NEC Corp

TSE:6701

Earnings Call Transcript 2021-Q3

[Takayuki Morita, executive]

This is Takayuki Morita, Senior Executive Vice President and CFO. Thank you very much for joining us today. We are happy to see many of you here with us today. Now let me present the financial results for Q3 of fiscal year ending March 31, 2021 that we announced today.

I will make the presentation based on the Page 2 index. The first is overview of financial results. Please turn to Page 4. This is a summary of Q3 financial results. 9-month revenue decreased by 6% year-on-year due to the market deterioration. In Q3, revenue turned to positive recovery growth, supported by solid orders from Q2.

Despite the impact of market deterioration, same as revenue, 9-month adjusted operating profit grew JPY 6.4 billion, including special countermeasures such as JPY 33 billion from asset sales. Q3 adjusted operating profit increased by JPY 32.7 billion, even excluding JPY 22 billion special countermeasures or on essential basis. With higher adjusted operating profit, adjusted net profit increased both for 9-month and 3-month.

Please turn to Page 5. 9-month revenue was JPY 2,044.4 billion. Adjusted operating profit was JPY 97 billion. Adjusted net profit was JPY 63.7 billion. Free cash flow was minus JPY 108.2 billion. We acquired Avaloq and sold assets such as real estate. I will explain those later on in detail. In comparison to our internal plan, 9-month revenue was JPY 41 billion lower but the adjusted operating income was JPY 9 billion higher.

Page 6 shows financial results by segment. I would explain each segment later on. Page 7 shows quarterly adjusted operating profit and loss status. I will explain each factor in comparison to the previous year. As you can see in the middle of this page, impact of market deterioration has been significantly reduced in Q3. The bar graph shows changes of quarterly adjusted operating profit. Red is the COVID-19 net negative impact. Green is special countermeasures such as asset sales. Blue is on an essential basis, excluding the first 2. Essential basis number turned positive year-on-year in Q3.

Page 8 shows quarterly order trends by segment. Total order grew 5% year-on-year in Q3. 9-month order also grew by 3% year-on-year. In Public Infrastructure, GIGA School project contributed. Network Services order increased significantly year-on-year with 5G base stations ramp-up. Public Solutions and Enterprise were most affected by COVID-19. However, order decrease was alleviated in Public Solutions and Enterprise order turned to positive growth year-on-year in Q3. Both segments are showing improvements. Global order appears lower year-on-year in Q3 but this is due to the deconsolidation of display from November.

Page 9 and onwards show results by segment. First is Public Solutions business. Revenue decreased due to decline in health care and local industry as well as fall in demand for business PC replacement, although firefighting and disaster prevention areas were solid. Adjusted operating profit decreased due to a decline in revenue.

Please turn to Page 10. This is Social Infrastructure business. There were different trends in NEC Corporation from a consolidated subsidiary. Revenue grew in NEC Corporation due to increase in IT services for central government and PCs for educational institutes with GIGA School project. But revenue, we decreased in a consolidated subsidiary, Japan Aviation Electronics or JAE. Adjusted operating profit increased in NEC Corporation due to the higher sales and improvements of unprofitable projects. But adjusted operating profit decreased in the consolidated subsidiary, JAE.

Please turn to Page 11, Enterprise business. Revenue decreased due to fewer large projects compared to the previous year for retail and services and financial sector, and lower demand for business PC replacement as well as restraint of corporate IT investment in manufacturing, retail and service industries. As I said, operating profit decreased due to decline in revenue.

Please turn to Page 12, Network Services business. Revenue grew significantly due to the increase in mobile network and fixed wired network in light of 5G introduction. Shipment of 5G base station is showing major increase from Q3. I will explain the status of 5G in detail later. Adjusted operating profit increased due to higher revenue.

Please turn to Page 13. This is the Global business. Revenue decreased due to a decline in the deconsolidation of display in November and a fall resulting from the termination of the part of KMD businesses despite an increase in Submarine Systems. Adjusted operating profit increased due to improvement of profitability in the service provider and an increase in revenue in Submarine Systems despite revenue decline.

Page 14 shows 9-month Global business status, showing scaling-back businesses and continuing businesses separately. As for the scaling-back businesses, both revenue and operating profit were affected by lower display sales and the consolidation of display in November.

9-month total Global revenue decreased. But if you only look at the continuing businesses' revenue, excluding the scaling-back businesses, it's on the rise. As for the operating profit of continuing businesses, you can see the major improvement in comparison to the previous year. This has been the driver for total Global business.

Page 15, this shows free cash flow, operating cash flow. Adjusted operating profit improved JPY 6.8 billion, and total operating number improved JPY 38 billion. But overall, profit deteriorated, excluding the special measures. With the increase in tax payment, the spend shows up JPY 25.6 billion year-on-year.

