NEC Corp

TSE:6701

Earnings Call Analysis

Company's Q1 FY2025 Performance and Future Outlook

In Q1 FY ending March 2025, the company generated JPY 690.3 billion in revenue, dipping by 2.3% due to the deconsolidation of JAE. Adjusted and non-GAAP operating profits significantly improved to JPY 12.7 billion and JPY 16.3 billion, respectively. IT services and social infrastructure segments saw revenue and profit growth, with strong booking trends, particularly in public and manufacturing sectors. Telecom services revenue declined because of decreased global 5G revenue. The company reaffirmed its FY ending March 2025 forecast and introduced BluStellar, an AI-driven value creation model to accelerate customer business transformations, aiming to achieve its midterm margin plan by 2025.

Introduction to Financial Results

The recent earnings call presented the financial results for Q1 of the fiscal year ending March 2025. The company reported a revenue of JPY 690.3 billion, marking a year-on-year decrease of 2.3% due to the deconsolidation of Japan Aviation Electronics (JAE). Despite the dip in revenue, the adjusted operating profit surged by JPY 12.2 billion to JPY 12.7 billion. The core business performance, measured by non-GAAP operating profit, saw an impressive increase of JPY 15.7 billion, reaching JPY 16.3 billion. Non-GAAP net profit also rose significantly to JPY 10.5 billion, indicating an increase of JPY 11.9 billion from the previous year.

Changes and Contributions to Profit

A clear picture of the factors contributing to these changes in profit was detailed. Improvements in operations contributed JPY 17.2 billion across different segments: JPY 6 billion from IT services, JPY 10.4 billion from social infrastructure, and JPY 0.8 billion from other segments. However, the deconsolidation of JAE negatively impacted non-GAAP operating profit by JPY 1.5 billion. Despite this, the total non-GAAP adjusted items amounted to JPY 3.6 billion, primarily composed of structural reform expenses, including JPY 1.5 billion for terminating services with a partner and JPY 2 billion related to KMD of international IT services.

Segment Performance

Diving into the segment-wise performance, the IT services segment demonstrated growth in both domestic and international markets. However, domestic adjusted operating profit fell by JPY 700 million due to one-time structural reform expenses, which are expected to balance out over the year. International profits rose, attributed to higher revenue and improved profitability at Avaloq. In terms of bookings, domestic IT services saw a 13% increase year-on-year, with a notable 32% increase in the public sector driven by large projects and municipal government initiatives. Enterprise sector bookings grew 2%, while manufacturing and retail services grew 13% and 10%, respectively.

Social Infrastructure Analysis

The social infrastructure segment saw a decline in telecom service revenue, down due to the deconsolidation of wireless backhaul and a global 5G revenue decrease. However, profitability improved significantly due to efficient management of development expenses and resource reallocation. The aerospace and national security (ANS) division performed well, leading to increased revenue and profit through steady project execution.

Financial Forecast and Strategic Initiatives

The earnings call reaffirmed the financial forecast for the fiscal year ending March 2025, with no changes from prior announcements made in April. Additionally, the call highlighted the launch of BluStellar, a value creation model aimed at driving digital transformation (DX) and incorporating AI across all stages from concept to service delivery. This initiative is expected to support the company's midterm margin plan for 2025. Strategic collaborations, such as a partnership with Toray Engineering for generative AI in manufacturing, and another with SoftBank in biometric authentication, were also emphasized.

Human Resources and Corporate Developments

The company is focusing on developing both in-house talent and wider digital skill dissemination through DX human resources development programs for approximately 420 companies and over 30,000 individuals. Introducing digital employee ID cards for 20,000 employees is part of this digital transformation effort. Furthermore, a new organizational structure dedicated to generative AI will be established, consolidating business and product development functions related to this technology.

Future Events

For investors and analysts, important upcoming events include IR Day on October 7, and NEC Innovation Day on November 27. These events will cover detailed strategies and progress towards the company’s midterm management plan and offer insights into the ongoing innovation and business transformation initiatives.

Earnings Call Transcript 2025-Q1

[Osamu Fujikawa, executive]

Thank you for joining us today. Let's go through our financial results for Q1 FY ending March 2025. The contents are shown here, the results for Q1 FY ending March 2025. Please note that as we have announced in our July 23 press release, the segment results now include the corporate expense allocations, which previously came under adjustments.

Page 4, summary of Q1 FY ending March 2025. Revenue was JPY 690.3 billion. Year-on-year decrease of 2.3% is attributable to the deconsolidation of JAE, Japan Aviation Electronics Industry. Adjusted operating profit was JPY 12.7 billion, an increase of JPY 12.2 billion from the previous year. Non-GAAP operating profit, which measures the performance of the core business, was JPY 16.3 billion, an increase of JPY 15.7 billion year-on-year. Non-GAAP net profit was JPY 10.5 billion, an increase of JPY 11.9 billion from the previous year.

Please refer to Pages 20 and 21 of the appendix for the reconciliation of GAAP profit to non-GAAP profit. The details by segment will be explained later, but both IT services and social infrastructure posted increase in both revenue and profit. In others, both revenue and profit declined. This is due to the deconsolidation of JAE.

