NESIC is an IT services company. The company configures, builds, operates, and maintains telecommunication networks and business ICT systems. The company is a subsidiary of NEC Corporation (TSE1: 6701), which effectively holds 51.48% of its voting rights (as of FY03/21). In FY03/21, NESIC generated revenue of JPY339.1bn, operating profit of JPY25.6bn, and had OPM of 7.5% (FY03/21).
The company’s business segments are Digital Solutions, Network Infrastructure, and Engineering & Support Services. One of the NEC group’s largest subsidiaries, in FY03/21, NESIC accounted for 11.3% of NEC’s consolidated revenue (average of 9% over the past decade) and 16.6% of operating profit (16%). One of Japan’s top-ten IT services companies by revenue, the company had more than 10,000 customers in FY03/20, including what the company classifies as “general companies” (essentially meaning private companies in various industrial sectors [e.g. manufacturing, services, financial]), telecom carriers, government and municipal offices, and “social infrastructure providers” (NESIC terminology for companies that provide public services [e.g. broadcasters, transportation services, electric utilities]). In FY03/21, the company captured demand associated with remote work and appears to have added about 10,000 new customers, primarily comprising small and medium-sized companies, through expanded sales of web conferencing systems.
In the Digital Solutions segment (FY03/21 revenue of JPY126.0bn [37.1% of the total], accounting for 38.6% of operating profit), the company provides business information and communication technology (ICT) solutions primarily to general companies. (In FY03/21, about 60% of revenue came from general companies, 20% from government and municipal offices [share boosted by GIGA school projects], and another 10% from telecom carriers.) One-time revenue business, in which the company books lump-sum revenue from system integration (SI) services, accounts for nearly 60% of Digital Solutions revenue. Most projects tend to be under JPY100mn. The core of this segment is EmpoweredOffice business, which the company launched in 2007. The EmpoweredOffice business combines ICT and office space design services. A pioneering initiative for “working-style reform” (a set of initiatives under former Prime Minister Abe), the business has gained traction as working in offices gives way to remote work and other means that offer flexibility in terms of work locations and hours. In 2017 (ahead of competitors), NESIC commenced domestic sales of Zoom service bundles. Amid the COVID-19 pandemic, this cloud-based online conferencing system saw widespread adoption in Japan. In autumn 2019, prior to the pandemic, the company made distributed work an in-house practice, establishing satellite offices and adopting various cloud services. This move helped NESIC seize the remote-work demand that surfaced with the pandemic and capture new customers, particularly for its Zoom service. Before developing the EmpoweredOffice business (FY03/07), general companies accounted for around one-third of companywide revenue. By FY03/21, that proportion had grown to about half. Shared Research understands NESIC’s business development efforts in this category contributed to the company’s growth.
In the Network Infrastructure segment (FY03/21 revenue of JPY89.2bn [26.3% of total], accounting for 30.1% of operating profit), the company builds ICT systems that undergird our society. Areas of business include fixed-line telephone networks (a social infrastructure alongside systems for providing electricity, water, and gas), mobile base stations and core networks for telecom carriers, television broadcasting networks, and wireless systems for firefighting and emergency communications. The main customers in this segment are carriers, government and municipal offices, and providers of other public services (such as broadcasters, railways, electric utilities, and water utilities). Most revenue in this segment is one-time revenue. NESIC says that providing social infrastructure requires substantial technological expertise, an area in which the company distinguishes itself from other IT services companies.
In the Engineering & Support Services segment (FY03/21 revenue of JPY114.1bn [33.6% of the total], accounting for 33.1% of operating profit), the company manages and provides technical support for the systems it builds. In this segment, the company also conducts business overseas, mainly in the construction sector. One-time revenue business (mostly construction) accounts for 60% of revenue. As a part of its (recurring-revenue) maintenance business, the company has a network of 400 24-hour support facilities across Japan. Although the company is categorized as an IT services company, in this segment, it engages in construction work. This characteristic differentiates NESIC from other IT services companies. The company has been expanding its network configuration business with non-NEC vendors thanks to its construction capabilities.
Earnings trends
In FY03/21, orders were JPY336.9bn (+10.5% YoY, 101.2% of forecast), revenue was JPY339.1bn (+11.7% YoY, 101.8% of forecast), operating profit was JPY25.6bn (+57.4% YoY, 116.2% of forecast), recurring profit was JPY25.5bn (+60.0% YoY, 115.9% of forecast), and net income attributable to owners of the parent was JPY15.7bn (+67.1% YoY, 116.6% of forecast). Each figure was a record high. The largest increase in revenue occurred in Engineering & Support Services (+17.1% YoY) and was driven primarily by GIGA school projects. At the same time, revenue also increased in Digital Solutions (+11.7% YoY) and Network Infrastructure (+7.4% YoY).
Operating profit was boosted primarily by the increase in revenue, initiatives aimed at expanding high value-added services, improved resource efficiency through interorganizational utilization of human resources, and heightened earning power attained mainly through thorough project management. Provisions for loss on orders received also declined. These factors outweighed downward impact on profit stemming from higher growth-related investments in new service development, personnel training, and other activities. The company raised its annual dividend by JPY6 per share compared to initial projections, deciding upon a figure of JPY35 per share. With this move, the company has achieved YoY dividend increases for 14 consecutive accounting periods.
For FY03/22, the company forecasts orders of JPY330.0bn (-2.0% YoY), revenue of JPY320.0bn (-5.6% YoY), operating profit of JPY26.0bn (+1.7% YoY), recurring profit of JPY26.0bn (+2.0% YoY), and net income attributable to owners of the parent of JPY16.0bn (+1.6% YoY). It projects a YoY decline in revenue due primarily to residual downward impact from the high concentration of GIGA school projects in FY03/21 and the effective completion of previously acquired large-scale mega-solar power plant construction projects. On the other hand, the company forecasts a YoY increase in profit. NESIC bases this forecast on its expectation of an improved revenue mix thanks to revenue growth in more profitable categories such as those associated with its working-style innovation initiatives and projects for telecom carriers. Additionally, the company plans to continue efforts launched in FY03/21 that are aimed at enhancing project and cost management. In FY03/22, the company projects an annual dividend of JPY38.00 per share. If this projection comes to pass, the company will have achieved YoY dividend increases for 15 consecutive accounting periods.
FY03/22 is the final year of “Beyond Borders 2021,” the company’s medium-term management plan, which took effect in FY03/20. Initially (when announced in May 2019), the plan targeted final-year revenue of JPY310.0bn, operating profit of JPY20.0bn, an OPM of 6.5%, and ROE of 10%. The company has made no changes to the qualitative targets of its plan, but has revised quantitative targets for FY03/22, aligning them with the earnings forecast for FY03/22.
In the first year of the medium-term management plan, the company reshuffled its business segments by technological focus rather than along customer lines. The company plans to reorganize its value chain and create solutions that combined network (5G) and digital technologies. In addition, NESIC focuses on the provision of cloud-based and other services, moving from an earnings model based on numbers of engineers and working hours to expand service-based recurring revenue. By improving the sales mix in this way, the company plans to boost profitability and pave the way to future SI businesses (creating a growth cycle). Specifically, the company aims to raise the revenue share from services (a recurring-revenue business) in Digital Solutions from 40% to 60%.
Strengths and weaknesses
NESIC’s strengths, according to Shared Research, are:
1) The ability to leverage the NEC group’s business platform (brands, customers, and technologies) in its own business,
2) An IT services company with technological and construction expertise in telecommunications, and
3) Expertise accumulated as the company deploys “working-style innovation” solutions in its own offices and then sells them to customers, creating a positive cycle
We perceive its weaknesses are:
1) Highly reliant on outsourcing for maintenance and other on-site services, which suppresses profitability,
2) A market latecomer with low recognition in platform-based cloud services (launched in 2019),
3) Aiming to expand its overseas business in the future, but has insufficient resources (personnel and expertise), hampering overseas expansion in business ICT solutions, a key to future growth (See the “Strengths and weaknesses” section for details.)
Key financial data
Income statement
FY03/11
FY03/12
FY03/13
FY03/14
FY03/15
FY03/16
FY03/17
FY03/18
FY03/19
FY03/20
FY03/21
FY03/22
(JPYmn)
Cons.
Cons.
Cons.
Cons.
Cons.
Cons.
Cons.
Cons.
Cons.
Cons.
Cons.
Est.
