NEC Corporation (6701) Earnings Call Transcript & Summary

Thank you very much for your attendance. Let's begin the presentation of financial results for Q3 FY March 23 that was released today. Topics are listed here. Firstly, a summary of Q3 FY March 23. Page 5, please. Key financial indicators are shown here. Revenue for the 3-month period of Q3 increased by 14.1%, and adjusted operating profit rose by JPY 18.4 billion year-on-year. Likewise, against the 9-month period of FY March 22, revenue went up by 8.2% and adjusted operating profit increased by JPY 7.5 billion. I will elaborate on the factors contributing to the changes in adjusted operating profit later. Page 6, results by segment. All segments trended favorably during the 3-month period of Q3, resulting in an increase in both revenue and profit. Consequently, 9-month adjusted operating profit rose in all segments, except Network Services. Page 7, factors driving changes in adjusted operating profit. Let's start from the 9-month figure of FY March '22, which is JPY 76 billion. While posting a onetime profit of JPY 8 billion in asset sales in FY March '22, that of FY March '23 was JPY 11 billion. The impact of changes in the macroeconomic environment were: one, a positive JPY 11.5 billion attributable to currency fluctuations; and two, a positive JPY 3 billion, resulting from the mitigation of component shortages from the previous year. Marginal profit and others were negative JPY 24.6 billion, mainly due to the deterioration of Network Services. Details of this impact are shown on the next page. We recorded JPY 14.5 billion in IP income in Q3 following that of Q4 FY March '22. IP income can be regarded as a part of the operational improvement. But since we have booked multiple year worth of IP income in a lump sum, its impact to our performance was significant. We, therefore, carved out IP income as a separate line item. We will continue focusing on monetizing our IP to enhance our base profit level. Putting all these factors together, adjusted operating profit for the 9-month period of FY March '23 amounted to JPY 83.4 billion. Page 8, Network Services business details. 9-month revenue totaled JPY 361 billion, up 3.1% year-on-year, mainly due to the increase of global 5G revenue and the posting of JPY 10 billion IP income. Details of the year-on-year changes in adjusted operating profit/loss are shown on the right with FY March '22 as its basis. The 9-month impact of the macroeconomic environment was negative JPY 2 billion, its breakdown being JPY 1.5 billion attributable to FX fluctuations and JPY 0.5 billion to the component shortages. Next, the breakdown of changes in business operation related matters. In addition to the JPY 7.5 billion in expenses for the global 5G strategic project recorded in the first half of FY March '23, JPY 5 billion was posted in Q3 as the expense for streamlining assets, including inventory valuation. Strategic expense for the expansion of 5G business is planned to be flat against FY March '22. So the expense level for Q3 remained the same year-on-year. Other operational expense was negative JPY 7.4 billion, attributable to the changes in product mix and other factors. Since IP was posted in lump sum for multiple years in Q3, IP income contributed JPY 10 billion to adjusted OP. Putting all these factors together, adjusted operating profit was negative JPY 600 million, a decrease of JPY 16.4 billion year-on-year. Page 9 shows the order trends. I would like to explain placing emphasis on Q3. Both Q3 and the 9-months period exceeded the previous year and total for the entire company was an increase of 14%, excluding largely fluctuating submarine systems. In the area of IT services, ample demand for companies led by Enterprise continued and was an increase of 10% for the 9 months period. Breakdown by segment was as follows: favorable trends continued for urban infrastructure and SMEs, resulting in a 15% increase. Public infrastructure experienced a large satellite project last fiscal year and was an 8% increase for the 9-months period. If we exclude this large project, the growth was positive 18%. Enterprise enjoyed a positive push backed by strong IT demand and was an 11% increase for the 9-months period. On top of 5G expansion for Network Services, intellectual property income was acknowledged, resulting in a 7% increase. Even with income from IP excluded, the increase was 4%. Global, excluding submarine systems, enjoyed a strong increase led by large projects for Netcracker. Allow me to move on to financial forecast. Page 11 shows the full year financial forecast. In accordance with share buybacks, there has been a change in the adjusted EPS. However, for the remaining indices, they stay unchanged from our outlook presented on October 28. Page 12 is the full year outlook by segment. This reflects amendments to the financial outlook for Japan Aviation Electronics announced on January 27. This downward revision is offset by the entire company and thus, there is no change to the October 28 announced adjusted operating profit of JPY 185 billion. On Page 13, I will explain the summary of our financial forecast. Domestic IT services continue to see strong IT service demand and orders are steady up to Q3. Based on this order backdrop, we believe that we are in a positive position to improve our yearly forecast. Network Services, starting with global 5G. Since revenue tends to be stronger in Q4, we foresee an expansion in the domestic market and forecast for the full year will be fulfilled. Needing the annual adjusted operating profit seeing some uncertainties due to the onetime costs and strategic expense increase, but we aim to achieve the forecast through expansion in Japan and abroad. With the Open-RAN market, we foresee some time needed to fully commence and are currently considering realization of an optimal cost structure in preparation for next fiscal year through specific initiatives. Aside from global 5G, there is some impact from the IP income of JPY 5 billion of knowledged in Q4 of last fiscal year as well as negative factors up to Q3. However, we estimate that this can be offset with IP income for this year. We are on track for the entire company progress for the 9-month period. Although some risks remain with global 5G recovery to attain the full year forecast, we will capture the strong IT services upside to cover for this and aim to meet the adjusted operating profit of JPY 185 billion. Lastly, on Page 14, our reform at the management foundation. As of today's BoD meeting, pursuant to the approval at the ordinary general meeting scheduled in June, we will transition from a company with an auditor committee to a company with a nominating committee. The composite of the BoD will be out of the 12 members, 7 independent external directors, a majority strengthening the oversight function. By transitioning to a company with a nomination committee, management and oversight functions can be segregated, transferring authority to the executive officers and speeding the pace of management. As noted on the right side, this organizational reform will make possible to clarify responsibilities in growth areas in light of attaining our midterm management plan. It will also aim to strengthen our approach to platform offerings underpinning DX, the expanding market of government digitalization as well as national security areas. Since April of 2022, we have been integrating departments, minimizing management layers and implementing an agenda oriented organization, and this transformation will complete the optimizations needed to attain our midterm management plan. We will strive to enhance our mid- to long-term corporate value. This will conclude my presentation. Thank you for your attention. [Statements in English on this transcript were spoken by an interpreter present on the live call.]