NEC Corp

TSE:6701

Earnings Call Transcript 2022-Q3

[Takayuki Morita, executive]

Thank you for your attendance today. I will now like to explain our financial results for Q3 fiscal year ending March 31, 2022, that was announced today. This is the agenda for today.

First, the highlights from today's announcement. We have thoroughly assessed the impact to date of semiconductor shortages as well as the impact until the end of the fiscal year, including our improvement plans and its effects. Needless to say, as a prerequisite, we have scrutinized our 9-month progress and future outlook as well and revised our adjusted operating profit from JPY 155 billion to JPY 160 billion. Although there are impacts from component shortages that were not anticipated at the beginning of the year, usual business has improved, and we have revised the forecast upwards.

Let me move on to the financial results for Q3 FY '22 March. Please refer to Page 6. Here, we show our major indices. 9 months accumulated revenue is JPY 2,096.4 billion, propelled by enterprise and global businesses and up 2.5% year-on-year. Adjusted operating profit is JPY 76 billion, a decline of JPY 21.1 billion year-on-year. However, business which excludes onetime factors in this fiscal year's strategic expenses is incorporating market recovery and improving. I will explain the details later on. Adjusted net profit due to decrease of adjusted operating profit is JPY 44.3 billion. Free cash flow was a cash out of JPY 27.4 billion.

Page 7, please. These are the results by segment. Page 8 shows the 9-month results of adjusted operating profit changes year-on-year. I would like to reference our profit of JPY 97 billion from last year. Last year, we acknowledged a onetime profit of JPY 33 billion. This year in Q1, we acknowledged a one-time profit gain of JPY 8 billion through sales of assets. Next, as a deteriorating factor, consolidated companies of Public Solutions and Network Services business acknowledged unprofitable projects amounting to JPY 6 billion. Transfer of Energy business shares represent minus JPY 1.5 billion, totaling JPY 7.5 billion. Due to component shortages mainly in semiconductors, 9-month results in gross is JPY 12 billion, and in net an impact of JPY 7 billion.

By product, general purpose products related to IT services and base station products for Network Services business saw a delay in supply, leading to shipment delays. As for upside, we saw recovery from deteriorating market caused by COVID-19 last year as well as an increase of JPY 38.5 billion in profit due to usual 5G business. For strategic expenses, we increased by JPY 20 billion year-on-year. The breakdown is as follows: 5G, JPY 11 billion; Internal DX, 3.5 billion, Core DX development-related, JPY 2.5 billion; and HR investment, JPY 3 billion. All in all, this results to a profit of JPY 76 billion for the 9-month period.

Page 9 shows order trends. For this 9-month period, after excluding large-scale orders that tend to fluctuate quarter-by-quarter, such as submarine systems as well as display business that was unconsolidated in November of 2020, we saw an increase of 4%. Some comments by segment. Enterprise increased by 7% due to a favorable IT services business. Network Services saw an uptick in 5G base stations, whereas large fixed wire networks experienced a drop, resulting in a flat increase all in all. Excluding Submarine Systems and Display business from Global, Avaloq consolidation contributed strongly, and telecom software company NetCracker was steady, boosting overall increase. Detailed quarterly basis numbers are shown on Page 26 in The Appendix.

Page 10 shows order trends for the 3 months of Q3. Public Solutions decreased due to a onetime profit acknowledged last fiscal year as well as postponement of projects scheduled in Q3 pushed out to Q4. Manufacturing and retail services are doing well in enterprise. Network services impacted by component shortages, which have forced us to adjust shipments and a decline in major fixed network project has resulted in an overall decrease. Global saw strong contribution from consolidated Avaloq as well as NetCracker and enjoyed a large increase. All in all, excluding Submarine Systems and Display businesses, we saw a 7% increase.

Page 11 and onwards depict breakdown by segment. For Public Solutions, there was a decrease in firefighting disaster prevention businesses as well as regional industries, resulting in an overall decline. Operating profit decreased mainly due to a decline in revenue, resulting in JPY 3.8 billion.