Revenue
217,948
204,658
235,716
270,326
292,164
279,961
257,912
267,939
277,949
303,616
339,109
320,000
YoY
0.1%
-6.1%
15.2%
14.7%
8.1%
-4.2%
-7.9%
3.9%
3.7%
9.2%
11.7%
-5.6%
Gross profit
33,132
32,079
37,182
44,690
48,110
45,162
42,585
44,265
47,681
54,374
63,929
YoY
0.6%
-3.2%
15.9%
20.2%
7.7%
-6.1%
-5.7%
3.9%
7.7%
14.0%
17.6%
Gross profit margin
15.2%
15.7%
15.8%
16.5%
16.5%
16.1%
16.5%
16.5%
17.2%
17.9%
18.9%
Operating profit
10,835
9,747
12,483
14,418
16,158
14,111
9,974
11,057
12,774
16,245
25,563
26,000
YoY
9.8%
-10.0%
28.1%
15.5%
12.1%
-12.7%
-29.3%
10.9%
15.5%
27.2%
57.4%
1.7%
Operating profit margin
5.0%
4.8%
5.3%
5.3%
5.5%
5.0%
3.9%
4.1%
4.6%
5.4%
7.5%
8.1%
Recurring profit
10,792
9,379
12,182
14,534
16,189
14,133
9,975
10,957
13,023
15,938
25,493
26,000
YoY
9.4%
-13.1%
29.9%
19.3%
11.4%
-12.7%
-29.4%
9.8%
18.9%
22.4%
60.0%
2.0%
Recurring profit margin
5.0%
4.6%
5.2%
5.4%
5.5%
5.0%
3.9%
4.1%
4.7%
5.2%
7.5%
8.1%
Net income attributable to owners of the parent
4,660
4,474
7,246
8,257
7,791
5,996
6,549
7,357
8,885
9,422
15,745
16,000
YoY
-17.4%
-4.0%
62.0%
14.0%
-5.6%
-23.0%
9.2%
12.3%
20.8%
6.0%
67.1%
1.6%
Net margin
2.1%
2.2%
3.1%
3.1%
2.7%
2.1%
2.5%
2.7%
3.2%
3.1%
4.6%
5.0%
Per-share data (split-adjusted; JPY)
Shares issued (year-end; '000)
149,321
149,321
149,321
149,321
149,321
149,321
149,321
149,321
149,321
149,321
149,321
Treasury shares ('000)
129
138
144
155
400
404
408
412
416
402
391
EPS (JPY)
31.2
30.0
48.6
55.4
52.2
40.3
44.0
49.4
59.7
63.3
105.7
107.4
EPS (fully diluted; JPY)
-
-
-
-
-
-
-
-
-
-
-
Dividend per share (JPY)
8.7
9.3
15.0
20.0
21.3
23.3
24.0
24.7
26.0
27.3
35.0
38.0
Book value per share (JPY)
512
533
572
587
622
623
635
668
704
741
830
Balance sheet (JPYmn)
Cash and cash equivalents
25,587
37,456
30,315
44,434
38,951
43,889
59,648
57,281
54,354
58,321
68,426
Total current assets
125,620
124,310
141,172
157,351
171,061
167,638
168,999
175,218
181,036
191,847
211,806
Tangible fixed assets
8,624
9,066
9,292
10,959
10,830
10,967
10,719
10,093
10,217
8,942
10,845
Investments and other assets
11,545
11,816
12,765
14,231
14,199
12,937
13,188
16,947
18,682
23,606
22,777
Intangible assets
3,673
3,936
4,241
6,516
5,871
5,025
4,561
5,384
6,234
5,847
4,908
Total assets
149,464
149,130
167,472
189,059
201,964
196,569
197,469
207,643
216,171
230,244
250,338
Short-term debt
2,300
3,500
1,099
1,913
4,801
4,317
4,240
7,257
2,515
4,930
9,658
Total current liabilities
50,773
50,277
59,612
69,994
79,302
67,113
63,498
72,874
72,328
80,128
91,474
Long-term debt
4,000
500
3,000
4,518
1,349
4,185
4,014
842
3,896
3,764
466
Total fixed liabilities
21,685
18,778
21,884
29,898
28,488
35,057
37,296
33,037
36,234
36,605
31,745
Total liabilities
72,458
69,055
81,497
99,893
107,790
102,171
100,795
105,911
108,562
116,734
123,220
Shareholders' equity
76,446
79,503
85,266
87,514
92,560
92,738
94,612
99,474
104,889
110,367
123,682
Total net assets
77,005
80,074
85,974
89,166
94,173
94,397
96,674
101,732
107,608
113,510
127,117
Total liabilities and net assets
149,464
149,130
167,472
189,059
201,964
196,569
197,469
207,643
216,171
230,244
250,338
Total interest-bearing debt
6,300
4,000
4,099
6,431
6,150
8,502
8,254
8,099
6,411
8,694
10,124
Cash flow statement (JPYmn)
Cash flows from operating activities
-1,595
18,595
-1,723
23,313
2,460
9,435
22,634
4,779
8,396
12,935
17,383
Cash flows from investing activities
-1,904
-2,648
-3,429
-5,504
-3,929
-2,822
-2,697
-2,802
-5,604
-6,726
-4,289
Cash flows from financing activities
-337
-3,979
-2,066
-3,824
-4,127
-1,402
-4,144
-4,366
-5,615
-2,300
-2,388
Financial ratios
ROA (RP-based)
7.3%
6.3%
7.7%
8.2%
8.3%
7.1%
5.1%
5.4%
6.1%
7.1%
10.6%
ROE
6.2%
5.7%
8.8%
9.6%
8.7%
6.5%
7.0%
7.6%
8.7%
8.8%
13.5%
Equity ratio
51.1%
53.3%
50.9%
46.3%
45.8%
47.2%
47.9%
47.9%
48.5%
47.9%
49.4%
Total asset turnover
147.3%
137.1%
148.9%
151.6%
149.4%
140.5%
130.9%
132.3%
131.2%
136.0%
141.1%
Net margin
2.1%
2.2%
3.1%
3.1%
2.7%
2.1%
2.5%
2.7%
3.2%
3.1%
4.6%
Source: Shared Research based on company data
Notes: Figures may differ from company materials due to differences in rounding methods.
The company conducted a three-for-one stock split of common shares on June 1, 2020. In the table above, EPS and BPS are calculated as if the stock split had occurred at the beginning of FY03/11.
Orders received by segment
By segment
FY03/11
FY03/12
FY03/13
FY03/14
FY03/15
FY03/16
FY03/17
FY03/18
FY03/19
FY03/20
FY03/21
FY03/22
(JPYmn)
Act.
Act.
Act.
Act.
Act.
Act.
Act.
Act.
Act.
Act.
Act.
Est.
