NEC Corp

TSE:6701

Earnings Call Transcript 2020-Q2

[Takashi Niino, executive]

I am Takashi Niino, CEO and President of NEC. Thank you very much for gathering today despite rain and the given time of the day. Now let me explain to you the earnings results of Q2 FY ending March 2020.

Page 2 is the Table of Content. Firstly, I will walk through the first half results, then talk about our forecast, ending with the progress of our Mid-term Management Plan 2020.

Financial results for the first half. Page 4. Revenue was JPY 1,449 billion with adjusted operating profit of JPY 55.4 billion. Income before income taxes was JPY 46.1 billion, while adjusted net profit was JPY 34.3 billion. Free cash flow was positive JPY 55.6 billion, year-on-year improvement of JPY 72.8 billion. Details will be provided later. Dividend of JPY 30 per share was finalized today at the Board of Directors meeting, as has been stated at the outset of the fiscal year. Against our first half internal forecast, revenue and adjusted net profit outperformed by JPY 80 billion and JPY 15 billion, respectively.

Page 5. Results of the first half by segment. Aside from others that was impacted by the sales of Electrode business, remaining segments revenues all increased. Adjusted operating profits went up in all segments as well. Against our internal first half forecast, adjusted operating profits over achieved, especially in Public and System Platform segments.

For your reference, we have provided to you the information on operating profit loss, adjusted operating profit loss and the details of adjusted items on Page 6. First half total adjustment was JPY 8.5 billion.

Page 7 illustrates the impact of business structure improvement undertaken in FY '19. March 2020, first half structural improvement impact was a total of JPY 15 billion, a result in line with our expectations of the initiative pursued in FY '19.

From the next page, I will explain the results by segment. Page 8, Public business. Japan Aviation Electronics revenue was down, but was more than offset by the increase in public solutions and public infrastructure areas, resulting in the revenue of JPY 418.1 billion, up 4.4% year-on-year. And due to increase in sales in IT services for local governments and aerospace defense areas, operating profit improved by JPY 13.4 billion, landing at JPY 26.3 billion.

Page 9, Enterprise business. Due to reclassification of Office 365 license business, revenue was enhanced by JPY 15 billion. Nonetheless, even without this special factor, thanks to the increase of sales to financial sector, revenue was up by 4%. Even with the booking of unprofitable projects due to the increase in sales, operating profit hiked by JPY 1.5 billion year-on-year, ending at JPY 17.5 billion. Please note that the positive impact of reclassification on profit was negligible.

Page 10, Network Services business. In addition to the strong demand of fixed network required for upcoming 5G, NEC Nets, SI of subsidiaries sales increase, which was further accompanied by the sales increase of IT services area. All of these contributed to the revenue of JPY 225.6 billion, up 11% year-on-year. Business with Rakuten mobile also boosted our first half revenue. Along with the hike in revenue, the improvement of unprofitable project recorded in the first half of FY '19 pushed up operating profit by JPY 6.6 billion, recording JPY 11.6 billion.

Page 11, the System Platform business. The sales of hardware, such as PC and servers for business increased and driving revenue to JPY 263.7 billion, up 16.7% year-on-year. With business structure improvement as a tailwind, strong sales pushed up operating profit by JPY 15.8 billion year-on-year, ending at JPY 20.8 billion.

Page 12, Global business. KMD's consolidation and increase of sales of submarine systems boosted revenue to JPY 243.6 billion, up 23.3% year-on-year. With the improvement of Safer Cities, service provider, wireless backhaul and submarine systems, operating profit was JPY 900 million, up JPY 3.6 billion year-on-year, leading Global business to turn into black in the first half.

Page 13, let me elaborate on Global business. The bar graph on the left illustrates the rough breakdown of revenue by major business units. And due to the consolidation of KMD, Safer Cities' revenue hiked dramatically as compared to the previous year. The increase of orders from FY 2019 contributed to the revenue enhancement of submarine systems. While the increase in sales of Safer Cities and submarine systems led to an uplift of profit, the improvement of profitability of wireless backhaul and service provider turned the businesses into black in the first half.

Meanwhile, although the revenue of Energy was up. And due to the booking of an unprofitable project, its profit was down. Likewise, amidst the heightening of competition, profit of display declined as well.

