Earnings Transcript for 6701.T - Q2 Fiscal Year 2025

Osamu Fujikawa: I will now present our financial results for second quarter of the fiscal year ending March 2025, which was just announced today. The contents of my presentation are as shown on the slide. I will now explain, the results for the fiscal year ending March 2025 second quarter. Page 4 is a summary of financial results for first half. Revenue was ¥1,486.7 billion. Non-GAAP OP was ¥64.8 billion. Excluding the effect of JAE, Japan Aviation Electronics consolidation both revenue and profit increased year-on-year with revenue up 3.5% and non-GAAP OP up by ¥25.2 billion. The first half results were in line with our expectations and showed steady progress towards the annual budget. Page 5 shows major metrics. Page 6 shows results by segment. I will explain the details later but both IT services and social infrastructure showed positive increase in revenue and profit. Others showed a decrease in revenue and profit due to the deconsolidation of JAE. Page 7 shows a variance analysis of adjusted OP and non-GAAP OP. Adjusted OP for the fiscal year ending March 2024 was ¥45.8 billion and non-GAAP OP ¥46.1 billion. On top of these from improvement operations we had ¥13.7 billion in IT services, ¥11.3 billion in social infrastructure, and ¥0.2 billion in others. Total improvement in operations amounted to ¥25.2 billion. The deconsolidation of JAE had a negative impact of ¥6.5 billion, resulting in non-GAAP OP of ¥64.8 billion. Non-GAAP adjusted items included negative ¥3.8 billion from structural reform expenses recorded in Q1 resulting in adjusted OP of positive ¥61 billion. Please refer to Pages 26 and 27 for the details of reconciliation from GAAP profit to non-GAAP profit. From page 8, I will explain the results by segment starting with IT services. Revenue showed a favorable trend both in Japan and overseas. Adjusted OP increased year-on-year due to higher sales in Japan and the profit improvement at Avaloq and other overseas entities showing steady progress. Page 9, shows the booking status of domestic IT services. Total booking increased by 17% compared to the same period last year. Excluding NEC facilities, which has high volatility total booking increased by 18% indicating continued strong demand. By domain public is up 38% driven by acquisition of large projects and increase in local government platform standardization projects. Even excluding large-scale projects the increase was approximately 10%. Enterprise is up 2%. By sector finance is down 11% but excluding large projects of the previous fiscal year it was up year-on-year showing a positive momentum. Manufacturing was up 11% due to an increase in DX-related projects. Retail and services is up 14% driven by the acquisition of large projects. In others ABeam Consulting continued to perform well with an increase of 14%. The ongoing order-taking environment is as strong as in Q1 enabling steady accumulation of projects toward achieving the annual target. Page 10 shows the progress of DGDF our international business which is the progress against the annual revenue target based on actual revenue recorded for H1 as well as projected revenue from orders already received at our three European entities. Compared to the 87% progress as of the end of Q2 last year the progress this year is already 89%, meaning we should be able to achieve the annual revenue plan this year. We will continue to win more projects to make the achievement even more certain. Page 11 is social infrastructure. Revenue from telecom service is down year-on-year due to the deconsolidation of the wireless business and the decrease in global 5G revenues. Adjusted OP improved dramatically YoY due to improved efficiency of development expenses as well as resource shifting. ANS or Aerospace and National Security increased both revenue and profit through the steady execution of projects. Our project acquisition is also progressing well with only those projects already acquired in first half. We should be able to achieve the revenue plan for this year. Next, the financial forecast for the fiscal year ending March 2025. Details are shown here on Page 13. There is no change from the annual forecast that was announced on October 7th at our IR Day. Page 14 is the details by segment. Page 15 provides the total results of our IT services and the breakdown between domestic and international DGDF businesses. Likewise Page 16 shows the total figures of social infrastructure and the breakdown between telecom services and ANS. Lastly topics. Today, we announced the commencement of a tender offer for shares of NEC Networks our listed subsidiary company. The purpose of this tender offer is to strengthen our business for local governments and SMEs nationwide. By positioning NEC Networks at the core of our reorganization effort, we plan to consolidate relevant resources that are dispersed within NEC Group. Specifically speaking, NEC Networks will be consolidated with NEC Nexsolutions a company that handles IT services for municipalities and SMEs in Tokyo Nagoya and Osaka areas. NEC Networks' network solutions construction and maintenance of network infrastructure and their nationwide operational strength will be integrated with NEC Nexsolutions' strength and system integrations and applications grounded in their industry insights. Furthermore NEC Corporation's relevant resources will be integrated driving the optimization of our services to municipalities and SMEs nationwide. We will be poised to provide end-to-end DX solutions that integrate IT services and network solutions covering consulting services, system integration, all the way up to construction work and maintenance. Under the backdrop of the Digital Garden City Nation vision, the digitalization of local governments will be accelerated. Likewise SMEs are expected to go full-fledged with their DX initiatives. We will leverage our unique strength as a system integrator that can handle all aspects of DX including construction works. Riding on the wave of DX, we will capture the growing demands for IT and network services that are required to support those IT services. The outline of the tender offer for the shares of NEC Networks is shown in the table on the left. The period of tender offers is from October 30 to December 11. The tender offer price is ¥3,250 per common stock. The outline of the reorganization is shown in the chart on the right. After NEC Networks is made a wholly-owned subsidiary NEC Networks and NEC Nexsolutions will be placed under the umbrella of a newly established intermediate holding company to operate the business in a unified manner. Furthermore, NEC's fire and disaster prevention business will be transferred to NEC Networks and the IT service business for local governments and SMEs will be transferred to NEC Nexsolutions. The details and timing of the reorganization will be decided upon consultation with NEC Networks, but the reorganization is expected to be implemented promptly after NEC Networks becomes a wholly-owned subsidiary of NEC Corporation. Page 20 is on BluStellar. In the first half of this fiscal year, orders for BluStellar products increased by about 40% from the previous fiscal year. This growth is attributable not only to the enterprise domain, but also to large-scale projects in the public sector. BluStellar provides industry-specific value-creation scenarios. In addition to the value creation for enterprises, we are expanding our offerings to public domain as well. In addition, we are seeing an increase in high-profit projects that utilize AI and security products. We are working to not only grow in revenues but improve in profitability as well. In September, we started offering an AI-enabled platform for advanced contact center operations which reduces operators' workload. To allow our customers to use our AI products safely and securely, we started to provide a function to prevent hallucination in October. We will continue expanding such use cases to solve customers' problems and realize innovation. Last but not the least we would like to announce the NEC Innovation Day. This event is for the media, IT analysts and capital market participants. It will be held on November 27. The venue is at our Tamagawa office and we are scheduled to conduct some demonstrations too. We will inform you of the program details and participation method in a separate notice. We look forward to seeing you there. This concludes my explanation. Thank you very much for your attention.

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