NEC Corp

TSE:6701

Earnings Call Transcript 2021-Q1

[Takayuki Morita, executive]

Good afternoon. This is the CFO, Morita. Today, we will be explaining our financial results via audio feed. Thank you for such a large attendance. Let me now explain the financial results for Q1 fiscal year ending March 31, 2021. I will explain the contents here covered on Page 2.

First, the financial results. Allow me to explain the overview of segment revision. Based on the structure and organizational changes we made in April, starting from this Q1 financials, we have revised some of the segments. For today, we will base this upon the new segments. For previous actuals as well, we have reincorporated them. The revisions are shown here, but let me add one point. System Platform is now included in Others. Please go to Page 5. I will explain the summary of financial results for Q1. Revenue decreased due to declines in large projects as well as PC replacement demands. There was further in from the outbreak of COVID-19.

For adjusted operating profit loss, cost reduction and sales of subsidiaries shares gave us gain. However, all in all, declined to the decrease in revenue. Adjusted net profit loss decreased due to the decline in adjusted operating profit and loss.

Now moving on to Page 6. Revenue for Q1 was JPY 587.7 billion and adjusted operating profit and loss was minus JPY 5.8 billion. Adjusted net profit and loss was also a loss of JPY 2.3 billion. Free cash flow was cash-in of JPY 84.2 billion, which I will explain later on. The right-hand chart shows actual results by segment.

Please proceed to Page 7. I will explain the factors behind the change in adjusted operating profit loss from the last year. For Q1, business PC revenue fell by minus JPY 2 billion. In fiscal year ending March 31, 2020, we had large projects. So there was a reactionary decline of JPY 4 billion. Having said that, these were anticipated. On top of this, the macro economy deteriorated due to the spread of COVID-19, impacting global enterprise and JAE, resulting in a loss of JPY 17.5 billion. Offsetting the negative impact of macro environment deterioration with control of costs and acquiring demand in the new normal remains unchanged. We also analyze that the impact of a deteriorating macro economy is within the range of what we assumed as of May. During this quarter, we have added JPY 4 billion in development costs, specifically around 5G since last year and cost management, an improvement of JPY 7 billion. Since the beginning of the year, we have proceeded with selling of assets, such as shares of Showa Optronics, and we are implementing objectives to embrace changes in the business environment.

From Pages 8 and onwards, we show the results by segment. First is Public Solutions business. Revenue decreased due to a decline in health care and local government as well as business PC. Adjusted operating profit and loss is also negative due to revenue decrease.

Page 9 is Public Infrastructure business. Aerospace defense decline as well as our consolidated subsidiary, JAE. And as a result, revenue decreased. As for adjusted operating profit mainly due to JAE, resulted in a decline.

Page 10 is Enterprise business. Revenue dropped due to a decline in large projects, such as retail and distribution and finance as well as the decline in business PC. Adjusted operating profit dropped due to the dip in revenue.

Page 11 is Network Service business. Revenue increased primarily due to our consolidated subsidiary, NESIC. Adjusted operating profit and loss was a decline due to 5G-related investments.

Page 12 is Global business. Due to high demand within Submarine Systems increased, however, display and wireless dropped. KMD terminated a part of their business despite our expectations, and all in all, revenue declined. Adjusted operating profit loss declined due to revenue drop. However, to mitigate this, we have conducted cost management and are able to absorb this impact to an extent.

Page 13 is Global business status. This is shown by SBU revenue trends. Please reference this at your leisure.

Page 14 shows initiatives in global business. First, display business. As for the formation of a joint venture with Sharp Corporation for NEC display solutions that we have announced, we are currently undergoing review by the respective countries' administrative agencies. The goal for unconsolidation will be towards the end of the first half of this fiscal year.

For Energy business, we have been exploring a partnership to improve profit, but has proven to be time-consuming. And coupled with the impact of COVID-19, we deemed it will be difficult to proceed further. We will stop new orders for NEC Energy Solutions and conduct only construction for existing systems, maintenance and warranty obligations. Existing projects will conclude by the first half of year ending March 2022 and warranty obligations end in year-ending March 2030. This was an executive decision to avoid future risks. Page 15 shows the first quarter domestic order trend. Public solutions declined due to the absence of a mine number server renewal project, which we had in the previous year and the deteriorating market conditions for the IT services for SMEs. Enterprise sales also declined due to the absence of large retail and distribution and the financial sector projects, which we had in the previous year, lower demand for business PCs and deteriorating market conditions. Orders in June were 97% of the previous year. There is uncertainty and lack of optimism, but we managed to maintain orders flat from last year.

