NEC Corporation (OTCPK:NIPNF) Q1 2024 Earnings Conference Call April 26, 2024 2:00 AM ET
Company Participants
Conference Call Participants
Operator
Thank you for your participation today. I would like to explain the full year results for year ended March 2024, forecasts for year ending March 2025 and progress of the Mid-term Management Plan 2025. These are the topics I will cover today.
First, the full year results for year ended March 2024. On Page 4, you’ll see the full year results. In comparison to the indices we set at the beginning of the year, we exceeded all forecasts. Revenue was JPY 3.4773 trillion, an increase from the previous year. Adjusted operating profit was JPY 223.6 billion, an increase of JPY 18 billion from last year.
Non-GAAP operating profit, which indicates the performance of our source business, was JPY 227.6 billion, increasing JPY 30.6 billion from the previous year, due to leveraging deferred tax assets, there was a decrease in taxation fees; and non-GAAP net profit was JPY 177.8 billion, an increase of JPY 45 billion versus last year. As for adjusted items from GAAP profit to non-GAAP profit, please refer to Pages 26 and 27 of the appendix.
Page 5 covers year-over-year changes in adjusted and non-GAAP operating profit. If we set non-GAAP operating profit of JPY 197 billion for the year ending March 2023 as the baseline, there was a net improvement of JPY 2.5 billion. Factors attributed to FY ’23 March were JPY 14.5 billion in intellectual property income and a onetime factor of JPY 17 billion in telecom services.
As was like the previous year, for FY ’24 March, we acknowledged JPY 15 billion in Q4 for a onetime factor in telecom services. This was due to the streamlining of assets in hardware business and shifting to software business, unprofitable SI projects and increased costs in submarine systems. Unprofitable projects, including IT services for the entire company, are at the same level as the year ending March 2023 and properly controlled.
Operational fluctuation improved by JPY 43.1 billion and non-GAAP operating profit was JPY 227.6 billion. We had gain on sales of JAE shares, and non-GAAP adjusted items such as structural reform expenses, accounting for minus JPY 4 billion. And the adjusted operating profit landed at JPY 223.6 billion.
Page 6 is breakdown by segment. I will go through each segment later on, but for both IT Services and Social Infrastructure, we achieved both revenue and profit growth versus last year. For others, although we sold JAE shares, we acknowledged structural reform expenses and thus a minus JPY 5.4 billion. For adjustments, there was reversal impact because we enjoyed gains from asset streamlining and IP last year. We also increased internal DX investments and overall saw an expense increase of JPY 18.2 billion.
Page 7; I will now go through each of our segments, starting with IT Services. Revenue grew, driven by domestic IT. Due to strong demand from enterprise and government sectors, domestic IT saw revenue increase of more than 10%. For adjusted operating profit, on top of profit increase due to revenue increase, domestic SI profitability improvements also contributed to the growth.
Page 8, shows IT Services booking status. On an annual basis excluding NEC Facilities because of its high volatility, an increase of 3% and we saw a continuum of steady demand. Among domestic, public dropped 1% year-over-year but grew substantially throughout FY ’22 March and ’23 March; and we saw a sustained high level for FY ’24 March. Enterprise increased by 5%, sustaining momentum. By sector, finance increased 16% and exceeded the strong demand of FY ’23 March.
Manufacturing saw a slight decrease and we continued to assess orders based on profitability, resulting in improvements. Retail, services increased 3% and continues to be strong. For domestic others, a beam is strong, growing at more than 15%. In the second half, we also acquired firefighting and disaster prevention projects, resulting in an increase from last year. For international DGDF, we acquired large projects at SWS in the UK and KMD in Denmark, increasing bookings by 20%.
Next, on Page 9 is Social Infrastructure. Revenue was the same as last year for telecom services. For adjusted operating profit, global 5G improved greatly according to plan, but as I explained earlier, we saw an overall decrease due to a onetime expense of JPY 15 billion. With the expansion of government budget, aerospace and national security acquired orders exceeding JPY 500 billion annum. Revenue also grew by 12.6%. And adjusted operating profit was an increase of JPY 7.9 billion.
Page 10, free cash flows; operation cash flow increased by JPY 119.1 billion versus the previous year with the increase in adjusted operating profit, an uptick of JPY 18 billion. As for working capital, we received prepayments for large projects, along with trade receivables accumulated at the end of FY ’23 March.
We also consumed all of the strategic stock that we had strategically increased, and this contributed to an improvement of approximately JPY 101 billion. For investment cash flows, reversal impact from FY ’23 March sales gain and data center investments resulted in increase of investments by JPY 26.4 billion. All in all, free cash flow has increased by JPY 92.7 billion versus last year, landing at JPY 195.2 billion. CCC now stands at 67 days, an improvement of three days year-over-year.
Page 11 is the status of investment securities. Back in April of 2020, we decided to hold zero investment securities. Since then, we have steadily decreased our holdings. The number of listed shares was 108 at the end of March 2020; and at the end of March 2024, we hold 27 shares, a reduction by 70%. Non-listed shares have also decreased from 206 to 113. Fair value of these shares have increased due to the stock market rise, but in FY ’24 March, we have sold off JPY 16.3 billion.
