NEC Corp

TSE:6701

Earnings Call Transcript 2023-Q4

[Takayuki Morita, President and Chief Executive Officer]

Good afternoon. Thank you very much for your participation today.

I will now explain the financial results for FY 2023 March along with the forecast for FY 2024 March. This will be the agenda for today.

First, the financial results for FY '23 March. Page 5 shows the summary of the financial results. Revenue was JPY3.313 trillion and increase in all segments. Year-on-year, this was a growth of 10%. Adjusted operating profit was JPY205.5 billion. Details will be explained later, but aside from Network Services, all segments increased. Adjusted net profit was JPY138.6 billion. Impact from tax expenses was approximately JPY30 billion yen versus last year. And if we exclude this, it effectively increased.

Page 6 shows the main indices along with performance by segment. Revenue, adjusted operating profit and adjusted net profit were all higher than the January 30 forecast. Details of each segment will be described later.

Now to Page 7. This shows the fluctuation of adjusted operating profit. I will use FY '22 March as the baseline to explain. In FY '22 March, one-time profit of JPY10 billion from asset sales was acknowledged. In FY '23 March, a one-time profit of JPY11 billion was attained. Next, in Q4, JPY5.5 billion was acknowledged for structural reform, such as global 5G cost structure optimization. As for macroeconomic environmental change impacts, forex fluctuation was a positive JPY16.5 billion. Component shortages were resolved from the second half of the year and onwards and year-on-year, a positive JPY4 billion. Intellectual property income was attained in Q4 of last fiscal year as well as Q3 of this year and on an annual basis contributed to a positive JPY7.5 billion. Operations improved by JPY11 billion. Domestic IT segment advanced fairly. Enterprise saw JPY14.9 billion. And Public Solutions business saw a JPY7.5 billion improvement. On the contrary, Network Service business was minus JPY13 billion. Based on these results, operating profit for FY '23 March was JPY205.5 billion.

From Page 8, I will explain each segment, starting with Public Solutions business. For revenue, the market situation surrounding SMEs have bottomed out and we continue to see a growth trend. Public and healthcare are increasing steadfastly as well, and all in all, a growth of 3.2%. Adjusted operating profit, due to an increase in revenue as well as cost optimization, saw plus JPY6.7 billion.

Page 9 is Public Infrastructure business. Revenue grew by 6.8% due to increases in business for satellites and defense. As for adjusted operating profit, on top of an increase in revenue, non-performing projects were contained and overall an increase of JPY8.1 billion.

Page 10 shows our Enterprise business. Revenue increased 6.9% due to strong trends in all domain, including financial, manufacturing and retail services business. Adjusted operating profit, due to revenue increase, enriched offering menus as well as enhanced profitability through strengthening of SI project risk management, improved JPY15.9 billion. Operating profit ratio has advanced to 11.9%.

Page 11 is Network Service business. Revenue increased despite investment restraints among domestic and overseas telecom carriers. Intellectual property income attained in Q3 also made a positive contribution.

On the next page, I will describe the adjusted operating profit. Here on Page 12, I will use the results from FY '22 March as a baseline to explain the changes in profits and losses. Change factors up to Q3 have been explained during previous financial announcements. For Q4, due to revenue expansion, business operational improvements were JPY12.8 billion. Further, to improve profitability, JPY3.3 billion for structural reform and JPY1.4 billion to streamline assets were acknowledged. There was also a negative JPY5 billion impact for IP income. And all in all, that gave us a profit of JPY24.7 billion for Q4 and, for the full year, JPY24.1 billion.

Next, Page 13 is Global Business. For revenue in Netcracker's OSS/BSS as well as acquired company software related business for digital government and digital finance along with a favorable trend for major domains such as submarine systems uplifted revenue by 20.8%. Adjusted operating profit increased JPY16.6 billion due to progress of business portfolio transformation and improved profitability in major business domains.

Page 14 illustrates free cash flows. Operating cash flows increased JPY34.5 billion due to an increase in adjusted operating profit. Inventory was increased by JPY60 billion because of component shortages in FY '22 March, and, as planned, in FY '23 March, this was resolved. But to prepare for longer procurement periods and mitigate component risks, another JPY34.5 billion has been added. Year-on-year, this is an increase of JPY85 billion. Because of a large increase in revenue, working capital balance has increased and accounted for a minus of approximately JPY115 billion. Operating cash flow total year-on-year is an increase of JPY4.6 billion. As for investment cash flows, expenditure decreased by JPY13.8 billion. This is due to a decline in spendings for M&A activities. All of this taken into account year-on-year free cash flows increased JPY18.4 billion, totaling JPY102.5 billion.

Page 15 is the status of our CCC. FY '23 March saw an increase in large projects where upfront expenditure was made and, on a normal business operation basis, a deterioration of six days year-on-year is the result. However, these projects lead to future intake. And when excluding such projects, CCC is on par with the previous fiscal year. Long-term large projects will increase in the future as well, so we will continue to promote improvement activities, such as securing advanced payment fees.

Page 16 shows the status of our investment securities. Back in April of 2020, we decided that the policy be zero holdings and, as explained to you previously, we have steadily decreased the volume. Among the investment securities for listed stocks as of end of 2021 March, 108 shares, and by 2023 March-end, this became 33 company shares, a decline of 70%. For FY '23 March, the same level as FY '22 March, JPY19.6 billion was sold and the total amount sold since 2021 March-end is JPY135.4 billion. Non-listed stock excluding alliance shares have dropped to 137 from 207.

