NEC Corp

TSE:6701

Earnings Call Analysis

Robust Growth in IT and Social Infrastructure

In Q1 FY ending March 2024, the company reported a 7.1% increase in revenue to JPY 706.5 billion and a substantial increase in non-GAAP operating profit by JPY 13.8 billion year-on-year. IT Services and Social Infrastructure segments were the primary growth drivers, with their operating profits rising by JPY 7.1 billion and JPY 3.1 billion, respectively. The growth was supported by strong demand in domestic IT services, particularly from the government and enterprise sectors, with bookings in IT services up by 3% year-on-year. The full year forecast remains unchanged with expected revenue growth in IT Services of 2.6% and in Social Infrastructure of 2.1%. The company is notably taking the lead in the generative AI market for the Japanese language and forming strategic partnerships, like with BlackRock, to enhance service offerings and competitiveness.

Steady Growth amidst Evolving Business Strategy

In the first quarter of the fiscal year ending March 2024, the company presented a positive financial performance with a 7.1% increase in revenue, reaching JPY 706.5 billion. A strategic pivot towards reporting based on non-GAAP operating profit underscored an improved fundamental business performance, showing a substantial year-on-year increase of JPY 13.8 billion.

Key Performers: IT Services and Social Infrastructure

The uplifting financial results were significantly influenced by the IT Services and Social Infrastructure segments. IT Services drove the improved earnings with a JPY 7.1 billion increase in operating profit, thanks in part to digital government and finance sectors excelling with over 10% growth in revenues. Social Infrastructure also contributed with a JPY 3.1 billion increase. These gains were partly offset by a JPY 2.6 billion decrease in the Japan Aviation Electronics industry.

Overcoming Headwinds

Despite facing a decrease in adjusted operating profit by JPY 10.3 billion due to prior year's asset sales gains and increased internal digital transformation investments, the firm managed to secure an overall increase in both adjusted operating profit and non-GAAP operating profit, reflecting robust business endurance.

Booking Trends Signal Strong Demand

Positive booking trends in IT services with a 3% rise intensify the company's prospects. A remarkable 37% rise in the financial services sector points to large project influences, while retail services saw a healthy 9% uptick. The International Digital Government and Digital Finance sector also experienced an encouraging growth of 8%.

Cautious Optimism with Unchanged Full-Year Forecast

While the first quarter outcomes were consistent with expectations, the company has maintained its full-year forecast as previously announced on April 28. Investors can anticipate a steady performance with careful projections showing a 2.6% increase in IT Services revenue and a 2.1% rise in Social Infrastructure revenue forecasted for the year.

Innovation and Partnerships Shape Future

The company is not resting on its laurels, as evidenced by its foray into generative AI and partnerships with both academic institutions and heavyweights like BlackRock in asset management. Expectations are set to not just adapt but lead in transformative technologies.

Investing in Enhanced Management Infrastructure

A revamped core IT system demonstrates the company's commitment to improving efficiency and optimizing business processes. By streamlining negotiations and operations, the firm is positioning for greater control over its pricing strategies and business models.

Engaging with the Investment Community

Transparency and engagement remain priorities, with upcoming IR day and Innovations Day events scheduled, providing insights into the company's R&D strategy and future plans to the capital market participants and other stakeholders.

Earnings Call Transcript 2024-Q1

[Takayuki Morita, President & CEO]

Thank you for joining us today. I am pleased to present our Financial Results of Q1 of FY ending March 2024, which we announced today. The contents of today's presentation are listed here. I will now explain the results for the first quarter of FY ending March 2024. Page 4. Summary of the financial results of Q1 of FY ending March 2024. Revenue was JPY706.5 billion, an increase of 7.1% year-on-year. Adjusted operating profit was JPY0.5 billion, an increase of JPY7.4 billion from the previous year.

Starting from this fiscal year, we report non-GAAP operating profit and net profit. Non-GAAP operating profit is an indicator of our fundamental business performance. It is defined as operating profit minus items such as the amortization of intangible assets recognized in acquisitions, M&A related expenses, one of restructuring related expenses, impairment losses, stock-compensations and other one-time gains and losses. The non-GAAP operating profit was JPY0.6 billion, an increase of JPY13.8 billion year-on-year. The adjustment items used in converting GAAP to non-GAAP are shown on supplementally document, Pages 23 and 24.

Page 5 shows the results by segment. The final adjusted results were driven by the changes in IT Services and Social Infrastructure. Specifically speaking, the operating profit of IT Services and Social Infrastructure increased by JPY7.1 billion and JPY3.1 billion, respectively. I will explain the details of each segment later, but please note that both revenue and adjusted OP increase in both IT services and social infrastructure. And others, there was a decrease of JPY2.6 billion attributable to Japan Aviation Electronics Industry.