And since March end of 2020, the accumulated amount divested is now JPY 151.7 billion. For the listed shares, if we were to count those we have agreed to sell, we have reduced our shareholdings by 80% since March-end 2020; and we will continue to divest. In January 2024, amongst our deemed shares held, we sold Renesas Electronic Corporation at JPY 174.9 billion, which accounted for the biggest portion.
Next, I will explain our financial forecasts for year ending March 2025 and progress of our Mid-term Management Plan 2025. Page 13, financial forecasts for FY ’25 March; revenue is projected at JPY 3.37 trillion, an year-on-year decrease due to the deconsolidation of JAE. Adjusted OP and non-GAAP OP stand at JPY 255 billion. Details are given on the next slide. Non-GAAP net profit is forecasted at JPY 165 billion.
Since we expect the application of normal effective tax rate, net profit is assumed to decrease year-on-year. Revenue adjusted as well as non-GAAP OP and net income for the Mid-term Management Plan 2025 remain unchanged despite the deconsolidation of JAE. However, EBITDA is revised to JPY 425 billion.
Page 14 shows factors contributing to the changes in adjusted and non-GAAP OP. Non-GAAP OP is expected to improve by JPY 15 billion from JPY 227.6 billion, given the reversal effect of the onetime expense recorded in FY ’24 March. JPY 27.4 billion increased in marginal profit is partially offset by the negative impact of JPY 15 billion from the deconsolidation of JAE, resulting in the expected adjusted and non-GAAP OP of JPY 255 billion in FY ’25 March.
Page 15 shows revenue and adjusted operating profit by segment. IT Services revenue and adjusted OP are projected at JPY 1.95 trillion and JPY 222 billion, respectively, while those of Social Infrastructure stand at JPY 1.18 trillion and JPY 122 billion, respectively. Details are provided in the following slides.
The revenue of others is projected at JPY 240 billion, while adjusted OP is expected to stand at negative JPY two billion given the deconsolidation of JAE. The adjustments is forecasted at JPY 87 billion, which is a year-on-year increase in expenses. The figure reflects the contingency factor given the risks in telecom services. We are revising others and adjustments of the Mid-term Management Plan 2025 accordingly.
Page 16, IT Services. Both revenue and adjusted OP grew significantly in Japan in FY ’24 March, and we plan further growth in FY ’25 March. Adjusted OP of international DGDF business anticipates improved profitability of Avaloq.
Page 17, Social Infrastructure. Revenue is expected to increase from steady delivery of projects ANS had contracted in FY ’24 March. Adjusted OP is expected to increase due to the improvement of global 5G in telecom services and the reversal effect from onetime expenses recorded in FY ’24 March.
Page 18, growth businesses. Core DX is growing steadily and continues to expand its revenue as it shifts to a more profitable business model by further increasing the revenue ratio of common platforms. So far, we focus on restructuring DGDF business through bolt-on M&A’s and the sale of noncore businesses. Going forward, we will improve profitability by shifting to more profitable products and further improving cost efficiency.
We reorganized global 5G business in FY ’23 and reaped the benefits of these reforms in FY ’24, resulting in a significant improvement in profitability. From now on, we will shift to more profitable software services areas to get back on track and increase profits.
Page 19 shows where we stand in low-profit businesses. As a result of our activities since FY ’23 March, a total of 9 previously low-profit businesses became high- to medium-revenue contributors. Of the remaining 9 businesses, we expect three businesses, one being the firefighting and disaster prevention and the remaining two being the SMB businesses, to improve profitability by the end of FY ’25 March.
We will continue monitoring other businesses to reduce low-profit businesses to zero by FY ’26 March as planned. For businesses where improving profitability is typical, we will explore ways to maximize business value during FY ’25 by, for instance, divestiture or partnering with other entities.
Page 20, capital allocation. While we continue to receive many inquiries from the capital market, our basic policy remains the same. We place the highest priority on investment in growth business areas while maintaining financial soundness.
In-line with the increase in profit level, we plan to pay a stable dividend and increase the dividend per share to JPY 140 in FY ’25; and to JPY 160 per share in FY ’26, which is the final year of our current mid-term management plan. We will be flexible in making share buyback decisions, taking into account, for example, the level of surplus at hand.
Lastly, topics; Page 22, our approach to generative AI, we have newly developed cotomi pro and cotomi light to provide optimal services that meet the needs of our customers. In addition to our existing cloud-based offerings, we began providing on-premise solutions, expanding our product lineup to meet the diverse needs of our customers.
For the medical industry, we started offering an electronic medical record system equipped with generative AI. This will help reduce the workload of not only physicians but also other medical professionals. We will continue to expand our industry-specific services.
Page 23, allocation of corporate expenses, to date, we have been disclosing corporate-wide expenses as adjustments, but in order to disclose segment and business unit results more accurately, we decided to allocate corporate-wide expenses to each segment, starting from the first quarter of FY ’25 March, specifically speaking: Corporate expenses will be allocated to each business segment and business development and IP expenses will be allocated to others.
R&D for advanced technology will continue to be recorded as adjustments. Although it is still an estimate of JPY 87 billion to be recorded as corporate-wide expenses in FY ’25, JPY 67 billion will be allocated to different business segments, while the remaining JPY 20 billion will be posted as adjustments.
This concludes my presentation. Thank you very much for your attention.
Question-and-Answer Session
Operator
Q – Unidentified Analyst
Unidentified Company Representative
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