NEC Corporation (6701) Earnings Call Transcript & Summary

Thank you for your participation today. I would now like to explain the financial results for Q2 fiscal year ending March 31, 2023. This is what I will cover today. I will first start with the outline of Q2 results. Please refer to Page 5. This shows the key indicators and financial results by segment. For first half revenue, we see an increase of 5.2% versus last year. Adjusted operating profit decreased. The fluctuation of network services will be explained in more detail when we cover financial forecast. But for this fiscal year, carriers capital expenditures are skewed towards the second half and first half was sluggish. There was also a onetime loss for an overseas strategic order that was acknowledged, and we are seeing a large decrease versus the same period last year. On the next page, I will cover the reasons for the fluctuating adjusted operating profit. Changes in adjusted operating profit and loss are shown on Page 6. I will explain using JPY 42.1 billion from FY '22 March as the baseline. In comparison to the onetime profit of JPY 8 billion acknowledged in FY '22 March, a onetime profit of JPY 11 billion was recorded in FY '23 March. Component shortages led to a minus JPY 500 million, where currency impact was a positive JPY 6.5 billion. When excluding these regular businesses, enterprise where domestic IT services are doing well, saw an improvement year-on-year but with the minus JPY 18.2 billion in network services. In total, we saw a downturn of JPY 19.9 billion. All in all, FY '23 March operating profit was JPY 31.2 billion. Page 7 shows order trends. For the entire company, excluding submarine systems, which heavily fluctuates, orders increased 16% in the first half. For IT services, mainly in the enterprise, strong demand continued resulting in an increase of 11%. By segment, urban infrastructure and SME fared well and increased 14%. Public infrastructure saw a large satellite order project last year during FY '22 March. However, we still increased by 4% for the first half. And if we exclude this large project, we saw an uptake of 17%. For Enterprise on top of large distribution and services projects, the tailwind of high IT demand resulted in an increase of 15% for the first half. Network Services was flat for the first half. But when we look at Q2, 5G demand expanded and resulted in an increase of 10% for the quarter. For Global, excluding submarine systems, large projects for NetCracker, along with digital government and digital finance, listed orders significantly. Next, I will outline the financial forecast for FY '23 March. Page 9 is the full year forecast. No changes have been made since the announcement on July 28. Page 10 are forecast by segment. When we updated our financials on July 28, the upside factored into the adjustments are now reflected into each segment. Consolidated companies JAE and NESIC outlook updates have also been incorporated. Page 11 are the details of the adjusted forecast. First, during the forecast made on July 28, as regular business upside, JPY 14 billion was factored in for segment adjustments. This upside taking into account the actuals for the first half as well as current circumstances are now factored into Public Infrastructure, Enterprise and Global. For Network Services, by reflecting forecast for consolidated NESIC, we have decreased the outlook by JPY 4 billion. NEC Corporation remains unchanged. Breakdown by segment will be explained in the following pages. As for corporate actions such as divestiture of assets that were factored into the July 28 announcement as scheduled. We have acknowledged a gain of JPY 11 billion in the first half. Now first on Page 12, the forecast for Public Solutions business. Revenue for the first half dropped due to the reversal impact of large urban infrastructure projects, but orders for Q1 and 2 are increasing and the recovery trend continues. Full year forecast remains unchanged from the updated numbers on July 28. This forecast will be deemed as the lowest range and by capturing the demand seen in the recovery trend, we would like to improve the numbers. Page 13, Public Infrastructure business. In the first half, revenue increased due to the boost in the number of projects for satellite defense businesses as well as a hike in sales of JAE, our consolidated subsidiary. Adjusted OP increased due to a hike in revenue and improvement of unprofitable projects. Full year forecast is revised upward by JPY 5 billion from the July 28 outlook, reflecting an increase of JPY 3 billion in NEC Corporation's adjusted OP and an increase of JPY 2 billion from the revised forecast of JAE. Page 14, Enterprise business. In the first half, orders, revenue and adjusted OP all increased year-on-year due to risk demand. Full year forecast is revised upward by JPY 10 billion in revenue and JPY 3 billion in adjusted OP from the July 28 forecast, reflecting the results of the first half and the favorable market environment that is expected to continue. Page 15, global business. In the first half, revenue increased due to the impact of weak yen. Despite the positive impact of the increase in revenue due to a onetime cost hike, adjusted OP remained flat year-on-year. We expect to offset this first half increase in expense in the second half. Our full year forecast is revised upward by JPY 50 billion in revenue and JPY 5 billion in adjusted OP from the July 28 outlook taking into account the greater depreciation of yen than originally forecasted. Page 16, Network Services business. Factors contributing to the changes in the actual variances in adjusted operating profit loss compared to FY '22 March are shown on the left. Firstly, let's start on the first half results on the top. We incurred a onetime loss of JPY 5.5 billion from the booking of a strategic project of the international 5G business. Furthermore, a loss of JPY 2 billion was posted as an allowance for long-term inventories. In total, onetime losses were JPY 7.5 billion. To begin with, strategic price was quoted for the initial mass production lot given the project's strategic nature, given that COGS was quite challenging to start with then after component costs rose more than initially expected due to the impact of inadequate supplies and the currency impact. We are requesting the customers for some relief about taking a conservative stance, we provisioned the allowance for loss. Strategic expenditure is concentrated on the first half in FY '23, March, posting JPY 4.5 billion, which is on par with the amount recorded in the second half of FY '21 March. In addition, we factored in a downward forecast vision of JPY 2.5 billion of NESIC, our consolidated subsidiary as well as the negative impact of JPY 2 billion from the component shortages. Carriers capital investments tend to concentrate in the second half and remain weak in the first half, result in the sales decrease of JPY 5.2 billion. Due to all these factors, the first half result deteriorated by JPY 21.7 billion, closing at a loss of JPY 13.3 billion. Given the first half results, the full year forecast is shown based on the second half assumptions on the right. Firstly, a onetime JPY 5 billion royalty income in Q4 FY '22 March will be a negative factor in the second half of FY '23 March. Strategic expenditure is expected to remain unchanged for the year because we anticipate it to decrease in the second half. NESIC revised its forecast for the full year, which will be recorded as a year-on-year decrease of JPY 1.5 billion in the second half. Sales are expected to be higher in the second half due to the concentration of domestic 5G demand, the increase in overseas 5G shipments and a boost in IT business. Although it is not a low-hanging fruit, we expect sales to increase by JPY 15.2 billion in the second half. We aim at achieving a full year operating profit of JPY 27 billion. Looking ahead to the next fiscal year and beyond, we will take heat up not only the environment surrounding our global 5G businesses, but the overall environment, including various macroeconomic factors and uncertainties. As we have done in the past, we will properly implement necessary measures as the change in environment calls for. As for 5G demand, there is no change in our medium- to long-term domestic and overseas forecast. However, we recognize that there are uncertainties such as carriers' investment policies and changes in the macroeconomic environment. Page 17. Lastly, the announcement of an NEC Innovation Day. This event is for media by the analysts and capital market professionals. It is scheduled on November 30 this year. Our CTO, Mr. Nishihara, will explain NEC's R&D and new business creation strategies. Details on the program will be announced shortly. We look forward to seeing you at the event. This concludes my presentation. Thank you very much for your attention. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]