NEC Corporation (6701) Earnings Call Transcript & Summary

I am Motoo Nishihara, CTO of NEC. Thank you very much for joining us today, both in person as well as through the Internet. It was 4 years ago that R&D activities were featured in Innovation Day. Today, I would like to explain in detail our activities, innovations, new business developments and R&D initiatives. I hope this presentation will help you deepen your understanding of NEC. With that, let's move on with the presentation. Today, I will be talking about innovation. In April this year, R&D unit and new business development unit were merged to create Global Innovation Unit. I will explain why we established this new unit, what is our strategy and what we plan to undertake through this unit and what is its future direction. Then after, I will touch up on technologies in relationship to our MTMP 2025, NEC 2030VISION, which was announced in September. Through IR activities, we have been providing various innovation. So today, I will cover advanced technologies, laser focusing on global No. 1 and Only (sic) [ Only 1 ] technologies we have and how those technologies contribute to various businesses. Lastly, I will talk about initiatives that started 4 years ago, our endeavor to combine technologies and new business model to create new businesses that will impact our society. I will report on our activities and their progress. This shows the backdrop of global innovation. As you know, we are facing social issues on a global scale, namely: infections, such as COVID-19; global environments, such as carbon neutrality; and growing disparity. We live in the era of VUCA, people's values, lifestyle, work styles, nature of society and responses to the global environment are changing significantly. Amid such a situation, DX, a shift to digitalization is advancing. We tend to think physical first by removing existing constraints. We try to provide digital support and realize incremental improvement. But if we actually want to solve major social and environmental issues, we need to make a drastic digital shift. We need to think digital first and optimize the digital, then come up with the physical support in line with the digital world, which means that the way we conduct physical activities must be changed. However, to realize this, social consensus is very critical given the fact that various social systems will undergo changes. NEC has been sharing this notion with the academic community. NEC [ proposed ] 2030VISION, which delineates our direction in 3 areas, namely: life, society and environment. We live in the era of VUCA, where the society is becoming complex and its future is unpredictable. How can we realize NEC vision 2030? We believe that the solution lies in the combination of shared vision for a brighter future and technology. Four components are necessary to implement technologies in our society. Firstly, market intelligence. What kind of market and society do we want to create? And secondly, a technology development, and we are the technology company. Thirdly, as a private company, we need to develop business and generate profit, which is a critical point. Fourthly, we need to take a lead in disseminating technologies to the society so that there will be a social acceptance, which is an important aspect. These 4 components are critical. Having said that, as a strategy, we pursue co-creation. We will further expand open innovations, centering around our No. 1 and Only 1 technologies as well as through partnership, we will build major solutions. Secondly, we will develop new businesses that have a major societal impact. Thirdly, we embarked on thought leadership this year. This is the structure of Global Innovation Unit. R&D is on the left, and business development is on the right. This unit used to belong to business innovation unit until last year. We added IP management division and future casting and corporate design. Through the collaboration of these divisions, we will take on new challenges. This shows our global sites. Blue denotes 7 labs in the world, such as in Europe and North America. Red denotes business operations. AI drug development, for example, has business sites in Europe, India and Japan. NEC X has sites in Silicon Valley and Heidelberg in Germany, BIRD INITIATIVE was launched last year in Japan. We work on 2 axis, namely technology and market. This is the first time we introduced this notion, but NEC will be conducting R&D around these 3 areas. One is digital twin for co-creation and trial of the future. There is such a notion as metaverse. Real and virtual will further converge, not only in gaming, but this convergence is happening in our societal and business activities. Unless we have a platform on which AI can be used for simulation analysis, we can't realize optimization. We will be creating digital twin. Secondly, AI is making leaps and bounds. AI that just follows instructions is not suffice. We need AI that can partner with people. Thirdly, platform, which is comprised of, for example, our computer and network hardware, provides high reliability and efficiency. And we are adding environmental friendliness, which would be our platform strength. Another point is on market side, whose emphasis is placed on future societal significance and impact. We combine these technological and market aspects. On the market side, we work on democratization of data science as exemplified by dotData, which was established in 2018. I will explain about it later. Anyhow, it is trending favorably. Combination of health care and life science with AI has a great potential. Other items such as carbon neutrality follows. How are we going to link these trends to businesses? We will use an ecosystem. On the top, you see NEC, which is comprised of R&D and business units. In some instances, we will spin out technologies and spin in external funds and talents to accelerate innovations. A track record wise, we established dotData in April 2018. And to accelerate this endeavor, we set up NEC X in Silicon Valley, which is growing steadily. I will elaborate on it