Page 12 shows Public Infrastructure business. Revenue dropped due to a reversal impact from special PC demand from GIGA school projects last year. Sales in consolidated subsidiary increased. Adjusted operating profit, though consolidated subsidiary increased, overall decreased due to unprofitable projects.

Page 13 shows the Enterprise business. Revenue increased due to steady growth in all domains. Operating profit also increased in line with the revenue increase.

Page 14 is the Network Services business. Revenue increased in the 5G business despite the impact of component shortages. On the other hand, sales at a consolidated subsidiary decreased due to the absence of large-scale projects recorded last year, resulting in an overall decrease in sales. Operating profit decreased due to a JPY 11 billion increase in strategic expenses.

Page 15 shows the Global business. Revenue is up mainly due to the increased sales in Digital Government and Digital Finance as well as in Service Provider solutions. Adjusted operating profit improved JPY 10 billion, of which approximately JPY 5 billion was attributable to the effect of portfolio reforms and the remaining JPY 5 billion to sales growth.

Page 16 shows the status of free cash flow. Cash flow from operating activities is down JPY 81.3 billion year-on-year due to a decrease in adjusted operating profit by JPY 21.1 billion and an outflow of JPY 60 billion arising from strategic inventory buildup to cope with component shortages. Investment cash flow decreased JPY 13.1 billion, excluding the impact of special factors last year. As a result of these factors, free cash flow was a cash outflow of JPY 27.4 billion.

Next is the financial forecast for fiscal year ending March 2022. Page 18 is the summary annual forecast. As I explained at the outset, we have revised our earnings forecast upward. Operating profit is up JPY 5 billion, and net profit is up JPY 3 billion from the plan.

On Page 19, I will explain about countermeasures for component procurement risks. The impact of semiconductor and other component shortages of JPY 8 billion has been reflected on the projected full year adjusted operating profit. We aim to minimize the gross annual impact of JPY 27 billion by implementing such measures as adopting design change and alternative components, optimizing sales prices and cutting expenses, which should save JPY 19 billion in total. Of the remaining JPY 8 billion, JPY 5 billion is due to the postponement of shipments in the network area, which should be resolved during fiscal year, March 2022.

Finally, I would like to explain the progress of growth businesses. Page 21 shows the global 5G business. As for Japan, although certain delay is expected during FY March 2022 due to component shortages, the mid- to long-term outlook remains unchanged. For the International business, we enjoy a brief demand from international customers and a strong order trend at the moment. We are accelerating strategic investment in order to keep up with the strong demand. Shipments of 5G equipment should begin within FY March 2022 and contribute to a margin increase along with the sales increase. An announcement was made on January 28 about the acquisition of Blue Danube Systems, a U.S.-based provider of radio units for base stations and control software solutions. The addition should help expanding our product lineup and customer support in North America and strengthen our overseas development capabilities. The acquisition is expected to close around March 2022.

Page 22 is Digital Government, Digital Finance and Core DX. We are making progress against our annual targets as planned. In DG and DF, orders from Avaloq have been particularly strong. In Core DX, the consulting and common platform areas are expanding steadily. In this area, the Digital Business Platform Unit, a cross-sectional digital-related organization established in April 2022, will unify the strategic consulting function with the digital-related products, services, technologies and field marketing functions, including the network domain. We aim to further strengthen the appeal and expand the provision of DX offerings to our customers.

Page 23 is about the organizational reform announced today. With the advancement of DX, market demands are shifting from operational efficiency and innovation to new value creation and business creation. And the competitive environment is becoming increasingly global and complex. In this environment, it's more important than ever to allocate all NEC resources with flexibility and speed. With this in mind, NEC is undertaking fundamental organizational reforms to further accelerate and strengthen the execution of business strategies aimed at realizing the midterm management plan 2025.

In order to realize the organizational vision, from April 2022, we will implement 4 reforms. Specifically, we will reorganize the number of divisions from 150 to about 1/3, and streamline the hierarchy from the current 8 levels to 6 levels, including the CEO level. The more flat management hierarchy should enable speedy business operations helped also by an agile organization design. At the same time, by clarifying the roles of shared functions as well as business departments, we hope to promote decision-making close to the front line.

With this, I would like to conclude my presentation. Thank you very much for your kind attention.