NEC Corporation (6701) Earnings Call Transcript & Summary

This is Niino, President and CEO. Thank you for the large turnout despite the fact that we are conducting the briefing this time in the webcast format. Now I would like to start my presentation on the financial results for the fiscal year ended in March 2020. The Page 2 is the agenda. First, I will explain the results for fiscal year March 2020 and go over the forecast for fiscal year March 2021. Please turn to Page 3. We want to report to you something before we go into the financial results. We have filed Form 20-F with the U.S. Securities and Exchange Commission to register our common shares with them. We aim to remove the restrictions on the purchase, sale and solicitation of shares of common stock of NEC in the United States. Once the registration takes effect, the restrictions will be removed. Simultaneously, the Public Business segment has been split into the Public Solutions Business and the Public Infrastructure Business. The new segmentation will apply from this briefing onwards. Now I would like to move on to the outline of the financial results. Please turn to Page 5. Summary of financial results for fiscal year 2020 ending in March 2020. Revenue increased in all reportable segments year-on-year. Adjusted operating profit increased in all reportable segments. We have implemented additional measures to improve profitability in March 2021, and therefore -- thereafter. Adjusted net profit increased due to increase in income before income taxes and decrease in onetime income taxes by around JPY 20 billion. Reflecting the strong performance, the Board today decided on a JPY 40 year-end dividend per share, which is an increase of JPY 10 per share in terms of the annual dividend. Please turn to Page 6. Fiscal year March 2020 results are shown here. Revenue, adjusted operating profit and all other figures exceeded the initial guidance. Free cash flow was JPY 177.8 billion, representing an improvement of JPY 190.3 billion year-over-year. Details will be discussed later. Page 7 shows adjusted operating profit changes from fiscal year March 2019. The improvement was JPY 75.5 billion due to absence of onetime cost, such as structure improvement, asset sale and the prior investment as well as the effect of structure improvement as well as business PC special demand of JPY 10 billion and operating improvement of JPY 35 billion were recorded. So that was behind JPY 75.5 billion improvement. These positive factors offset the JPY 27 billion additional costs to improve the mid- to long-term enterprise value. Page 8 shows the details of JPY 27 billion additional measures. On top of JPY 10.5 billion announced at Q3 briefing, we have invested JPY 16.5 billion during Q4 for Global and Public Infrastructure businesses. Next page, Page 9, shows the results by segment. Please turn to Page 9. Revenue and operating profit increased in all of the segments other than the Other segment impacted by electrode business divestiture. Compared with the guidance, System Platform, Network Service and Public Solution had higher operating profit. Page 10 shows domestic order trends. After a significant improvement in fiscal year March 2019, this business had another year of favorable performance. Page 11, first of all, Public Solutions business. Revenue increased primarily in IT services for local governments and health care. Adjusted operating profit increased due to increased sales as well as improved profitability. Page 12, Public Infrastructure business. Revenue increased in aerospace and defense areas despite the large X band satellite project in the previous year. Adjusted operating profit increased due to an improvement in profitability and increase in sales and a decrease in unprofitable projects. Page 13, Enterprise business. Revenue increased due to an increase in sales for financial sector. Revenue is up 1% if special factors of Office 365 license related accounting change is excluded. Adjusted operating profit increased due to an increase in sales. Page 14, Network Services business. Revenue increased in fixed network area for 5G introduction, in addition to onetime large projects in Enterprise Network business and an increase from the subsidiary NEC Nets SI. Adjusted operating profit improved due to increase in sales and absence of JPY 3 billion onetime loss for fiscal year March 2019, despite the onetime costs of NEC Nets SI. Page 15, System Platform business. Revenue increased, primarily driven by the increase in business PC replacement demand. Adjusted operating profit improved due to the effects of absence of expenses and effects of business structure improvement last year as well as sales increase in business PCs. Page 16, Global business. Revenue increased in Safer Cities due to KMD consolidation and submarine systems due to an increase in orders in fiscal year March 2019. Adjusted operating profit improved, thanks to the absence of onetime impairment as well as structure reform costs recorded in fiscal year March 2019, and there was an effect of structure reform as well. Page 17 is about the details of Global business. The bar chart shows the breakdown of revenue by business category. Safer Cities are up significantly year-on-year due to KMD consolidation. Submarine Systems and Energy are up as well due to increased orders in March 2019. On the other hand, profits are up in Safer Cities and Submarine Systems due to increased sales, and also profits are up in Service Provider and Wireless Backhaul businesses due to higher margins. On the other hand, profits are down in Energy business due to unprofitable projects despite increasing sales and also in Display business due to intensifying competition. Page 18 shows Global business adjusted