Orders
212,277
215,373
241,271
280,071
299,097
274,946
279,241
287,831
284,739
304,978
336,877
330,000
YoY
-4.4%
1.5%
12.0%
16.1%
6.8%
-8.1%
1.6%
3.1%
-1.1%
7.1%
10.5%
-2.0%
Digital Solutions
106,618
115,180
128,301
123,000
YoY
-
8.0%
11.4%
-4.1%
% of total
37.4%
37.8%
38.1%
37.3%
Network Infrastructure
80,829
87,728
95,338
102,000
YoY
-
8.5%
8.7%
7.0%
% of total
28.4%
28.8%
28.3%
30.9%
Engineering & Support Services
88,300
92,040
103,718
100,000
YoY
-
4.2%
12.7%
-3.6%
% of total
31.0%
30.2%
30.8%
30.3%
Other
9,000
10,031
9,518
5,000
YoY
-
11.5%
-5.1%
-47.5%
% of total
3.2%
3.3%
2.8%
1.5%
[Old segments 1]
Enterprise Networks Business Unit
95,610
108,909
109,944
116,958
125,826
122,456
YoY
-
13.9%
1.0%
6.4%
7.6%
-2.7%
% of total
34.1%
36.4%
40.0%
41.9%
43.7%
43.0%
Carrier Networks Business Unit
82,656
85,618
66,899
68,675
68,543
73,020
YoY
-
3.6%
-21.9%
2.7%
-0.2%
6.5%
% of total
29.5%
28.6%
24.3%
24.6%
23.8%
25.6%
Social Infrastructure Business
94,849
99,757
91,195
86,546
87,046
80,285
YoY
-
5.2%
-8.6%
-5.1%
0.6%
-7.8%
% of total
33.9%
33.4%
33.2%
31.0%
30.2%
28.2%
Other
6,954
4,812
6,907
7,060
6,414
8,976
YoY
-
-30.8%
43.5%
2.2%
-9.2%
39.9%
% of total
2.5%
1.6%
2.5%
2.5%
2.2%
3.2%
[Old segments 2]
Enterprise Networks Business Unit
82,200
91,849
105,311
YoY
-
11.7%
14.7%
% of total
34.1%
32.8%
35.2%
Carrier Networks Business Unit
65,800
74,724
76,448
YoY
-
13.6%
2.3%
% of total
27.3%
26.7%
25.6%
Social Infrastructure Business
75,700
94,879
99,767
YoY
-
25.3%
5.2%
% of total
31.4%
33.9%
33.4%
Other
17,700
18,617
17,570
YoY
-
5.2%
-5.6%
% of total
7.3%
6.6%
5.9%
[Old segments 3]
Enterprise Networks Business Unit
77,791
82,287
89,558
99,277
YoY
1.1%
5.8%
8.8%
10.9%
% of total
36.6%
38.2%
37.1%
35.4%
Carrier Networks Business Unit
43,655
50,604
52,875
64,279
YoY
-0.9%
15.9%
4.5%
21.6%
% of total
20.6%
23.5%
21.9%
23.0%
Social Infrastructure Business
78,191
70,111
84,453
102,157
YoY
-9.8%
-10.3%
20.5%
21.0%
% of total
36.8%
32.6%
35.0%
36.5%
Other
12,638
12,370
14,384
14,357
YoY
-12.1%
-2.1%
16.3%
-0.2%
% of total
6.0%
5.7%
6.0%
5.1%
Source: Shared Research based on company data
Notes: Figures may differ from company materials due to differences in rounding methods.
The company conducted a three-for-one stock split of common shares on June 1, 2020. In the table above, EPS and BPS are calculated as if the stock split had occurred at the beginning of FY03/11.
Revenue by segment
By segment
FY03/11
FY03/12
FY03/13
FY03/14
FY03/15
FY03/16
FY03/17
FY03/18
FY03/19
FY03/20
FY03/21
FY03/22
(JPYmn)
Act.
Act.
Act.
Act.
Act.
Act.
Act.
Act.
Act.
Act.
Act.
Est.
Revenue
217,948
204,658
235,716
270,326
292,164
279,961
257,912
267,939
277,949
303,616
339,109
320,000
YoY
0.1%
-6.1%
15.2%
14.7%
8.1%
-4.2%
-7.9%
3.9%
3.7%
9.2%
11.7%
-5.6%
Digital Solutions
102,073
112,758
125,960
113,000
YoY
-
10.5%
11.7%
-10.3%
% of total
36.7%
37.1%
37.1%
35.3%
Network Infrastructure
79,468
83,110
89,232
101,000
YoY
-
4.6%
7.4%
13.2%
% of total
28.6%
27.4%
26.3%
31.6%
Engineering & Support Services
89,021
97,434
114,089
97,000
YoY
-
9.5%
17.1%
-15.0%
% of total
32.0%
32.1%
33.6%
30.3%
Other
7,383
10,314
9,827
9,000
YoY
-
39.7%
-4.7%
-8.4%
% of total
2.7%
3.4%
2.9%
2.8%
[Old segments 1]
Enterprise Networks Business Unit
94,776
102,797
109,584
107,366
110,887
122,775
YoY
-
8.5%
6.6%
-2.0%
3.3%
10.7%
% of total
35.1%
35.2%
39.1%
41.6%
41.4%
44.2%
Carrier Networks Business Unit
86,286
86,164
69,306
61,579
64,902
70,529
YoY
-
-0.1%
-19.6%
-11.1%
5.4%
8.7%
% of total
31.9%
29.5%
24.8%
23.9%
24.2%
25.4%
Social Infrastructure Business
82,599
96,767
96,260
82,362
85,192
77,260
YoY
-
17.2%
-0.5%
-14.4%
3.4%
-9.3%
% of total
30.6%
33.1%
34.4%
31.9%
31.8%
27.8%
Other
6,664
6,434
4,810
6,602
6,957
7,383
YoY
-
-3.5%
-25.2%
37.3%
5.4%
6.1%
% of total
2.5%
2.2%
1.7%
2.6%
2.6%
2.7%
[Old segments 2]
Enterprise Networks Business Unit
78,000
90,804
99,269
YoY
-
16.4%
9.3%
% of total
33.1%
33.6%
34.0%
Carrier Networks Business Unit
64,900
78,335
76,631
YoY
-
20.7%
-2.2%
% of total
27.5%
29.0%
26.2%
Social Infrastructure Business
74,100
82,627
96,782
YoY
-
11.5%
17.1%
% of total
31.4%
30.6%
33.1%
Other
18,800
18,599
19,481
YoY
-
-1.1%
4.7%
% of total
8.0%
6.9%
6.7%
[Old segments 3]
Enterprise Networks Business Unit
78,266
80,722
85,338
98,199
YoY
2.8%
3.1%
5.7%
15.1%
% of total
35.9%
39.4%
36.2%
36.3%
Carrier Networks Business Unit
43,317
46,716
54,732
65,142
YoY
-3.6%
7.8%
17.2%
19.0%
% of total
19.9%
22.8%
23.2%
24.1%
Social Infrastructure Business
84,099
64,518
80,935
92,203
YoY
1.9%
-23.3%
25.4%
13.9%
% of total
38.6%
31.5%
34.3%
34.1%
Other
12,266
12,700
14,709
14,781
YoY
-13.0%
3.5%
15.8%
0.5%
% of total
5.6%
6.2%
6.2%
5.5%
Source: Shared Research based on company data
Notes: Figures may differ from company materials due to differences in rounding methods.
The company conducted a three-for-one stock split of common shares on June 1, 2020. In the table above, EPS and BPS are calculated as if the stock split had occurred at the beginning of FY03/11.
Operating profit by segment
By segment
FY03/11
FY03/12
FY03/13
FY03/14
FY03/15
FY03/16
FY03/17
FY03/18
FY03/19
FY03/20
FY03/21
FY03/22
(JPYmn)
Act.
Act.
Act.
Act.
Act.
Act.
Act.
Act.
Act.
Act.
Act.
Est.
