Full Year 2017 NEC Corp Earnings Call
Tokyo May 2, 2017 (Thomson StreetEvents) -- Edited Transcript of NEC Corp earnings conference call or presentation Thursday, April 27, 2017 at 10:59:00am GMT
TEXT version of Transcript
* Takashi Niino
NEC Corporation - CEO, President and Representative Director
Takashi Niino, NEC Corporation - CEO, President and Representative Director 
Thank you very much for joining us. I'm Takashi Niino, President and CEO of NEC. Now let me present the financial results for the fiscal year ended March 31, 2017. Page 2 shows the agenda. First, I'd like to report to you the financial results for fiscal March '17. The fiscal results are about the same as the financial forecast revisions, we announced on Monday, April 24. And then I will present the financial forecast for fiscal March '18. And finally, I'd like to share with you our ideas about the midterm management plan.
Now let me start with the financial results. Page 4 shows the summary of financial results. As for the revenue, although Enterprise business revenue increased, revenues of Telecom Carrier business, Public business and Others decreased.
On the left, we are showing you that variance from the forecasts that we announced on January 30. So the revenue was down by JPY 15 billion. As for the operating profit, it decreased mainly in Telecom Carrier and Public. However, in comparison to the forecast, operating profit was higher by JPY 11.8 billion through the improvement of the cost efficiencies.
Financial income increased due to the gain on sales of joint venture stocks to Lenovo and Others. But with the lower operating profit and higher income taxes, the net profit declined year-on-year, and it was JPY 73 billion higher than our forecasts. Today, we decided to pay JPY 6 per share year-end dividend as promised.
Please turn to Page 5. Fiscal March '16 revenue was JPY 2.665 billion. Operating profit was JPY 41.8 billion. Income before income taxes was JPY 68.1 billion. Net profit was JPY 27.3 billion. Free cash flow was positive at JPY 99 billion, which was up JPY 33.3 billion year-on-year.
On the right-hand side, we are showing you the variance from forecasts. The revenues were down by JPY 15 billion. But as you can see, operating profit, net profit and free cash flows all improved.
Page 6 shows the results by segment. Compared to the previous year, Enterprise, which is the second from the top was strong. But there was significant decline in revenue and profit in Telecom Carrier and Public businesses.
Now let me explain segments. Page 7 shows Public business. Japan Aviation Electronics Industry or JAE was consolidated in Q4. And there were decreases in the Public areas for firefighting and disaster prevention network and revenue declined year-on-year. Operating profit decreased due to lower volume and lower profitability in the space business with 1 unprofitable project and provision for contingent loss.
Although revenue was lower than forecasts, mainly in the social infrastructure area, operating profit surpassed our forecast slightly through the thorough improvement of cost efficiencies. Impact of the consolidation of JAE was JPY 48 billion on revenue and JPY 3 billion on operating profit.
Page 8 shows Enterprise business. Despite lower sales in retail and services, strong sales from manufacturing led to higher sales than the year before. Operating profit remained flat year-on-year and was almost the same as the forecasts.
Page 9 shows Telecom Carrier business. Revenue decreased year-on-year. Impact of the sluggish capital investment by telecommunications carriers and the influence of the strong yen was about JPY 23 billion. Operating profit decreased year-on-year due to the sales decline, impact of strong yen, higher investment in focus areas, including SDN, NFV and 5G and higher cost due to the construction delay of the submarine cable system. Compared with the forecasts, International business revenue was slightly lower, but operating profit improved by JPY 3 billion.
Page 10 shows System Platform business. Due to fewer than last year large-sized hardware projects and Enterprise networks decrease, revenue declined year-on-year. With lower revenue, the operating profit also declined year-on-year. Revenue was higher than the forecast due to one-time demand increases for the municipalities and schools. Operating profit was higher than the forecast with higher sales and improved cost efficiency. Improvement of about JPY 6 billion was realized.
Page 11 shows the Others. Domestic utility business was transferred to the Public business for the second half. Smart Energy business decreased. Mobile handset business was transferred to System Platform business. As a result, the revenue decreased year-on-year.
International business profitability declined due to the structure improvement expenses and others. Improved profit and loss in Energy business pushed up the operating profit year-on-year. Compared with the forecasts, revenue was lower, mainly in international business.
Page 12 shows year-on-year net profit change. Financial income and costs improved, but operating profit decreased and income taxes increased. Under the financial income and costs, there were gain on sales of affiliates' stocks, gain on step acquisitions of JAE and financial income and cost improved by JPY 31.1 billion.
As for the income taxes, in the previous year, there was a dissolution of NEC Mobile Communications and the tax expenses declined by JPY 24 billion last year. This year, there was a consolidation of JAE. And as a result, there was a reduction of the tax expenses. The overall decline was JPY 30.1 billion. The total net profit worsened by JPY 48.6 billion and ended at JPY 27.3 billion. With the improvement of the operating profit, net profit exceeded other forecast by about JPY 7.3 billion.