later. Under the same scheme, we started AI drug discovery in 2019 and BIRD INITIATIVE last year. Next, thought leadership. How are we going to collaborate with external entities and lead the society? On the left, we have open co-creation and standardization. FIWARE is a standard used in collecting data, such as in smart cities, which started in Europe. But now it is implemented in Japan as well. We took the lead in this initiative. Gaia-X is developing in Europe, and we would like to actively participate in this effort through our labs in Europe. We want to communicate our thoughts to the society at large, and that is depicted in the middle. A book entitled [ quick book for facial recognition ] has been published this month. NEC fellow, Mr. Imaoka here, is the author. Another book is call Composable Management, which is on NEC's new DX strategy. Both touch upon technology and business. Last item is ethics, which is extremely important. We need to develop AI with ethics on mind. We have a very rigid internal rule on this, and we collaborate with external entities to ensure implementation of safe AI. Next is highly skilled talents. To realize innovation, talents are the must. For R&D, we established selective compensation program for professional researchers 2 years ago, which sets no upper limit on compensations regardless of age, including new graduates. To date, we have 20 people under this program, and they are quite involved in the technologies I am showcasing to you today. On the right, we have a corresponding scheme on the business side. We plan to give the position of executive analytics consultant lead to both internal and external talents with high caliber. Next, on tying technologies to businesses. This is our growth model announced at our IR Day. On both sides, we have NEC's business domains, which is supported by various technologies. Foundational components are, for example, R&D and M&A. NEC's R&D activities are on the world top-class level. For example, regarding machine learning and the benchmark ranking paper acceptance by top academic conferences, we are the only Japanese company listed on top 10. Given the difference in the size of a company, the number of papers cannot be an accurate rule of thumb for comparison, but at least we are on par with GAFA. Looking at the patent, we are #1 globally in the facial recognition patent applications. We are also world #1 in patent applications, when including video analytics and AI. In network and communications, we have a long track record in the academia. We have an overwhelming position in facial, iris and fingerprint recognition and biometrics. We have topped in 3 areas, benchmarked by NIST of North America. We enjoy #1 position in patient recognition over multiple years. We are #1 in business solutions and brand awareness. On our IR Day, we introduced NEC digital platform, our technology foundation. Based on this common platform, we will be building various solutions. In principle, our R&D activity should be deployed on this platform. Our forementioned 3 areas of technologies, which I will be elaborating today, all reside on this platform. Let's look at each technologies. Details will be given at the demo booth. Firstly, digital twin for co-creation and trial of the future. Biometrics authentication is used to realize optimal personalized service. On the right, you see the usage of remote facial and iris recognition technologies. This authentication can distinguish 10 billion persons. Since the world population is 7 billion, we can distinguish each and every person on this globe. In relationship to this, as featured in today's newspaper, we can encrypt facial data and conduct cross-referencing. Various security measures are embedded. So facial data and personal information cannot be compromised, a major aspect of the system we are working on. Secondly, sensing technology. Let's take a quick look at each piece. On the top, you see fiber sensing, which is showcased at the demo booth. As you might know, optical fiber is used not only for telecommunications, but by attaching devices to the fiber, it can be used as a sensor with high accuracy. For example, the length of optical fiber can be about 380 kilometers. And when our sensors is attached to the fiber, we can detect vibrations and temperature on a real-time basis by meter. And this has a great impact. Numerous fibers are installed globally so we can, for example, identify traffic flow, earthquakes and climate change. Sensing can occur while the fiber carries communication signals. A second sensing technology uses satellites, which orbit around the earth. The conventional method can detect specific location every 2 weeks. You have to wait for 2 weeks to see a certain point. Satellites take different orbits. By combining those images, even at night or in bad weather, such as storm, we can detect the status of a given point at a higher frequency, for example, within an hour to a day. We can use this technology. We can check the situation after a disaster and also the situation of congestion or a construction progress. We can readily grasp the status quo. And this technology is very effective. Third point is at the demo booth as well. Glass bottles of medicine or drinks go under visual inspection by very seasoned experts. We developed a technology that can identify on near real-time basis for a matter of about 50 micron, which is 1/200 millimeter, actually just a dot. Foam and foreign matters are separately screened. This contributes to the efficiency of screening of chemical liquids and to safety as well because the sensor detects foreign matters, too. Now analytical technology, which was in the press release before. We are globally on the top notch class in this area. Lockheed Martin is in charge of developing manned spacecraft, Orion, for manned lunar exploration project, Artemis, by NASA. NEC is in charge of AI analytics for design, development, manufacturing and operations. Generation of a normal operation model by finding 22 billion relations from 150,000 sensors is quite a challenge. After going through many