NEC Corporation (6701) Earnings Call Transcript & Summary

I am Nishihara, CTO. Thank you very much for joining NEC's Innovation Day today. This is a second innovation day as we started from the last year. Today, I'd like to present the impact of cutting-edge technology on the midterm management plan and the expansion of new business and its future prospect. First, let me explain NEC's organizational structure, which was explained last year as well. Global Innovation Unit is a consolidated body of the R&D function at the previous central laboratories, new business integration and the development function and the corporate IP function with 1,200 members. About 40% of the research people are deployed in overseas laboratories. This is the global structure. There are 7 laboratories in the world, and the later shows the business locations. Business incubation sites are widely spread in North America and Europe, among others. In Europe, they are in Germany and Portugal. This is a summary of NEC's concept and technological and business innovations. We believe that 4 key points support the competitive advantages. First, as for how the business portfolio contains a global #1 technologies, NEC is renowned as a technology company. But what matters is our global strength, not only in Japan. Second, as for the business innovation, which was also mentioned by CEO, Mr. Morita. We need to have diverse know-hows about the business development processes and the finance schemes to create businesses. In the last 5 years, we worked very hard to accumulate them. And then Human resources are, of course, important. We will develop HR globally acquiring and training business and the technology professionals. Environment needs to be developed, both in terms of cyber environment for R&D and fiscal environment as well. I will elaborate this at the end of my presentation. Today, we have 3 agenda. First, let me talk about the technology, how it is reflected in the contribution to the midterm management plan and NEC 2030 vision. Second, I'll talk about the concept and the policy of creating a new business in GIU, Global Innovation Unit and the portfolio and the current growth. Third, I will talk about the development of people and opportunities for the new growth in the mid- to long-term perspective. First, let me start with the technology. This slide summarizes the position of NEC technology with objective facts for your better understanding. In AI, security and communication, at least in terms of academic record, NEC has the #1 position far ahead of other Japanese companies. When you refer to the ranking of paper acceptance by top academic conferences in machine lining shown on the right, which is a total from 2000-2021, we were in the top 10 companies as the only Japanese company. It is not only in machine lining but in other discrines, NEC is always in top 10 or 20 companies ranked among GAFA and the Chinese leading companies as the only Japanese company. Besides the example in machine lining, as you see on the left, in security and communication, we have the high level of benchmark and patents record is also prominent. Our biometrics authentication technology through phase iris and fingerprint are widely covered by media, and they are extremely outstanding. According to the NICE, American benchmarking organization, we have been ranked as #1 for 5 consecutive years, and NEC is a global #1 in the brand's Chair of mind as well. As for biometric authentication, today, we present the exhibit of new technology, which is not publicly released yet. Through biometrics authentication, we can identify individual and furthermore, the hers condition -- hers scale information will be available. For identification, our system can be provided for various scenes as shown in the vertical axis and it is highly accurate. By the combination of facial and iris recognition, we can attain the ID accuracy 1 out of 10 billion. Given the word preparation 7 billion, we can identify the individual out of the entire world population. Horizontal axis shows the degree of stress free instead of stop-and-go type inspection almost without knowing the authentication will be conducted. Today, I'd like to present the gateless biometric authentication shown at the right bottom. And we also issued its press release today. One camera can identify 100 people in 1 minute. And even if people look side way, it still functions well. Therefore, it can be applied extremely widely as almost all technologies cores are completed. So it will be commercialized in 2024 not only in biometric authentication. In the field of #1 machine learning that I mentioned at the beginning, you may be interested in other disciplines in the area of image recognition analysis, prescription AI and so-called explainable AI, the patent scoring of NEC is global #1 respectively. Currently, the quality of patent can be improved further. So we commit to achieve #1 position in 3 areas by 2025 as we achieved in biometrics and face recognition with a high level of visibility. All of image recognition, biometric authentication and analysis perceptive AI are extremely important assets for upcoming DX, and this former technology vision every year to clarify how our technology will be used in societies through the extensive discussion among engineers around the world. This year, all industry is shifting to DX. In other words, all data create the state of duplication in the digital twins. And there, the various simulation will be enabled. In the real world, simulations are sometimes difficult but it is possible in the digital twins. Then we can find the optimized solution and put it back to the real world. Through this, all industries can get smarter and the business models may change drastically. As for the requirement for this year trends, the elaborate modeling of the real world is essential. And we need to consider the optimization. After the optimization for the feedback to the real world, we need to control and handling pitching crude communication, being aware of latency. In mobility, also the communication is critical. As for the platform, as we need to address the security attacks through the system, 3 elements of safety, trust and green to minimize energy consumption in platform are crucial. Therefore, for digital trends, I think technologies have NEC will be indispensable. Today, technologies circle in the exhibition column are exhibited. They are the major technologies for which press