Operating profit
10,835
9,747
12,483
14,418
16,158
14,111
9,974
11,057
12,774
16,245
25,563
26,000
YoY
9.8%
-10.0%
28.1%
15.5%
12.1%
-12.7%
-29.3%
10.9%
15.5%
27.2%
57.4%
1.7%
Operating profit margin
5.0%
4.8%
5.3%
5.3%
5.5%
5.0%
3.9%
4.1%
4.6%
5.4%
7.5%
8.1%
Digital Solutions
9,040
11,653
13,763
13,500
YoY
-
28.9%
18.1%
-1.9%
Operating profit margin
8.9%
10.3%
10.9%
11.9%
% of total
41.4%
43.1%
38.6%
37.5%
Network Infrastructure
5,111
8,129
9,291
11,000
YoY
-
59.0%
14.3%
18.4%
Operating profit margin
6.4%
9.8%
10.4%
10.9%
% of total
23.4%
30.1%
26.1%
30.6%
Engineering & Support Services
7,388
6,715
11,813
11,500
YoY
-
-9.1%
75.9%
-2.6%
Operating profit margin
8.3%
6.9%
10.4%
11.9%
% of total
33.8%
24.9%
33.1%
31.9%
Other
311
511
794
YoY
-
64.3%
55.4%
Operating profit margin
4.2%
5.0%
8.1%
% of total
1.4%
1.9%
2.2%
Adjustments
-9,076
-10,763
-10,098
-10,000
[Old segments 1]
Enterprise Networks Business Unit
7,415
7,464
8,900
8,823
10,797
13,408
YoY
-
0.7%
19.2%
-0.9%
22.4%
24.2%
Operating profit margin
7.8%
7.3%
8.1%
8.2%
9.7%
10.9%
% of total
32.7%
31.1%
40.0%
47.3%
55.4%
61.4%
Carrier Networks Business Unit
6,598
6,920
3,503
3,569
5,021
4,714
YoY
-
4.9%
-49.4%
1.9%
40.7%
-6.1%
Operating profit margin
7.6%
8.0%
5.1%
5.8%
7.7%
6.7%
% of total
29.1%
28.8%
15.7%
19.1%
25.8%
21.6%
Social Infrastructure Business
8,139
9,548
9,490
6,029
3,399
3,454
YoY
-
17.3%
-0.6%
-36.5%
-43.6%
1.6%
Operating profit margin
9.9%
9.9%
9.9%
7.3%
4.0%
4.5%
% of total
35.9%
39.7%
42.6%
32.3%
17.4%
15.8%
Other
539
93
376
246
263
276
YoY
-
-82.7%
304.3%
-34.6%
6.9%
4.9%
Operating profit margin
8.1%
1.4%
7.8%
3.7%
3.8%
3.7%
% of total
2.4%
0.4%
1.7%
1.3%
1.4%
1.3%
Adjustments
-8,274
-7,867
-8,158
-8,693
-8,423
-9,078
[Old segments 2]
Enterprise Networks Business Unit
6,500
7,089
7,171
YoY
-
9.1%
1.2%
Operating profit margin
8.3%
7.8%
7.2%
% of total
32.7%
31.2%
29.8%
Carrier Networks Business Unit
5,900
6,639
7,052
YoY
-
12.5%
6.2%
Operating profit margin
9.1%
8.5%
9.2%
% of total
29.6%
29.3%
29.4%
Social Infrastructure Business
7,100
8,159
9,606
YoY
-
14.9%
17.7%
Operating profit margin
9.6%
9.9%
9.9%
% of total
35.7%
36.0%
40.0%
Other
400
804
195
YoY
-
101.0%
-75.7%
Operating profit margin
2.1%
4.3%
1.0%
% of total
2.0%
3.5%
0.8%
Adjustments
-
-8,273
-7,866
[Old segments 3]
Enterprise Networks Business Unit
7,709
7,594
7,368
8,034
YoY
3.8%
-1.5%
-3.0%
9.0%
Operating profit margin
9.8%
9.4%
8.6%
8.2%
% of total
44.8%
46.2%
36.4%
35.1%
Carrier Networks Business Unit
4,439
4,941
6,306
6,669
YoY
12.7%
11.3%
27.6%
5.8%
Operating profit margin
10.2%
10.6%
11.5%
10.2%
% of total
25.8%
30.1%
31.2%
29.1%
Social Infrastructure Business
4,817
3,576
6,162
7,738
YoY
20.8%
-25.8%
72.3%
25.6%
Operating profit margin
5.7%
5.5%
7.6%
8.4%
% of total
28.0%
21.8%
30.5%
33.8%
Other
235
313
396
474
YoY
-58.8%
33.2%
26.5%
19.7%
Operating profit margin
1.9%
2.5%
2.7%
3.2%
% of total
1.4%
1.9%
2.0%
2.1%
Adjustments
-6,365
-6,677
-7,749
-8,497
Source: Shared Research based on company data
Notes: Figures may differ from company materials due to differences in rounding methods.
The company conducted a three-for-one stock split of common shares on June 1, 2020. In the table above, EPS and BPS are calculated as if the stock split had occurred at the beginning of FY03/11.
Recent updates
1H FY03/21 flash update
2021-10-29
NEC Networks & System Integration Corporation announced earnings results for 1H FY03/22; see the results section for details.
Trends and outlook
Quarterly trends and results
Cumulative
FY03/20
FY03/21
FY03/22
FY03/22
(JPYmn)
Q1
Q1–Q2
Q1–Q3
Q1–Q4
Q1
Q1–Q2
Q1–Q3
Q1–Q4
Q1
Q1–Q2
% of Est.
FY Est.
Revenue
60,537
136,270
214,032
303,616
67,369
151,205
233,469
339,109
67,662
140,961
44.1%
320,000
YoY
9.2%
11.2%
12.1%
9.2%
11.3%
11.0%
9.1%
11.7%
0.4%
-6.8%
-5.6%
Gross profit
8,736
22,512
36,002
54,374
10,343
25,171
41,572
63,929
12,633
27,257
YoY
8.7%
15.3%
13.5%
14.0%
18.4%
11.8%
15.5%
17.6%
22.1%
8.3%
Gross profit margin
14.4%
16.5%
16.8%
17.9%
15.4%
16.6%
17.8%
18.9%
18.7%
19.3%
SG&A expenses
8,915
18,143
27,793
38,128
9,334
18,439
27,769
38,366
9,682
19,636
YoY
6.6%
7.4%
9.2%
9.2%
4.7%
1.6%
-0.1%
0.6%
3.7%
6.5%
SG&A ratio
14.7%
13.3%
13.0%
12.6%
13.9%
12.2%
11.9%
11.3%
14.3%
13.9%
Operating profit
-178
4,369
8,208
16,245
1,008
6,732
13,803
25,563
2,950
7,621
29.3%
26,000
YoY
-
66.0%
30.6%
27.2%
-
54.1%
68.2%
57.4%
192.7%
13.2%
1.7%
Operating profit margin
-
3.2%
3.8%
5.4%
1.5%
4.5%
5.9%
7.5%
4.4%
5.4%
8.1%
Recurring profit
-251
4,335
8,196
15,938
941
6,778
13,856
25,493
3,045
7,889
30.3%
26,000
YoY
-
49.5%
25.7%
22.4%
-
56.4%
69.1%
60.0%
223.6%
16.4%
2.0%
Recurring profit margin
-
3.2%
3.8%
5.2%
1.4%
4.5%
5.9%
7.5%
4.5%
5.6%
8.1%
Net income attributable to owners of the parent
21
2,902
4,296
9,422
326
3,967
8,358
15,745
1,653
4,703
29.4%
16,000
YoY
-
51.9%
0.0%
6.0%
-
36.7%
94.6%
67.1%
407.1%
18.6%
1.6%
Net margin
0.0%
2.1%
2.0%
3.1%
0.5%
2.6%
3.6%
4.6%
2.4%
3.3%
5.0%
Quarterly
FY03/20
FY03/21
FY03/22
FY03/22
(JPYmn)
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
% of Est.
1H Est.
Revenue
60,537
75,733
77,762
89,584
67,369
83,836
82,264
105,640
67,662
73,299
95.9%
147,000
YoY
9.2%
12.9%
13.6%
3.0%
11.3%
10.7%
5.8%
17.9%
0.4%
-12.6%
-2.8%
Gross profit
8,736
13,776
13,490
18,372
10,343
14,828
16,401
22,357
12,633
14,624
YoY
8.7%
19.9%
10.5%
15.2%
18.4%
7.6%
21.6%
21.7%
22.1%
-1.4%
Gross profit margin
14.4%
18.2%
17.3%
20.5%
15.4%
17.7%
19.9%
21.2%
18.7%
20.0%
SG&A expenses
8,915
9,228
9,650
10,335
9,334
9,105
9,330
10,597
9,682
9,954
YoY
6.6%
8.2%
12.8%
9.2%
4.7%
-1.3%
-3.3%
2.5%
3.7%
9.3%
SG&A ratio
14.7%
12.2%
12.4%
11.5%
13.9%
10.9%
11.3%
10.0%
14.3%
13.6%
Operating profit
-178
4,547
3,839
8,037
1,008
5,724
7,071
11,760
2,950
4,671
87.6%
8,700
YoY
-
53.6%
5.1%
23.8%
-
25.9%
84.2%
46.3%
192.7%
-18.4%
29.2%
Operating profit margin
-
6.0%
4.9%
9.0%
1.5%
6.8%
8.6%
11.1%
4.4%
6.4%
5.9%
Recurring profit
-251
4,586
3,861
7,742
941
5,837
7,078
11,637
3,045
4,844
90.7%
8,700
YoY
-
41.5%
6.6%
19.1%
-
27.3%
83.3%
50.3%
223.6%
-17.0%
28.4%
Recurring profit margin
-
6.1%
5.0%
8.6%
1.4%
7.0%
8.6%
11.0%
4.5%
6.6%
5.9%
Net income attributable to owners of the parent
21
2,881
1,394
5,126
326
3,641
4,391
7,387
1,653
3,050
85.5%
5,500
YoY
-
36.2%
-41.6%
11.7%
1,452.4%
26.4%
215.0%
44.1%
407.1%
-16.2%
38.6%
Net margin
0.0%
3.8%
1.8%
5.7%
0.5%
4.3%
5.3%
7.0%
2.4%
4.2%
3.7%
Source: Shared Research based on company data
Note: Figures may differ from company materials due to differences in rounding methods.
