NEC Corporation (6701) Earnings Call Transcript & Summary

Thank you very much for joining us today. I would like to explain about the progress of BluStellar business. This is the agenda. Now I would like to explain about the current status and the future of BluStellar and then invite two leaders for the following presentation, Kimura will explain about the growth strategy for BluStellar scenario, and Yamada will talk about the growth strategy for ABeam Consulting. Now let me explain about the current status and the future of BluStellar. First, I would like to talk about the positioning of the BluStellar. Last year, May, we have announced BluStellar as a DX brand. And as I mentioned at the time, I mentioned that BluStellar is a key driver for our company-wide MTP. NEC's core business or IT service and social infrastructure, BluStellar will support in all of our company's operations. BluStellar can be described as a culmination of NEC's DX initiatives. Since 2019, we have been driving transformation along three key access: business model, technology and organization and talent. In the initial phase, we focused on process and the framework development and established a dedicated DX organization. We also launched an internal strategy consulting team, enabling us to establish an end-to-end process that collects strategy, delivery and operations. We also promoted standardization and unification through offerings, which has led to improved gross profit and higher profitability. By consolidating approximately 10,000 DX product close into 500 categorized product groups, we achieved greater visibility and efficiency management. And in addition, we have developed a comprehensive talent development program and our DX talent pool now numbers, 12,000, and know-how cultivated through this initiative is being utilized by more than 540 client companies through the BluStellar Academy. Since 2021 in the strengthening phase, we have integrated all DX functions across the company. Consolidating six separate organizations into one cross functional structure of over 30,000 members. Building upon this history of transformation, we have branded BluStellar as a value creation model that leads our customers towards the future. The business model of BluStellar lies in the BluStellar scenario. As shown on the slide, BluStellar scenario is a framework that starts from our customers' management challenges, systematically organizing our co-creation cases with the clients. And NEC's on practical experience as Client Zero, the structured asset leveraging cutting-edge technologies from NEC's lab. It consists of approximately 500 products and services about 150 sets of offerings and 30 sets of BluStellar scenarios. By extracting success and failure factors from real cases and optimizing and standardizing our offerings and approaches, we are able to deliver value to customers more safely, reliably and rapidly. Up until last fiscal year, we communicated our approach at IR like today through two pillars, BluStellar offerings and consultium-led business. From this fiscal year, we are updating these for the next midterm management plan by focusing on two areas, more clearly, scenario offering and product and services, BluStellar offering and AB as a consulting light business. Both approaches aim to drive our customers' transformation starting from the management agendas. The scenario offering and product and service will deliver solutions to management challenges by combining cutting-edge technologies such as AI and on practical knowledge. Meanwhile, AB, as an independent consulting firm has strong expertise in business consulting. Through the synergy between technology and business consulting, we will continue to realize transformation for our customers. And here is a summary of the overall BluStellar business. As a whole, the BluStellar business has already achieved the fiscal year 2025 midterm plan target 1 year ahead of schedule. Since the beginning of this fiscal year, we have been steadily progressing towards the revised FY 2025 target of JPY 624 billion, which was raised from last year's midterm plan. Looking ahead, we are steadily advancing along the road map towards a long-term goal of JPY 1 trillion in revenue and 20% operating profit. Over the last 6 years, we have driven transformation along the access of business model, technology and organization and talent. Looking ahead to the next midterm management plan, BluStellar, will serve as a further growth engine for the entire NEC growth. Following the presentation are two leaders, Mr. Kimura, and Mr. Yamada will present the specific initiatives. We hope you will gain a clear understanding of both the direction we are aiming for and the measures we are implementing.

