NEC Corp

TSE:6701

Earnings Call Transcript 2021-Q2

[Takashi Niino, executive]

I am Takashi Niino, President of NEC. Thank you very much for taking part in today's online earnings report. I am very grateful for all your participation.

Without further ado, let's move on to the financial results for Q2 of FY ending March 2021. Page 2 is the index showing the content of my presentation.

Firstly, financial results summary. Page 4 is the summary of financial results for the first half of FY ending March 2021. Revenue decreased due to a decline in large projects compared to last year and the slowdown of business PC placement demand. Also, the deterioration of macro economy caused by COVID-19 pushed down revenue.

Despite cost reduction efforts and gain on sales of subsidiary shares, adjusted operating profit declined due to revenue decrease. Adjusted net profit was pushed down by the decrease of adjusted operating profit.

Page 5, please. First half revenue was JPY 1,315 billion while adjusted operating profit amounted to JPY 29 billion. Adjusted net profit was JPY 16.6 billion. Free cash flow was positive JPY 29.7 billion. Details on this will be provided later.

Dividend per share was set at JPY 40 at today's Board of Directors meeting, reflecting the unchanged commitment we have made in the beginning of this fiscal year.

Against our internal plan, revenue and adjusted operating income were down by JPY 70 billion and JPY 16 billion, respectively.

Page 6 shows the results by segment. Details will come later.

Page 7 is the adjusted operating profit change from last year. Against the first half of last year, business PC special demand was down by JPY 4 billion. In the absence of large projects, which were recorded in FY ending March 2020, there has been a decline of JPY 10 billion. Furthermore, investments in 5G and DX common platform posted an outflow of JPY 9 billion. Meanwhile, an improvement of JPY 3.1 billion was recorded by unprofitable projects. All these items were factored in, in our variances.

However, in the first half, market deterioration negatively impacted global enterprise and JAE, our consolidated subsidiary, hitting our operating profit by JPY 33 billion. Cost reduction, capturing a new normal demand and sales of consolidated subsidiaries shares were conducted to offset market deterioration. But nevertheless, adjusted operating profit was down by JPY 26.3 billion year-on-year.

Page 8 and beyond show the results by segment. First, Public Solutions business. Revenue decreased due to a decline in health care and local industry as well as fall in demand for business PC replacement. Adjusted operating profit was down due to decline in revenue.

Page 9, Public Infrastructure business. Revenue decreased due to a decline in aerospace/defense as well as drop in revenue of JAE, our consolidated subsidiary. However, decrease from last year in business PC replacement demand was offset by GIGA School project demand.

Adjusted operating profit was down due to the deterioration of JAE business. Excluding JAE, on an unconsolidated basis, the improvement of unprofitable projects offset the decrease in revenue and loss from underutilization of facilities. As a result, profit is flat year-on-year.

Page 10, Enterprise business. On the backdrop of decline in large retail and financial sector projects compared to the previous year as well as the decline in business PC replacements demand and the restraint of corporate IT investment in manufacturing, retail and service industries, revenue went down. Meanwhile, new demand related to new normal is emerging, and we expect it to contribute to our financial performance in the future. Adjusted operating profit decreased due to decline in revenue.

Page 11, Network Services business. With an increase in demand of new normal-related products of NETS-SI, our consolidated subsidiary, revenue went up. Despite NETS-SI's profit increase, however, due to the acceleration of development efforts for both stand-alone 5G equipment and 5G base station, which is scheduled to be shipped out in the second half and beyond, increase in development cost pushed down profit.

Page 12, Global business. Demand hike in submarine systems contributed to revenue, but due to decrease in display and wireless backhaul as well as the termination of a part of KMD businesses, which was anticipated at the time of acquisition, revenue dropped. Adjusted operating loss deteriorated due to decline in revenue, but cost reduction effort mitigated the negative impact to some extent.

Page 13 is the first half Global business results broken down into 2 categories: one, scaling back businesses; and two, continuous businesses. Scaling back businesses are comprised of energy, display and a part of KMD businesses, which will be terminated as anticipated at the time of acquisition. Both revenue and operating profit were greatly hit by the deterioration of display business. As a result, Global business revenue for first half of FY '21 declined. But even given the current backdrop, continuing businesses are showing improvements.

