Earnings Transcript for 6701.T - Q3 Fiscal Year 2024

Unidentified Company Representative: Thank you for joining us today. I would like to take you through our financial results for the third quarter of fiscal year ending March 31, 2024, which were just announced today. The content of today's presentation are just as shown on this page. I will now explain the results for the third quarter of fiscal year ending March 2024. Page 4 shows an overview of the third quarter results. Nine months total revenue was ¥393.3 billion, up 5.5% from the previous year. Adjusted operating profit was ¥97 billion, an increase of ¥13.6 billion from the previous year. Non-GAAP operating profit, which measures the performance of the core businesses was ¥99.4 billion, up ¥28.2 billion from the previous year. Revenue for the third quarter was ¥844.5 billion, an increase of 3.8% over the previous year. Adjusted operating profit was ¥51.2 billion, a decrease of ¥1.1 billion year-on-year. While non-GAAP operating profit was ¥53.3 billion, an increase of ¥0.5 billion year-on-year. We believe that the progress during the first nine months against the full year forecast is in line with our expectations. Please refer to page 24 and 25 of the appendix for a reconciliation of GAAP earnings to non-GAAP earnings. Page 5 explains the factors behind the changes in adjusted and non-GAAP operating profit for the third quarter. Adjusted operating profit for FY March 2023 was ¥52.2 billion and non-GAAP operating profit was ¥52.8 billion. From this number, there was a decrease of ¥14.5 billion in intellectual property income. There was an improvement of ¥5 billion due to the elimination of one-time losses such as asset cleanup in telecom services, which was recorded in fiscal year March 2023. Marginal profit and profitability change for FY March 2024 was an improvement of ¥10 billion, resulting in non-GAAP operating profit of JPY53.3 billion. Non-GAAP adjustment items, such as restructuring costs associated with transfer of wireless business amounted to JPY2.1 billion, resulting in adjusted operating profit of JPY51.2 billion. Page 6 shows the changes in adjusted and non-GAAP operating profit for the nine-month period. Non-GAAP operating profit for fiscal year March 2023 was JPY71.2 billion. From this number, there was a deterioration of JPY14.5 billion in IP income and an improvement of JPY12.5 billion due to the absence of onetime losses such as strategic orders, asset cleanup in telecom services, which were recorded in the previous year, an improvement of JPY30.2 billion due to marginal profit and profitability change, resulting in non-GAAP OP of JPY99.4 billion and adjusted OP of JPY97 billion. Page 7 shows results by segment. The breakdown of adjusted operating profit for the nine months period was JPY28.3 billion for the IT services and JPY4.4 billion for social infrastructure. I will explain the details of each segment later, but both IT services and the social infrastructure posted increases in both revenue and profit. Others were flat year-on-year. Adjustments deteriorated by JPY19.2 billion due to the absence of gain on sale of assets and IP income recorded in the previous year as well as an increase in internal DX investment. On page 8, I will explain the nine-month cumulative results by segment, starting with IT services. Revenue increased by more than 10% year-on-year, driven by continued strong demand from the domestic market and strong performance of enterprise and the government and public sectors due to robust demand. Adjusted operating profit also increased due to higher profits on higher sales and the improved profitability of the domestic SI business. Page 9 shows IT services booking status. For the third quarter, overall orders for IT services were up 2% from the previous year. Excluding NAC facilities, which has a higher volatility on a quarterly basis, orders increased 4%. Cumulative nine month orders for IT services was flat from the previous year. And excluding NEC facilities, there was an increase of 4%. Next, as for the order trend for the third quarter, in Japan, public is down 3%. However, this is due to the strong growth for fiscal years March 2022 and March 2023, and the business remains strong for fiscal year March 2024. Enterprise continued to be strong with an increase of 8%. If we look at the by segment, finance grew 11%. Strong growth was obtained last year and brought us to a high level, and we continue to overachieve last year's level without impact. For manufacturing, a slight dip, but we have been selective with the orders from a profitability perspective and are shifting to higher-margin projects. Retail Services remained strong, increasing by 10%. For domestic others, ABeam continues to perform well and firefighting and disaster prevention system has turned positive in Q3. International DGDF is a minus due to the onetime impact of Avaloq last year, but SWS KMD has grown. Page 10 is social infrastructure. Telecom services revenue was about the same as last year. Adjusted operating profit was the same level as last year due to the one-time gain of ¥10 billion for the nine month period of last year, along with losses of ¥12.5 billion, topped with a loss of ¥3 billion acknowledge for structural reform due to the transfer of wireless business. ANS Aerospace National Security were strong in both revenue and adjusted operating profit. Continuing on from the first half of the year, orders are strong, and for the nine month period, orders increased by 60%. For the three months of Q3, we acquired large orders, especially for defense and doubled our orders year-on-year. Next, the annual forecast for fiscal year ending March 2024. Page 12 shows the full year forecast. We are progressing as planned up to this third quarter, and there are no changes to the previous annual forecast for fiscal year ending March 2024. Page 13 is revenue and adjusted operating profit by segment. Based on the nine-month results, we have revised the annual forecast by segment. IT Services' revenue and adjusted operating profit have been revised upwards by ¥30 billion and ¥10 billion, respectively. For Social Infrastructure, revenue remains the same, but adjusted operating profit has been reduced by ¥5 billion. Details of these two segments will be described in later slides. Revenue and adjusted operating profit for others have been adjusted by ¥30 billion and ¥5 billion each. Page 14 is IT Services. The domestic market continues to enjoy a favorable environment, especially in enterprise and based on the nine-month results, revenue and adjusted operating profit have been increased by ¥30 billion and ¥10 billion, respectively. International DGTF remains unchanged. Page 15 shows Social Infrastructure. Overall revenue for Social Infrastructure remains the same, but Telecom Services has been amended downwards by ¥20 billion, and ANS has been amended upwards by ¥20 billion. For adjusted operating profit, Telecommunications Services amended downwards by ¥10 billion and ANS upwards by ¥5 billion. As for Telecom Services, profit improvements for global 5G are going as planned, but numbers have been updated, mainly due to the transfer impact of Wireless business, and ANS reflects strong demand from defense. Lastly, topics. Page 17 covers our generative AI endeavors. At NEC Innovation Day in December, we announced NEC developed LLM-cotomi. Leveraging high Japanese language performance, various models specific to multiple sectors and tasks are built, and this will allow us to cater to specific businesses of our customers. We are also expanding our value creation, utilizing generative AI, such as our efforts with MS and AD Insurance Group Holdings, along with our verifications with Tohoku University Hospital and Hashimoto Municipal Hospital. We will continue to lead Japan's generative AI market. Lastly, Page 18, notification of our ESG Day. This year, we will host this online. I will be explaining our initiatives, addressing materiality to enhance corporate value and our CHRO Horikawa will cover our Human Capital Management. We look forward to your participation. This concludes my explanation. Thank you for your kind attention.

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