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Earnings Transcript for 6701.T - Q1 Fiscal Year 2024

Unknown Executive: Thank you for joining us today. I am pleased to present our financial results of Q1 of FY ending March 2024, which we announced today. The contents of today's presentation are listed here. I will now explain the results for the first quarter of FY ending March 2024. Page 4, summary of the financial results of Q1 of FY ending March 2024. Revenue was JPY 706.5 billion, an increase of 7.1% year-on-year. Adjusted operating profit was JPY 0.5 billion, an increase of JPY 7.4 billion from the previous year.
Starting from this fiscal year, we report non-GAAP operating profit and net profit. Non-GAAP operating profit is an indicator of our fundamental business performance. It is defined as operating profit minus items such as the amortization of intangible assets recognized in acquisitions, M&A-related expenses, one-off restructuring-related expenses, impairment losses, stock compensations and other onetime gains and losses. The non-GAAP operating profit was JPY 0.6 billion, an increase of JPY 13.8 billion year-on-year. The adjustment items used in converting GAAP to non-GAAP are shown on supplementally document, Pages 23 and 24. :
Page 5 shows the results by segment. The final adjusted results were driven by the changes in IT services and social infrastructure. Specifically speaking, the operating profit of IT services and social infrastructure increased by JPY 7.1 billion and JPY 3.1 billion, respectively. I will explain the details of each segment later, but please note that both revenue and adjusted OP increase in both IT services and social infrastructure. In others, there was a decrease of JPY 2.6 billion attributable to Japan Aviation Electronics industry. Adjusted operating profit decreased by JPY 10.3 billion year-on-year, mainly due to the absence of gains on sales of assets recorded in the previous fiscal year and an increase in internal DX investments. Given all these factors, total adjusted operating profit and non-GAAP OP increased by JPY 7.4 billion and JPY 13.8 billion, respectively, over the previous year. [.:
Page 6 is by segment, highlighting the IT services. In the lower right-hand corner, you see the breakdown between domestic and international business, which includes digital government and digital finance. Revenue and adjusted OP are shown for your reference. Revenue increased more than 10% year-on-year, driven by domestic sales and strong demand of enterprises and government, public sector. Adjusted operating profit also increased due to higher revenue and improvements of profitability in system integration business. :
Page 7, booking trends of IT services. The breakdown is shown by domestic and international DGDF segments and by major industrial segments. All in all, IT services increased by 3% year-on-year, of which 2% is driven by an increase in domestic orders. Domestic public sector continued to perform well, recording an increase of 6%, driven by the government sector. Enterprise booking rose 16%, maintaining its momentum. By industry, the financial services sector recorded a large increase of 37%, driven by large projects. Even excluding these large projects, the growth was almost double digit. The manufacturing sector grew by 5% in FY '22 March and FY '23, March, respectively, and kept its steady momentum in Q1. We Retail Services was up 9%, with an increase in service-related projects. Others in Domestic segment was down 14%. The order received in Q1 was small, given the fact that the renewal of firefighting disaster prevention systems is just around the corner. International DGDF increased by 8%, led by NEC Software Solutions U.K. :
Page 8, social infrastructure. In the lower right-hand corner, you will see the revenue and adjusted OP of telecom services and Aerospace and National Security ANS for your reference. Revenue increased due to international businesses, mainly from submarine systems and OSS/BSS in telecom services. Adjusted operating profit increased in line with the revenue growth. Next is the March 2020 forecast. :
Page 10 shows the forecast figures for the full year. Since the first quarter results were in line with our expectation, the full year forecast announced on April 28 was kept unchanged. Please refer to Page 11 for revenue and adjusted operating profit by segment. I will give you more details on the following pages for the IT services and the Social Infrastructure segments. First, the IT Services segment on Page 12. Revenue is expected to increase by 2.6% over the previous year as we expect a strong demand in the domestic private sector market. Adjusted operating profit is projected to increase by JPY 9 billion over the previous fiscal year due to higher profits from increased revenue in Japan and improved profitability in overseas DGDF. Page 13 shows social infrastructure. :
Revenue is projected to increase by 2.1% due to expected revenue growth in both telecom services and ANS. Adjusted operating profit is expected to improve by JPY 21.2 billion, mainly due to the absence of onetime factors, which we had in the previous year in telecom services. Lastly, we have a couple of topics we would like to discuss. The first topic on Page 15 is generative AI. On July 3, we announced the development and the provision of a generative AI model for the Japanese market. In addition to the world-class Japanese language proficiency and the lightweight LLM or large language model developed by NEC, we will provide a one-stop service that contributes to the business transformation of our customers by leveraging the technologies of our global partners. In addition, we have launched a program to provide services, starting with approximately 10 companies and universities. Since announcing the development and the provision of generative AI on July 6, we have received several hundred inquiries in just a few days. While many other players in the domestic market have only expressed their intention to develop such a model, NEC has taken the lead in providing actual services and aiming to expand its business. :
Next, on Page 16, you can see information related to our subsidiary, Avaloq. The company has entered into a partnership with a U.S. asset management company, BlackRock to provide integrated solutions to wealth managers and private banks. By combining the strength of both companies, we will strengthen our competitiveness in the market and expand our business through approaches that include cross-selling to a wide range of customers. :
Page 17 is about enhancement of the management infrastructure. To upgrade our management infrastructure, we have revamped our core IT system as a flagship of this effort. The first phase product has already been in operation during this fiscal year ending March 2024. By standardizing and digitalizing the business negotiation process across the entire company and accumulating and visualizing relevant information, we'll be able to set optimize the pricing before going to the negotiation stage and improve operational efficiency by streamlining and optimizing business processes. :
Finally, on Page 18, I would like to inform you of the events we will be holding. First is the IR Day. This event is held for the capital market participants and will be held in the last week of November this year. The managers of each business area will explain about the activities to achieve the midterm management plan 2025. :
Next is the NEC Innovation Day. This event will be held for the media, IT analysts and the capital market participants. The event will be held on December 15 this year. And we will explain about NEC's R&D strategy and the new business creation strategy. We will inform you of the detailed schedule, program and participation method on a separate notice to be served on a later day. We look forward to your participation. That concludes my presentation. Thank you very much for your kind attention.: