NEC Corp

TSE:6701

Earnings Call Analysis

Strong Revenue Growth and Strategic Reorganization Insights

In the second quarter of FY 2025, the company reported a revenue of JPY 1,486.7 billion, marking a 3.5% increase year-on-year. Non-GAAP operating profit rose to JPY 64.8 billion, influenced by stronger performance in IT Services and Social Infrastructure. In IT Services, total bookings rose 17%, driven by public sector projects. The company targets maintaining its revenue plan with an annual forecast unchanged since October. A strategic tender offer for NEC Networks aims to consolidate services for local governments and SMEs, enhancing efficiency. Overall, the firm remains positioned for growth, capitalizing on digital transformation demands.

Strong Revenue Growth and Margin Improvements

In the second quarter of fiscal year 2025, the company reported robust financial results with revenues reaching JPY 1,486.7 billion, marking a 3.5% increase year-on-year. The non-GAAP operating profit was JPY 64.8 billion, reflecting an increase of JPY 25.2 billion compared to the previous year. This solid performance indicates the company's steady progress towards its annual targets.

Sector Performance Highlights

The IT Services and Social Infrastructure segments demonstrated particularly strong growth, with both revenue and profit improving. The IT Services segment saw total bookings surge by 17%, excluding high volatility from NEC facilities, indicating strong ongoing demand. Specific sectors like public services experienced significant growth, with bookings up 38% due to large projects.

Challenges in Telecom Services

Conversely, the Telecom Services division faced challenges, with revenue declining year-on-year due to the deconsolidation of the wireless business and lower global 5G revenue. However, adjusted operating profit showed improvement thanks to more efficient development expense management.

Guidance Maintained Amidst Market Dynamics

Looking ahead, the company reiterated its full-year guidance, with no changes to the forecasts previously announced. The anticipated revenue growth remains on track, supported by an increasing order pipeline and positive booking trends from international operations.

Strategic Reorganization to Enhance Local Government Offerings

A significant strategic initiative announced during the call is a tender offer for NEC Networks, aimed at consolidating resources across NEC's IT services for municipalities and SMEs. By making NEC Networks a wholly-owned subsidiary, the company plans to optimize service delivery, further enhancing their capabilities in delivering end-to-end digital transformation solutions.

Focus on Innovation and High-Profit Projects

The first half of the fiscal year also witnessed a 40% increase in orders for BluStellar products. This growth was fueled not only by enterprise clients but also by large-scale public sector projects. The company is actively expanding its high-profit offerings, particularly in AI and security, aiming not just for revenue growth but for enhanced profitability as well.

Engagement with Stakeholders

The company is focused on maintaining open lines of communication with investors and analysts. It plans to host the NEC Innovation Day on November 27, highlighting their ongoing commitment to transparency and engagement with the capital markets.

Earnings Call Transcript 2025-Q2

[Motoo Nishihara, executive]

I will now present our financial results for the second quarter of fiscal year ending March 2025, which was just announced today. The content of my presentation are as shown on the slide.

I will now explain the results for fiscal March 2025 2nd quarter. Page 4 is a summary of financial results for the first half. Revenue was JPY 1, 486.7 billion, non-GAAP OP was JPY 64.8 billion. Excluding the effect of JAE, Japan Aviation Electronics consolidation, both revenue and profit increased year-on-year, with revenue up 3.5% and non-GAAP OP up by JPY 25.2 billion. The first half results were in line with our expectations and show steady progress towards the annual budget.

Page 5 shows major metrics. Page 6 shows the results by segment. I will explain the details later. But both IT Services and Social Infrastructure showed a positive increase in revenue and profit. Others showed a decrease in revenue and profit due to the deconsolidation of JAE.

Page 7 shows a variance analysis of adjusted OP and non-GAAP OP. Adjusted OP for FY March '24 was JPY 45.8 billion and non-GAAP OP JPY 46.1 billion. On top of this, from improvement operations, we had JPY 13.7 billion in IT Services, JPY 11.3 billion in Social Infrastructure and JPY 0.2 billion in Others. Total improvement in operations amounted to JPY 25.2 billion. The deconsolidation of JAE had a negative impact of JPY 6.5 billion, resulting in non-GAAP OP of JPY 64.8 billion.

Non-GAAP adjusted items included negative JPY 3.8 billion from structural reform expenses recorded in Q1, resulting in adjusted OP of positive JPY 61 billion. Please refer to Pages 26 and 27 for the details of reconciliation from GAAP profit to non-GAAP profit.

From Page 8, I will explain the results by segment, starting with IT Services. Revenue showed a favorable trend, both in Japan and overseas. Adjusted OP increased year-on-year due to higher sales in Japan and the profit improvement at Avaloq and other overseas entities showing a steady progress.