Cash flow from investing activities. We completed the investment for data centers and we sold the stocks of Showa and [ Optus ], here all in all, JPY 31.2 billion. With the sale of the fixed assets, including Sagamihara plant, it improved about JPY 35 billion. These activities resulted in the growth of JPY 35 billion, but we had to expend as much as JPY 198 billion, with the acquisition of Avaloq. All in all, DX expense grew as much as JPY 131.8 billion.

All in all, free cash flow became JPY 108.2 billion. If we are to exclude a onetime factor of the fixed assets sold and acquisition of Avaloq, free cash flow was almost at the same level of the 9-month cumulative number we had last year.

Next, I will then explain the financial forecast for fiscal year ending March 31, 2021. Please look at Page 17. We have not changed the latest annual forecasting from the numbers we announced on May 12 last year.

Please turn to Page 18. Here, I would like to share our latest outlook as for the market deterioration caused by COVID-19. I may go into some details. As of October 2020, we had assumed that full year operating profit will be minus JPY 65 billion. But we had revised this number by looking at the actual impact in the third quarter as well as the latest outlook for the fourth quarter. So as for today, our latest assumption shows that revenue being minus JPY 140 billion to JPY 150 billion and operating profit being minus JPY 50 billion.

Back then, when we made our forecast for the first half, we had assumed COVID-19 impact would last a lot longer than we had expected. But recently, the orders are now on the recovering trend. With this taken into account, as of now, we do believe that we can limit the negative impact within the numbers we had assumed in the beginning of the fiscal year.

As for the cost control efforts, we are now further advancing toward new cost structures with remote working in mind. Nominal cost reduction has been carried out and as planned. Now we have to build on the cost increase coming from the Network Services and the Public Infrastructure businesses. Now we estimate somewhat smaller improvements up to JPY 17 billion for the full year.

As for new normal haul demand, we estimate it to be JPY 9 billion for the full year. We have already delivered on our solutions against the COVID-19 infections into Hawaii airport. We are now getting those unexpected opportunities, which were totally unthinkable prior to COVID-19. We do believe that these initiatives will trigger further digitalization activities.

With a couple of special measures, we have already taken account of JPY 33 billion by the third quarter. With these efforts, we should be able to absorb negative impacts. We do plan to advance our growth investment activities as much as possible for future opportunities. We are so happy to be able to report this.

Here on Page 19, I would like to expand on cash management. As of the end of December, liquidity on hand, including our commitment line became 2.8 months plus of the monthly revenue. Though we had the expenses for the Avaloq acquisition, we continue to make efforts to generate free cash flow. With the third-party allocation in July last year, it improved 0.5 months plus year-on-year. In regard to this point, with then a possible market deterioration, we have fully unsecured needed liquidity on hand.

Page 20. Management topic. First is the completion of Avaloq acquisition as well as the funding for the deal. We completed the acquisition of Avaloq in December last year, a major Swiss financial software company, and it will contribute to our performance starting from the fourth quarter. Today, NEC announced that it will accept investment from JICT. This investment amount is planned to be about CHF 300 million or JPY 35 billion. This execution is planned to take place after February 2021. With this investment and acceptance as well as the asset sales we had this year, it will enable us to complete the transaction within the current cash flow we have.

The second management topic is 5G initiatives. Here in Japan, 5G initiatives are fully advancing in terms of networking activities. In this station area, NEC has been already ahead in radio units. We are now fully shipping central units supporting Open RAN. Besides these base station activities, we now have NTT DOCOMO and Rakuten Mobile in the 5G core space, which do support stand-alone methods. We are here to make further contributions to the advancement of 5G network here in Japan. We are also advancing our activities in overseas. We are making steady efforts here. In the U.K., we established a Center of Excellence, as you may notice in November, for business development. It has been already decided that NEC would participant in the U.K. and government-led Open RAN trial project leveraging the Center of Excellence. NEC has also been selected as system integrator for the Open RAN system pilot by Telefónica Germany. Going forward and as well, we will be actively engaged in collaborations with our partners who have those advanced technologies. We will further advance Open RAN market activities globally.

The third management topic is initiatives for the digitalization of government services. We are already providing solutions for educational institutes with GIGA School project as well as managing the government's common platform. We are actually making proposals to government on usages of the My Number Card. We intend to enhance our business by offering the secure cloud platform services. We also intend to build company-wide systems to promote those activities.

With the know-how coming from KMD located in the advanced digital country of Denmark, NEC strongly believes that we can make the great contributions to realizing the government's digitalization. That's all from me. I'd like to thank you for your kind attention.

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