Next, is about the presentation on the growth scenario using the BluStellar as a core. Hello. My name is Kimura. I am in charge of the Digital Platform Service business unit. Following the presentation by Yoshizaki, I will now explain our growth strategy centered on the BluStellar scenario. And this is today's agenda. First, I will explain the strategic framework and the key themes for BluStellar. NEC will focus on the following three points as part of its growth strategy for BluStellar. The first is penetration and expansion of BluStellar scenario. And the second is AI security-driven competitive advantage. Number three is the market expansion strategy. Since 2019, NEC has been continuing its DX transformation efforts in business models, technology, organization and human resources, and we would like to move forward by leveraging these efforts as the BluStellar platform. The BluStellar seller business model was already explained by Yoshizaki. Our product and service is based on the NEC past asset, and our effort is to digitize, especially AI security, cloud, network managed service are the main product. Regarding these standardized offerings, so we will expand them by addressing the new customer challenges and adapting to emerging technologies, while also implementing replacement through portfolio management. We will also strengthen the expand our scenarios for each industry by utilizing feedback from our existing clients and expanding our client base. Now, let me explain about the BluStellar quantitative target and the plan. FY 2025, excluding ABeam Consulting as BluStellar business, we are expecting to hit JPY 457 billion of revenue, of which scenario offering represents JPY 150 billion. Future target will be -- will be JPY 700 billion of revenue, OP margin of 20%. As a growth driver, on top of the high-margin scenario, we would like to shift toward a high-margin scenario offering so that we can further improve OP margin. Next is about the further penetration and expansion of scenario. Looking at the domestic IT market as a whole, the DX market, in particular, is expected to grow by a CAGR of 14%. In particular, we are seeing the sophistication of cyber attack and we are seeing more use of the data utilization. So the major management agenda is to further utilize cybersecurity, AI strategically. NEC strengths in AI and security are combined to achieve modernization. We provide scenarios that can be used across industries in areas such as data management and also provide industry-specific scenarios. Through this, we hope to achieve growth at BluStellar that exceeds the market growth rate. Next, let me explain about the value of our scenario. We take a standardized scenario, and we take consulting perspective and offer them in a speedy manner. So we would like to offer various benefits in terms of reliability, value and speed to our customers. Specifically, the proven track record ensures high reliability peace of mind. Pricing aligned with delivered value offers a strong return on investment and speedy solution to the management agenda. So the scenarios we have presented so far are currently offered as 30 steps. Covering both cross-industry and industry-specific scenarios. Later, I will introduce three example scenarios highlighted here. Next, I will explain our competitive advantage through AI and security. NEC strength lies in its overwhelming technological capabilities and track record in the field of AI and security. In AI domain, our biometric authentication technology ranked world #1 in this benchmark test. And in the field of security, CISSP, we have over 560 employees who are certified, and we are offering a very advanced and reliable services. For instance, in the case of leveraging the Client Zero alert pit and leveraging AI, we are reducing the reporting generation and lead time by 96.7%, contributing to the streamlining of the process -- business process. And with that, will be able to contribute to our customers and give them the sense of assurance with the consistent quality and making a better proposal to the customers. And next, I would like to explain how we plan to deploy and expand these scenarios. First, to enhance the value delivered to our customers, as mentioned earlier, we will execute horizontal deployment and linkage to scenarios. We will then evaluate and analyze the feedback obtained through scenario deployment and manage the scenario portfolio to enable selection and concentration in high-value scenarios. Furthermore, by capturing customer feedback through operations and maintenance, as well as changes in the market and management challenges, we will continuously improve the scenarios. By running this cycle of improvement and expansion, we aim to strengthen the scenarios and increase their value. And now we will introduce three examples based on these scenarios. In the slides that follow, the left-hand side shows the customer challenges and the scenario is applied to address them. And on the right, the resulting value delivered to the customer. First, let me introduce an example in the AI domain. One food manufacture aimed to enhance promotion effectiveness across multiple channels. That faced challenges in the speed of planning and execution initiatives and effective leverage and promotional challenges. Now by applying BluStellar's AI scenario, and combine them with our Gen AI technology with purchase trend analysis data, we were able to generate ideas, such as target customer segments and catch phrases or taglines that would be difficult for humans to conceive, enabling approaches to customer segments that were previously challenging. For video promotions, we had achieved a 125% increase in views on social media compared to the previous campaign, significantly contributing to sales expansion for them. As such, NEC's unique AI technology and data utilization enable faster marketing activities and improved effectiveness. Second, I will introduce an example in the network and security domain. One manufacturing company made business expansion on restructuring. Faced a proliferation of system, leading to complex operations and increased system cost. Additionally, different sales and security measures across overseas group companies post management risk. NEC had to address security challenges starting from the management agenda, formulating a security strategy within the security scenario and applied a network scenario to build a network infrastructure, while establishing a global security incident response system. As a result, the optimized network infrastructure overall enabled operational efficiency system efficiency and