Page 17: orders. I will focus on the order trends of FY '23 March. By segment, Public Solutions orders were up 10% due to an increase in urban infrastructure projects and the bottoming out of SME's sluggish demand. Public Infrastructure increased 8%, mainly due to strong demand in the national defense sector. Enterprise increased 12% on the back of robust IT demand. Network Services rose 10%, mainly driven by 5G. Even excluding IP revenues recorded in Q3, the increase was 8%. Global Business, excluding the offshore business impact, was up a substantial 15%, driven by Netcracker's large projects. Thus, all segments posted year-on-year gains. Even excluding the volatile submarine systems business, the total orders increased 12%. And the IT services also registered an increase of 9% for the full year.

Next, our forecast for FY '24 March and the progress of the Mid-term Management Plan 2025.

Page 19: forecast for FY '24 March. We are projecting sales of JPY3.38 trillion and adjusted operating profit of JPY220 billion, with increases in all major segments. The annual dividend for FY '24 March is planned at JPY120 per share, an increase of JPY10 from FY '23 March.

Page 20: factors contributing to the changes in adjusted operating profit. The basis of my explanation is the FY '23 March adjusted OP of JPY205.5 billion, one-time profit recorded in FY '23 March will have a negative impact of JPY11 billion in FY '24 March. Although there is a decrease of JPY5.5 billion in structural reform expenses, IP income is expected to decrease by JPY14.5 billion. Other than these items, we have factored in a JPY34.5 billion increase in profit from operations. We expect to post adjusted OP of JPY220 billion in FY '24 March.

Page 21: the progress of Mid-term Management Plan 2025. Page 22, progress by segment. Network Services is behind our expectations due to restraint investment by domestic telecommunications carriers and delays in the ramp up of overseas 5G market. Despite these drawbacks, Enterprise, Public Solutions, Public Infrastructure and Global segments are all in all making steady progress toward the achievement of the Mid-term Management Plan 2025.

Page 23, status of growth businesses. Profitability of digital government and digital finance will be improved by reaping the fruits of investments made in FY 2023 March. We will expand cross selling in APAC and EMEA, including Japan and augment synergies by promoting offshore operations. Global 5G will shift more from hardware to software and services. We will enhance profitability by expanding our market share in Japan and optimizing our sales and development structure and overseas markets. We will work on shifting to a high-profitability business model by further expanding the ratio of common platform sales. In addition, we will reinforce our strategic customer business by strengthening cooperation with Abeam, which is trending favorably.

Page 24: status of underperforming businesses. We are focusing on improving low profit businesses and in FY '23 March, we achieved a 2.4% improvement in adjusted OP margin over the previous year. This improvement contributes to about half of business enhancement. In FY '22 March, CFO-led monitoring began, and four out of 16 businesses were removed from the monitoring list due to improved profitability. We will continue to make appropriate decisions to maximize the value of non-core businesses by divesting them or establishing joint ventures.

Page 25: culture. First, the engagement score, one of the KPIs of Mid-term Management Plan 2025. It rose from 25% in FY '21 March to 36% in FY '23 March.

We are promoting job-based management as part of the people and culture reforms undertaken within our engagement program. Job-based management will be initially introduced to general managers and above in FY '24 March and will be expanded to all employees in FY '25 March. Without the right allocation of people based on business strategies without the top caliber talent and without the best team, we cannot compete globally. The aim of job-based management is to assign the right person to the right places at the right time. Employees want to work for a company where they can see their own growth and feel motivated to realize their goal. We want NEC to be such a workplace and this is extremely important to improve engagement.

RISE Fast, an initiative to accelerate transformation through issue resolution practices, is being promoted as an activity to simplify on-site processes and strengthen the autonomy of employees. The program is well established and 1,300 employees participated in FY '23 March. Through improving efficiency, we realized an impact of JPY1.7 billion and we want to continue this effort.

In Smart Work 2.0, teams maximize their productivity by selecting optimal work style. In developing internal business infrastructure, we will build a globally top-level management infrastructure so that all information can be digitized, thus, enabling data-driven management. This will enable our business operations to be flexible and adaptable to environmental changes and maximize our business outlook.

Finally, topics. Page 28: segment revision. In accordance with the reorganization implemented in April 2023, we will revise our segment disclosure from Q1 FY '24 March. The new segments are IT Services and Social Infrastructure, and the organization included in each segment is shown here. The new segments are based on business domains rather than market customer segments as in the past. This revision does not only allow the tracking of the Mid-term Management Plan 2025, but also enables the capital market players to understand our business, which was said to be difficult to grasp.

Page 29: non-GAAP indicators. From Q1 FY '24 March, we will disclose non-GAAP profit loss in addition to the conversion adjusted operating profit loss. Adjustment items from GAAP OP are shown here. Through this change, we aim at disclosing underlying profitability excluding one-time profits and losses and enhancing the ease of compatibility with global competitors. Non-GAAP indicators will be disclosed only for the total earnings, and segment based earnings will be disclosed only on an adjusted OP basis as it stands now.

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