years of discussions with Lockheed Martin, they recognize our technology to be unsurpassable and very trustworthy. Our technology is used for NASA's rocket analysis. Similar technology is used for large plant anomaly detections as well. Next is AI. There are various areas, and I'd like to introduce to you the workflow of data science. So it starts with consultation and then analytical work and then the delivery of models. So this is our workflow. In our case, we have already commercialized analytical work, which is in the middle. So we have dotData, and we have NEC Data Enrichment. This is the Only 1 technology integrating data. So this is the extension or expansion from the dotData. And in the upstream process, in the consultation, for example, converting the expert intention into AI. And after the delivery of the models, when the environment changes, it's possible that the model degrades. So there is a technology to recover the degradation. So those are the new areas that we are working on. Next, about the AI is the optimization of the prescriptions. We often talk about visualization and analysis. But in order to utilize it for the society, what is important is the prescription optimization. So for example, human resource allocation, recommendation optimization, vehicle dispatch plan, timetable correction, most of them are done by human beings. So we believe it's important to do this with AI. So we offer support services for introducing optimization technologies. So there is intention learning, online optimization as well as quantum computing, that is to find the optimum solution at high speed from vast amount of candidates. This is the last part of AI about robots. In our case, this is a systematic robots. So individual robots shown here are, for example, have a simple transfer function. But when they are connected to the network, the robot capability is in the cloud. So tens and hundreds of the robots can work together and together with the human beings, and we will show this in the demonstration. For example, there is one warehouse, and there's a camera in the ceiling, and network environment is available. So hundreds of robots can work together to transfer things and to avoid collision with human beings. So this is systematic robot technology. Actually, the -- with the construction machinery, together with Obayashi group, we have a remote control of this machinery via network, which is already realized. So basically, the concept is the same. So here is the transfer robots. And we have a press release for this today, which includes this technology. Next is drones. In the future, there will be hundreds of drones used in the logistics system, and they are unmanned. So actual operation right now is done by the control tower. But in the future, unmanned, huge amount of drones working with AI, they need to work together with the safety and without the degradation of the services. So this is, in a way, controlling robots. So our way of thinking is that we want to have a systematic function of all of those drones and in an autonomous way. So this is AI negotiation technology. Concerning platform, there are various areas. So I'd like to show you a simple list here. Satellite constellation. A year ago, I think I reported this to you. We provide the gigabps-level optical communication between low orbit and stationary orbit satellites, 40,000 kilometers away. So that is the distance actually, 3 or 4x longer than the distance between Japan and U.S. So this means that we have a potential to cover the whole globe with this telecommunication technology. So 5G, beyond 5G and 6G, this satellite communication technology is an absolute necessity. Next is all-photonics network. We are working with the entity, IOWN. So wavelength conversion technology, targeting less than 1/100 low latency and power and photonic chips. And also 5G, O-RAN resource optimization, 30% less power consumption, distributed MIMO, this is the next-generation wireless equipment, drastically reducing the cost and size to improve the performance. This is the next telecommunication equipment. And last is submarine optical communication, which is being exhibited this time. This is the 4 core fiber cable, uncoupled, multicore fiber transport system. It's a very thin, 1 millimeter fiber with the 4 core. So that means that the capacity will quadruple. And this is for the long haul. So for example, the submarine communication technology is included here. As for the quantum technology, there are 2 things, starting with quantum computing. NEC is a pioneer of this area. In 1999, we successfully demonstrated the quantum bit. So rather than quantum processors, we have Aurora supercomputer, which is the desktop type, which can be inserted into the server. So we have vector annealing service. And also, we work with the D-Wave of Canada. We invest in this company to offer the quantum cloud service. As for the future, right now, the practical use of the superconducting quantum computing circuit is targeted for 2023. Major global players are also working on this. But our characteristic is that the quantum coherence time, which is 100x higher, which means we are closer to the optimization and also scalability. Usually, we make quantum processers and in order to scale up, we have to go through the scalability process. But we can connect this computing circuit in a series so that we can improve the scalability. So 2023 is the year that we try to pursue the major breakthrough. As for the quantum cryptography, we have been working on this for the past 20 years. And we are hoping to deploy the commercial environment, the long distance communication technology in the fiscal 2022. And also, the prevailing model or the low-cost model will be available, we are hoping, in 2 years after that in 2024, which has not been reported very heavily, but we are working on this. And also, we are having the joint research with NICT, Hokkaido and Tokyo Universities. Actually, our technology or protocol is open. So those institutions can confirm our safety. So this type of technology should not be a black