NEC Corporation (NIPNF) Q2 2023 Earnings Call Transcript

NEC Corporation (OTCPK:NIPNF) Second Quarter 2023 Earnings Conference Call October 28, 2022 2:00 am ET

company participants

Conference call participants

Unidentified company representative

Thank you for your participation today. I would now like to explain the financial results for the second quarter of the fiscal year ending March 31, 2023. This is what I will cover today. First I will start with the summary of the results of the second quarter.

See page 5. This shows key indicators and financial results by segment. For first half revenue, we saw a 5.2% increase compared to last year. Adjusted operating profit decreased. The fluctuation of network services will be explained in more detail when we cover financial forecasts. But for this fiscal year, carriers [ph] capex is skewed toward the second half and the first half was slow. There was also a one-time loss from a strategic overseas order that was recognized and we’re seeing a big decrease compared to the same period last year.

On the next page, I’ll cover the reasons for fluctuating adjusted operating income. The changes in adjusted operating profit and loss are shown on page 6. I will explain it using 42.1 billion JPY of March fiscal year 2022 as a reference.

Compared to the one-time gain of JPY 8 billion recognized in March FY2022, a one-time gain of JPY 11 billion was recorded in March FY2023. The component shortage led to minus JPY 500 million, where the Currency impact was positive JPY 6.5 billion. Excluding these regular businesses, businesses where home IT services are doing well saw year-over-year improvement, but with less than JPY 18.2 billion in network services. In total, we saw a drop of 19.9 billion JPY. In total, March 2023 fiscal year operating profit was 31.2 billion JPY.

Page 7 shows order trends. For the entire company, excluding subsea systems, which fluctuate a lot, orders increased 16% in the first half.

For mainly enterprise IT services, strong demand continued resulting in an 11% increase. By segment, urban infrastructure and SMEs performed well, up 14%.

Public Infrastructure saw a large satellite order project last year during fiscal year 2022 March. However, we still increased by 4% during the first half. And if we exclude this big project, we saw an absorption of 17%. For enterprises as well as large service delivery projects, the tailwind of high IT demand resulted in a 15% increase for the first half. Network services were flat during the first half, but when we look at the second quarter, 5G demand expanded, resulting in a 10% increase for the quarter.

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For global systems excluding submarines, Netcracker’s large projects along with Digital Government and Digital Finance significantly boosted orders. Next, I will describe the financial forecast for fiscal year 2023 from March.

Page 9 is the forecast for the entire year. No changes have been made since the July 28 announcement.

Page 10 are forecast by segment. When we updated our financials on July 28, the advantage that was taken into account in the adjustments is now reflected in each segment. Outlook updates from consolidated companies, JAE and NESIC have also been incorporated.

Details of the adjusted forecast are on page 11. First of all, during the forecast made on July 28 as normal business to the upside, JPY 14 billion was included in segment adjustments. This positive aspect, taking into account the actual data of the first half, as well as the current circumstances, are now taken into account in the public, business and global infrastructure. For network services, reflecting forecasts for consolidated NESIC, we have lowered the outlook by JPY 4 billion. NEC Corporation remains unchanged. The breakdown by segment will be explained on the following pages.

As for corporate actions, such as asset sales that were included in the July 28 announcement, as scheduled. We have recognized a profit of JPY11 billion in the first half. Now, first on page 12, the forecast for the Public Solutions business.

First half revenues fall due to the negative impact of large urban infrastructure projects, but orders for the first and second quarters are increasing and the recovery trend continues. The full-year forecast remains unchanged from the numbers updated on July 28. This forecast will be considered as the lower range and by capturing the demand seen in the recovery trend, we would like to improve the numbers.

Page 13, Public Infrastructure Business. In the first half, revenues increased due to the increase in the number of defense and satellite business projects, as well as the increase in sales of JAE or consolidated subsidiary. Adjusted OP increased due to an increase in revenues and the improvement of unprofitable projects.

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The full-year forecast is revised up by JPY5 billion from the July 28 forecast, reflecting an increase of JPY3 billion in NEC Corporation’s adjusted OP and an increase of JPY2 billion from the revised forecast of JAE.

Page 14, Entrepreneurial Business. In the first half, orders, revenue and adjusted PO are up year over year due to risk demand. Full-year forecast is revised up by JPY10 billion in revenue and JPY3 billion in OP adjusted from July 28 forecast, reflecting first half results and favorable market environment expected to continue .

Page 15, Global Business. In the first half, revenues increased due to the impact of the weak yen. Despite the positive impact of increased revenue due to a one-time increase in costs, adjusted OP was flat year-over-year. We expect to offset this increase in expenses from the first half in the second half.

Our full-year forecast is revised upwards by JPY50 billion in revenue and JPY5 billion in OP adjusted from the July 28 forecast, taking into account the yen’s greater depreciation than originally forecast.

Page 16, Network Services Business. Shown to the left are factors contributing to changes and actual variations in adjusted operating profit loss compared to March fiscal 2022. First of all, let’s start with the results of the first half at the top. We incurred a one-time loss of 5.5 billion JPY from the booking of a strategic project of the 5G international business. In addition, a loss of JPY2 billion was recorded as a provision for long-term inventories.

In total, the one-time losses were 7.5 billion JPY. To begin with, a strategic price was quoted for the initial batch of mass production, given the strategic nature of the projects, given that [indiscernible] it was quite challenging to begin with. Then, after the component rose higher than initially expected, due to the impact of inadequate supplies and currency impact, we are asking clients for some relief on taking a conservative stance, provisioning for losses .

Strategic spending is concentrated in the first half of March fiscal year 2023, recording JPY4.5 billion, which is partly with the amount recorded in the second half of March fiscal year 2021. In addition, we incorporate a downward revision of the forecast of NESIC, our consolidated subsidiary, of JPY2.5 billion, as well as the negative impact of JPY2.0 billion from component shortages. Operators’ capital investments tend to be concentrated in the second half and remain weak in the first half, resulting in a sales decline of JPY5.2 billion. Due to all these factors, the first half result deteriorated by JPY21.7 billion and closed with a loss of JPY13.3 billion. Given the first half result, the full-year forecast based on the second half assumptions is shown on the right. First, a one-time royalty income of 5 billion JPY in the fourth quarter of March fiscal year 2022 will be a negative factor in the second half of March fiscal year 2023.

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Strategic spending is expected to remain flat for the year because we anticipate it will decline in the second half. NESIC revised its forecast for the full year, which will be recorded as a decrease of JPY1.5 billion year-on-year in the second half. Sales are expected to be higher in the second half due to the concentration of domestic 5G demand, increased overseas 5G shipments and a boost in IT business. Although it is not a fruit at hand, we expect sales to increase by JPY15.2 billion in the second half. Our goal is to achieve an operating profit of 27 billion JPY for the full year.

Looking ahead to the next fiscal year and beyond, we will be concerned not only with the environment surrounding our global 5G businesses, but also with the broader environment, including various macroeconomic factors and uncertainties. As we have done in the past, we will appropriately implement the necessary measures as the changing environment progresses. Regarding the demand for 5G, there are no changes in our national and international forecasts in the medium and long term. However, we recognize that there are uncertainties, such as the investment policies of carriers and changes in the macroeconomic environment.

Page 17. Finally, the NEC Innovation Day announcement. This event is for media, IT analysts and capital market professionals. It is scheduled for November 30 this year. Our CTO, Mr. Nishihara, will explain NEC’s R&D and new business creation strategies, and details of the program will be announced shortly. We hope to see you at the event.

This concludes my presentation. Thank you very much for your attention.

questions and answers session

Operator

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