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

Thank you for joining us for the financial results for the fiscal year ended March 2023. I am Ushijima, President of the company. Let me take you through the earnings for the last fiscal year. This is today's agenda. I will start with a summary of results for the fiscal year ended March 2023. Last year was marked by foreign exchange fluctuations, materials shortage and sudden rise in prices from Q1 to Q3, and the company had a hard time. From the fourth quarter, however, we enjoyed an upward momentum. As you see in the slide, orders received reached JPY 356 billion, which was record high. Net sales and profit showed a recovering trend from the fourth quarter. Net sales was JPY 320.8 billion. Semiconductor and material shortage, coupled with delayed sales timing had an impact on our performance. However, we saw a gradual recovery from Q4. As a result, net sales was up 3% year-over-year. Operating income was impacted by investments for growth, JPY 3.5 billion in SG&A, weaken and delayed sales timing. Operating income for the year was JPY 22.8 billion, down JPY 0.4 billion year-over-year. ROE 10.0% with prolonged duration of projects due to shortage of materials, among other reasons, free cash flow was minus JPY 2.1 billion. Orders backlog was up 22% year-over-year, which was a strong growth year-over-year. Let me turn to orders received and net sales by business model. SI/construction, with the easing of various issues, sales picked up from Q4. At the bottom of the slide, you will find change in the 3 months in Q4 in brackets. For SI/construction, orders received was up 9% year-over-year or 17% in the 3 months in Q4. Similar growth was seen for net sales, 4% growth year-over-year or 13% in Q4. Catch-up was seen in the fourth quarter. Turning to Services. Orders received was flat growth year-over-year or plus JPY 0.2 billion despite a reactionary fall of large projects with local governments in the previous year. Here again, the fourth quarter growth was 9%. Net sales was up 3% year-over-year. This could be due to leveling of net sales from services. Fourth quarter was down 1%, which is an impact of decrease of Covid related call center demand in a subsidiary, but the overall trend is growing. Let me turn to operating income factor analysis of year-over-year change. On the left is March 2022, and on the far right is March 23. I Special overseas factors from the left include: first, impact of allowances for Myanmar project, JPY 1.8 billion, partial reversal of allowances for Myanmar, JPY 1.4 billion. Loss in Thai project negative JPY 1.1 billion, foreign exchange impact, minus JPY 1.5 billion. These are the special factors. Then there was SG&A for investment in growth, which consists mainly of enhanced sales and new business development, JPY 3.5 billion. Business improvement, JPY 2.5 billion, and we ended the year at JPY 22.8 billion. At the top right, please find details for Q4, which I have been referring to. Profit growth higher than SG&A was achieved in the fourth quarter. The following slides are breakdown by segment. Let me start with orders received. DX Solutions business saw an increase in SI construction business, such as in upgrades for the financial sector. While there was reactionary fall of large projects with municipal governments, DX and workstyle related business continue to grow. DX Solutions ended the year at JPY 122.7 billion, up 3% year-over-year or up 5% in Q4. Here again, the fourth quarter was relatively strong. Network Solutions business was JPY 92.1 billion. Business from telecom carriers decreased while local 5G and marine and space-related business were the drivers, 9% year-over-year or 31% growth in Q4. Environmental and Social Solutions. The reactionary fall of large orders in the year ended March 22 was covered by SI/construction in Japan and disaster prevention projects, JPY 132.7 billion, up 3% year-over-year and up 7% in the fourth quarter. Q4 was strong across all segments. GIGA School contributed significantly in the year ended March '21. But this past year, we were able to achieve record high orders without such special large orders. We take this positively. Let me move to net sales by segment. DX Solutions, JPY 114.2 billion, up 6% year-over-year and 13% in Q4. Service business grew stably by 6%. SI/construction also grew 6% with situation settling down in semiconductor and materials supply. Regarding Network Solutions, business for telecom carriers decreased while marine-related business increased, JPY 79.2 billion, down 3% year-over-year. Environmental and Social Solutions, JPY 119.2 billion. SI/construction business, such as kitting projects and overseas construction projects increased last year, up 4% year-over-year or 8% in Q4. Turning to operating income by segment. The company performance in Q1 to Q3 was sluggish for the reasons I outlined earlier. DX Solutions business made JPY 13.2 billion, up JPY 0.2 billion year-over-year, with strong sales growth more than compensating for the FX impact and SG&A increase. We are still at a transition period to DX service business model with major transition taking place in the first half. But [GP] ratio in the 3 months in Q4 has recovered to last year's level. I feel the need to drive new businesses more aggressively. Network Solutions business, JPY 9.8 billion, down JPY 1.1 billion year-over-year. This is due to a decrease in sales and increase in investment for growth. Regarding Environment and Social Solutions. Overseas, special factors I mentioned earlier, had positive impacts, JPY 10.7 billion, up JPY 2.5 billion year-over-year. In others, head office relocation and development of the ERP system led to a cost increase of JPY 2 billion from the previous year. Let me turn to forecast for the year ending March 2024. This is our forecast. As mentioned earlier, signs of improvement are seen in the fourth quarter, JPY 370 billion in orders received and JPY 340 billion in net sales. We aim to achieve record high levels. Since order backlog is increasing, I believe it is crucial to work to better control order backlog to generate profit. Operating income, JPY 24 billion. We seek to increase income through sales growth and high value-added service expansion while investing in growth. In light of the market environment and order backlog, we will strive to achieve stronger growth than this forecast. Next is forecast by segment. DX Solutions orders received, JPY 130 billion, DX and workstyle reform is a favorable win for us. Sales, JPY 121 billion, up 6% year-over-year. Operating income, JPY 14 billion, up JPY 0.8 billion year-over-year. Network Solutions, investment by telecom carriers, I believe, will remain slow, but there are growth areas, including marine. Orders received, JPY 95 billion, up 3%; net sales, JPY 85 billion, up 7% and operating income, JPY 11 billion, up JPY 1.2 billion from the previous year. Regarding Environment and Social Solutions. In addition to the initiatives we've been working on, such as safe and secure community building, there are many others, including fire prevention. JPY 137 billion in orders received up 3%; net sales JPY 126 billion, up 6%; operating income, JPY 12 billion, up JPY 1.3 billion year-over-year. Next is dividend. The company's policy is to increase shareholder return based on stable dividend while expanding corporate value through investment in growth. Year-end dividend for the year ended March 2023, JPY 23, JPY 46 for the full year will be paid. For the year ending March 2024, JPY 49 will be paid out at the year-end, which will be an increase of JPY 3. We aim to increase dividend payout for 17 years in a row. [Statements in English on this transcript were spoken by an interpreter present on the live call.]