Performance by segment
By segment (cumulative)
FY03/20
FY03/21
FY03/22
FY03/22
(JPYmn)
Q1
Q1–Q2
Q1–Q3
Q1–Q4
Q1
Q1–Q2
Q1–Q3
Q1–Q4
Q1
Q1–Q2
% of Est.
FY Est.
Orders
74,115
151,724
215,214
304,978
84,359
177,890
253,488
336,877
83,717
165,922
50.3%
330,000
YoY
11.9%
3.4%
3.7%
7.1%
13.8%
17.2%
17.8%
10.5%
-0.8%
-6.7%
-2.0%
Digital Solutions
26,501
55,399
82,856
115,180
34,036
71,260
97,112
128,301
30,428
62,164
50.5%
123,000
YoY
5.6%
3.6%
5.1%
8.0%
28.4%
28.6%
17.2%
11.4%
-10.6%
-12.8%
-4.1%
Network Infrastructure
23,101
45,304
62,364
87,728
25,398
47,577
71,560
95,338
26,937
49,632
48.7%
102,000
YoY
10.1%
8.4%
6.3%
8.5%
9.9%
5.0%
14.7%
8.7%
6.1%
4.3%
7.0%
Engineering & Support Services
22,324
46,574
63,012
92,040
22,152
54,331
77,356
103,718
24,719
51,872
51.9%
100,000
YoY
27.0%
-2.2%
-1.5%
4.2%
-0.8%
16.7%
22.8%
12.7%
11.6%
-4.5%
-3.6%
Other
2,188
4,448
6,982
10,031
2,771
4,721
7,459
9,518
1,631
2,252
45.0%
5,000
YoY
-14.5%
16.6%
17.3%
11.8%
26.6%
6.1%
6.8%
-5.1%
-41.1%
-52.3%
-47.5%
Revenue
60,537
136,270
214,032
303,616
67,369
151,205
233,469
339,109
67,662
140,961
44.1%
320,000
YoY
9.2%
11.2%
12.1%
9.2%
11.3%
11.0%
9.1%
11.7%
0.4%
-6.8%
-5.6%
Digital Solutions
24,107
53,210
80,727
112,758
26,819
56,712
83,776
125,960
25,317
52,394
46.4%
113,000
YoY
13.7%
11.8%
13.3%
10.5%
11.2%
6.6%
3.8%
11.7%
-5.6%
-7.6%
-10.3%
Network Infrastructure
15,362
35,505
56,006
83,110
16,610
38,083
60,384
89,232
19,851
42,759
42.3%
101,000
YoY
5.0%
4.2%
3.6%
4.6%
8.1%
7.3%
7.8%
7.4%
19.5%
12.3%
13.2%
Engineering & Support Services
17,824
41,602
68,605
97,434
20,841
51,551
82,027
114,089
19,860
42,298
43.6%
97,000
YoY
0.1%
10.4%
12.1%
9.5%
16.9%
23.9%
19.6%
17.1%
-4.7%
-17.9%
-15.0%
Other
3,243
5,954
8,694
10,314
3,098
4,858
7,279
9,827
2,633
3,508
39.0%
9,000
YoY
79.9%
91.1%
93.1%
39.7%
-4.5%
-18.4%
-16.3%
-4.7%
-15.0%
-27.8%
-8.4%
Operating profit
-178
4,369
8,208
16,245
1,008
6,732
13,803
25,563
2,950
7,621
29.3%
26,000
YoY
-
66.0%
30.6%
27.2%
-
54.1%
68.2%
57.4%
192.7%
13.2%
1.7%
Operating profit margin
-0.3%
3.2%
3.8%
5.4%
1.5%
4.5%
5.9%
7.5%
4.4%
5.4%
8.1%
Digital Solutions
1,832
4,760
7,768
11,653
2,101
5,271
8,542
13,763
2,864
5,558
41.2%
13,500
YoY
47.4%
34.0%
41.6%
28.9%
14.7%
10.7%
10.0%
18.1%
36.3%
5.4%
-1.9%
Operating profit margin
7.6%
8.9%
9.6%
10.3%
7.8%
9.3%
10.2%
10.9%
11.3%
10.6%
11.9%
Network Infrastructure
160
1,839
4,045
8,129
208
2,213
4,659
9,291
787
2,796
25.4%
11,000
YoY
-
83.7%
70.4%
59.0%
30.0%
20.3%
15.2%
14.3%
278.4%
26.3%
18.4%
Operating profit margin
1.0%
5.2%
7.2%
9.8%
1.3%
5.8%
7.7%
10.4%
4.0%
6.5%
10.9%
Engineering & Support Services
-124
2,196
3,481
6,715
726
3,464
7,020
11,813
1,230
3,437
29.9%
11,500
YoY
-
-1.7%
-25.5%
-9.1%
-
57.7%
101.7%
75.9%
69.4%
-0.8%
-2.6%
Operating profit margin
-
5.3%
5.1%
6.9%
3.5%
6.7%
8.6%
10.4%
6.2%
8.1%
11.9%
Other
120
250
405
511
145
363
598
794
207
382
YoY
130.8%
59.2%
58.2%
64.3%
20.8%
45.2%
47.7%
55.4%
42.8%
5.2%
Operating profit margin
3.7%
4.2%
4.7%
5.0%
4.7%
7.5%
8.2%
8.1%
7.9%
10.9%
Company-wide, eliminations
-2,166
-4,676
-7,491
-10,763
-2,173
-4,579
-7,016
-10,098
-2,139
-4,554
-10,000
By segment (quarterly)
FY03/20
FY03/21
FY03/22
FY03/22
(JPYmn)
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
% of Est.
1H Est.
Orders
74,115
77,609
63,490
89,764
84,359
93,531
75,598
83,389
83,717
82,205
100.6%
165,000
YoY
11.9%
-3.6%
4.6%
16.1%
13.8%
20.5%
19.1%
-7.1%
-0.8%
-12.1%
-7.2%
Digital Solutions
26,501
28,898
27,457
32,324
34,036
37,224
25,852
31,189
30,428
31,736
101.9%
61,000
YoY
5.6%
1.8%
8.2%
16.4%
28.4%
28.8%
-5.8%
-3.5%
-10.6%
-14.7%
-14.4%
Network Infrastructure
23,101
22,203
17,060
25,364
25,398
22,179
23,983
23,778
26,937
22,695
99.3%
50,000
YoY
10.1%
6.6%
1.0%
14.6%
9.9%
-0.1%
40.6%
-6.3%
6.1%
2.3%
5.1%
Engineering & Support Services
22,324
24,250
16,438
29,028
22,152
32,179
23,025
26,362
24,719
27,153
103.7%
50,000
YoY
27.0%
-19.3%
0.6%
19.2%
-0.8%
32.7%
40.1%
-9.2%
11.6%
-15.6%
-8.0%
Other
2,188
2,260
2,534
3,049
2,771
1,950
2,738
2,059
1,631
621
56.3%
4,000
YoY
-14.5%
79.7%
18.7%
0.8%
26.6%
-13.7%
8.1%
-32.5%
-41.1%
-68.2%
-15.3%
Revenue
60,537
75,733
77,762
89,584
67,369
83,836
82,264
105,640
67,662
73,299
95.9%
147,000
YoY
9.2%
12.9%
13.6%
3.0%
11.3%
10.7%
5.8%
17.9%
0.4%
-12.6%
-2.8%
Digital Solutions
24,107
29,103
27,517
32,031
26,819
29,893
27,064
42,184
25,317
27,077
95.3%
55,000
YoY
13.7%
10.2%
16.3%
4.0%
11.2%
2.7%
-1.6%
31.7%
-5.6%
-9.4%
-3.0%
Network Infrastructure
15,362
20,143
20,501
27,104
16,610
21,473
22,301
28,848
19,851
22,908
99.4%
43,000
YoY
5.0%
3.6%
2.7%
6.6%
8.1%
6.6%
8.8%
6.4%
19.5%
6.7%
12.9%
Engineering & Support Services
17,824
23,778
27,003
28,829
20,841
30,710
30,476
32,062
19,860
22,438
96.1%
44,000
YoY
0.1%
19.5%
15.0%
3.5%
16.9%
29.2%
12.9%
11.2%
-4.7%
-26.9%
-14.6%
Other
3,243
2,711
2,740
1,620
3,098
1,760
2,421
2,548
2,633
875
87.7%
4,000
YoY
79.9%
106.5%
97.7%
-43.8%
-4.5%
-35.1%
-11.6%
57.3%
-15.0%
-50.3%
-17.7%
Operating profit
-178
4,547
3,839
8,037
1,008
5,724
7,071
11,760
2,950
4,671
87.6%
8,700
YoY
-
53.6%
5.1%
23.8%
-
25.9%
84.2%
46.3%
192.7%
-18.4%
29.2%
Operating profit margin
-0.3%
6.0%
4.9%
9.0%
1.5%
6.8%
8.6%
11.1%
4.4%
6.4%
5.9%
Digital Solutions
1,832
2,928
3,008
3,885
2,101
3,170
3,271
5,221
2,864
2,694
91.1%
6,100
YoY
47.4%
26.8%
55.5%
9.3%
14.7%
8.3%
8.7%
34.4%
36.3%
-15.0%
15.7%
Operating profit margin
7.6%
10.1%
10.9%
12.1%
7.8%
10.6%
12.1%
12.4%
11.3%
9.9%
11.1%
Network Infrastructure
160
1,679
2,206
4,084
208
2,005
2,446
4,632
787
2,009
87.4%
3,200
YoY
-
42.7%
60.7%
49.2%
30.0%
19.4%
10.9%
13.4%
278.4%
0.2%
44.6%
Operating profit margin
1.0%
8.3%
10.8%
15.1%
1.3%
9.3%
11.0%
16.1%
4.0%
8.8%
7.4%
Engineering & Support Services
-124
2,320
1,285
3,234
726
2,738
3,556
4,793
1,230
2,207
85.9%
4,000
YoY
-
46.8%
-47.3%
19.1%
-
18.0%
176.7%
48.2%
69.4%
-19.4%
15.5%
Operating profit margin
-
9.8%
4.8%
11.2%
3.5%
8.9%
11.7%
14.9%
6.2%
9.8%
9.1%
Other
120
130
155
106
145
218
235
196
207
175
YoY
130.8%
23.8%
56.6%
92.7%
20.8%
67.7%
51.6%
84.9%
42.8%
-19.7%
Operating profit margin
3.7%
4.8%
5.7%
6.5%
4.7%
12.4%
9.7%
7.7%
7.9%
20.0%
Company-wide, eliminations
-2,166
-2,510
-2,815
-3,272
-2,172
-2,407
-2,437
-3,082
-2,138
-2,414
-4,600
Source: Shared Research based on company data
Note: Figures may differ from company materials due to differences in rounding methods.
1H FY03/22 results (out October 29,
2021)
Overview
Orders: JPY165.9bn (-6.7% YoY; 100.6% of the company’s 1H target)
Revenue: JPY141.0bn (-6.8% YoY; 95.9%)
Operating profit: JPY7.6bn (+13.2% YoY; 87.6%)
Recurring profit: JPY7.9bn (+16.4% YoY; 90.7%)
Net income*: JPY4.7bn (+18.6% YoY; 85.5%) * Net income attributable to owners of the parent
The company announced that it is leaving its FY03/22 earnings forecast (out April 27, 2021) unchanged. However, it revised its orders, revenue, and operating profit projections for individual segments (details follow).
Key takeaways
Orders declined 6.7% YoY, coming in at 100.6% of the company’s 1H FY03/22 target. Orders dipped mainly on the absence of large-scale orders such as those received in FY03/21 (GIGA school project orders of about JPY27.0bn) and a
reduction in orders of about JPY1.5bn from Q2 FY03/21 on the non-consolidation
of a subsidiary.
On the other hand, orders were bolstered by
about JPY16.5bn on strength in the DX (working-style innovation) and telecom
carrier infrastructure businesses.
Revenue declined 6.8% YoY, coming in at 95.9% of the company’s 1H FY03/22 target. Revenue was helped in part by a boost of
about JPY4.0bn from the DX (working-style innovation) and telecom carrier
infrastructure businesses, although the absence of GIGA school project orders had a negative impact of about JPY6.0bn, revenue from mega-solar projects decreased about
JPY6.5bn, and removal of a subsidiary from the scope of consolidation adversely impacted revenue
by about JPY1.5bn.
Operating profit rose 13.2% YoY, reaching 87.6% of the company’s 1H target. The company’s OPM reached 5.4%, up 0.9pp from 4.5% in 1H FY03/21. Operating profit rose YoY, since a better revenue mix and improved efficiency made it possible to absorb an increase in SG&A expenses.
Achievement rates versus the company’s full-year
forecasts (and performance in 1H FY03/21 versus full-year results) are as
follows.
Orders: 49.8% (52.8% in 1H FY03/21);
revenue: 44.1% (44.6%); operating profit: 29.3% (26.3%); recurring profit: 30.3%
(26.6%); net income attributable to owners of the parent: 29.4% (25.2%)
Performance by segment
Digital Solutions
Orders: JPY62.2bn (-12.8% YoY; 101.9% of the company’s 1H forecast)
Revenue: JPY52.4bn (-7.6% YoY; 95.3%)
Operating profit: JPY5.6bn (+5.4% YoY; 91.1%)
OPM: 10.6% (9.3% in 1H FY03/21)
Revenue was JPY52.4bn (-7.6% YoY). In connection with the mainstay working-style innovation field using DX technologies, there was expansion in ICT services. On the other hand, revenue was negatively affected by removal of a group company (that was included in consolidated results through Q1 FY03/21) from the scope of consolidation and by the delayed posting of revenue due to the shift to a service provision model.
Operating profit was JPY5.6bn (+5.4% YoY), with OPM improving to 10.6% (+1.3pp YoY). Profitability in the business improved as a result of progress in shifting the business model.
Network Infrastructure
Orders: JPY49.6bn (+4.3% YoY; 99.3% of the company’s 1H forecast)
Revenue: JPY42.8bn (+12.3% YoY; 99.4%)
Operating profit: JPY2.8bn (+26.3% YoY; 87.4%)
OPM: 6.5% (5.8% in 1H FY03/21)
Revenue
was JPY42.8bn (+12.3% YoY). There was expansion in both businesses for telecom carriers and for social and public infrastructure projects.
Operating profit was JPY2.8bn (+26.3% YoY), and OPM was 6.5% (+0.7pp YoY). The positive impact from revenue growth and an improved revenue mix served to bolster operating profit YoY.
Engineering & Support Services
Orders: JPY51.9bn (-4.5% YoY; 103.7% of the company’s 1H forecast)
Revenue: JPY42.3bn (-17.9% YoY; 96.1%)
Operating profit: JPY3.4bn (-0.8% YoY; 85.9%)
OPM: 8.1% (6.7% in 1H FY03/21)
Revenue was JPY42.3bn (-17.9% YoY). Revenue from mega-solar projects and GIGA school project work declined and there was a negative impact from semiconductor shortages.
Operating profit was JPY3.4bn (-0.8%
YoY), and OPM was 8.1% (+1.4pp YoY). Although the decline in revenue had a negative impact, the absence of the impact of unprofitable mega-solar projects left operating profit essentially flat YoY.
For details on previous quarterly and annual results, please refer to the “Historical financial statements” section.
FY03/22 full-year company forecast (out April 27, 2021; 1H forecast revised July 29, 2021)
FY03/21
FY03/22
YoY
(JPYmn)
1H Act.
2H Act.
FY Act.
1H Act.
2H Est.
FY Est.
1H Act.
2H Est.
FY Est.
Revenue
151,205
187,904
339,109
140,961
179,039
320,000
-6.8%
-4.7%
-5.6%
Cost of revenue
126,033
149,146
275,179
113,703
-9.8%
Gross profit
25,171
38,758
63,929
27,257
8.3%
Gross profit margin
16.6%
20.6%
18.9%
0
-
SG&A expenses
18,439
19,927
38,366
19,636
6.5%
SG&A ratio
12.2%
10.6%
11.3%
0
-
Operating profit
6,732
18,831
25,563
7,621
18,379
26,000
13.2%
-2.4%
1.7%
Operating profit margin
4.5%
10.0%
7.5%
5.4%
10.3%
8.1%
-
-
-
Recurring profit
6,778
18,715
25,493
7,889
18,111
26,000
16.4%
-3.2%
2.0%
Recurring profit margin
4.5%
10.0%
7.5%
5.6%
10.1%
8.1%
-
-
-
Net income
3,967
11,778
15,745
4,703
11,297
16,000
18.6%
-4.1%
1.6%
Net margin
2.6%
6.3%
4.6%
0
6.3%
5.0%
-
-
-
Source: Shared Research based on company data
Note: Figures may differ from company materials due to differences in rounding methods. Shared Research has calculated 2H forecasts by subtracting 1H forecasts from corresponding full-year forecasts.