Page 9 shows the booking status of domestic IT Services. Total bookings increased by 17% compared to the same period last year. Excluding NEC facilities, which has a high volatility, total booking increased by 18%, indicating continued strong demand. By domain, public is up 38%, driven by acquisition of large projects and increasing local government's platform standardization project. Even excluding large-scale projects, the increase was approximately 10%. Enterprise is up 2%. By sector, finance is down 11%. But excluding large projects of the previous fiscal year, it was up year-on-year, showing a positive momentum. Manufacturing was up 11% due to an increase in DX-related projects. Retail and services is up 14%, driven by the acquisition of large projects.

In Others, ABeam Consulting continued to perform well with an increase of 14%. The ongoing order taking environment is as strong as in Q1, enabling steady accumulation of projects towards achieving the annual target.

Page 10 shows the progress of DGDF, our international business, which is the progress against the annual revenue target, based on actual revenue recorded for the first half as well as projected revenue from orders already received at our 3 European entities. Compared to the 87% progress as of the end of Q2 last year, the progress this year is already 89%, meaning we should be able to achieve the annual revenue plan this year. We will continue to win more projects to make the achievement even more certain.

Page 11 is social infrastructure. Revenue from Telecom Service is down year-on-year due to the deconsolidation of the Wireless business and decrease in global 5G revenues, adjusted OP improved dramatically Y-o-Y due to improved efficiency of development expenses as well as resource shifting. ANS or Aerospace and National Security increased both revenue and profit, through the steady execution of projects.

Our project acquisition is also progressing well with only those projects already acquired in the first half, we should be able to achieve the revenue plan for this year. Next, financial forecast for FY ending March 2025. Details are shown here on Page 13, there is no change from the annual forecast that was announced on October 7 at our IR Day.

Page 14 is the details by segment. Page 15 provides the total results of our IT services and the breakdown between domestic and international DGDF businesses. Likewise, Page 16 shows the total figures of social infrastructure and the breakdown between Telecom Services and ANS.

Lastly, topics. Today, we announced the commencement of tender offer for shares of NEC Networks, our listed subsidiary company. The purpose of this tender offer is to strengthen our business for local governments and SMEs nationwide. By positioning NEC Networks at the core of reorganization effort, we plan to consolidate relevant resources that are dispersed within an NEC Group. Specifically speaking, NEC Networks will be consolidated with NEC Nexsolutions, a company that handles IT services for municipalities and SMEs in Tokyo, Nagoya and Osaka areas.

NEC networks, network solutions, construction and maintenance of network infrastructure and nationwide operational strength will be integrated with NEC Nexsolutions, strength and system integrations and applications grounded in their industry insights. For the more NEC Corporation's relevant resources will be integrated, driving the optimization of our services to municipalities and SMEs nationwide.

We will be poised to provide end-to-end DX solutions that integrate IT services and network solutions covering consulting services, system integration, all the way up to construction work and maintenance. Under the backdrop of the Digital Garden City Nation vision, the digitalization of local governments will be accelerated.

Likewise, SMEs are expected to go full fledge with the DX initiatives. We will leverage on our unique strength as the system integrator that can handle all aspects of DX, including construction works, riding on the wave of DX, we will capture the growing demand for IT and network services that are required to support those IT services.

The outline of the tender offer for the shares of NEC Networks is shown in the table on the left. The period of tender offers is from October 30 to December 11. Tender offer prices, JPY 3,250 per common stock. The outline of the reorganization is shown in the chart on the right. After NEC Networks is made a wholly owned subsidiary, NEC Networks and NEC Nexsolutions will be placed under the umbrella of a newly established intermediate holding company to operate the business in a unified manner.

Furthermore, NEC's Fire and Disaster prevention business will be transferred to NEC Networks and the IT Service business for local governments and SMEs will be transferred to NEC Nexsolutions. The details and timing of the reorganization will be decided upon consultation with NEC Networks, but the reorganization is expected to be implemented properly after NEC Networks becomes a wholly owned subsidiary of NEC Corporation.

Page 20 is on BluStellar. In the first half of this fiscal year, orders for BluStellar products increased by about 40% from the previous fiscal year. This growth is attributable not only to the enterprise domain, but also the large-scale projects in the public sector. BluStellar provides industry-specific value-creation scenarios. In addition to the value creation for enterprises, we are expanding our offerings to public domain as well.

In addition, we are seeing an increase in high-profit projects that utilize AI and security products. We are working to not only grow in revenues, but improve in profitability as well. In September, we started offering an AI-enabled platform for advanced contact center operations, which reduced operators' workload. To allow our customers to use our AI product safely in security, we started to provide a function to prevent hallucination in October.

We will continue expanding such use cases to solve customers' problems and realize innovation. Last but not the least, we would like to announce the NEC Innovation Day. This event is for media, IT analysts and capital market participants. It will be held on November 27. The venue is our Tamagawa office, and we are scheduled to conduct some demonstrations too. We will inform you of the program details and participation method in a separate notice. We look forward to seeing you there.

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