NEC Corporation (6701) Earnings Call Transcript & Summary

Thank you very much for participating today. Today, we have already presented the results of Q2 for FY ending March 2026. So let me walk you through the material. This is a table of the contents that I'll be explaining to you today. Page 3, second quarter financial results. In the first half of FY 2026, revenue was JPY 569.8 billion (sic) [ JPY 1,569.8 billion ] Non-GAAP OP was JPY 127.5 billion. Year-on-year, the revenue went up by 5.6%. And regarding non-GAAP OP year-on-year, it was up by JPY 62.6 billion, and this is a dramatic growth being driven by domestic IT as well as ANS. With that as a backdrop, we decided to upward revise our full year forecast. Non-GAAP OP, we will be increasing it by JPY 20 billion, amounting to JPY 340 billion. Now let's look at the details of the financial results of Q2 FY ending March 2026. Firstly, the major indicators for the first half. Adjusted OP was JPY 131.6 billion, up JPY 70.6 billion year-on-year. Also, regarding adjusted OP margin, it was 8.4%. As compared to our internal forecast, adjusted OP was up by JPY 20 billion. This is due to the unexpected growth of domestic IT Services. Now let's look at the year-on-year changes in adjusted and non-GAAP OP. In the first half of FY '25, adjusted OP was JPY 61 billion and non-GAAP OP was JPY 64.8 billion. So this is a starting point. IT Services and Social Infrastructure increased dramatically in terms of profit. And also, we invested in AI. Therefore, the margin and profit improved by JPY 62.6 billion. Having said that, the first half of FY '26, non-GAAP OP ended at JPY 127.5 billion. Non-GAAP adjusted items includes JPY 4.1 billion of gain from sales of business amounting to JPY 131.6 billion. Regarding details of translation from GAAP profit to non-GAAP profit, please take a look at Pages 19 and 20. Next, let's explain by segment. The details will be given later. But on all, we can say that both IT Services and Social Infrastructure increased in both revenue and profit. Firstly, IT Services segment. Domestic public was a major driver and year-on-year revenue went up by 3.4%. Regarding the transfer of sales of function for business PC and the termination of a subsidiary company, these are special factors. And if you put aside those factors, there have been an increase of revenue by 9%. And regarding adjusted OP, we were able to increase the profit in line with revenue. And around BluStellar, we were able to improve the profitability. And also, we were able to register the gains from the sales of business, which was a one-off. And year-on-year, there has been an increase of JPY 52 billion. And also overseas, there has been the termination of unprofitable business, which reduced the revenue of KMD and also Avaloq profitability improved. And year-on-year, if you decide not to think about the one-off expense, we were able to increase the profit. Now in terms of domestic IT, BluStellar and base business improved. And in terms of BluStellar, because of the improving DX demand, we were able to do as expectation and profitability went up as well. And year-on-year, there was an improvement of 19.8%. And also due to that, the profit went up to JPY 26.1 billion. And the base business, as mentioned before, because of the special factors, the revenue went down. But because of the cost reduction as well as improvement of the profit and also the sales of the business year-on-year, the revenue was JPY 25.8 billion.

The large projects were obtained in the domestic IT Services declined by 5% in quarter 2. The public sector, while orders of the public domain standardization, platform standardization and disaster prevention projects have largely been continued through the life cycle, but enterprise recorded an 11% decline. The DX demand remains robust. And ABeam maintained a strong performance with a plus 13% increase, continuing the trend from the previous year. Next is the Social Infrastructure segment. In Telecom Service, the expenses have been become more efficient in centering on the development expenses and some of the expense has been -- some of the project revenue has been placed forward. So therefore, it has increased its profit. In ANS, there's been one-off expense of JPY 10 billion has been recorded in submarine cable business, but the aerospace and defense has increased its revenue and profit significantly by executing some of the projects. Let me talk about now the projection of FY -- March ending FY '26. As I mentioned earlier, we have upwardly corrected the projection of the earnings. The revenue and profits has been increased by JPY 60 billion to reach JPY 3.42 trillion. And for the adjusted profit, OP is the JPY 330 billion increased by JPY 20 billion. Non-GAAP operating profits also corrected to be JPY 340 billion by the increase of JPY 20 billion. So these corrections has been based on the progress of the performances up until the first half of the year. And with the background of the very solid market environment, upside potential has been drawn. As I've been explained from the projection, this risk expense has been already included in projecting the fluctuation of the environment of the business and the risk is being managed appropriately. And also, we are considering the measures to increase the profits of the next fiscal year as well. And let me focus on examining the performance projection of the earnings. Let me talk about now for the revenues and adjusted OP per segment. This upward adjustment is the IT Services segment change. The very good business in public is already included the revenue increase and profit increase. IT Services and IT Services revenue and profit revenues are the JPY 2.4 trillion, by increased by JPY 60 billion. And adjusted OP is the JPY 321 billion, increased by JPY 20 billion. There's no change in terms of the Social Infrastructure, which we have already announced in April. And the ANS, the aerospace and the defense is very good in the business in the -- and there's upside potential, but because of the downside risk in the submarine cable, there we are kept the same projection. And let me describe the announcement of the event. First one is the IR Day, which will be held on November 13. With the capital markets, very much interest are drawn on the BluStellar and the security will be the topic to be explained from the person in charge of this business domain. The second one is the Innovation Day on December 3. Media and IT analysts and for the capital market persons, we will conduct it in our Tamagawa works. And in relation to the lecture, with AI, we will also have a demonstration exhibit of the latest state-of-the-art technology. Please come and participate in our IR Day and Innovation Day. That's all my explanation. Thank you very much.