By segment
FY03/21
YoY
(JPYmn)
1H Act.
2H Act.
FY Act.
1H Act.
2H Est.
FY Est.
1H Act.
2H Est.
FY Est.
Orders
177,890
158,987
336,877
165,922
164,078
330,000
-6.7%
3.2%
-2.0%
Digital Solutions
71,260
57,041
128,301
62,164
60,836
123,000
-12.8%
6.7%
-4.1%
Network Infrastructure
47,577
47,761
95,338
49,632
52,368
102,000
4.3%
9.6%
7.0%
Engineering & Support Services
54,331
49,387
103,718
51,872
48,128
100,000
-4.5%
-2.5%
-3.6%
Other
4,721
4,797
9,518
2,252
2,748
5,000
-52.3%
-42.7%
-47.5%
Revenue
151,205
187,904
339,109
140,961
179,039
320,000
-6.8%
-4.7%
-5.6%
Digital Solutions
56,712
69,248
125,960
52,394
60,606
113,000
-7.6%
-12.5%
-10.3%
Network Infrastructure
38,083
51,149
89,232
42,759
58,241
101,000
12.3%
13.9%
13.2%
Engineering & Support Services
51,551
62,538
114,089
42,298
54,702
97,000
-17.9%
-12.5%
-15.0%
Other
4,858
4,969
9,827
3,508
5,492
9,000
-27.8%
10.5%
-8.4%
Operating profit
6,732
18,831
25,563
7,621
18,379
26,000
13.2%
-2.4%
1.7%
Digital Solutions
5,271
8,492
13,763
5,558
7,942
13,500
5.4%
-6.5%
-1.9%
Operating profit margin
9.3%
12.3%
10.9%
10.6%
13.1%
11.9%
Network Infrastructure
2,213
7,078
9,291
2,796
8,204
11,000
26.3%
15.9%
18.4%
Operating profit margin
5.8%
13.8%
10.4%
6.5%
14.1%
10.9%
Engineering & Support Services
3,464
8,349
11,813
3,437
8,063
11,500
-0.8%
-3.4%
-2.6%
Operating profit margin
6.7%
13.4%
10.4%
8.1%
14.7%
11.9%
Other
363
431
794
382
5.2%
Operating profit margin
7.5%
2.3%
5.8%
Eliminations
-4,579
-5,882
-10,098
-4,554
-5,446
-10,000
-0.5%
Source: Shared Research based on company data
Note: Figures may differ from company materials due to differences in rounding methods.
Note: 2H forecasts are calculated by Shared Research by subtracting the company’s 1H forecast from its full-year forecast.
The company announced that it is leaving its FY03/22 earnings forecast (announced on April 27, 2021) unchanged. However, it revised its orders, revenue, and operating profit projections for individual segments.
Digital Solutions
Orders: JPY123.0bn (previous projection was JPY120.0bn)
Revenue: JPY113.0bn (JPY116.0bn)
Operating profit: JPY13.5bn (JPY14.0bn)
Network Infrastructure
Orders: JPY102.0bn (previous projection was JPY100.0bn)
Revenue: JPY101.0bn (JPY96.0bn)
Operating profit: JPY11.0bn (JPY10.0bn)
Engineering & Support Services
Orders: JPY100.0bn (unchanged)
Revenue: JPY97.0bn (previous projection was JPY98.0bn)
Operating profit: JPY11.5bn (JPY12.0bn)
The following content is as of August 19, 2021. Shared Research plans to update this content following interviews with the company.
Overview of the company’s full-year FY03/22 forecast
Orders: JPY330.0bn (-2.0% YoY)
Revenue: JPY320.0bn (-5.6% YoY)
Operating profit: JPY26.0bn (+1.7% YoY)
Recurring profit: JPY26.0bn (+2.0% YoY)
Net income*: JPY16.0bn (+1.6% YoY)
DPS: JPY38.00 per share (versus JPY35.00 per share in FY03/21)
* Net income attributable to owners of the parent
The company projects a decline in revenue due to the tapering off of GIGA school projects, which were heavily concentrated in FY03/21, and the effective conclusion of large-scale mega-solar construction projects won previously. Despite the overall decline in revenue, the company projects continued revenue growth in the DX business (ICT investment in the working-style innovation field) and projects targeting telecom carriers.
Factors contributing to revenue decline: Disappearance of GIGA school projects (downward YoY impact of about JPY28.0bn) and mega-solar projects (downward impact of about JPY12.0bn)
Factors driving revenue increase: Upward JPY21.0bn impact mainly on revenue from DX business and projects targeting telecom carriers
Meanwhile, the company projects a YoY increase in FY03/22 profit (operating profit growth of JPY447mn, or 1.7%, YoY). This forecast partly rests on the company’s expectation of an improved revenue mix achieved through expansion of high-margin businesses in the working-style innovation field and those targeting telecom carriers. Additionally, the company plans to continue the efforts made in FY03/21 such as enhancing project and cost management. It also projects that the drop-off of unprofitable mega-solar projects will contribute to profit growth. The company forecasts that these factors will outweigh downward impact from a decline in revenue associated with GIGA school projects. As a result of the conditions above, it projects OPM of 8.1% in FY03/22, up 0.6pp from 7.5% in FY03/21.
Factors driving profit increase: Upward impact of JPY2.5bn mainly from the DX business and projects targeting telecom carriers, as well as the drop-off of unprofitable mega-solar projects (resulting in upward impact of approximately JPY1.0bn)
Factors contributing to profit decline: GIGA school projects tapering off (downward impact of about JPY3.0bn)
Shared Research has calculated operating profit in Q2 (three months) to be JPY5.8bn (+0.5% YoY) based on the company's revised 1H FY03/22 forecast. It is expected to slow down compared to the operating profit growth rate (192.7% YoY) in Q1. In Q2, the company plans to increase its investment for future growth (solution development and education and training) by JPY5.0—6.0bn YoY. It expects restrained operating profit growth due to the investment.
The company forecasts annual dividends of JPY38.00 per share (up from JPY35.00 per share in FY03/21). If this projection comes to pass, the company will have achieved YoY increases in dividends for 15 consecutive accounting periods. According to the company, these dividend increases are reflective of improved earning power. Specifically, the company cites ROE of 13.5% in FY03/21, which marked a 4.7pp improvement from its level of 8.8% in FY03/20. Until FY03/20, the company had based its decisions regarding dividend levels on a target DOE (ROE × dividend payout ratio) of 3.8%. In FY03/21, the company raised this target DOE to about 4.5%, reflecting the increase in earning power (ROE).
The company believes that this improvement in earning power is not a temporary condition stemming from GIGA school projects. Rather, it attributes this improvement to heightened internal resource efficiency achieved in part through organizational restructuring performed in FY03/20, the first year of the company’s current medium-term management plan. The company maintains that revenue growth is possible in FY03/22 despite the disappearance of GIGA school projects, indicating that it believes it can secure this growth by capturing demand related to DX and 5G. Aided by these conditions, the company aims to first steadily maintain its ROE (13.5% in FY03/21) at around 12–13%.
Segment forecasts
Digital Solutions
Orders: JPY120.0bn (-6.5% YoY)
Revenue: JPY116.0bn (-7.9% YoY)
Operating profit: JPY14.0bn (+1.7% YoY)
OPM: 12.1% (10.9% in FY03/21)
The company expects a YoY order drop-off of about JPY14.5bn in GIGA school projects, which were significant contributors to segment performance in FY03/21, but also forecasts an order boost from the recovery in ICT projects, driven mainly by continued growth in DX-related orders. It also expects residual impact from the deconsolidation of a second-tier subsidiary in Q2 FY03/21(downward impact of about JPY1.5bn) but expects this impact to be limited to Q1.
