NEC Corp

TSE:6701

Earnings Call Transcript 2022-Q2

[Osamu Fujikawa, executive]

Thank you very much for joining us today. I will brief you on the Q2 FY '22 March results announced today.

This is today's agenda. Page 5, Summary of Financial Results for the first half FY '22 March. Revenue was JPY 1,382.8 billion, up 5.2% year-on-year, reflecting the increase in sales in both domestic and overseas businesses. Given the recovery of the domestic market, IT and 5G businesses trended favorably. With Avaloq being newly consolidated, global business grew, supported by the expansion of DG and DF. Adjusted operating profit was JPY 42.1 billion on year-on-year improvement of JPY 13.1 billion, reflecting our capability to steadily capture the market recovery. Variances will be explained later. And due to the improvement of adjusted operating profit, adjusted net profit was JPY 26.1 billion.

Page 6. As you can see, major indices have improved year-on-year. Second results are shown here, too. Details will follow. Free cash flow was positive JPY 1.1 billion. I will elaborate on it later.

Page 7 shows the changes of adjusted operating profit versus the first half of FY '21 March. Let's start on the profit of JPY 29 billion of FY '21 March. While there was an absence of onetime profit of JPY 11 billion recorded in the previous year, we registered a onetime profit of JPY 8 billion from the sales of real estate in Q1 this fiscal year, positive and negative factors of operation. Firstly, negative components. Due to an increase of unprofitable projects in public infrastructure, we recorded an outflow of JPY 3 billion. Also, impact on component shortage, semiconductor, in particular, dampened the profit by another JPY 3 billion. Transfer of NEC Energy Solutions shares lowered profit by JPY 1.5 billion. In total, negative factors amounted to JPY 7.5 billion.

About the impact of component shortage. Due to the component supply delay and product shipment, especially data servers and storage that belong to the general-purpose IT, service-related business were impacted. Now positive factors. The market recovered from the dip of COVID-impacted FY '21 and enjoyed growth in 5G business, resulting in an improvement of JPY 36.6 billion. In the first half, JPY 13 billion was invested as strategic expenses, breakdown being JPY 7 billion for 5G and JPY 2 billion each for Core DX, Internal DX and HR. As a result, first half FY '22 March, adjusted operating profit was JPY 42.1 billion.

Page 8, Order Trends. In the first half, total orders decreased by 3%. However, setting aside the large projects of Submarine Systems that fluctuate quarter-over-quarter as well as the Display business, which was not consolidated in November 2020, all this increased by 2% year-on-year.

By segment. Firefighting and disaster prevention of Public Solutions declined, recording a negative growth. However, public and health care trended favorably. Next, Public Infrastructure. In the absence of GIGA School project of last year, Public Infrastructure was down. However, excluding this, National Defense fared well, recording an increase of 6%. Enterprise increased by 4%. Excluding NEC facilities that received data center order last year, the increase of the first half was 6%. IT service business for the Enterprise customers belonging to finance and manufacturing sectors trended favorably. Network Services grew by 5%. Excluding last year's [ 6 ] GIGA School project, the increase was 19% with the expansion of 5G demand being a major contributor. Next Global. Excluding Submarine Systems and Display business, the order was flat year-on-year, indicating a steady trend.

Pages 9 and onward show results by segment. Firstly, Public Solutions business. Local government and regional industries revenue decreased. Due to an increase in sales-related costs, adjusted operating profit was down by JPY 700 million.

Page 10, Public Infrastructure business. Since the broadcasting and media sector has completed its upgrade for now, revenue in this sector declined. However, given the increase in Japan Aviation Electronics business, Public Infrastructure's revenue rose. Despite an increase of unprofitable projects due to an increase in revenue, adjusted operating profit improved.

Page 11, Enterprise business. Sales from all domains such as manufacturing, retail/services and finance fared well, resulting in a revenue hike, which uplifted adjusted operating profit as well.

On Page 12, Network Services. 5G revenue increased dramatically, but stayed at the same level as last year due to the decrease of consolidated subsidiary sales such as GIGA school. Operating profit increased despite an increase in strategic expenses of JPY 8 billion, thanks to revenue increase in 5G and also by profitability improvements.

Page 13 is Global business. Revenue increased in digital government and digital finance areas, partially due to consolidating Avalog. Service Provider Solutions revenue also increased. Adjusted operating profit improved by JPY 15.8 billion, approximately JPY 7 billion from portfolio optimization, the remaining JPY 9 billion due to revenue growth and improved cost efficiency.

Page 14, please find free cash flow. Operating cash flow and adjusted operating profit increased by JPY 13.1 billion, but working capital increased by JPY 54 billion, and therefore, operating profit went down by JPY 43.3 billion. Working capital increased due to material purchase, expecting sales demand pickup and also due to delayed shipment due to component shortage. On the other hand, cash flow from investing activities improved by JPY 14.7 billion, mainly due to the sales of investment securities. As a result, free cash flow was a positive of JPY 1.1 billion.

Now let me go to the financial forecast. As you can see on Page 16, there is no change in the financial forecast for FY '21. Compared to the annual budget, DX and 5G demand is strong, but there is a risk of component supply shortage, mainly with the semiconductors and the macroeconomic situation is still not clear. And therefore, we decided to keep the full year forecast unchanged.

On Page 17, I'd like to explain the countermeasures for component procurement risks. Due to the concern of supply shortage in the market, inventory buildup is more prominent. Management is very keen on this issue vis-à-vis the situation. Concrete countermeasures are already discussed and implemented and the impact of delay in the first half is likely to be resolved in the second half. As regards to the impact expected in the second half, company will absorb the impact by taking the countermeasures, shown on this page, thoroughly with agility.

Lastly, but not the least, I would like to introduce the topics mainly on growth business in the medium-term management plan for 2025. Page 19, firstly, business to expand global 5G and overseas markets. NEC entered an agreement with Telefónica to conduct Open-RAN precommercial trials in 4 global markets, namely Spain, Germany, the U.K. and Brazil. We are enhancing our undertaking as a leading open RAN vendor in the overseas markets to establish the leading position.

The second area is the digital government/digital finance area. NEC Software Solutions U.K. intends to acquire U.K. Capital Group's software business for U.K. police forces. Bolt-on M&A will enhance the assets of our strength and NEC will strengthen and expand the customer base in this area.

Page 20 shows our collaboration with hyperscalers as one of the important areas of Core DX. NEC concluded strategic collaboration at the corporate level with AWS in November last year, and we are now expanding the collaboration in global 5G and the digital government area as well. The company will contribute to support accelerated DX of our customers, including the telecom operators. In the other area, NEC has been contracted by Facebook as a supplier of ultra high-performance submarine cable, connecting Europe and the United States. Submarine cable demand from OTT operators are likely to increase in the future, and we are ready to acquire more business in this area.

Lastly, let me inform you on ESG briefing and NEC Innovation Day. These are the events for the Capital Market participants and to the media. ESG briefing is planned on December 10 to cover nonfinancial activities and also our environmental initiatives. NEC Innovation Day will be on December 17 to cover new business development and research and development. I hope you'll find the time to participate those events as well.

This concludes my remarks. Thank you very much for your attention.