Page 14 shows in free cash flows. Allow me to explain our major factors and for the improved free cash flows. As for our operating cash flow, adjusted operating profit became about JPY 37 billion. With the collection of receivables and at the year-end and there was the improved working capital due to the enhanced asset efficiency, operating balance improved by about JPY 27.5 billion -- on top of that, we had an impact of about JPY 26.5 billion due to the application of IFRS 16 as much as JPY 26.5 billion -- on the other hand, and the cash flow from investing activities went down about JPY 18 billion due to the investments we made into our data centers and the new business operations. All in all, our free cash flow improved by JPY 72.8 billion year-on-year. Due to IFRS 16 and for leases, our first half and balance sheet shows an increase of interest-bearing debt as much as JPY 170 billion.

Next allow me to explain our financial forecast for FY 2020. Please look at Page 16. The first half actual turnout will be in a better than our internal forecast. But going forward, we have to make further improvements and for better profitability and future growth. What we have to revisit and how we can execute our actions in order to strengthen our corporate stamina, which is important in mind, we have not changed the full year forecast, which was announced on April 26.

Page 17. Here, I would like to explain the orders and trend in the first half for Japan. As you see here, we have sustained a favorable half performance and continuing from the first quarter.

In Public, we grew centered around the local governments and central public agencies and health care institutions and the broadcasters. We maintained a higher level of enterprise business performance.

In Network and Services, we were able to increase our fixed line infrastructure development and for the upcoming deployment of 5G, giving us growth opportunities, particularly coming from the domestic fixed line carriers.

System Platform grew in orders, thanks to the strong growth in business personal computers tethered by Windows 10 migration. Hardware, as a whole, grew in orders.

Page 18, here, I would like to explain our full year outlook. Supported by a favorable business environment, both sales and profit increased in all segments for the first half. We achieved higher profits than initially expected in the first half, driven particularly by the Public and the System Platforms. We will continue on our best efforts in order to achieve better performance than expected for the full year as well.

Looking at the international side, though we became profitable in the first half, but Energy and the Display businesses and fell short of the original plans. So we believe we still have some risks vis-à-vis in our full-year plan. So we will strive to make further efforts in order to eliminate those risks. And as I said at this point earlier, we will address these challenges, how to improve our future performance as well as our profitability by making extra growth investments and by improving our basic corporate stamina.

Lastly, I will then explain our NEC's Mid-term Management Plan 2020. Page 20. Here, I would like to explain the current status of our Global business.

First, in terms of profit and loss, we achieved a profit in wireless backhaul and Service Provider Solutions in the first half. Thanks to this, actually, we became profitable for the entire Global business. We are enjoying a rather good progress of PMI and following the M&A of NPS and KMD. As for the partnership with the Star Alliance, we will accelerate our best efforts, and so that we can launch our services by March 2020.

On the side of the Service Provider Solutions, we are also making steady progress in the space of virtualization project for Tier 1 European carriers.

Page 21. Here, I would like to explain any sales biometrics initiatives. NEC achieved the #1 ranking in NIST or the National Institute of Standards and Technology facial recognition testing for the fifth time. We believe that we were able to improve our competitiveness here. We are further promoting our cocreation activities with our customers. For example, Seven Bank decided to use our face recognition technologies and for Asian ATMs, which was announced recently. With Lawson on how we are now engaged in unmanned or on a smart store as a proof of concept, utilizing our face recognition technologies.

We are broadening our ESG activities. NEC would like to make further contributions to find solutions into the social issues by working with UN, WFP and GAVI, Global Alliance for the Vaccines and Immunization.

Page 22, I will explain here our 5G initiatives. We started on a shipping 5G base station radio units into NTT DOCOMO. We are happy to inform you that we have received an order from Rakuten Mobile Inc. On top of them, we are now having a much wider and broader hand in cocreation activities and the PoCs, such as in railways, retail, construction and manufacturing.

We honor that we are providing a next-generation commercial radio systems for trials at the Rugby World Cup 2019, which will have its final match this weekend.

Page 23. Here, I am quite happy to explain our project rise and progress aiming at the restructuring our execution capabilities.

We are now working on a project-wise in order to create our next NEC history. We are trying to transform our own culture. For your information, we created on the third floor in this building, a coworking space, BASE. We are also engaged in promoting our teleworking practices and others. We are also on a mission to renovate our systems, particularly on the side of human resources. This new HR systems are now applied both at home and abroad. For more transparency and accountability, we renovated our corporate and officers appointment system. We worked on many reforms, including IR day in July, involving a variety of stakeholders.

Lastly, I may remind you that FY 2020 is our turnaround year for NEC. We are here in this second half to execute our plan to the fullest possibilities and so that, we will further grow our business and improve our profit. And by doing so, we will achieve NEC Mid-term Management Plan 2020.

This concludes my presentation. Thank you, indeed, for your kind attention.

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