Regarding operating profit, when based on the continuing businesses, a dramatic improvement is observed, leading to an increase in profit.

Please note that the scheduled display business JV with Sharp is expected to be established in November.

Please turn to Page 14. Here, I will explain our order trends. Orders for the entire NEC for the first half became positive 2% year-on-year. Particularly, we had a growth of 10% in the second quarter year-on-year. Compared with the first quarter, the momentum definitely improved.

Here, now I will go into details by segment. Public Solutions and Enterprise, which tend to have a great negative impact, showed smaller negative numbers compared with the first quarter. Public Infrastructure and Network Services grew dramatically in the second quarter from the previous year. In the Global business, submarine systems maintained a good business both in the first and second quarters.

Page 15 shows free cash flow. Operating cash flow improved by about JPY 22 billion due to the decline to revenue and increased advances received. But adjusted operating profit deteriorated by JPY 26.3 billion. With the increased payment of tax and bonus, it all resulted into a deterioration of JPY 37 billion. It deteriorated by JPY 41.4 billion year-on-year.

As for our investment cash flow, with the investment into data centers settling down and with the optimized consolidated subsidiaries, we had an improvement of JPY 15.5 billion. All in all, free cash flow became positive JPY 29.7 billion.

Next, I will then explain the financial forecast for fiscal year ending March 2021. Please turn to Page 17. As for our full year forecast, there is no change from the numbers we announced back on May 12.

Please turn to Page 18. Here, I will explain the negative impact we are having due to the COVID-19 pandemic at the macroeconomic level. We originally had assumed for a full year impact of JPY 50 billion in terms of operating profit. But this time, we further analyzed the first half and actual as well as our forecast. As of today, we are assuming the negative impact of JPY 65 billion. We need to have more time before we see the infection problems gone. Its impact on us now appears to be bigger compared with the original assumption. But there is no change as for our attitude that we will try to offset this negative impact by controlling costs and by acquiring new demands coming from new normal.

May I remind you that our cost control effort is well underway as planned. We continue to control unnecessary and nonurgent cost items. By doing so, we expect it to have an improvement of JPY 22 billion on a full year basis.

Next, in regard to our efforts to acquire orders from new normal, we will get extra budget and get orders in a timely fashion. As of now, we are now seeing already JPY 6 billion out of the full year number of JPY 16 billion. So we will further work on the remaining JPY 10 billion.

As a special measure from the corporate, we plan to sell the stocks of Showa Optronics. And we announced today, we will sell the land of our Sagamihara plant. By putting them together, we expect the profit contribution as much as JPY 27 billion.

Page 19, I will here review our cash management. Liquidity on hand, including commitment line, as of the end of September, became 2.8 months of the monthly sales. With the continued efforts to free cash flow and in third-party allotments we had in July, liquidity on hand improved 0.4 months year-on-year. We will further seek to increase our liquidity on hand in order to be fully prepared against negative impact on the macro economy.

Please turn to Page 20. Here, I will introduce 2 business topics. First, NEC decided to sell the land of Sagamihara plant to Hulic Co., Ltd. Recently, the usage ratio of Sagamihara plant by non-NEC Group has increased, and the usage pattern has changed dramatically. We expect to generate JPY 16 billion in operating profit in the second half of the current fiscal year. We intend to accelerate cash generation by compressing assets so we can make more investment for growth.

Page 21. The second business topic was announced on October 5. We decided to acquire a leading Swiss financial software company, Avaloq. Avaloq holds #1 and #2 market share for wealth management software in Europe and Asia Pacific, respectively. Avaloq has a strong customer base as well as digital finance platform and data analysis solutions. NEC has its own biometrics, AI and blockchain capabilities. By combining those capabilities, we intend to fully move into digital finance business on a global scale. The acquisition price is about JPY 236 billion, and we use our own fund. The acquisition is to be expected to be completed by the end of April 2021.

This concludes my presentation. We've seen COVID-19 impact becoming a lot longer than we had thought. Its impact on our performance is expected to become bigger than we originally assumed. But by executing those measures I introduced to you today, as shortened as possible, we would like to achieve JPY 165 billion in adjusted operating profit. And that will give us a good segue to our next midterm management plan, which is going to start next year.

Thank you indeed for your kind attention.