releases were issued. As for the phases, the blue items of those already commercialized. Light blue items are making steady progress for commercialization. So you can see that majority is already in the phase of commercialization or very close to the commercialization. Then how can we make contribution to the businesses through those technological strengths? Since 2 years ago, when is presented in Innovation Day, we have been working on this. Please refer to the chart on the left, BRL and TRL are technical terms that the vertical axis of BRL shows the business readiness levels and the horizontal axis shows the technology readiness levels. And we did the detailed traces and upper right position shows the high likelihood of commercialization. And when we refer to the internal KPI of speed of research from the basic research to the commercialization, it improved 15% from the last year to this year. And the number of practical applications increased by 20%. When they are not replied, the throughput is up by 1.5x with the progress for the commercialization. Deploying the basic research technologies to the NEC's Vista platform, NDP, shown on the right, the foundation of NEC's DX offering is made. We are accelerating the speed of this cycle in our global innovation unit. Mere devotion to the research would not lead to commercialization. And recently, we have been enhancing development product development area. The ratio is shown as 10% and 15%, and the unit has been transforming every few years. So central research labs were added with development function to change into research and development unit in 2020. And in 2021, business incubation function was added further. By having the seamless consolidation from the technology to the product development, we have been achieving results and the resources for development will be expanded to 30% in 2025. As for the technological front, we show you the exhibitions at the back later, so I'll walk you through briefly here. As for modeling, cities will be modeled as smart cities, industries will be modeled through the digital trains, and the people can be also modeled into the digital twins. As for cities, by monitoring through AI and SAR satellite, we can expect the breaches in millimeter order, predicting and preventing the collapse of region several weeks before in advance. With the aging of social infrastructure, maintenance market will be expanding. Then without deploying human resources through AI and satellite information, we can identify the high-risk locations and it can be used globally. As for the worksite of digital trains, there are diverstic examples. And we show 2 examples of factory worksite and the construction work site. Robotics will be increasingly adopted. But the current workers' operations to check safety and others can be done by AI, and the rebate technology is presented. On the right health care digital twins action. I will elaborate the health care initiatives more in detail later when I talk about the new business development. As for the optimization, let me skip the detailed explanation. Simply put, there are 2 axis. First, the vertical axis is the real-time optimization. If the of optimization takes several days, it doesn't mean much. You need to be immediate to be useful in the case of a smart city and other applications. Horizontal axis is the automated cooperation in the best method. In optimization, no single golden algorithm can be the solution for all. We may adapt quantum annealing, computing and machine learning. We need to find the best match of these in the process of integration in the optimization. If people do it, it will be the bottleneck. So it needs to be automated process. Today, out of our many technologies, let me show you the vector annealing. It is a technology of pseudo quantum annealing, applying quantum computing technology to the specific area of annealer, and it is already commercialized service. We also present the optimization support compiler in the exhibition. As for the prescription and controlling, it is related to robot in the controlling in the real world. There is no exhibition regarding this today, but besides the robot control, to cause action in the real world, explainability will be required. Explainable AI needs to be understandable and convincing to people because AI will be operated and its responsibility will be taken by people. So explainability that people can understand is important. As for negotiation between AIs, when everything will be AI, we need to go through a negotiation between AI's for collaboration, focusing on this point from the start. We established a consortium and has been leading the academia as well. As for the platform, as mentioned at the beginning, after the various aspects, what matter most is the total trust and it is also related to security. NEC launched the open consortium in November 2022 with NTT Group. It involves the technology to monitor and ensure the safety in all process from supply chain system integration to operation and tailing the whole network equipment and connected all devices and OT, which will be rolling in future. It also includes a sophisticated blockchain technology. We adopted open consortium approach, not to close one where we make our specification public to invite other people to join us for making safe system. This open consortium is jointly promoted with NTT. On the right, quantum cryptography is a system of distributed cryptographic key. And it is regarded as the ultimate security system. Simply put, the information session changes upon eaves dropping in the quantum cryptography. So with any form of is dropping, it will be denied and the no eves dropping is possible. only unlimited companies engage in this technology and NEC is ready to launch the product in the next fiscal year. Let me announce this today. As for the communication capacity, NEC is renowned in 5G open radio access network. And there's a next step in beyond 5G distributed MIMO, we work with NTT Group. And it is shown in the exhibition today. We succeeded in realizing the summary optical fiber cable, our amazing capacity of 1.74 gigabit at 3,000 kilometer lengths. NEC is one of the global 3 companies of submarine optical fiber cables. In application, IT and network combined control technology is enabled with our strength of covering both of commutation and computer. So far, IBM research and for more details, we explain with the exhibit and take a question there.