operating profit changes year-on-year. Positive factors are absence of JPY 20 billion onetime cost, effect of business structure improvement was JPY 5 billion, operational improvement of JPY 9 billion. These are positive factors year-on-year. However, operating profit is lower than the guidance at the beginning of the year due to those negative factors such as margin deterioration in problematic businesses, onetime cost of JPY 9 billion for Latin America's structure reform and asset divestiture. Page 19 shows the status of post-merger integrations for NPS and KMD, recently acquired by NEC. Thanks to PMI know-how of NetCracker, PMIs of both companies are contributing to earnings. Also, the bolt-on M&A deals conducted by these acquired businesses are also contributing to earnings. Page 20, free cash flows. Cash flow from operating activities. Adjusted operating profit was JPY 75.9 billion. The collection of receivables at year-end and improvements in working capital by enhancing the asset efficiency was JPY 66 billion. Impact of applying IFRS 16 was JPY 56 billion. Altogether, we had JPY 197.6 billion. That was an improvement. On the other hand, cash flow from investing activities, investments for data centers and new businesses was minus JPY 24 billion, and the impact of business structure optimization was JPY 16.5 billion. It was a positive. In total, we had a negative JPY 7.3 billion deterioration. As a result, year-on-year improvement of free cash flow was JPY 177.8 billion. Next, I would like to move on to the forecast for fiscal year March 2021. Page 22, please. Revenue is estimated at JPY 3.030 trillion. Adjusted operating profit is estimated at JPY 165 billion. This includes increase due to decrease in onetime costs and prevention of unprofitable projects despite an increase in 5G-related investments. Adjusted net profit is expected to deteriorate by JPY 12.2 billion. Excluding the onetime tax factor of JPY 20 billion in March 2019, it is up JPY 99 billion year-on-year. Free cash flows, it is JPY 150 billion, including the increase in receivables at the beginning of the previous year, that was JPY 27.8 billion. Annual dividends are up JPY 10 per share to JPY 80 per share, of which JPY 40 is for the interim period and JPY 40 is for the year-end period. These forecasts are based on the assumption that coronavirus impact will settle down by the end of the first half. We are confident that we can achieve these goals by overcoming the negative impact caused by macro environment changes by taking various measures to improve the business. Page 23, forecast by segment. Generally speaking, revenues are expected to remain flat in all of the segments, except for System Platform, where business PC replacement demand will go down; and Global, where Display business is deconsolidated. Adjusted operating profit is likely to improve, mainly in Global, thanks to decrease in onetime expenses. Page 24, free cash flows. Cash flow from operating activities is expected to deteriorate year-by-year by JPY 11.9 billion due to adjusted operating profit increase as well as the worsened working capital due to the increase in receivables at the beginning of March 2020. Cash flow from investing activities is likely to deteriorate by JPY 16 billion. An increase in investment of approximately JPY 16 billion is expected. As a result, the free cash flow is deteriorating by JPY 27.8 billion. Page 25 shows our response to the coronavirus. Given the ongoing uncertainties, we will focus on cash management and try to minimize the business impact through cost control, and we'll achieve active development of new business opportunities. Page 26, cash management under crisis. First of all, we have secured sufficient liquidity by issuing unsecured straight bonds the other day as well as the obtainment of commitment lines worth more than JPY 300 billion. We will prioritize the destination of funds clearly by thoroughly controlling unnecessary spending and flexibly adjusting budgets. In addition, we will generate cash through disposal of assets, in principle, by not holding any shares for the purpose of cross shareholding and examining asset available for sale and liquidate receivables flexibly. Page 27, please. Our vision of new normal after the COVID-19 effect is shown here. The pandemic of COVID-19 brought about digital, remote, online, autonomous and touchless society. And these changes are favorable for our technologies, such as DX, biometrics, AI and 5G, and we will capitalize on these technologies to provide the best solution to the customers to realize our vision of new normal. Specific changes already happening in government agencies, municipalities, schools and hospitals and will further accelerate in the near future. Page 28 shows initiatives of NEC. First, telecommuting solutions provide various services such as a telecommuting environment, security measures, responses by AI-enabled chatbot, and we are receiving many inquiries at the moment. Next is facial recognition system compatible with the masks. And people do not have to take off the masks with this system. Already, this is introduced in NEC headquarters building, and we plan to commercialize it in the first half of this fiscal year. We're also helping efforts to create vaccine for COVID-19 using AI prediction platform in the development of personalized cancer vaccines. We also started collaborations to accelerate creating a vaccine. We believe that these initiatives will help overcoming the challenges posed by COVID-19 and contribute to the improvement of the post-COVID period. This concludes my presentation. Thank you very much for your kind attention. [Statements in English on this transcript were spoken by an interpreter present on the live call.]