NEC Corporation (OTCPK:NIPNF) Q2 2023 Earnings Conference Call October 28, 2022 2:00 AM ET
Company Participants
Conference Call Participants
Unidentified Company Representative
Thank you for your participation today. I would now like to explain the financial results for Q2 fiscal year ending March 31, 2023. This is what I will cover today. I will first start with the outline of Q2 results.
Please refer to Page 5. This shows the key indicators and financial results by segment. For first half revenue, we saw an increase of 5.2% versus last year. Adjusted operating profit decreased. The fluctuation of network services will be explained in more detail when we cover financial forecasts. But for this fiscal year, carriers [ph] capital expenditures are skewed towards the second half and first half was sluggish. There was also a one-time loss for an overseas strategic order that was acknowledged and we are seeing a large decrease versus the same period last year.
On the next page, I will cover the reasons for the fluctuating adjusted operating profit. Changes in adjusted operating profit and loss are shown on Page 6. I will explain using JPY42.1 billion from FY 2022 March as the baseline.
In comparison to the one time profit of JPY8 billion acknowledged in FY 2022 March, a one time profit of JPY11 billion was recorded in FY 2023 March. Component shortages led to a minus JPY500 million where currency impact was a positive JPY6.5 billion. When excluding these regular businesses, enterprise where domestic IT services are doing well, saw an improvement year-on-year, but with the minus JPY18.2 billion in network services. In total, we saw a downturn of JPY19.9 billion. All in all, FY 2023 March operating profit was JPY31.2 billion.
Page 7 shows order trends. For the entire company, excluding submarine systems, which heavily fluctuates, orders increased 16% in the first half.
For IT services mainly in the enterprise, strong demand continued resulting in an increase of 11%. By segment, urban infrastructure and SME fared well and increased 14%.
Public Infrastructure saw a large satellite order project last year during FY 2022 March. However, we still increase by 4% for the first half. And if we exclude this large project, we saw an uptake of 17%. For enterprise on top of large distribution of services projects, the tailwind of high IT demand resulted in an increase of 15% for the first half. Network services was flat for the first half, but when we look at Q2, 5G demand expanded and resulted in an increase of 10% for the quarter.
For global, excluding submarine systems, large projects for Netcracker along with Digital Government and Digital Finance boosted orders significantly. Next, I will outline the financial forecast for FY 2023 March.
Page 9 is the full year forecast. No changes have been made since the announcement on July 28.
Page 10 are forecast by segment. When we updated our financials on July 28, the upside factored into the adjustments are now reflected into each segment. Consolidated companies, JAE and NESIC outlook updates have also been incorporated.
Page 11 are the details of the adjusted forecast. First, during the forecast made on July 28 as regular business upside, JPY14 billion was factored in per segment adjustments. This upside, taking into account the actuals for the first half as well as current circumstances are now factored into public infrastructure, enterprise, and global. For network services, by reflecting forecasts for consolidated NESIC, we have decreased the outlook by JPY4 billion. NEC Corporation remains unchanged. Breakdown by segment will be explained in the following pages.
As for corporate actions such as divestiture of assets that were factored into the July 28 announcement as scheduled. We have acknowledged gain of JPY11 billion in the first half. Now, first on Page 12, the forecast for Public Solutions business.
Revenue for the first half drop due to the reversal impact of large urban infrastructure projects, but orders for Q1 and Q2 are increasing and the recovery trend continues. Full year forecast remains unchanged from the updated numbers on July 28. This forecast will be deemed as the lowest range and by capturing the demand seen in the recovery trend, we will like to improve the numbers.
Page 13, Public Infrastructure business. In the first half, revenue increased due to the boost in the number of projects for satellite, defense businesses, as well as a hike in sales of JAE or consolidated subsidiary. Adjusted OP increased due to a hike in revenue and improvement of unprofitable projects.
Full year forecast is revised upward by JPY5 billion from the July 28 outlook, reflecting an increase of JPY3 billion in NEC Corporation’s adjusted OP and an increase of JPY2 billion from the revised forecast of JAE.
Page 14, Enterprise Business. In the first half, orders, revenue and adjusted OP, all increase year-on-year due to risk demand. Full year forecast is revised upward by JPY10 billion in revenue and JPY3 billion in adjusted OP from the July 28 forecast, reflecting the results of the first half and the favorable market environment that is expected to continue.
Page 15, Global business. In the first half revenue increase due to the impact of weak yen. Despite the positive impact of the increase in revenue due to a one time cost hike, adjusted OP remained flat year-on-year. We expect to offset this first half increase in expense in the second half.
Our full year forecast is revised upward by JPY50 billion in revenue and JPY5 billion in adjusted OP from the July 28 outlook, taking into account the greater depreciation of yen than originally forecasted.
Page 16, Network Services business. Factors contributing to the changes and the actual variances in adjusted operating profit loss compare to FY 2022 March are shown on the left. Firstly, let’s start from the first half results on the top. We incurred a one-time loss of JPY5.5 billion from the booking of a strategic project of the international 5G business. Furthermore, a loss of JPY2 billion was posted as an allowance for long-term inventories.
In total, one time losses were JPY7.5 billion. To begin with strategic price was quoted for the initial mass production lot, given the projects strategic nature, given that [indiscernible] was quite challenging to start with. Then after component goes rose more than initially expected, due to the impact of inadequate supplies and the currency impact, we are requesting the customers for some relief about taking a conservative stance reprovision, the allowance for loss.
Strategic expenditure is concentrated on the first half in FY 2023 March, posting JPY4.5 billion, which is on part with the amount recorded in the second half of FY 2021 March. In addition, we factored in a downward forecast revision of JPY2.5 billion of NESIC, our consolidated subsidiary, as well as the negative impact of JPY2 billion from the component shortages. Carriers capital investments tend to concentrate in the second half and remain weak in the first half, result in the sales decrease of JPY5.2 billion. Due to all these factors, the first half result deteriorated by JPY21.7 billion closing at a loss of JPY13.3 billion. Given the first half result, the full year forecast is shown based on the second half assumptions on the right. Firstly, a onetime JPY5 billion royalty income in Q4 FY 2022 March will be a negative factor in the second half of FY 2023 March.
Strategic expenditure is expected to remain unchanged for the year because we anticipate it to decrease in the second half. NESIC revised its forecast for the full year, which will be recorded as a year-on-year decrease of JPY1.5 billion in the second half. Sales are expected to be higher in the second half due to the concentration of domestic 5G demand, the increase in overseas 5G shipments and a boost in IT business. Although it is not a low hanging fruit, we expect sales to increase by JPY15.2 billion in the second half. We aim at achieving a full year operating profit of JPY27 billion.
Looking ahead to the next fiscal year and beyond, we will take heat of not only the environment surrounding our global 5G businesses, but the overall environment, including various macroeconomic factors and uncertainties. As we have done in the past, we will properly implement necessary measures as the changing environment goes for. As for 5G demand, there is no change in our medium to long-term domestic and overseas forecasts. However, we recognize that there are uncertainties such as carriers investment policies and changes in the macroeconomic environment.
Page 17. Lastly, the announcement of NEC Innovation Day. This event is for media, IT analysts and capital market professionals. It is scheduled on November 30 this year. Our CTO, Mr. Nishihara, will explain NEC’s R&D and new business creation strategies and details on the program will be announced shortly. We look forward to seeing you at the event.
This concludes my presentation. Thank you very much for your attention.
Question-and-Answer Session
Operator
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