NEC Networks & System Integration Corporation (1973) Earnings Call Transcript & Summary

Good morning. Thank you for joining us in the financial results briefing for the first half ending March 2020. As we are in the midst of the spread of the new coronavirus, we are holding the session on Zoom. Your understanding is greatly appreciated. Today, I'll be covering financial results and progress of our midterm management strategy, Beyond Borders 2021 plan, which started last year. First is our financial results. And this is the financial summary page for the year ended March 2020. For the year ended March 2020, the company recorded large increase in both sales and profits. Topline surpassed JPY 300 billion for the first time and achieved record high results in orders received, sales and income, exceeding the revised forecast announced in January. Orders received, JPY 305 billion, up 7% year-over-year. Sales, JPY 303.6 billion, up 9% year-over-year. Regarding orders received. Orders from domestic businesses, telecom carriers and governments increased, respectively, although first half last year included large projects. Sales also in good. shape overall for domestic businesses, telecom carriers and governments. Regarding income. While investment for growth increased by approximately JPY 3.1 billion, improved fixed cost efficiency from increased productivity, combined with increase in orders led to profitability improvements. Operating income was JPY 16.2 billion, up JPY 3.5 billion year-over-year. Net income, JPY 9.4 billion, up JPY 500 million year-over-year, marking record high net income. ROE was 8.8%, up by 0.1 point. Regarding free cash flow. While investment cash flow increased as a result of positive investment in growth, operating cash flow improved. Free cash flow was JPY 6.2 billion, up JPY 3.4 billion year-over-year. Orders received by segment. Orders received increased across all segments, JPY 305 billion, up 7% year-over-year. Let me start with Digital Solutions. While orders from financial companies decreased due to project concentration in the previous fiscal year, work-style innovation related orders remained robust, JPY 112.5 billion, up 8% year-over-year. Digital Transformation business, although still small in size, is doing better than forecast with a strong start. Network Infrastructures segment saw increase in both telecom carriers business and social and public Infrastructure business, such as firefighting, disaster risk reduction systems and video and CATV, JPY 89 billion, up 10% year-over-year. Telecom Carriers segment suffered sluggish growth in the first half due to shift in investment timing, but is on a recovery trend from the third quarter. In Engineering & Support Services, despite the reactionary drop in overseas business due to the JPY 10 billion project recorded first half last year, domestic construction picked up JPY 93.5 billion, up 3% year-over-year. Next is net sales by segment. Sales also increased across all segments. Total sales posted JPY 303.6 billion, up 9% year-over-year. Digital Solutions, same story as orders received. Orders in work-style innovation area grew strong as well as network for hotels, JPY 110 billion, up 10% year-over-year. Network Infrastructure. Sales for social and public infrastructure increased in general, JPY 84 billion, up 4% year-over-year. Sales for telecom carriers were behind in the first half, but recovered in the second half to flat growth year-over-year. Engineering & Support Services. domestic construction for mega-solar and firefighting networks and various service businesses using the company's service platform grew JPY 99.4 billion, up 10% year-over-year. Next is operating income by segment. JPY 16.2 billion, up JPY 3.5 billion year-over-year. The fact that profit increased to JPY 16.2 billion despite of year-over-year increase in unprofitable projects which we must draw lessons from and investment for growth is a sign of improved capabilities. Digital Solutions increased in gross profit due to increase in orders received, combined with improved fixed cost efficiency as a result of higher net sales led to operating income of JPY 11 billion, up 2.6 billion year-over-year. Operating income margin was up 1.5 points. Network Infrastructure. Higher net sales and cross-functional use of resources in the new organization, which is a result of reorganization, improved project management and dissolving of loss-making projects led to increase in profit, JPY 9.2 billion, up JPY 3.3 billion year-on-year. Engineering & Support Services. This segment suffered negative impact of loss-making projects, JPY 3 billion on the downside, but saw some positives such as higher net sales and consolidation of construction resources, together absorbing 2/3 of the impact of unprofitable projects, JPY 6.3 billion, down JPY 900 million year-over-year. Regarding forecast for the new fiscal year. I must say that there is a significant level of uncertainties with the spread of COVID-19 and extension of the emergency state declaration. In the meantime, we have decided to leave the forecast undecided. Announcement will be made promptly as soon as we are ready to present reasonable forecasts based on assessments of the outlook. Let me turn to business environment and basic policy for March 2021. Business environment in the new fiscal year is, as mentioned earlier, expected to deteriorate significantly due to COVID-19 with downturns expected in the world economy as well as in Japan. We are experiencing delays in projects due to confusion in the supply chains and restricted access to sites, to name a few. Let me take you through each business segment. For general enterprises, while demand related to teleworking and work-style reform to counter the new coronavirus is expected to grow strongly, in the short term, there is concern over client companies cutting back on investments because of the sluggish domestic economy. As for telecom carriers, gradual progress can be seen in the migration to 5G. Capital investment is expected to be solid with increasing use of telecommunication with rise in teleworking. For governments. Although investments for disaster risk reduction expected to remain firm, there are concerns of delay in public bidding due to COVID-19. As explained, the year started with a