Adjusted operating profit decreased by JPY10.3 billion year-on-year, mainly due to the absence of gains on sales of assets recorded in the previous fiscal year and an increase in internal DX investments. Given all these factors, total adjusted operating profit and non-GAAP OP increased by JPY7.4 billion and JPY13.8 billion, respectively, over the previous year.

Page 6 is by segment highlighting the IT services. In the lower right hand corner, you see the breakdown between Domestic and International Business, which includes digital government and digital finance. Revenue and adjusted OP are shown for your reference. Revenue increased more than 10% year-on-year driven by domestic sales and strong demand of enterprises and government public sector. Adjusted operating profit also increased due to higher revenue and improvements of profitability in system integration business.

Page 7, booking trends of IT Services. The breakdown is shown by domestic and International DGDF segments and by major industrial segments. All-in-all, IT services increased by 3% year-on-year, of which 2% is driven by an increase in domestic orders. Domestic public sector continued to perform well recording an increase of 6% driven by the government sector. Enterprise booking rose 16% maintaining its momentum.

By industry, the financial services sector recorded a large increase of 37% driven by large projects. Even excluding these large projects, the growth was almost double-digit. The manufacturing sector grew by 5% in FY ‘22 March and FY ‘23 March, respectively and kept its steady momentum in Q1. Retail services was up 9% with an increase in service related projects. Others in domestic segment was down 14%. The order received in Q1 was small, given the fact that the renewal of fire-fighting/disaster prevention systems is just around the corner. International DGDF increased by 8% led by NEC Software Solutions UK.

Page 8, Social Infrastructure. In the lower right hand corner, you'll see the revenue and adjusted OP of Telecom Services and Aerospace and National Security ANS for your reference. Revenue increased due to international businesses mainly from submarine systems and OSS, BSS in telecom services. Adjusted operating profit increased in line with the revenue growth.

Next is the March 2024 forecast. Page 10 shows the forecast figures for the full year. Since the first quarter results were in line with our expectation, the full year forecast announced on April 28 was kept unchanged.

Please refer to Page 11 for revenue and adjusted operating profit by segment. I will give you more details on the following pages for the IT Services and Social Infrastructure segments.

First, the IT Services segment on Page 12. Revenue is expected to increase by 2.6% over the previous year, as we expect a strong demand in the domestic private sector market. Adjusted operating profit is projected to increase by JPY9 billion over the previous fiscal year, due to higher profits from increased revenue in Japan and improved profitability in overseas DGDF.

Page 13 shows Social Infrastructure. Revenue is projected to increase by 2.1%, due to expected revenue growth in both Telecom Services and ANS. Adjusted operating profit is expected to improve by JPY21.2 billion, mainly due to the absence of one-time factors, which we had in the previous year in Telecom Services.

Lastly, we have a couple of topics, we would like to discuss. The first topic on Page 15 is generative AI. On July 3, we announced the development and the provision of a generative AI model for the Japanese market. In addition to the world class, Japanese language proficiency and the lightweight LLM or a large language model developed by NEC, we will provide a one-stop service that contributes to the business transformation of our customers by leveraging the technologies of our global partners.

In addition, we have launched a program to provide services, starting with approximately 10 companies and universities. Since announcing the development and a provision of generative AI on July 6, we have received several hundred inquiries in just a few days. While many other players in the domestic market have only expressed their intention to develop such a model. NEC has taken the lead in providing actual services and aiming to expand its business.

Next, on Page 16. You can see information related to our subsidiary Avaloq. The company has entered into a partnership with a U.S. Asset Management company, BlackRock to provide integrated solutions to wealth managers and private banks. By combining the strength of both companies, we will strengthen our competitiveness in the market and expand our business through approaches that include cross-selling to a wide range of customers.

Page 17 is about enhancement of the management infrastructure. To upgrade our management infrastructure, we have revamped our core IT system as a flagship of this airport. The first phase product has already been in operation during this fiscal year ending March 2024. By standardizing and digitalizing the business negotiation process, across the entire company and accumulating and visualizing relevant information. We'll be able to set optimized pricing before going to the negotiation stage and improve operational efficiency by streamlining and optimizing business processes.

Finally, on Page 18, I would like to inform you of the events we'll be holding. First is the IR day. This event is held for the Capital Market participants and will be held in the last week of November this year. The managers of each business area will explain about their activities to achieve the midterm management plan 2025.

Next is the NEC Innovation Day. This event will be held for the media, IT analyst and the Capital Market participants. The event will be held on December 15 this year. And we will explain about NEC's R&D strategy and a new business creation strategy. We will inform you of the detailed schedule, program, and participation method on a separate notice to be served on a later day. We look forward to your participation.

That concludes my presentation. Thank you very much for your kind attention.