NEC Corporation (6701) Q1 2027 Earnings Call Transcript

If a minute, I'd like to thank you for your precious time to support your business schedule. We have just made an announcement for the FI 2027, the first quarter, as well as fully in the forecast for the FI 2027 March. This shows the important points I'd like to cover today. As has been announced in our press list on July 10th, actually, we have changed some segmentations. As for the numbers for FI26 March, actually these numbers are based upon the newly created segmentations. And also, for your information, the unit in this set of materials is 1 billion yen. Now allow me to go through the financial results for the Q1 FI27 March. First, I'd like to begin with these key takeaways. IT services domestic as well as aerospace and national security and actual return will be quite firm, making great contributions to the overall performance. Starting from the main, actually, we incorporated CSG in the USA. IT services and social infrastructures, both segmentations actually enjoyed big growth, both in revenue and profit. Thanks to these results, as for the actual numbers for the first quarter, Revenue year-on-the-basis increased 14.5%, 819.8 billion yen. As for the non-gap operating profit year-on-the-basis, up 34.7 billion yen, becoming 74.7 billion yen. Based upon the latest progress for the first quarter, actually we revised up our full year forecast. In regards to non-gap and opening profits, compared with the past announcement, actually increased 10 billion yen, becoming 430 billion yen. First, allow me to go through the major numbers as well as the segment performance. The bottom left shows the actual numbers, performance basis, excluding the M&A and the impacts. Assuming that starting from last year on CSC Incorporated, revenue actually improved 9.8% of profit growth, 27 billion yen. As for the actions by segment, I'll let me move on to the next pages. First, IT services segmentation. And the domestic situation, the blue cell expanded. And also, due to the impacts from the structural reform among the subsidiaries, on a basis, actually, the profit actually improved 13.4 billion yen. And the profit actually improved 2.7 points. As for the overseas, due to the CSC newly integrated, On a basis, up 46% in revenue and 3.6 billion in improvement in profit. Next, allow me to explain the domestic IT services, Blue Stella, and the base business separately. First, Blue Stella. Thanks to our scenario business and actually solutions, actually trying to solve the customers' issues, particularly in the municipalities and financial services. On a basis, actually, revenue improved 33%. Profit improved 7.6 billion yen. As for base business, we decided to end in low-profit making of business and also make a shift toward the blue seller, resulting in actually revenue and profit. But thanks to the actual structural reforms among the subsidiaries, Thanks to the ending of the previous year's unprofitable businesses, your business, and actually the profit actually improved by 5.7 billion yen. Allow me next. I'd like to move on to the domestic IT service booking status. At a high level, the larger projects and the special demands and actually ending of the low profit making business, excluding them in the actual basis, it became a positive 3%, Centering around modernization projects, demand momentum has been rather strong. By domain, digitalization projects for the central government and the telecommunication area were firm. On the enterprise, the finance services and the retail services actually grew, actually giving us positive numbers. A beam passed over 16%. We are able to continue good results starting from last year. As for the full year, actually, first quarter revenue, as well as the end of June, the backlog coverage, actually, year-on-a-basis, it's been increased by 2%. Vis-a-vis our annual forecast, things are going rather firmly and steadily. Next, I'd like to move on to the social infrastructure segmentation. Aerospace and national security actually continue to be stronger. On the basis, actually, the revenue increased 50 percent, result in a profit of 9.2 billion yen. As for the submarine systems, we have received orders last year that actually made contributions to the actual numbers. Actually, it will turn out to be positive as much as by 52%. Next, I'd like to move on to the financial forecast for FY27 on March. First, I will explain the company-wide financial forecast. As I explained at the beginning, based on the business progress in the first quarter, we have revised our forecast upward. Revenue is revised up by 40 billion yen to 3,540 billion yen. Non-gap operating profit is up by 10 billion yen to 430 billion yen. Please note that the impact of the full-year forecast from the new consolidation of CSG is currently under close review, therefore it is not reflected in this forecast. We plan to disclose a forecast that includes CSG's results at the first half earnings announcement. Next is the financial forecast by segment. Details regarding both the IT services and social infrastructure segments will be explained on the following pages. Please note that we have maintained the allowances which were set at the beginning of the fiscal year against component shortage risks and the macroeconomic uncertainty. The amounts factored in on $100 billion for revenue and $30 billion for non-GAAP operating profit. Regarding component shortages, the impact, as of the first quarter, has been minor. However, the uncertain situation still continues, and we will continue to take measures to minimize the risks. Next is the IT services segment. The revisions to the financial forecast and IT services are entirely implemented in the domestic market. The revised forecast for revenue is up by 20 billion yen to 2,175,000,000 yen. Non-gap operating profit is up by 5 billion yen to 329,000,000,000 yen. We have factored in a negative revenue impact of 100 billion yen due to municipal standardization in the public sector and the peaking out of the fire and disaster prevention projects. we also factored in 100 billion yen for component shortage risks. Despite these, we plan to improve profitability through the expansion of Blue Stiller. As for overseas, we will continuously work on improving profitability. In addition, by curbing unprofitable projects that occurred in the previous fiscal year, we plan for a profit of 52 billion yen, which is a profit increase of 9,200,000,000 yen. Again, please note that at this time, the impact of CSG consolidation is not reflected. Next, we will present a 5 March 2027 financial forecast for domestic IT services divided into BlueStellar and the Bayes business. The revisions to the financial forecast are entirely implemented in the Bayes business, leaving BlueStellar unchanged. For Blue Stellar, we will work on further expanding scenarios using AI and improving productivity. This will contribute to further profit margin improvement for the overall IT services. This is a breakdown of the first quarter results and full-year financial forecasts for Blue Stellar by segment. Until now, BlueStellar has been entirely disclosed as included within IT services. However, assuming that its deployment into social infrastructure will expand in the future, we will disclose the breakdown by segment starting this fiscal year. Next is social infrastructure. Since the first quarter results exceeded our internal expectations, we have made upward revisions. For aerospace and national security, revenue is revised upward by 20 billion yen and profit by 4 billion yen. For submarine systems, profit is revised upward by 1 billion yen. In addition to the further expansion of aerospace and national security, which has strong demand, submarine systems will turn profitable. As a result, for the full-year forecast, we plan for a profit of 9 billion yen, which is an increase of 45.6 billion yen. Finally, we have topics. The first point is a topic on Blue Stellar. In April, we became the first Japanese company to become global partner of Anthropic. We are advancing efforts toward providing this to our customers. We are jointly developing a secure, task-specific AI solution with excellent safety and reliability. First, aiming for utilization in the financial industry, we started co-creation with multiple financial institutions in June. Furthermore, as a first service based on this collaboration, we launched the NEC AI Insight Reporting Service, Dismas. This service utilizes CLAWD to fully automate the creation of product planning and sales promotion plans based on consumer purchase data. Internally, we have rolled out cloud code to 30,000 NEC group employees. By utilizing education provided by Anthropic, we aim to build the largest AI native engineer organization in Japan. Finally, I will explain the integration of NEC and NEC solution innovators, scheduled for October 1st. With the rapid advancement of AI, the business model of the IT service business is expected to change significantly. It will shift from the conventional man-to-man basis to one centered on end-to-end value provision. This time, through the integration of the two companies, we will bring together 20,000 engineers, as well as domain knowledge and implementation capabilities. We will accelerate the transformation into a value provision model that consistently offers everything from consulting to system integration and operations. This integration is a strategic move to transform the entire NEC group ahead of changes in the market environment. We aim to strengthen our competitiveness in the AI native era and achieve further growth in the IT services business. That concludes my explanation. Thank you very much.