fluctuates dramatically on a quarter-to-quarter basis, depending on whether there are large projects or not, the overall order increased by 18%. IT Services increased 10% due to steady corporate demand growth.

By segment, all domains in Public Solutions were up, mainly driven by public and health care units. Public Infrastructure rose 16%, led by the favorable trend in satellites and national defense. Enterprise received large orders from not only retail and service industries, but also enjoyed an increase in order from financial and manufacturing industries on the backdrop of a strong IT demand. Consequently, its order was up by 18%.

Network Services order fell, given the absence of large fixed wired network projects, which were booked in the previous year. 5G business declined slightly despite a year-on-year increase in backlog. Excluding the Submarine Systems, Global business rose significantly year-on-year, given the large projects of Netcracker and Digital Government and Digital Finance.

Page 10 is on the revision of forecasts by segment. After closing Q1 and reviewing the current environment, we revised the FY 2023 forecasts by segment. Please note that the forecasts for NEC Corporation as a whole remains unchanged. With the aim to realize our initial forecasts, we conduct a corporate-level risk assessment of Public Solutions and Network Services segments.

Based on the corporate-level assessment, downward revision was made to the lowest range of our outlook. On the other hand, the positive momentum of Public Infrastructure, Enterprise and Global segments was factored in as the upside factor. The corporate actions, which brought about the gain on sales of assets were factored in as the upside element as well.

Page 11 shows the amended full year forecasts by segment. For operating profit, a downward adjustment of JPY10 billion for Public Solutions and JPY15 billion for Network Services was made. As for Public Infrastructure, Enterprise and Global, we have incorporated upside potential along with corporate actions into the adjusted amount, a total of JPY25 billion.

From Page 12, I would like to explain by segment the actuals for Q1, along with the full year forecast. First, Public Solutions. public and healthcare Q1 saw an increase of orders year-on-year. Revenue declined due to the reversal impact from a large project last year. For the full year, we expect a favorable order trend based on steady demand, and there will be no changes from the initial plan.

Next, for SMEs and urban infrastructure, although orders increased year-on-year, recovery momentum is slower than anticipated at the beginning of the year. Based on these situations, we expect full recovery of the market to delay until FY March 2024 and onwards. So we will update the numbers from the initial plan and now expect to achieve the same level as the previous fiscal year.

Page 13 is the forecast for Network Services. For global 5G in Q1, Japan customers' limited capital expenditure resulted in a decrease year-on-year. Strategic expenditure increased by JPY3 billion year-on-year on a quarterly basis. However, last fiscal year was project-heavy in the second half, while for this year, it was project-heavy during the first half, and Q1 results are on par with Q4 of last year.

For the full year forecast, considering these situations, we expect the global 5G Japan market's demand will partially shift to FY '24 March. For the international market, orders anticipated in the first half was slipped into the second half, and hence the full year forecast has been amended. Strategic expenditure remains unchanged and is the same level of FY '22 March.

In the area of IT services, we had assumed an increase in demand. However, it is now expected to be at the level of last fiscal year and has been subject to revision, taking a conservative approach. There is no change in the global 5G plan under the Mid-term Management Plan 2025.

Page 14 illustrates the details of upside from businesses with strong demand and corporate actions. Public Infrastructure and Enterprise see steady strong demand, and we anticipate an uptick from the initial forecast. For global, DG/DF and Netcracker show strong orders, along with an improvement in revenue and operating profit due to the devalued yen.

As for corporate actions, along with the gain on sale of assets in Q1, gain of transfer of shares of NEC Embedded Products, which was announced today, is to be recognized in Q2. For the 3 business segments, an uptick total of JPY14 billion; corporate actions, JPY11 billion; and all in all, an uptick total of JPY25 billion is expected.

Lastly, allow me to cover some topics. Page 16 illustrates the enhancement of resources for 5G global deployment. First, as announced on July 1, the acquisition of Aspire Technology, this company handles network SI business and will allow us to secure system engineers with experience in major telecom operator business to strengthen Open RAN, system design and integration.

We are also enhancing our collaboration with Blue Danube Systems, which we previously acquired and will strengthen our development for radio units and expand our product portfolio.

Page 17 shows the execution of SDG's financing. In July, we issued JPY110 billion in sustainability-linked bonds, the largest scale in Japan. These bonds have been set with the KPI related to response to climate change. NEC will continue to promote sustainability management in the area of financing as well.

Lastly, on Page 18, we would like to inform you of NEC IR Day. This is an event focused on the capital market players. And for this year, the dates are September 7 and 8, a total of 2 days. The business unit heads and management responsible for growth businesses will explain strategies for achieving the Mid-term Management Plan 2025. We look forward to your participation.

This will conclude my explanation. Thank you for your kind attention.