system cost optimization and strengthen security governance. Thereby reducing the management risks. In this way, NEC possesses extensive assets and applicable offerings for cybersecurity and network. And we receive consultations from many customers. The third example is in the area of modernization. One financial institution customer aim to implement DX strategy, including customer experience transformation and process reform. That faces challenges in system architecture and specific -- specifying their plans. In addition, fragmented and lost data, made data aggregation and analysis time-consuming and labor-intensive. NEC provided architecture consulting based on use cases and data volume, optimizing cost and flexibility and build a data utilization platform, which reduced the data preparation effort required for decision-making and enabled faster decision-making also. So this modernization scenario for financial institutions has been horizontally deployed and is already being offered to multiple customers. Finally, let me share our market expansion strategy. We consider it critical to determine how to deploy BluStellar into the market as introduced so far. Bringing example, in the enterprise and public sectors, we aim to expand both customer share and market share. Expanding customer share, also known as wallet share expansion involves the increase of NEC's promotion -- proportion of IT investment by top customers find by NEC, including those we have previously engaged with directly in both the enterprise and public sectors, we define clear targets. In the enterprise customer starting from Client Zero and using the upstream consulting approach we applied various scenarios introducing earlier to deliver value to customers. In public domain, we use scenarios specialized for the public market and approach social issues in coordination with policy, thereby acquiring strategic project. To expand market share in the enterprise sector, we plan to deploy BluStellar to customer through partners building a new partner model beyond traditional product sales in collaboration with NEC Group companies and partners and spreading success cases and insight from large enterprises, fear scenarios and offerings. In the public sector, we will focus on offerings for small- and medium-sized municipalities deploying them through an area-based approach. Through these initiatives, we aim to increase the BluStellar ratio in revenue and profit across each business unit, thereby expanding the customers' top line and profit margins. And that is all for my presentation. Thank you for your attention. Now ABeam growth strategy will be presented by Yamada.

Yes, let me introduce ABeam Consulting's growth strategy. But before that, I would like to talk about the market environment and also the competitive advantage of ABeam Consulting. The business environment surrounding companies have been dynamically changing, as you know, reconstruction of global supply chain and use of AI, cloud and other technology, climate change, sustainability agenda, lowering birth rate, war for talent, change in the consumers' mindset. We are seeing enhanced diversity and less transparency uncertainties. Customers and clients needs to deal with these diverse issues and they need to pursue the transformation of itself to further brush up their competitive advantage. This is a following for consulting industry, especially strategic consulting market is dramatically growing. Due to the emergence of digital technology, solution consulting, outsourcing, these businesses have been trending and growing quite strongly. At our company, we work with Japanese global companies. Japanese companies doing the business in Asia. And also, we are supporting international clients who are globalizing and growing their business. We are responding to the transformation needs of the client, and we respond to the diversified nature of the market, and we are committed to the support of the customers' transformation. We have three major competitive advantage. Number one, client first, people first. So we prioritize on customers and people. We support industry. We support society and we center around the client agenda. We co-create value. The process of the transformation offers opportunity for people to grow and create a social economic impact. Together with the client, we developed a next-generation talent pool. That is the ideal state for us. From the strategy development to the implementation of the technology, we're always running by the customer. We support everyone's development in the growth. This is the source of our sustainable growth, and this is the source of the competitive advantage. Number two is the competitive advantage in the area of technology. AI-enabled intelligent is put at the core. and we are generating new knowledge by using AI. And we formulate a strategic idea, implement transformation and we also create new value, especially we have particular strengths in technology implementation. We use technology as a source of the business transformation, intelligence implementation capability, transformation capability are our strengths. Finally, we are headquartered in Japan, yet we are a global consulting firm. We belong to NEC Group, but we always stay neutral to the business management. We offer optimal solution to the customers and make a quick flexible decision. At the same time, we made maximum use of the group-wide asset against the Japanese global company's management agenda, we listen to the management input. And then, we transplant that to the actual action happening in the field. So we offer a well-balanced proposal and promote the transformation. Now based on such competitive advantage, how are we envisioning our future growth? And let me explain about the outline of our growth strategy. At our company, we have set forth three pillars. Number one is maximization of customer value. From strategy to the actual execution, we offer end-to-end solution. We work with a client as a partner to create value. And we respond to various transformation needs. Strategy solution, outsourcing are all combined together into our integrated service offering. With that, together with our customers and the partners, we will be able to continuously generate the new value and the outcome. And not just a one-shot transformation outcome, we are supporting the sustainable growth. Next, I would like to talk about the expansion of transformation capabilities for the Japanese global enterprises. It will be more important for creation of the value chain and the structure reform across the enterprises and making the standardization of