challenging business environment. The company will focus on its strengths in the area of work-style innovation and solutions to address various social challenges while implementing appropriate cost control where expenses are controllable in order to improve profitability. Next is dividends. The company will seek to increase corporate value through investment for growth and continue to increase shareholder return based on stable dividend at the same time by taking DOE into account. In March 2020, as net income exceeded forecast and achieved record high and net worth increased more than expected, year-end dividend of JPY 42 per share, up JPY 2 from the plan was paid out, making the annual dividend JPY 82 with 13 consecutive years of increase in dividend. March 2021, however, as we are yet to put together business forecasts, as explained, dividend is undecided at this moment. We plan to disclose in line with the timing of disclosing our financial forecasts. Next is on stock split. As the company share prices increased, a resolution has been made to conduct a three-for-one stock split with the record date being May 31, 2020. The purpose is to create an environment where investors, especially individual investors can invest more easily and to seek to improve the liquidity of the company's shares and expand investor base by reducing price per investment unit. Let me take you through the progress of Beyond Borders 2021 plan, our midterm management plan. This slide is a recap of our midterm plan. And this is the social value creation model, the base of our midterm management plan. The company's vision for society is an inclusive and sustainable society created through communications. At the bottom of the page, you will find nationwide capability, technology and credibility and business creation capability, which is about creating new work styles and new businesses. These are our capabilities. Such capabilities of the company, combined with various cutting-edge technologies or advanced technologies of startups enable us to deliver business that cater to the needs of our customers. Among the numerous cutting-edge technologies, our focus during the midterm will be digital transformation and infrastructure that support the 5G era. We will reallocate resources in these areas to be able to call it our strengths. So that at the end of the day, new business and services will be created around the 2 focus areas. The value of the company to society is to create environments in which everyone can work more vigorously, develop pleasant and plentiful communities with cutting-edge technologies and to provide robust services that underpin safety and security in an evolving society. This is to be realized by 2030. The first step of the vision is to be executed in the midterm plan. The current midterm management plan is being implemented in preparation to realize the vision for 2030. Last year was the starting year. Let me take you through the progress. First is digital shift. We were able to make a strong start by using new technologies such as Zoom. As for 5G, we are making steady progress in preparation for a full-scale start under the next midterm plan. Smooth transition towards that is needed in the current midterm plan. Various initiatives and projects are on the horizon and we are making good progress. Business capabilities of the company is making progress in the past year, including improved profitability and reorganization. Financial results including all of the above, made progress ahead of schedule, except for the negative factor of the loss-making mega-solar plant project. It was a fairly good year as a starting year of the midterm management plan. Let me look at the substance in more detail. First is digital. As you see on the left, digital transformation was used to address societal challenges such as over concentration to Tokyo and facilitating companies in innovation, we call it distributed work and started from October 2019. February this year, Nihonbashi innovation office was opened. Investments have been made to realize this. The number of visitors reached the same level as the previous year, even though we had to close our offices due to construction. This gives us confidence. Shift in our business model was an important part of our effort. Take-up of service business, combining device and system integration business with new cloud service, for example, is increasing. Our business model as a whole, not just service, is shifting towards a recurring model similar to BPO. This is one example of tangible results. In terms of technologies, we saw expansion of businesses through the establishment of cloud-based services that started from Zoom. With the launch of a digital platform, Symphonict, that connects cloud-based services, different cloud-based services are made reasonably accessible and usable. By all means, we made solid progress. Let me elaborate on distributed work that I briefly mentioned earlier. We have been working on work-style innovation by way of seeking higher productivity at work as well as in workplace creation. The goal of work-style innovation is for the company to become stronger and deliver positive results and for the employees to enjoy returns. How to increase employees' performance and facility innovation was the key. One of the challenges identified was the over concentration to Tokyo, the problem of overcrowding. People are exhausted with commuting. Even many of our own people were commuting 2 to 3 hours every day, relieving physical fatigue and creating a working environment where people can come up with new ideas flexibly as a human being, that was the starting point. With the new coronavirus, BCP is also drawing attention. Our idea of distributed work enables both business continuity and productivity by bringing out the full potential of the employees. In other words, we had started a business that could become the standard workstyle in Japan in the post corona world. Distributed work consists of the 3 mentioned on the slide. One is digitalization. It is not efficient to have paper when working from home. Therefore, paperless work is realized through digitalization. Various different cloud-based services, such as Zoom, Slack, Wrike, KloudSpot and DocuSign are used in the company. Symphonict, a digital