NEC Corporation (6701) Earnings Call Transcript & Summary

Thank you very much for joining our performance briefing for Q2 FY ending March 2024. Here is the agenda. First, results for Q2 FY ending March 2024. Page 4, summary of the first half. Revenue was JPY 1,548.8 billion, up 6.4% year-on-year. Adjusted operating profit was JPY 45.8 billion, an increase of JPY 14.6 billion from the previous year. Non-GAAP operating profit, which measures the performance of our core business was JPY 46.1 billion, up JPY 27.7 billion year-on-year. The results up to the first half of this fiscal year are in line with our overall forecast. Please refer to Pages 22 and 23 of the appendix for the details of the adjustments from GAAP to non-GAAP operating profit. Page 5, results by segment. The factors behind the change in adjusted operating profit in the first half were an increase of JPY 16.9 billion in IT services and an improvement of JPY 13.1 billion in social infrastructure. As will be explained in more detail later, IT services and social infrastructure posted increases in both revenue and profit. The Q2 IT services result fell year-on-year due to the absence of the JPY 6 billion gain on the transfer of shares in NEC Embedded Products, which was recorded in FY March 2023. Excluding this, IT services operational profit increase. Others decreased by JPY 3.1 billion due to Japan Aviation Electronics industry performance. Adjustments decreased by JPY 12.3 billion due to the absence of gains on sales of assets recorded in the previous year and an increase in internal DX investments. Putting all these factors together, the company-wide adjusted operating profit increased by JPY 14.6 billion. Non-GAAP operating profit was up by JPY 27.7 billion. Page 6 is by segment, starting with IT services. Revenue increased more than 10% year-on-year due to strong domestic demand driven by the enterprise and government sectors. Adjusted operating profit also increased due to the improved profitability of domestic system integration business and increased sale despite the reversal impact from the gain on a stock transfer of JPY 6 billion recorded in FY March 2023. Page 7, IT services booking status. Although overall orders for IT services in the first half decreased 1% year-on-year on a quarterly basis, orders increased 4%, excluding NEC facilities, which is subject to large fluctuations. Domestic public sector saw a decline due to a reversal effect of large projects recorded in FY March 2023, but the enterprise sector remained strong with a 14% increase. By industry, the enterprise segment saw a big leap attributable to large projects of the financial sector. Results of the manufacturing sector is slightly negative due to us selectively taking orders based on profitability. Retail and service sectors remained strong, increasing 5%. Others declined due to a reversal effect of large projects of NEC facilities recorded in FY March 2023. Meanwhile, ABeam is performing well. International DGDF increased at both NEC Software Solutions, U.K. and Avaloq with KMD playing a central role. Next page, 8, on social infrastructure. Telecom services improved, thanks to the structural reform, in global 5G business we carried out in the previous fiscal year as well as the reverse effect from one-off loss in the previous fiscal year. On top of them, the growth in revenue in the Submarine Systems helped us to grow revenue. ANS had a firm growth, both in revenue and adjusted operating profit. On top of it, the orders include 40% in the first half. And in the second half, we received the defense and other major projects, giving us orders 3x compared with the previous fiscal year. We expect our defense business will further grow, thanks to the upcoming orders in the second half and onwards. Next, I'd like to go through the full year forecast. Page 10, this shows our full year forecast. In the first half, we made progress as we had assumed. There are no changes from the full year forecast we made on July 28. Page 11 shows the revenues and adjusted operating profit by segment. There are no changes from the forecast that we made on July 28. Now Page 12 and Page 13. This is just for your reference. This shows our full year forecast by segment. There are no changes in regard to the social infrastructure. Lastly, I will go through topics. Page 15 shows our initiatives for generative AI. Back in the first quarter earnings call, we explained the NEC development in world-class generative AI in the Japanese language. And starting from the October period, we started our collaboration with Sagamihara City in Japan for joint testing. And also, we are engaged in a series of projects in order to make sure that generative AI we're going to are going to be safe and secure. We will continue to lead generative AI in the market here in Japan. Lastly, in Page 16. I would like to explain the IR event we plan to hold using this Page 16. First, IR Day. This is going to be the event mainly for the capital market stakeholders, and it will be held on November 30. Each speaker from a segment is going to explain the specific efforts in order to achieve 2025 midterm management plan. Next, innovation day. The target for this event is going to be media, IT analysts as well as the capital market and the people. And this event will be held on December 15. And the keynote address, we are going to actually go through NEC's R&D activities as well as our strategy to create business value opportunities. Also, we would like to explain our health care and life science opportunities. I hope that you will find time to come and join us. This concludes my explanation. I'd like to thank you for your kind attention. [Statements in English on this transcript were spoken by an interpreter present on the live call.]