NEC Corp

TSE:6701

Earnings Call Transcript 2023-Q3

[Unidentified Company Representative]

Thank you very much for your attendance. Let's begin the presentation of financial results for Q3 FY, March 2023 that was released today. Topics are listed here. Firstly, summary of Q3 FY March 2023.

Page 5, please. Key financial indicators are shown here. Revenue for the three month period of Q3 increased by 14.1% and adjusted operating profit rose by JPY18.4 billion year-on-year. Likewise, against the nine month period of FY March 2022, revenue went up by 8.2% and adjusted operating profit increased by JPY7.5 billion. I will elaborate on the factors contributing to the changes in adjusted operating profit later.

Page 6, results by segment. All segments trended favorably during the three month period of Q3, resulting in an increase in both revenue and profit. Consequently, nine months adjusted operating profit rose in all segments except network services.

Page 7, factors driving changes in adjusted operating profit. Let's start from the nine month figure of FY March 2022, which is JPY76 billion. While posting a one-time profit of JPY8 billion in asset sales in FY March 2022 that of FY March 2023 was JPY11 billion. The impact of changes in the macroeconomic environment were one, a positive JPY11.5 billion, attributable to currency fluctuations and two, a positive JPY3 billion, resulting from the mitigation of component shortages from the previous year.

Marginal profit and others were negative JPY24.6 billion, mainly due to the deterioration of network service. Details of this impact are shown on the next page. We recorded JPY14.5 billion in IP income in Q3, following that of Q4 FY March 2022. IP income can be regarded as a part of the operational improvement, but since we have booked multiple [year worth] [ph] of IP income in a lump sum, its impact to our performance was significant.

We therefore carved out IP income as a separate line item. We will continue focusing on monetizing our IP to enhance our base profit level. Putting all these factors together, adjusted operating profit for the nine month period FY March 2023 amounted to JPY 83.4 billion. Page 8, network services business details. Nine month revenue totaled JPY361 billion, up 3.1% year-on-year, mainly due to the increase of global 5G revenue and the posting of JPY10 billion IP income.

Details of the year-on-year changes in adjusted operating profit/loss are shown on the right with FY March 2022 as its basis. The nine-month impact of the macroeconomic environment was negative JPY2 billion, its breakdown being JPY1.5 billion attributable to FX fluctuations and JPY0.5 billion to the component shortages.

Next, the breakdown of changes in business operation related matters. In addition to the JPY7.5 billion in expenses for the global 5G strategic project recorded in the first half of FY March 2023, JPY5 billion was posted in Q3 as the expense for streamlining assets, including inventory valuation. Strategic expense for the expansion of 5G business is planned to be flat against FY March 2022, so the expense level for Q3 remained the same year-on-year.

Other operational expense was negative JPY7.4 billion, attributable to the changes in product mix and other factors. Since IP was posted in lump sum for multiple years in Q3, IP income contributed JPY10 billion to adjusted OP. Putting all these factors together, adjusted operating profit was negative JPY600 million, a decrease of JPY16.4 billion year-on-year.

Page 9 shows the order trends. I would like to explain placing emphasis on Q3. Both Q3 and the nine months period exceeded the previous year and total for the entire company was an increase of 14%, excluding largely fluctuating summary systems. In the area of IT services, ample demand for companies led by enterprise continued and was an increase of 10% for the nine months period.

Breakdown by segment was as follows: favorable trends continued for urban infrastructure and SMEs, resulting in a 15% increase. Public Infrastructure experienced a large satellite project last fiscal year and was an 8% increase for the nine months period. If we exclude this large project, the growth was positive 18%. Enterprise enjoyed a positive push backed by strong IT demand and was an 11% increase for the nine months period.

On top of 5G expansion for network services, intellectual property income was acknowledged resulting in a 7% increase. Even with income from IP excluded, the increase was 4%. Global, excluding some resistance, enjoyed a strong increase led by large projects for net cracker. Allow me to move on to financial forecasts.

Page 11 shows the full-year financial forecast. In accordance with share buybacks, there has been a change in the adjusted EPS. However, for the remaining indices they stay unchanged from our outlook presented on October 28.

Page 12 is a full-year outlook by segment. This reflects amendments to the financial outlook for Japan Aviation Electronics announced on January 27. This downward revision is offset by the entire company and thus there is no change to the October 28 announced adjusted operating profit of JPY185 billion.

On Page 13, I will explain the summary of our financial forecasts. Domestic IT services continue to see strong IT service demand and orders are steady up to Q3. Based on this order backdrop, we believe that we are in a positive position to improve our yearly forecast. Network services starting with global 5G. Since revenue tends to be stronger in Q4, we foresee an expansion in the domestic market and forecast for the full-year will be fulfilled.

Needing the annual adjusted operating profit see some uncertainties due to the one-time costs and strategic expense increase, but we aim to achieve the forecast through expansion in Japan and abroad. With the open ground market, we foresee some time needed to fully commence and are currently considering realization of an optimal cost structure in preparation for next fiscal year through specific initiatives.

Aside from global 5G, there is some impact from the IP income of JPY5 billion [acknowledged] [ph] in Q4 of last fiscal year, as well as negative factors up to Q3. However, we estimate that this can be offset with IP income for this year. We are on track for the entire company progress for the nine months period. Although some risks remain with global 5G recovery to attain the full-year forecast, we will capture the strong IT services upside to cover for this and aim to meet the adjusted operating profit of [JPY185 billion] [ph].

Lastly, on Page 14, our Reform of the Management Foundation. As of today's BOD meeting, pursuant to the approval at the ordinary general meeting scheduled in June, we will transition from a company with an auditor committee to a company with a nominated committee. The composite of the BOD will be out of the 12 members, 7 independent external directors, a majority strengthening the oversight function.

By transitioning to a company with a nomination committee, management and oversight functions can be segregated, transferring authority to the executive officers and speeding the pace of management. As noted on the right side, this organizational reform will make possible to clarify responsibilities in growth areas in-light of attaining our mid-term management plan.

It will also aim to strengthen our approach to platform offerings underpinning DX, the expanding market of government digitalization, as well as national security areas. Since April of 2022, we have been integrating departments, minimizing management layers, and implementing an agenda oriented organization and this transformation will complete the optimizations needed to attain our mid-term management plan. We will strive to enhance our mid-to-long term corporate value. This will conclude my presentation. Thank you for your attention.