Now let me explain about business incubation. First of all, I think it will be better to introduce NEC's approach to new businesses. First, new businesses are not limited to ideas that come out of NEC loan. As you see here, the key is together with them from around the world. There are things that are oriented toward the technological seeds of the market, and there are also a variety of market-oriented themes. Also, the process of new business creation is necessary to commercialize the ideas. This is know-how that we have learned over the past 5 years after creation, we commercialize. In some cases, commercialization is done in-house at NEC while in other cases, a startup is created or joint ventures form with a partner. This is the approach we take and the upper part of this chart shows the process that NEC Group follows. The bottom is actually the process that other companies follow. This year, our new business creation process has become a consulting business. We started this with a company to Bird Initiative, and it has been well received. As I will explain later, we received consulting requests from approximately 34 companies. Through this endeavor, we can understand where customers want to establish new businesses. We offer consultation and then we take them through the establishment of their new businesses and these create synergy with NEC's business. This is a very unique system. We believe that business incubation cannot expand unless it becomes an ecosystem. Some aspects may be handled within the group, some with external players, but the intent is to connect all of this. Now this is something that I'm sure you're all aware of, but let me introduce it in a more organized manner. Here vertically is where NEC can properly control innovation and is also strong in the market. Needless to say, NEC will undertake these initiatives where NEC has the technological capability but in terms of the market. If other companies are stronger, JVs or business alliances are needed. As I mentioned earlier, many industries are going to empower ICT with digital twins. There are promising areas where other companies are already engaged in and where we need to add a little more to our technology. This is where we will need to create start-ups. However, this is meaningless unless the benefits are returned to NEC, which is shown on the lower left. The White out space shows the business units or companies that we have set up in accordance with this thinking. Let me explain the lower part first. This is a market that is controlled by another company, but NEC has the capability to create what we call domain type new businesses in which our company and joint ventures can collaborate on business partnerships. Typical examples are health care, life science, agriculture and carbon neutrality. In health care, life science and agriculture, many ICT companies are interested in these areas. But if I may speak of NEC's strength shown on the left side, this is where domain accumulation over many years becomes essential. In fact, we've been involved in life science, not just 3 years, but 24 years. We started back in 1998 and is 39 years since we embarked on agriculture. We have been pursuing these ever since. On the right side of this page, to better understand the market, we may acquire a top vendor because we need a partner to understand this market, and we need a top joint venture or business collaboration with them. The key point is to create services, solutions and business models with a competitive advantage that other companies cannot offer by connecting them with our digital twin technology. I would now like to explain why we embarked on Life Science business. The vertical axis is quite expotential, and the axis is quite actually more longer. Moore's law is the blue line and costs have been decreasing rapidly over the past 20 years. Now for the cost of DNA analysis, which is the cost of obtaining DNA Genomic individual has also been decreasing, outpacing Moore's law. 20 years ago, we anticipated this phenomena. And since DNA is a digital code containing all of human information, we thought that this would prove to be of enormous value for health care. With this accumulated 20 years of insight, we are seeing a great deal of progress, especially during the past 3 years. We have collaboration with Transgene in the field of individualized cancer immunotherapy acquired company OncoImmunity have joined forces with NEC's European Research Center to see breakthrough in personalized cancer vaccines. In the middle, UCSB, mainly COVID-related which is yet to can and coped viruses are constantly transforming into variance. Therefore, a new COVID variant appears every 6 months. What can we do? This is still an open issue. We are also working with Shionogi on hepatitis B treatment. There are a lot of things to talk about and details will be covered in the exit. Here, I would like to talk about CPI. CPI is a fund that invests in COVID-related matters. The United Nations issued a 100 days mission do something within 100 days. We recently issued a press release regarding this. NEC was the first Japanese corporate group to receive this fund. There are several reasons why. I can't talk about all of them, so I'll highlight one. It was about our technology. As you can see from the picture on the right, we simulate to create vaccines, and we still have the usage of AI power design. This is an example of a standard company. It takes 4 months to use an AI model and simulate. The result is shown in blue. After checking the results of solutions created, this routine is done every 6 months with a new vaccine twice a year. We have succeeded in doing this in 1 week instead of 4 months. That means we can do 15 vaccine trials in half a year. This is still just a simulation stage with digital twin of ICT. For actual immune treatment, a separate physical trial pipeline may be needed, but a single to double-digit advancement can be anticipated. This is possible because of NEC's II technology advanced optimization and HPC supercomputer technology. We are now able to combine these technologies, allowing NEC to challenge ourselves in new fields like health care. This is one of the reasons why CPI chose NEC out of Japanese companies, and I wanted to introduce you to this today. Another is Boston Gene, a start-up company in Boston USA, which is also using genomics to search for new treatments. NEC