Next, let me share with you the financial forecast for fiscal March '18. On page 14, before talking about the forecasts, I'd like to first of all explain the special items of the fiscal March '18 forecast, the positive impact and the negative impact. Let me start with the positive side. The JAE was consolidated in Q4 in fiscal March '17. Therefore, the 9-month performance of the JAE are reflected as positive impact. And JAE uses Japanese accounting standard. So after the conversion to IFRS, the positive impact was JPY 180 billion on revenue, JPY 7 billion on operating profit. And also, there were improvement in unprofitable projects of fiscal March '17 and business structure improvement expenses, provision for contingent loss, respectively, they were JPY 9 billion, JPY 6 billion and JPY 8 billion. Total improvement was about JPY 30 billion. As for the negative side, last year, there was an investigation by Japan Fair Trade Commission. Therefore, we expect the impact of the nomination suspension, which is expected to be JPY 60 billion on revenue, JPY 15 billion on operating profit. Those are mainly in Public and System Platform businesses.
As for adjustment, we include JPY 10 billion structure improvement expenses and JPY 8 billion strategic investments. As a result, operating profit has a positive impact. However, we included about JPY 33 billion negative factors into our forecasts.
Now let me turn to Page 15 to share with you our financial forecasts. On the left-hand side, we are showing you the full year revenue forecast, which is to JPY 2.8 trillion, which is 5.1% increase year-on-year. There are factors, including the consolidation of the JAE and nomination suspension, excluding these special items, revenue will be flat.
Operating profit is expected to be about JPY 50 billion and excluding the negative special items, which was JPY 33 billion, as I explained on the previous page, the operating profit is expected to be around JPY 80 billion. Net profit is expected to be JPY 30 billion. As free -- as cash flow from investment activities improved significantly last year. Compared to that, free cash flow declined by JPY 19 billion to about JPY 80 billion. And we will try to achieve the net profit of JPY 30 billion, so that we can continue to pay the dividend per year of JPY 6.
And now let me turn to each segment. Page 16, please. This is Public business. We expect the revenue to increase year-on-year due to consolidation of Japan Aviation Electronics Industry Limited, despite the impact from the nomination suspension of JPY 15 billion.
As for operating profit, including the impact of nomination of suspension of JPY 11 billion, we expect it to improve due to a sales increase and profitability improvement in the space business as well as a decrease in provision for contingent loss in the previous fiscal year.
Next, Page 17, Enterprise business. We expect revenue to be flat year-on-year. There is a stable sales from manufacturing industries. However, there is a decline in sales from retail and the services industries. We expect the operating profit to decline due to a project mix.
Page 18, Telecom Carrier business. We expect the revenue to be flat due to a decline in existing international business, such as submarine cable businesses despite expansion of new businesses, such as SDN, NFV and domestic business is expected to be flat as well. And now we expect operating profit to improve due to International business, including the impact of reduced cost realized by the extension of submarine cable system construction period despite an increase in development expenses for 5G.
Page 19, System Platform business. We expect revenue to decrease year-on-year due to the influence of the suspension of nomination of JPY 10 billion as well as a decline in hardware such as mobile handsets. The operating profit is expected to be almost flat despite a sales and profit decline because of an improvement from cost reductions as well as a decrease in provision of contingent loss in the previous fiscal year.
For Others business, revenues are expected to increase year-on-year because of the increase in the International business and the Energy business, such as ESS or electrode business. Operating loss is expected to decrease due to the improvement in the Energy business and the International business, despite the increase in financial burden for the development of IoT infrastructure.
Page 21 shows you the net profit changes year-on-year. In the areas of financial incomes and losses, we had a positive effect from the gain on sales of stocks in NEC Tokin Corporation, that was a positive effect. However, we also have a absence of the gain on sales of affiliates' stocks and a gain on step acquisitions that we had last year. So overall, the impact of financial incomes in costs is negative.
On the other hand, we had an improvement in operating profit in Public and Others as well as a decrease in income taxes. Therefore, we expect the net income to increase by JPY 2.7 billion to JPY 30 billion.
Last, but not least, I'd like to elaborate on the background of medium-term management plan. Last fiscal year was the first year of the medium-term business plan, but the result was not as much as we had expected. However, there are some areas where we would like to explain in detail. First and foremost, in terms of the reorganization of profit structure, the business process optimization project was set up and the target was JPY 35 billion in 3 years. In the first year, we were able to achieve JPY 14 billion. And this is in line with the plan that we had at the beginning of the year.
Regarding the optimization of development and manufacturing functions, we have promoted this and by integrating the subsidiaries for hardware and software on April 1, we set up a new company and we would like to harvest the effect in the next year.
