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Edited Transcript of 6701.T earnings conference call or presentation 29-Jan-20 8:30am GMT

Q3 2020 NEC Corp Earnings Presentation

Tokyo Jan 31, 2020 (Thomson StreetEvents) -- Edited Transcript of NEC Corp earnings conference call or presentation Wednesday, January 29, 2020 at 8:30:00am GMT

TEXT version of Transcript

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Presentation

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Unidentified Company Representative, [1]

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Good afternoon, ladies and gentlemen. I would like to thank you for such a large turn up today. Thank you very much. I would now like to explain our financial results for Q3 fiscal year ending March 2020. The topics to be covered are shown on Page 2. First, I will explain the overall performance for the company, and this will be followed by a breakdown by segment.

First, consolidated financial results and forecasts. Please refer to Page 4. For the 9 months, April to December, actual revenue was JPY 2.1756 trillion. Adjusted operating profit was JPY 90.6 billion. Income before taxes, JPY 78.8 billion. Adjusted net profit, JPY 56.9 billion. Free cash flow was JPY 49.2 billion, an improvement by JPY 112.2 billion year-on-year. I will elaborate later on.

In comparison to our internal assumptions on a 9-month accumulated basis, revenue was up JPY 100 million approximately, and adjusted operating profit up JPY 15 billion. Out of this, we plan to utilize JPY 10 billion in initiatives to enhance corporate value in the mid to long term. Hence, our full year forecast remains unchanged from what we announced on April 26, 2019.

On Page 5, as referenced, we show the details of the adjusted items, which is the gap between operating profit and adjusted operating profit.

Now on Page 6. The impact of business structure improvement and expenses for improvement in Q3 of the year ending March 2019 is shown. On an accumulative 9-month period, the total effects of business structure improvement was JPY 22 billion. Progress is on track with what was slated at the beginning of the year, and contributions are being made to business improvement. JPY 25 billion was recorded as expenses for business structure improvement in Q3 year ending March 2019. So for the cumulative 9-month period, the improvement amount is JPY 47 billion.

Next, I will explain booking status in Japan for the 9-month period. Aside from System Platform business, all segments are trending on par with last year. However, when we consider the substantial increase enjoyed during the same period last year, we can say that the booking status is strong, and Japan business continues to be sound.

Page 8 shows our approach to the full-year plan. Adjusted operating profit for the first 9 months was JPY 15 billion higher than the internal plan, with emphasis on Japan business. Out of this, JPY 10 billion will be invested in additional initiatives to enhance mid- to long-term corporate value. Roughly half will be used to strengthen DX, 5G and security. The remaining half will go to creating a friendly working environment, human resource development and profit structure reform.

Next is free cash flow. Allow me to explain the reasons for the free cash flow improvements. During the accumulative 9-month period for cash flow from operating activities, adjusted operating profit was approximately JPY 67 billion. Collection of receivables at year-end and improvements in working capital through enhancing asset efficiency resulted in an improvement of approximately JPY 40 billion. Further, by applying IFRS 16, there was an impact of approximately JPY 40 billion. As for cash flow from investing activities, investments were made into data centers and new businesses, and this resulted in a negative impact of approximately JPY 26.5 billion. All in all, free cash flow improved JPY 112.2 billion year-on-year. Since IFRS 16 lease has been applied, interest-bearing debt has increased approximately JPY 170 billion on the December end 2019 balance sheet.

Next, let me explain financial results and forecast by segment. Please refer to Page 11. Segment results and full year forecast are shown. For revenue, aside from others impacted by the selling of our electric business, all segments saw an increase. For operating profit, all segments enjoyed growth due to increase in revenue and effects of structural reform. For the 9-month accumulative period, operating profit increased for System Platform, Public and Network Services versus our internal forecast.

Next is Public business. Revenue was up 4% year-on-year to JPY 644.2 billion due to increased sales in public solutions and public infrastructure. Adjusted operating profit was up 19.2% year-on-year to JPY 47.5 billion due to increased sales in the IT services for local government and in the aerospace and defense areas. Excluding Japan Aviation Electronics, revenue was up 10%, and operating profit was up JPY 21.9 billion year-on-year.

As for full year outlook, we have an upside potential in the IT services for local governments and others, which performed well in the first 9 months. We may exceed the full year target by JPY 30 billion. As for the operating profit, given the increase in unprofitable businesses during the first 9 months, we are conservatively estimating a full year result in line with the guidance.

Next is Enterprise business. Revenue is up 7.7% year-on-year to JPY 339.5 billion due to increased sales for the financial sector and a special factor that is the change of the division recording Office 365 license sales. Even after excluding the special factor, revenue is up 2% year-on-year despite the strong increase of 9% in the previous year. Adjusted operating profit is up JPY 1.7 billion to JPY 27.3 billion due to increase in sales absorbing the unprofitable businesses of JPY 2.8 billion during the first half.

As for the full year outlook, revenue is expected to overperform the full year guidance by JPY 20 billion or so on the back of the change in the division, which is recording the license sales as well as strong financial sector sales. Operating profit is also trending strongly to achieve the full year guidance.

Next is Network Service. Revenue is up 10.5% to JPY 341.4 billion due to the brisk demand for 5G-related fixed line network projects as well as the increase from NEC NIST SI, a subsidiary. Adjusted operating profit is up JPY 8.4 billion to JPY 18.1 billion due to an increased sales absorbing a one-off loss incurred by NEC NIST SI. As for full year, revenue may exceed guidance by around JPY 30 billion due to increased sales in fixed line network, and operating profit may also have some upside due to strong sales.

System Platform business. Revenue up 12.2% to JPY 389.2 billion due to sales increase in business PCs and servers. Adjusted operating profit is up JPY 27.5 billion to JPY 32.3 billion due to increased sales of business PCs and servers and the effects of business structure improvement. As for full year, there is a possibility of an upside by about JPY 60 billion in revenue, helped by favorable business PC sales and by around JPY 10 billion in operating profit compared with the original guidance.

Global business. Revenue is up 23.3% to JPY 366.6 billion due to the consolidation of KMD and submarine systems. Adjusted operating profit is up JPY 7.3 billion to JPY 1.2 billion due to improvement in Safer Cities server service provider, wireless backhaul and submarine systems.

Page 17 shows additional details about the Global business. The chart on the left shows the breakdown of revenue by business during the first 9 months. Safer Cities showed a significant growth year-on-year due to the consolidation of KMD. Submarine systems and energy are also up year-on-year, thanks to increased orders in the previous year. As for earnings, Safer Cities and submarine systems improved year-on-year due to increased sales. Service provider and wireless backhaul also improved year-on-year due to improved margins. While Energy and Display and others decreased earnings due to unprofitable projects, offsetting increased sales and intensify the competition, respectively.

As for full year outlook, we expect a continuously strong trend in submarine systems and wireless backhaul, while energy and display and others remain challenged by tough business environment. In Safer Cities, organic businesses are affected by the political situation in Hong Kong as well as foreign exchange rate fluctuations.

All in all, the Global business may have a downside risk of around JPY 40 billion in revenue and JPY 10 billion in earnings vis-à-vis the full year guidance, though we still believe that the segment is able to secure a positive adjusted operating profit for the year.

That's all I have for today. Thank you very much for your kind attention.

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