box. Now let me talk about the challenge of the new business development. As I said at the outset, we are focused on the co-creation. So we are proactively using external funds and external personnel. And Global Innovation Unit take on the challenge to be high-value businesses with social impact. And the third is strengthening partnering. Now let me start with the BIRD INITIATIVE. A year ago, this was created in September 2020. So this year's revenue is expected to be 7x that of the year before. So major growth is being realized in terms of revenue. Now in this BIRD INITIATIVE, our technology as well as the technologies of the national research lab or universities and private companies are brought together so that we can foster and develop them so those technologies can take off. That is the way of thinking. So this is truly a grand concept, I believe. Now actually, the major companies and universities have those technologies. But we want to foster them and develop them to create a bigger market. So that is the aim of this initiative. We have 2 projects which are planned to be carved out next fiscal year. Here is some of the examples: digital twin combined with AI, drones and supply chain. For each one of them, we are showing the partners working with us. Another is NEC X in North America. In the past 3 years, we have had those achievements. Three companies were already carved out, and other multiple spinouts are anticipated in coming years. So the key in the past 3 years is that when we started, this was completely new, so we did not have any experiences. But for example, our activity was introduced at the Stanford business school as a MBA case study. And here it says Alchemist Accelerator, which is a group of venture capitalists. So we have concluded our partnership as they evaluated the technology and activities very highly. And we also have network with venture capitalists as well as entrepreneurs. So we are seeing the accelerated speed of our spinout or carve out. There are some examples of the 3 of them which were carved out, and there are many others in our pipeline. So since we have already built this channel, we want to increase the speed. Another thing I'd like to mention here is that in all of them, the funds come from outside. So venture capitalists invest in those. The venture capitalists and companies who understood our technologies invested in those areas. So this is truly ecosystem type. Now collaboration with the major companies, especially with NTT, we have, for example, open RAN, global 5G, IOWN. So these are for the future network. And we also have a collaboration with universities. Next is NEC Orchestrating Future Fund. We are releasing the press release today. In order to drive our ecosystem, we need funds. So NEC is a leading partner and other companies, of course, joined to create this fund. Those 6 areas are our targets: 5G, 6G, digital government, digital finance, health care and carbon neutrality and DX. So those are growth related to our businesses, and start-ups as well as operating company can join to create the solution and the future together. And we are about to start this fund. Now as for the cases of the new business development, this is the last part of my presentation. As for dotData, it has completed the Series A, and the total financing amount is $43 million. So gradually and steadily, it's growing, so we are thinking about next step. So NEC, as a leading capitalist, will benefit some values from this. And also NEC Japan becomes the data-driven DX business division. And this is basically for Japan. And already more than 70 companies offer the technologies, combining the dotData technology and other NEC technologies. So the sales since 2018 have been doubling to '21. Now AI drug development. Our target is to achieve business value of JPY 300 billion in 2025, and we are making steady progress. So based on the individual DNA, we are trying to create the blue print so that we can provide a customized or personalized treatment. And the Phase I clinical trials have started on the November 24 last month, we have made this press release, and we are seeing the very good results, which has been talked about widely in the industry. In the similar way, based on the individual DNA or gene, the BostonGene Corporation has the same way of thinking. So rather than AI drug delivery, they are focused more on therapy or treatment methods and what kind of existing drugs, pharmaceuticals they can use. But basically, the concept is similar to what we have. So we agreed to have a strategic global partnership. So their treatment can be provided as a part of our medical care. And also they are interested in the AI drug development, so we will be working together in this area. As for carbon neutrality -- this is the last part. And NEC has various assets which can make a contribution. So for example, in the area of the industry, there are some differences, but the companies are working on the visualization and optimization within the company to reduce the carbon footprint. And the next step would be supply chain optimization, to make it greener. In a similar way, well, we are doing this in the enterprise side, but also the government and smart cities are working on this. In order to make the carbon neutrality most effective, we have to work together with the government and smart cities. So there has to be a cross-domain total optimization. So digital twin that I talked about is to make it possible so that we can integrate and visualize and conduct a simulation so that we are very much in sync here. And also, we are working on the network side or ICT infrastructure, including O-RAN and others. So this is the optimization using the green technologies. So as I said at the beginning, market intelligence, technology development, business development, social acceptance, we are working on this all so that we can realize new social value creation through innovation, brought about by a shared division for a brighter future and technology. And with that, I'd like to end my presentation. Thank you for your attention.