The second point is going back to growth trajectory. In the Safety business, as you may be aware, NEC has been promoting face recognition technology for the static picture technology. 3 times in the past, in 2009, '10, and '13, we were ranked #1 in the world, and you may be aware of this. But this year, we have got the #1 position for the face recognition in video this time. And this is quite significant because the face recognition in video can allow us to expand the business opportunities and applications going forward.
Next is SDN and NFV globalization. Now commercialization efforts are having some difficulty. However, last year, in Europe, the Middle East, North America and so forth, we were able to acquire 10 commercial deployment orders from major players. And our pipeline is expected to be 1.5x in sales in the next fiscal year. In this fiscal year, we were able to expand the pipeline by 1.6x in the last 6 months. And also, in the retail IT service, from 7-Eleven, United States, we were able to acquire an order for POS system and maintenance service. And for AI and IoT, we are promoting partnership with academic institutions and commercial partners, including GE and DENSO. Last year, we have deal with these 2 companies, and this year, we'd like to generate specific numbers out of this deal.
Having said that, last year, the result was not as much as we had expected, as I have explained earlier. And there were a number of issues that we have identified, but it was inadequate execution of plans by the management team in response to the changes in market and customers in general. The failure in achieving the target in existing businesses as well as the delay in the start up of new businesses in overseas is attributable to this aspect.
On top of that, we had certain problems in certain business areas, such as Telecom Carrier business, Energy business and also social infrastructure business, and then we had additional unprofitable projects in social infrastructure business. For Telecom Carrier business, since last year, we have been allocating more resources to focus business areas, and then we would like to continue to do so this year. For this year, March 18, because we are planning to ship commercial prototypes to carriers in March 19, therefore, for this year, we would like to accelerate the technology development of 5G. And for Energy business, the profitability improvement was not as much as we had anticipated. But excluding one-time costs for the operation base and profitability, we have made a lot of advancement. And this year, in Europe, we expect sales growth and profitability improvement for large ESS and electrode business.
And there is another lesson learned last year. That is, in the social infrastructure, we were faced with additional unprofitable projects. We are reducing those. However, we would like to accelerate deployment of project management know-how from system integration and services businesses throughout the company.
So furthermore, another lesson was learned in the area of governance and compliance last fiscal year. There were 3 cases with FTC giving inspection of our sites, and we received cease and desist order orders and orders for payment of surcharge. In the last fiscal year, we booked a provision for contingent loss. And for this year, March 18, we are anticipating an influence from the nomination suspension as explained earlier.
Including these issues and the current -- based on the current environment, the next page shows our key management agenda going forward. First and foremost, we have to accelerate the management speed. And for the medium-term business plan and annual budgeting plan, we are reviewing the planning process so that between the planning and execution, we will have more coherence and more -- faster lead time.
Going forward, on the corporate level, we have to further accelerate the improvement of corporate functions. That's why, starting this year, we are promoting the delegation empowering of -- empowerment of Chief Officers, so that -- while articulating their roles and responsibilities to improve the speed of management. So for overall management, we would like to improve the profitability of business in Japan, including transformation of underperforming businesses. We don't anticipate dramatic improvement in the sales of Japan. However, there are areas where we can still improve profitability by looking at the structure.
Regarding growth, we still believe that the growth is coming mainly from overseas. But on top of the 3 focus areas, we would like to pursue further opportunities. Under the current mid-term management plan, we are achieve -- trying to achieve 5% operating profit margin, and we would like to establish a structure to -- which allow us to do so.
In the first year of the medium term as well as -- -- there was a setback and also the March '18 plan is just as I have described. Therefore, at the moment, we are trying to figure out our future steps under the new medium-term management plan. Within this year, we would like to formulate one, so that we can announce it in January next year. Currently, well, in March '19, our target was JPY 150 billion in operating profit, but with the existing growth speed, this is likely to be around JPY 100 billion. Therefore, we would like to take additional actions so that we can make the OP level in March '19 as close as possible as JPY 150 billion. So the next fiscal -- January, we would like to announce the new medium-term management plan.
And also, we would like to report to you that we are planning to introduce a performance-based stock compensation program going forward this year. And this is to incentivize the management team to improve to mid- to long-term financial performance in line with the expectations of the shareholders. The target of this program is Directors and Executive Officers and the period for this program is 3 years of medium-term management plan. So we will change the ratio and compensation based on the achievement of operating profit and ROE.
And please be aware that this -- introduction of this program is subject to approval at the upcoming 179th Ordinary General Meeting of Shareholders scheduled on June 22. Last but not the least, well, the changes of market and the customers is proceeding at a very rapid pace, and we cannot beat the competition unless we change ourselves and enhance our capabilities. That's why we are enhancing our transformation further, so that we can increase the management speed and effectiveness of plan execution.
For this fiscal year, we would like to deliver on the forecast that I have explained before and in order to regain the trust from investors. And also, we would like to forecast on the formulation of the new medium-term business plan this year.
This concludes my explanation. Thank you very much for your kind attention.