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

Today, I will be covering financial results for the year ended March 2022 followed by overview of the new medium-term management strategy. Let me start with our financial results for the year ended March 2022. This is the financial summary for the year ended March 2022. Orders received, JPY 336.8 billion; net sales, JPY 310.3 billion; operating income, JPY 23.2 billion, net income attributable to owners of the parent, JPY 15 billion. Orders received and net sales were in line with our revised forecast in January and operating income ended slightly above the revised forecast. Year-over-year growth may not be apparent. This is due to the reactionary fall of big projects and temporary factors such as semiconductor material shortage, among others, that surfaced from the second quarter. The year ended March 2022 was the final year in the medium-term management plan. Target sales, operating income and ROE are shown at the bottom. The fact that we were able to exceed all medium-term targets owed to the strong performance in the previous year. As for orders and sales, robust growth is seen in the strategic areas. If we take away multiple temporary factors, orders received were up 12% and sales up 8% despite impact of shift in timing. On profits. We did not surpass the record high profit marked in the year ended March 2021. But, and I will be coming back to this later, I believe steady progress was made in various areas such as improved sales mix and efficiency. Next is year-over-year change in orders and sales. Starting on the left, orders received. Please take a look at the left side. This is where we were in March 2021. Orders received were impacted by various factors such as GIGA School and deconsolidation of a subsidiary, but strategic areas, such as promotion of DX initiatives more than offset the drop. Orders received was up 12% year-over-year. With the semiconductor material shortage, we had to suspend receiving orders and as a result, the company posted JPY 336.8 billion in orders received. Same story for net sales. GIGA School down JPY 28 billion and Mega Solar, which we still had, JPY 11 billion and unconsolidated subsidiary, JPY 1.5 billion. A total of JPY 40.5 billion were special factors. Strategic areas, including DX initiatives grew JPY 24 billion. Net sales was up 8% year-over-year. With JPY 12.5 billion in semiconductor material shortage, we ended the year with JPY 310.3 billion in net sales. So while there was a reactionary fall in large projects and shortage of semiconductor materials, we are basically on track. Strategic areas are growing as planned. Next is orders received and net sales by business model. Both orders received and net sales were up year-over-year. For Services, orders received was up 11% and sales up 9%. SI and construction. Year-over-year drop looks big, but it is basically due to a shift in timing for semiconductor materials. But as the slide shows, our business model is shifting towards services. Next is a waterfall chart of year-over-year change in operating income. From the left, drop of JPY 3 billion in income due to a decrease in sales of GIGA School. In the meantime, strategic areas of DX and telecom business was up by JPY 4.9 billion and profitability improvement measures contributed by JPY 2 billion. Combined with increase in SG&A for new business development, JPY 1.9 billion on the downside, but enhanced business capabilities pushed up operating income by JPY 4.9 billion. Impact of semiconductor material shortage and loss incurred in Myanmar, which are temporary factors, had a downside impact of JPY 4.3 billion. Operating income was JPY 23.2 billion or 7.5% in operating income margin. The following slides are a breakdown by segment, starting with orders received. Digital Solutions, at the top, decreased due to the impact of GIGA School and deconsolidation of a subsidiary, JPY 121.7 billion, down 5% year-over-year. In the meantime, DX and workstyle innovation-related businesses grew by expanding to governments and municipalities. Excluding impacts from special factors, the segment grew by 9%. In network infrastructures, business for telecom carriers was the driver, especially with stronger relationship with our strategic partners such as KDDI and Rakuten Mobile. The segment ended with JPY 100.9 billion in orders received, up 6% year-over-year. Engineering & Support Services increased by strong construction demand offsetting the reactionary fall of GIGA School, JPY 109.9 billion, up 6% year-over-year. Excluding the impact of GIGA School, orders received was up 29% year-over-year, representing a strong growth in orders. Now, net sales by segment. While there is a big boom in sales, Digital Solutions segment was JPY 110.3 billion, down 12% year-over-year, owing to reactionary fall of GIGA School and unconsolidation of a subsidiary. Meanwhile, Service business grew 7% year-over-year. So if we were not for temporary factors, the segment grew 2% year-over-year. Network Infrastructure segment was JPY 96.4 billion, up 8% year-over-year on the back of growth in telecom carriers. Engineering & Support Services decreased due to the semiconductor material shortage in addition to the reactionary fall of large projects in the previous year. JPY 98.1 billion, down 14% year-over-year. Domestic construction business increased steadily. Excluding temporary factors, year-over-year growth was 18%. Next is operating income by segment. Starting with Digital Solutions. Operating income was JPY 13 billion, down JPY 0.7 billion year-over-year due to reactionary fall of GIGA School, but profitability improved with the change in our business model. Operating income margin was 11.8%, up 0.9 points from the previous year. Network Infrastructure segment was exposed to many factors, but sales increase led to profit growth, JPY 10.3 billion in operating income, up JPY 1 billion year-over-year. Operating income margin was up 0.2 points. As for Engineering & Support Services, JPY 9.1 billion, down JPY 2.7 billion year-over-year, owing to drop in sales of GIGA School and mega projects and loss of a project in Myanmar as well as semiconductor material shortage. There were many temporary factors, but business capabilities were enhanced and gross margin increased across all segments, which I think is a good outcome. The next page is for your reference, gross margin by segment. And that concludes the earnings results for the year ended March 2022. [Statements in English on this transcript were spoken by an interpreter present on the live call.]