NEC Corp

TSE:6701

Earnings Call Transcript 2019-Q3

[Takayuki Morita, executive]

I am Takayuki Morita, CFO of NEC. I am grateful to see such a large audience today. Let me walk you through our FY ending March 2019 Q3 results which have been announced today. I will cover these points on this page today. Firstly, Q3 results then full year forecasts, which have not been revised from the plan disclosed in the beginning of this fiscal year.

Firstly, the summary of our Q3 results. Please turn to Page 4. Q3's revenue covering 3-month period from October to December was JPY 698.2 billion, while operating profit was JPY 2.9 billion, income before income taxes JPY 4.7 billion and net profit negative JPY 1.5 billion.

9-month cumulative figures were JPY 2,034.7 billion for revenue, JPY 16.7 billion for operating profit, JPY 26.5 billion for income before income taxes and JPY 7.7 billion for net profit. And due to accounting JPY 25 billion for structure reform cost this term, 3-month operating profit decreased year-on-year. Details will follow later. Income before income taxes and net profit deteriorated by JPY 4.7 billion and JPY 300 million, respectively.

Free cash flows of Q3 were an outflow of JPY 45.8 billion, worsened by JPY 8.7 billion year-on-year.

Page 5. This chart shows Q3 results by segment. While operating profit of the public business remarkably improved due to the impact of structure reform expense, operating profit of the System Platform business and adjustment worsened.

Page 6. Before explaining the results by segment, let me highlight on the structure reform implemented in Q3. Firstly, 2,170 people applied for the voluntary early retirement program, which amounted to JPY 20 billion in structure reform cost. On the right, you see the cost breakdown by segment. Through other measures, such as temporarily and permanent transfers to companies outside the NEC Group and the transfer of NEC Lighting Limited's businesses as already being announced, a total headcount reduction of 3,000 people is expected. Also, aiming at optimizing allocation of researchers, a decision to end the operation of Tsukuba Research Laboratories was made in Q3. In relationship to this shutdown cost, about JPY 5 billion is posted under adjustment.

Starting from the next page, I will talk about the results by segment. Page 7, Public business. Firstly, revenue. On top of the overall increase in public infrastructure areas centering around aerospace and defense business, public solutions areas, firefighting and disaster prevention systems improved as well, registering revenue of JPY 228.4 billion, up 3.1% year-on-year. Although structure reform expense of JPY 3 billion was posted, an increase in sales and a decrease of unprofitable projects improved operating profit by JPY 10 billion year-on-year, posting JPY 15.6 billion.

Page 8, Enterprise business. Revenue of retail and services, as well as financial institutions increased resulting in a year-on-year growth of 6.7%, landing at JPY 106 billion. Breakdown-wise, for retail and services, convenient stores were the major driver, while insurance and security houses bolstered the revenue of the financial institutions category.

Next, operating profit. Along with the structure reform cost of JPY 1 billion, another JPY 1 billion was allocated to the Enterprise business as the development cost of the company-wide IoT platform, which was moved onto the commercialization stage. Nonetheless, an increase in sales was able to absorb these impacts, recording operating profit of JPY 9.6 billion, which is an improvement of JPY 200 million.

Next, Network Services business. And since CapEx by telecom carriers remained sluggish, revenue was flat. Structure reform cost of JPY 2 billion was recorded, pushing down the operating profit by JPY 500 million year-on-year, resulting in JPY 2.7 billion.

Page 10, System Platform business. Thanks to an increase in business PCs, revenue is up by 1.6% year-on-year, posting JPY 133 billion. Structure reform cost of JPY 8 billion was recorded, causing operating profit to dip by JPY 8.8 billion, resulting in JPY 500 million.

Next, Global business. Revenue, while display solutions declined, safety solutions increased, leading revenue to be on par on a year-on-year basis.

Next, operating profit. Display solutions profit decreased and JPY 1 billion structure reform cost was incurred. But due to an increase of wireless solutions, operating loss improved by JPY 800 million, posting negative JPY 4.8 billion.

Page 12 shows the details of our Global business. The left shows the revenue of main solutions included in our Global business. On the right, you see the revenue trends for Q3. Safety increased revenue year-on-year due to the consolidation of Northgate Public Services. Service providers solutions revenue was the same level as last year as well as wireless solutions. Submarine cable systems increased. Display was exposed to heated competition in the U.S., resulting in a decline.

Page 13 shows net profit/loss change. Operating profit decreased by JPY 4.1 billion. Financial income/costs deteriorated by JPY 0.6 billion. On the other hand, income tax costs improved by JPY 4.2 billion and all in all, net profit/loss year-on-year was minus JPY 300 million, accounting to a loss of JPY 1.5 billion.

On Page 14, I will cover third quarter management topics. As of end last year on December 27, we announced the acquisition of KM Holding (sic) [ KMD Holding ]. This is part of our initiative to strengthen NEC's Safer Cities. By acquiring the largest IT company in Denmark, a country that pioneers in government digitalization, we aim to attain a business model leveraging a platform within the arena of digital government.

This acquisition is scheduled to be completed by the end of February. Upon completion, NEC, Northgate Public Services and KMD synergy will be accelerated, focusing on expansion through cross-sales and combining NECs biometrics, Bio-IDiom, state-of-the-art AI technology suite, NEC device and various KMD software to cultivate new customer value.

Let me now move on to our full year financial forecast. Please refer to Page 16. Our full year forecast has not changed since our initial forecast announced April 27, 2018. For the months April to December, 9 months cumulative, revenue is up by approximately JPY 67 billion, operating profit is also up by approximately JPY 19 billion. However, for the full year, there are segments where upside potential can be expected as well as risk-prone segments. To lead us into performance improvement after the year ending March 2020 and fulfilling our 2020 mid-term plan, we will consider possible initiatives that can be executed and put into implementation everything possible. Based on these factors, the forecast remains unchanged.

Please refer to Page 17. The left side shows IT services orders trends in Japan, and the right shows order trends for IT services, plus consolidated basis enterprise and public. As you can note, the domestic business environment continues to be favorable. The growth in orders up to Q3 will be our tailwind, and we can expect an uptick versus our annual plan, with enterprise and public being the drivers.

On Page 18, I will explain our full year outlook for Global business operating profit and loss. The left bars show first half and Q3 actuals as well as full year forecasts. Q3 saw an improvement on a year-on-year basis by JPY 800 million. However, on a 9-month cumulative basis, the full year improvement plan is JPY 28 billion, and we currently stand at JPY 6.7 billion.

When we look at the breakdown by solution, safety and wireless are improving as planned. For service providers solutions, energy and display, the risks explained during the first half guidance remain, and we are continuing to propel profit improvement for Global business.

Page 19 shows our measures for profitability improvement toward March 2020. Initiatives implemented during Q3 have been explained in the onset, but for Q4 as well, we will optimize plans at NEC platforms, conduct business structure improvement in NEC Lighting Limited, decrease SG&A throughout NEC Group by optimizing office floors and we will also optimize overseas offices. We are also considering measures that will lead to cost and risk reduction in the next fiscal year, such as front-loading development investments.

Lastly, as I've explained so far, risks pertaining to Global business will be offset by favorable domestic business, and we will strive firmly to attain our full year forecast. Again, we will also consider and pursue all possible initiatives that we can implement within the fiscal year to lead us into profitability improvement after the year ending March 2020 and fulfill our 2020 mid-term plan.

On that note, I would like to conclude.

Thank you for your kind attention.