Public infrastructure showed positive growth due to the contribution of Earth observation satellites for Vietnam. Even excluding this, the business recorded positive year-on-year growth and maintained a solid order trend.

Page 16 shows the free cash flow situation. Operating cash flow was affected by a decrease in adjusted operating profit by JPY 1.34 billion and the payment of income taxes, et cetera, of JPY 3.2 billion. However, the collection of receivables at the year-end and improvement in working capital of JPY 4.4 billion helped the business to maintain the similar level to the last year. On the other hand, investing cash flow was about JPY 2 billion due to sales of investments in securities and the improvement of consolidated companies. As a result, free cash flow improved by JPY 1 billion year-on-year, resulting in an inflow of JPY 84.2 billion. Next, I would like to explain the full year forecast for fiscal year ending in March 2021. Page 18, please. There is no change in the full year forecast from the forecast announced on May 12. Segment breakdown reflects the new segmentation announced on July 21.

Please see Page 19. I'd like to explain how we are responding to the changes in the business environment caused by the COVID-19 pandemic. Following an internal review of the situation in the first quarter and the current outlook for the fiscal year, we have decided not to revise the outlook at this time from the original plan announced in May this year. Assuming the end of pandemic in the first half of the year, we expect a certain level of revenue decline. However, we believe that we will be able to achieve our profit forecast by controlling expenses and capturing new demand. In terms of cash management, we will continue to ensure that we have adequate liquidity at hand by selling those assets available for sale.

On Page 20, you will find an overview of the new normal initiatives. First, infection control solutions, combining biometric and video analytics technologies with thermal cameras delivered to 5 major airports in Hawaii. The solution enables identification of people with high body temperature as well as visualization of their movement within the airport compound. It's expected to contribute to safety and security of visitors, business travelers and residents. NEC has also launched a digital office project aimed at realizing a new work style through DX. Trials has started at NEC headquarters building, including gateless entry and exit and a cashier-less payment enabled by biometric authentication that can even recognize people who are wearing face masks for tight delivery within fiscal year ending in March 2021.

Please turn to Page 21. We are also implementing changes in our marketing efforts to adapt ourselves to new normal. This month, we held our first digital event, which was attended by more than 30,000 guests, and the results were as positive as a real event. And in light of this, we have decided to hold our annual private event in November as one of the largest all-digital events in Japan this year, including exhibitions. We aim to attract 50,000 visitors, which is 2.5x larger than the previous year's real event, by taking advantage of digital technologies, inviting more overseas guests.

Finally, here are a few topics. Page 23, let me explain about the reinforcement of 5G initiatives. Firstly, in June this year, NTT and NEC agreed on an alliance for joint R&D and the global rollout of ICT products using innovative, optical and wireless technologies. Specifically, we will work towards the realization of O-RAN and IOWN on. Through these efforts, we will strengthen Japan's industrial competitiveness and contribute to ensuring the safety and reliability of the communications infrastructure.

Second, we have agreed with Rakuten Mobile to jointly develop a stand-alone 5G core network. We will work together to build a highly reliable made-in-Japan 5G core network and contribute to the global rollout of the Rakuten Communications Platform, or RCP. Please move on to Page 24. In March 2020, NEC submitted Form 20-F to the U.S. Securities and Exchange Commission. The registration took effect as of June 29, 2020. With this, the restrictions on transactions of NEC's common shares have been lifted in the United States. Since the announcement of Q1 results, we have been actively communicating with the U.S. investors, and we'll continue to strengthen our efforts to enhance corporate value through dialogue with capital market participants. Lastly, Page 25. This is an event for those of you who are working in the capital market. Continuing from last year, we will hold NEC IR day on the September 14. The Head of each segment will explain what the company is doing to achieve the medium-term management plan in their respective areas of responsibility. I hope you can all join us for this event.

Thank you for your kind attention. That's all for today.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]