Page 5 shows the factors contributing to the changes in adjusted and non-GAAP operating profit. Adjusted operating profit for FY March 2024 was JPY 0.5 billion, and non-GAAP operating profit was JPY 0.6 billion. Starting from these figures, we have improved operations by JPY 6 billion in IT services, JPY 10.4 billion in social infrastructure, and JPY 0.8 billion in others, a total of JPY 17.2 billion improvement in marginal profit and profitability.

The deconsolidation of JAE resulted in a negative impact of JPY 1.5 billion, bringing non-GAAP operating profit to JPY 16.3 billion in Q1 of FY ending March 2025. Non-GAAP adjusted items totaled JPY 3.6 billion, which mainly consists of structural reform expenses. Approximately JPY 1.5 billion of structural reform expenses is attributable to the cost of terminating services conducted with a service partner and the domestic IT cross-industry subsegment. The remaining JPY 2 billion was incurred in relationship to KMD of international IT services, in other words, DGDF business. The net result of the adjusted operating profit was JPY 12.7 billion.

From Page 6 by segment information. First, IT services. Revenue increased for both domestic IT and international. Adjusted operating profit in Japan deteriorated by JPY 700 million due to onetime expenses. This was due to the recording of structural reform expenses as explained on Slide 5. In addition, a change in the subsidiary company's compensation scheme led to an increase in onetime expenses in Q1, which will level out over the full year. Overseas adjusted operating profit increased due to higher revenue and improved profitability at Avaloq. We believe that the measures we have been taking to improve profitability are steadily progressing and showing positive results.

Page 7 shows the booking trend of domestic IT services. Overall domestic IT services booking increased 13% year-on-year. Excluding NEC Facilities Ltd., which is subject to high volatility, booking increased 15%, reflecting the momentum of robust demand. By sector, public was up 32%, a significant increase brought above by large projects and an increase in municipal governments platform commonization projects. Even excluding the large projects, public grew by more than 10%.

Enterprise grew 2%. By industry, finance declined 7%, but excluding the large projects of the previous year, it maintained a double-digit growth, maintaining its strong momentum. Manufacturing increased 13%, given a hike in DX-related projects. Retail and service rose 10% due in part to the acquisition of large projects. In others, ABeam Consulting continued to maintain its robust momentum, posting an increase of 19%. As described, booking is trending favorably, and we are steadily building up projects to achieve our annual goal.

On Page 8, I'll talk about social infrastructure. The revenue of telecom service has declined due to the deconsolidation of wireless backhaul and also the global 5G revenue decline. Adjusted operating profit have been significantly improved due to the making expenses efficient of the development expenses and resource shifting. In ANS, aerospace and national security, we have excluded the obtained projects in a steady manner that therefore, has increased revenues and profits.

Next, I'll talk about FY ending March 2025 forecast. On Page 10, this is the financial forecast of FY ending March 2025. We have -- there is no change from the numbers that we have announced in April 26. On Page 11, this is the information in regards to the -- per each segment. The corporate-wide expenses, which have been accounted in the adjustment, has been allocated to each segment, so we will show the revenue and adjusted operating profit. On Page 12, entire IT service and domestic international DGDF. These numbers are shown here. On Page 13, entire social infrastructures, telecom service, ANS. These numbers are shown here.

Lastly, I'll talk about some topics. In May, we have started -- we launched BluStellar, a value creation model that will lead our customers into the future. We will strengthen our existing DX initiatives and accelerate our customers' business transformation to create a new value. A feature of BluStellar is that it uses AI, artificial intelligence, in all processes from concept formulation to service delivery, operation and maintenance, evolving from the traditional SI business and maximizing customer value.

We also position AI technology, which brings together cutting-edge technologies and [indiscernible] business process transformation and security, which is essential for the operation of safe and secure social infrastructure as key technologies. In addition, we will strengthen and expand our business through strategic collaboration and global hyperscalers and co-creation with approximately 400 partners such as co-creation partner programs.

In terms of human resources, we will not only develop in-house human resources, but also promote the penetration of digitalization by providing DX human resources development programs to approximately 420 companies and more than 30,000 individuals. In this way, we will realize our customers' business transformation by evolving business models, technologies, organizations and human resources.

Page 16 introduces BluStellar's initiatives. Specific examples include a demonstration project with Toray Engineering, which aims to utilize generative AI in the manufacturing industry, and a strategic partnership with SoftBank, which focuses on the biometric authentication field.

In addition, the company will introduce digital employee ID cards to its 20,000 employees as client zero, with the company as its zero client. In addition, we -- a promotion structure, a new organization of about 200 people will be launched in August that will consolidate business and product development functions related to generative AI. NEC will position BluStellar as a growth engine to achieve its 2025 midterm margin plan and further accelerate its DX business.

Finally, on Page 17, here are the information about future meetings. First, IR Day. This is an event for those in the capital market and the sixth time. It will be held on October 7. In addition to the heads of each business area, the responsible person of each business domain, they will explain their efforts to achieve their midterm management plan 2025. We are planning a session by external directors, which was highly requested by the capital market. We will also hold NEC Innovation Day. This event is aimed at media and IT analysts and the capital market people and will be held on November 27 this year.

Details of schedules, programs and participation method will be announced later. And I hope that you will participate in these events. That's all the explanations. Thank you very much for listening.