the global group. And in order to realize this transformation, the Asia, the Europe and U.S. mainly, and the global capability for the transformation in dispensable. Currently, we are working on the India digital talent development -- talent development, as well as the cutting-edge technology insights used the global capability center and we are enhancing on the organization and the scheme to commit the outcome supporting the transformation seamlessly all across the domain. And in order for us to enable our customers to have both the social value and economic value and challenging into realizing the transformation of the new business models. At the same time, as consolidating the business strategy and the talent portfolio optimized and through the development of those talents we are enhancing the human-based management. And we are establishing the mechanism for the sustainable growth for quantifying the corporate culture. And based on these three pillars based on the customer transformation and innovation, we are going to support and continue to support the growth of the customer and talent. And now I would like to specifically explain about the growth plan. On the left, you see our plan this year and for the future growth. We are targeting at the revenue of JPY 300 billion and the operating profit of 20%. When it comes to the revenue improvement, we are promoting the strategic area of the vertical account selection and three measures specifically. First, is the revenue growth. we are going to have a cross coordination of the customer agenda and solution output and integrated service offering. And with that, we are going to improve the proposal capability and we'll be able to create the high-value-added deal opportunity to increase the orders. And the second, is the concurrent realization of the revenue growth and the revenue improvement not to be fixated on the human model conventionally. We are going to focus more on the new revenue model based on the outcome starting from the starting of the business. At the same time as building a platform that is common throughout the industry, we are going to multiply product and service, and we will be able to have a reproducible revenue model. And already in power railroad and real estate lease industry, we have the track record, and we are going to expand to the global manufacturing industry. Third is about the revenue improvement. Leveraging AI, we will use the platform to transform the delivery model. We are going to have an advanced expertise globally and by the region, efficiently leveraging the global capability center. And as such, we are going to offer value to the customers and the productivity taking scalability at the same time and improve their revenue. And with these three pillars in the business, we are going to have both the expansion of the business portfolio, as well as a sustainable revenue increase and add value to the customer proposal. From here on, I would like to talk about the -- our strategic sales strategy. First is to improve our value for the customer proposal. More specifically, we are going to start with the customer agenda, but moreover, specifically, we are going to -- based on the agenda of the industry management, we are going to create the transformation theme and transformation scenario based the strategic solution, and then implement the outsourcing businesses services and transformation. As such, we will be able to create the structural reform and business innovation to enable the sustainable value creation. Recently, globally, the management environment has been changing quickly and the use of digital technology and the expectations for the transformation has increased use of Gen AI and agent financial data will be used and redesign the business model and will directly lead to the business value, and that is expanding. And on the other hand, we need to enhance on the governance and security and modernization of the management platform. And with such background, we will deal with the CxO agenda, strategy, consulting and the business process. And in other words, we will drive the transformation based on the BPX and outsourcing enhanced and try to expand on the value for the customers. Furthermore, with the collaboration with the partner, NEC, we will be able to strategically focus on the both intelligence asset services and the support scheme that we are going to build. For instance, the insight and economic security in the age of the risk increase and with the advancement of the cloud and other technologies, we are going to have the global governance and the management and enhancement, IT architecture modernization and ABeam will be able to drive the strategic idea planning and BluStellar of NEC, we are going to collaborate and we'll be able to transform the scheme itself, all of the services for the customers. And with the partnership with NEC Group, we'll be able to differentiate the solutions and contribute to the value improvement for the entire enterprise. And finally, I would like to introduce our global transformation realization cases. Today, with bailing points and optimum solution, we are currently working on the global consulting scheme establishment, including them, we have the total of 20,000 professionals globally. And each market in the front line of the customers in each region, we are working on the transformation starting from the customer agenda. In Malaysia and Vietnam, we have the capability centers and leveraging the uniqueness of the regions of the languages, we will be able to offer the regional local talent and technologies. In India in collaboration with Optimum Solution, we had established a global capability center focusing on AI, digital technology, cybersecurity, we have an overwhelming digital competitiveness. So the local -- the Japanese global companies will be able to transform their business as an intelligent COE. And this global network we'll be able to connect seamlessly the intelligence, digital talent and be able to maximize the capability, transform and the value of the customers. In each market and countries will be aligned to the uniqueness of the region, and we'll be able to support the global management at the same time being local. And we have a competitive capability, as well as the execution capability and the flexibility with such strength at ABeam, we have real-world executable transformation with the global size. And as such, we would like to contribute to the social as well as the economic value improvement for our customers. [Statements in English on this transcript were spoken by an interpreter present on the live call.]