platform that bundles and connects cloud services is very useful in automating the operation process. It is becoming a core of our business. The driving force is, needless to stay, open and straightforward communication. Zoom and Slack. I'll come back to Zoom later. But we are receiving many inquiries. It is being utilized quite effectively. This slide shows how the company is making use of digital. Photo on the left, and apologies to those of you joining by phone, this is a photo taken in early April. Less than 10% show up at the headquarters. Others are working remotely, working from home. Photo on the right is an example of open communication using Slack for those working from home and have no one to chat with. We will eventually share our know-how as part of new workstyle. Photo on the bottom right is myself, talking to new staff members who came on board this spring. There was no welcome ceremony, unfortunately. They are on remote training from home. As for myself, all my business trips were canceled. Using Zoom, therefore, I was able to speak to all 131 new employees in groups of 10, 13 sessions, each lasting for about 19 minutes. It was a great opportunity to communicate with them in terms of both quality and volume. COVID-19 has not only brought bad things to us as new form of communication was made possible. Next is recent trend in demand for telework. As you see on the left side, although the numbers are not current, online-based inquiries were up 5x from February to March, and orders were up 6x during the same period. April numbers doubled from March. Well, this is not mentioned on the slide. This is a sharp increase. Zoom orders are still on a stand-alone basis but since new customers are increasing, we are keen to make them loyal customers by supporting their needs. As for future initiatives, in light of the situation we are in, we will, for the time being, focus on acquiring new customers through Zoom. Schools in the meantime are facing the challenge of not being able to teach students as taken up by the media. This is a serious challenge, and demand is growing. For now we will cooperate more as social contribution than business, but hope to gradually and steadily grow the business with more people having first-hand experience using Zoom. Our know-how on work-style innovation can be found on our homepage. A system used by a business unit of the company to check up on the health condition of team members is made available for free. Please take a look at our homepage when you have the time. Next is on 5G. As I briefly mentioned earlier, full-scale investment in 5G is yet to come. We are on track in preparation. In the midterm management plan, deepening businesses with telecom carriers through KNSI, a joint venture with KDDI, was front and center. After the launch, there were issues with quality improvement of 4G, which was not on track. Signs of recovery are seen from the second half of March 2020, picking up pace in growth. Functions that were not originally covered by KNSI, such as 5G and maintenance, will be included. Adjustments will be made to achieve target. As I said, 5G is not yet on a full scale. At the moment, migration in preparation for 5G is the main focus. We are strengthening demonstration projects and have good prospects in what is called local 5G, regional BWA, cable operators and ICT related to disaster prevention and risk reduction. Progress is as planned. In order to support such business, in the summer of this year, a new facility will be completed in Shin Kawasaki, as you see in the photo. It can accommodate various technical trainings, including 5G-focused personnel training and validate 5G-related technologies. Technical training will involve actual equipment. The number of engineers versed and base stations, core networks and other wireless technologies will increase by fourfold by 2023. As the 5G lab will actually serve as local 5G, 5G signal will be installed. The 5G laboratory will be a one-stop shop to cover consulting to license application, system integration and system operation. We also intend to create solutions by combining digital transformation and 5G technology. Next is strengthening business capability to support growth strategies. The company has been working to better serve our customers in an integrated manner by organizational realignment in line with the midterm plan. We are beginning to see fruit of the effort. Effort to optimize the effect of organizational realignment has dramatically improved efficiency per person. Resource efficiency and project quality have both increased. Various digital technologies are used as part of our work-style innovation efforts including Zoom and other services I talked about earlier. By using these technologies in-house, gross margin increased to 17.9% and sales per person was up 8%. These are positive changes that made profit contribution and our tangible results of putting work-style reform into practice. Financial progress and growth strategy. Goal for the midterm management plan are shown on the far right. Net sales, JPY 310 billion; operating income, JPY 20 billion; and ROE, 10%. Regarding numbers, we have been striving for the top line to exceed JPY 300 billion. In fact, internally, we have been calling for a challenge 3,000, meaning orders received, net sales and share prices exceeding the JPY 300 billion and 3,000 mark, respectively. In the first year, we were able to make a good start by closing in on net sales of JPY 310 billion. In operating income despite the loss of unprofitable mega-solar project and investment for growth, we have come quite close to eyeing our target of JPY 20 billion, yet we have just barely made our first steps. There are quality issues and resource challenges that we need to overcome. We will strive to be in good shape to reach our final goal. And this is my last slide. The impact of the new coronavirus is highly unpredictable, and the company has its own challenges. The year ending March 2021 will be a year of preparation to be able to achieve our midterm goals. We will prepare ourselves for a further leap by successfully delivering digital and 5G. That is all for me. Thank you very much for your attention. [Statements in English on this transcript were spoken by an interpreter present on the live call.]