NEC Corp

TSE:6701

Earnings Call Transcript 2018-Q3

[Isamu Kawashima, executive]

I am Isamu Kawashima, CFO of NEC. Thank you very much for gathering today. Let me walk you through Q3 results for FY ending March 2018. I will follow this table of content. So firstly, I will talk about the actuals of Q3, and then talk about the revised full year forecast.

Please turn to Page 4. In Q3, for 3 months covering October to December, revenue was JPY 683.3 billion; operating profit JPY 7 billion; income before tax was JPY 9.4 billion; and net profit was negative JPY 1.2 billion. 9-month cumulative results were as follows: Revenue JPY 1.9713 trillion; operating profit JPY 14.3 billion; income before income taxes JPY 14.2 billion; and net profit JPY 17.6 billion. Both 3- and 9-month cumulative figures showed increase in both revenue and profit. In Q3, free cash flow was negative JPY 37.2 billion, an improvement of JPY 3.1 billion year-on-year, posting JPY 31.4 billion in the past 9-month period.

Page 5 shows Q3 results by segment. All segments, our profit increased year-on-year. Revenue was up by JPY 20 billion and operating profit by JPY 10 billion against the budget.

Let's compare each segment against the budget. Public. Due to the improvement of JAE business, revenue exceeded by about JPY 7 billion. However, because of the nonprofitable project, operating profit underachieved the budget by JPY 4 billion. Next, Enterprise business revenue was as expected, while operating profit exceeded by about JPY 1 billion. Moving on to the Telecom Carrier business. While revenue was down about JPY 3 billion against the budget, operating profit trended as planned.

System Platform business. Owing to large deals and positive FX impact, revenue and operating profit were up against the budget by JPY 16 billion and JPY 6 billion, respectively. Others business. Operating profit underachieved the budget by JPY 3 billion due to the expenses incurred upon the discontinuation of the development and manufacturing of residential energy storage. Adjustment overshot the budget by about JPY 10 billion.

Now please turn to Page 6. Net profit and loss change. In light of the negative FX impact, financial income and cost deteriorated by JPY 4.1 billion. Income taxes increased by JPY 5.9 billion. Operating loss, therefore, improved by JPY 14.7 billion year-on-year, posting a negative JPY 1.2 billion.

Now let's move on to our full year forecast. Please turn to Page 8. This is the summary of financial forecasts. Full year revenue is upwardly revised by JPY 30 billion from the previous outlook, forecasting JPY 2.83 trillion, operating profit up JPY 10 billion to be JPY 60 billion, net profit up JPY 5 billion to be JPY 40 billion, free cash flow is revised to JPY 100 billion, up JPY 10 billion. Please note that the current forecast does not factor in already announced share transfer of Automotive Energy Supply and NEC Energy Devices, and the acquisition of Northgate Public Services, a U.K. IT company announced on January 9. Annual dividend of JPY 0.60 per share remains unchanged.

Page 9 shows the difference between previous and the latest forecasts. Revenue is JPY 30 billion higher due to the reduced impact from suspension from contract bidding processes and improvement of Japan Aviation Electronics Industries (sic) [ Industry ] or JAE. And the impact from the suspension from contract bidding process is unchanged from the end of October, at which point we kept the forecast unchanged, but this time around the impact is reflected on the forecast.

Operating profit is up JPY 10 billion, including reduced impact from bidding process suspension and the JAE, and underperforming projects. Structure improvement expense of JPY 10 billion and a strategic investment of JPY 8 billion is unchanged, but this time around they are allocated to each business segment.

Page 10 shows the difference between the previous and latest forecast by segment. Public revenue is up JPY 40 billion due to the impact of bidding process and JAE. Operating profit is down JPY 2 billion due to the project mix change and underperforming projects in Q3 in the social business.

Enterprise. Revenue is down JPY 10 billion due to reduced sales, but OP is up JPY 1 billion due to the better cost efficiency. Telecom Carrier. Revenue is down JPY 25 billion and OP is down 1 -- JPY 10 billion due to the revised forecast for domestic mobile and overseas mobile backhaul. System Platform. Revenue is up JPY 25 billion and OP is up JPY 3 billion due to the impact of bidding suspension and large-sized deal acquisition during Q3.

For Other business, the OP is up JPY 3 billion despite the cost for discontinuation of the development and manufacturing of residential energy storage products, thanks to the cost reduction. As I explained earlier, the structural reform cost and the strategic investment, which is -- was included in the adjustment, is now allocated to each segment. So because of that and because of the cost reduction, the adjustment is likely to improve by JPY 15 billion.

Regarding this year's performance, I would like to explain by segment compared with the previous year. Starting with Public business. Revenue is up 24.6% to JPY 955 billion despite the influence of the suspension from contract bidding process of JPY 34 billion and thanks to the consolidation of JAE. Operating profit is up JPY 19.8 billion to JPY 53 billion due to a sales increase and profitability improvement in the space business as well as a decrease in provision for contingent loss recorded in the previous year.

Page 12, Enterprise business. Revenue down slightly to JPY 405 billion due to large-scale projects for manufacturing industries in -- reported in the previous fiscal year. Operating profit is down JPY 5.7 billion to JPY 34 billion due to a sales decline as well as an increase in strategic investment expenses.

Page 13, Telecom Carrier's business. Revenue down 5.1% to JPY 570 billion. International sales decreased due to a decline in mobile backhaul and submarine cable systems despite expansion of TOMS. Also domestic sales declined due to sluggish capital investment by telecommunications carriers. Operating profit is down JPY 5.1 billion to JPY 13 billion due to a sales decline.

Page 14, System Platform business. Revenue is down 1.4% to JPY 710 billion due to the influence of the suspension from contract bidding processes of JPY 6 billion as well as a decline in hardware. Operating profit up JPY 2.4 billion to JPY 32 billion due to a cost efficiency improvement despite a sales decline.

Page 15, Others business. Revenue is up 11.8% to JPY 190 billion, thanks to increase in international business and the energy business. Operating loss improved by JPY 5 billion to JPY 15 billion due to the improvement in the energy business and international business despite an increase in IoT platform-related investment expenses.

This concludes my presentation on this year's performance. Thank you.