has invested in this company for the past 3 years. The concept of this company, which is based on economics is exactly the same. So by combining this company's technology with NEC's technology, we can create business synergies through optimal treatment recommendation. We can also leverage vers assets of BostonGene for NEC's AI drug discovery. Since BostonGene is an American company, we will develop BostonGene services in the Japanese market. In addition, Boston Gene and NEC are now considering the establishment of a joint venture to develop the service in the Asian region in the Japanese market, the APAC market. The Asian market, NEC will undertake the various services of BostonGene. Next, agriculture. We will introduce at exhibit, but there are sensors that are very sophisticated, and they can absorb all kinds of information from the ground. By controlling with digital twin in Portugal, we have been able to reduce nitrogen fertilizer by 20%. Irrigation was also reduced by 15%, but yield was increased by 20%. This was an example with tomatoes. The results were so impressive that we formed a joint venture with Cocome. As you can see on the right, we are already doing this not only for Cocome tomatoes, but also for 14 other crops in 11 countries. So we are now in the process of expanding agriculture globally. As for carbon credits, carbon neutrality, we are still in the research stage. Shown on the left is our creating knowledge scheme with KO University that we started this year. In the area of disaster prevention, as soon as fire breaks out in a forest, CO2 is generated. CO2 is also generated when new buildings are reconstructed after floods, about 10% CO2 is generated. NEC's disaster prevention and mitigation solutions have the effect of reducing CO2 emissions in light of carbon neutrality. This is a new concept, and we are currently exploring its potential by proposing it to various organizations. On the right side, we are proposing to credit various natural capital, such as force to companies with net 0 emission goals. The focus is to create a market and consult. We are still in the research stage for both of these proposals, but we are looking ahead to the next phase of the project. Next, I would like to introduce an example of a start-up business. In the case of NEC, a typical start-up company is dotData. I introduced this last year as well. On the bottom right, you see former NEC researchers and they have left the company to create dotData. As noted on the previous page, NEC benefits from the collaboration with dotData. dotData is also growing. Series B has been completed and corporate value of JPY 50 billion is insight. A total of 100 companies have been provided with products accumulatively. NEC handles domestic business and data-driven DC solutions using retail and both orders and sales are growing very rapidly. This is among the top ranking within NEC and has grown into a growth product. Our aim is to extend its corporate value to Unic Open-RAN 2025 and beyond. NCX, which I will introduce today is a very different scheme. NEC has abundant IP, and we will provide these. In the past 4 years, we have created a pool of 5,000 interpreters in the U.S. called the EIR. They will use the technology to commercialize businesses. They also bring funding from outside. So NEC provides a license along with a very detailed hands-on program to nurture the business. The number of successful programs is increasing, and this is clearly written in the book by Charles O'Reilly, the author of laden which you can see on the upper right. It is also used as a case study at the Stanford NBA school. There were many struggles during these 4 years. However, in the past 2 years, last year and this year, in the past 1.5 years, we have seen a rapid increase in the number of successful cases and have established 7 successful start-ups. By creating these businesses, NEC may enjoy capital gain or it may become a means of doing business by combining forces with NEC business. Since NEC provides the intellectual property, we also receive a license fee if the product is sold. As I mentioned at the beginning of this presentation, in the same way, we are also developing our consulting business, and we have 34 projects in the pipeline for which we provide consulting services for a fee. We also have a CVC fund, which was announced in the press today. We started this faster and have successfully raised JPY 20 billion and have already invested in 2 companies. As you can see on the left, this perfectly coincides with the target area of NEC's midterm management plan. We are working together with limited partners who agree with this plan and also working with start-ups who fit into this plan. As mentioned in today's announcement, we are aiming to create business value of JPY 300 billion by 2025. Depending on the characteristics of the project, we may use DCF method or multiples. But in any case, we have checked objectively with outside consulting firms and most of the experts in the consulting firms have come to a conclusion that this is a fair estimation. We are steadily advancing to attain this target. I have only 3 more pages to go. Innovation, this is all about people. In the area of technology, we have a global selective compensation program for professional researchers that allows people in their 20s and 30s to earn a salary with no [indiscernible] depending on their abilities, and we have trained nearly 1,000 people to become accelerators. Recently, we announced the NEC DX Innovator 100 and 44 of them are from the Global Innovation Unit. To underpin this, NEC also has invested in a data center. The AI supercomputing center has a capacity of 580 petaFLOPS, which is by far the largest in Japan compared to the top company for AI equipped supercomputing, we have heard. Through the accumulation of environment people and know-how, we are planning to build a location for technology dissemination in the Tamega area, not only NEC, but partners, universities, investors and start-ups co-located here will demonstrate technologies and new businesses here. These will be converted into IP and linked to businesses. This entire complex will strive to do so. We will promote global innovation in this way and as CEO Morita mentioned, NEC plans to multiply technology innovation with business innovation to expand new business ecosystem reform. Thank you very much for your kind attention.