NESIC forecasts that segment operating profit in FY03/22 will increase by JPY237mn YoY. The drop-off of GIGA school projects is expected to weigh down companywide profit by JPY3.0bn. The company expects that about half of this downward impact (roughly JPY1.5bn) will be in the Digital Solutions segment. On the other hand, the company forecasts the emergence of nearly equivalent upward impact from the DX business.
Company forecast concerning DX-related orders
In FY03/22, the company aims to achieve JPY30.0bn in total DX-related orders (versus JPY13.0bn in FY03/21) companywide. In the Digital Solutions segment, the company also targets a double-fold increase in orders YoY.
Changes in ICT investment
Although non-essential and non-urgent investment fell off in FY03/21, the company projects that some of the demand will reemerge as DX-related investment beginning in FY03/22. As such, rather than pursuing conventional PBX replacement demand (hardware upgrades and voice-related system integration work), for example, the company will work to promote services that integrate cloud-based PBX systems (covered by the company’s own voice cloud service platform, Nets Voice). Alternatively, it plans to encourage customers to replace their existing platform with cloud-based PBX systems.
Network Infrastructure
Orders: JPY100.0bn (+4.9% YoY)
Revenue: JPY96.0bn (+7.6% YoY)
Operating profit: JPY10.0bn (+7.6% YoY)
OPM: 10.4% (same in FY03/21)
The company projects that seismometer installation projects (orders of JPY3.0bn in FY03/21) will not factor into orders in FY03/22 but forecasts that orders from telecom carriers will continue to increase, rising JPY8.0bn YoY.
Engineering & Support Services
Orders: JPY100.0bn (-3.6% YoY)
Revenue: JPY98.0bn (-14.1% YoY)
Operating profit: JPY12.0bn (+1.6% YoY)
OPM: 12.2% (10.4% in FY03/21)
The company projects that GIGA school projects (orders of JPY14.5bn in FY03/21) will not factor into orders in FY03/22 but also predicts that it will capture other public infrastructure projects in regional areas. It forecasts recovery in ICT investment associated with projects that were postponed due to the COVID-19 pandemic.
NESIC expects that revenue will be weighed down by the drop-off of both GIGA school projects (downward impact of JPY13.5bn) and mega-solar projects that generated JPY12.0bn in revenue in FY03/21.
Beyond Borders 2021 (medium-term management plan for FY03/20 to FY03/22)
As of end-FY03/21, roughly two years had passed since May 8, 2019, when the company announced “Beyond Borders 2021,” a three-year medium-term management plan ending in FY03/22. The company offered the following explanations regarding current progress associated with this medium-term management plan at a financial results briefing held on May 7, 2021.
Progress under the medium-term management plan
Early achievement of numerical targets
The company achieved the revenue and operating profit targets it set for FY03/22 (the final year of the plan) ahead of schedule in FY03/21. Accordingly, the company has replaced prior targets for the final year of its plan with its earnings forecast for FY03/22 (the previous targets can be found below).
Unexpected factors
When the company formulated its medium-term management plan, it did not account for the COVID-19-induced postponements to ICT investment, the resulting emergence of DX-related investment, or the earnings contributions from GIGA school projects. The company attributes its early achievement of numerical targets to upward impact from its successful acquisition of DX-related projects and GIGA school projects. It indicates that this upward impact offset hindrances associated with the COVID-19 pandemic.
NESIC also recognizes that its customer and business bases expanded further than initially expected. Through GIGA school projects, the company was able to add the education field to its service offerings targeting government and municipal offices, which have historically been a major customer base for the company.
With regard to the DX business (ICT services associated with working-style innovation), the company acquired orders for Zoom and other remote work products from small and medium-sized enterprises that were previously not included in the company’s customer base. The total number of customer companies in the DX category increased by 14,500 companies from about 1,200 companies at end-FY03/20, eventually reaching approximately 15,700 companies by end-FY03/21. The majority of the increase in DX customers comes from newly acquired customers, predominantly small and medium-sized companies that mainly purchase Zoom licenses, which are relatively small in value. However, the company intends to raise the customer spend moving forward through up-selling and cross-selling.
Progress toward qualitative goals
DX and 5G
The company has indicated that, under this medium-term management plan, it will focus on expanding the DX business and establish communication networks grounded in the fifth-generation mobile communication system (5G).
As mentioned above, the customer base targeted by the company’s DX business expanded more than initially expected. Meanwhile, in terms of value provided (services), the company is striving to expand services for new customers while maintaining focus on working-style innovation and urban development. The provision of web conferencing system Zoom has added many new customers (small and medium-sized enterprises) to the company’s client pool. Moving forward, the company plans to provide other cloud services (Wrike, Docusign, etc.) as well as multicloud services that integrate various cloud-based products for improved usability.
Enhancing business strength (initiatives to improve profitability)
In FY03/21, two years into the Beyond Borders 2021 medium-term management plan, overall gross profit margin improved from 17.2% in FY03/19 (a year before the start of the plan) to 18.9%. Operating profit margin rose from 4.6% to 7.5% over the same period, with the FY03/21 result surpassing the company’s target of 6.5% for the final year of its medium-term management plan.
The company attributed these profitability improvements to enhanced operational efficiency and cost control as well as efforts to add more value to its services.
To rein in costs and make operations more efficient, the company said it improved resource efficiency by taking full advantage of the benefits of organizational restructuring. It also pushed forward its working-style innovation initiatives (took measures to improve in-house productivity through the use of DX). According to the company, these efforts have led to better resource efficiency and improvements in project quality.
To add greater value to its services, the company developed and launched services through collaboration with customers, business partners, and other companies (startups). Through such services, NESIC was able to capture DX-related demand, which in turn expanded orders and improved profitability for the company. Additionally, NESIC is working to strengthen its consulting business, utilizing employees with hands-on (in-house) experience and expertise in working-style innovation that leads to operational improvement. It maintains that this business also contributes to higher-margin orders.
Reference: Previous numeric targets of the company’s medium-term management plan (as announced on May 8, 2019)
For the final year of the plan (FY03/22), the company targets revenue of JPY310.0bn (actual revenue of JPY303.6bn in FY03/20), operating profit of JPY20.0bn (JPY16.2bn), OPM of 6.5% (6.5%), and ROE of 10% or higher (8.7%). These targets represent all-time highs for revenue and profits.
The company plans to introduce several measures to raise profitability. In addition to reorganizing to benefit from greater resource consolidation, in Digital Solutions the company intends to promote the DX business with a concentration on cloud-based services (discussed later in this section). In addition, the company aims to shift from its current one-time revenue earnings model (under which results are linked to the number of engineers and working hours) to a recurring-revenue model (under which compensation for services is booked as revenue). The company thinks this move will increase one-time revenue still further.
In the Digital Solutions segment, recurring-revenue business accounted for 40% (approximately JPY40.0bn) of revenue in FY03/19, before the plan was introduced. By FY03/22, the company plans to raise this figure to 60% (JPY66.0bn), improving OPM.
Executive summary
Business overview
NESIC is an IT services company. The company configures, builds, operates, and maintains telecommunication networks and business ICT systems. The company is a subsidiary of NEC Corporation (TSE1: 6701), which effectively holds 51.48% of its voting rights (as of FY03/21). In FY03/21, NESIC generated revenue of JPY339.1bn, operating profit of JPY25.6bn, and had OPM of 7.5% (FY03/21).
The company’s business segments are Digital Solutions, Network Infrastructure, and Engineering & Support Services. One of the NEC group’s largest subsidiaries, in FY03/21, NESIC accounted for 11.3% of NEC’s consolidated revenue (average of 9% over the past decade) and 16.6% of operating profit (16%). One of Japan’s top-ten IT services companies by revenue, the company had more than 10,000 customers in FY03/20, including what the company classifies as “general companies” (essentially meaning private companies in various industrial sectors [e.g. manufacturing, services, financial]), telecom carriers, government and municipal offices, and “social infrastructure providers” (NESIC terminology for companies that provide public services [e.g. broadcasters, transportation services, electric utilities]). In FY03/21, the company captured demand associated with remote work and appears to have added about 10,000 new customers, primarily comprising small and medium-sized companies, through expanded sales of web conferencing systems.
In the Digital Solutions segment (FY03/21 revenue of JPY126.0bn [37.1% of the total], accounting for 38.6% of operating profit), the company provides business information and communication technology (ICT) solutions primarily to general companies. (In FY03/21, about 60% of revenue came from general companies, 20% from government and municipal offices [share boosted by GIGA school projects], and another 10% from telecom carriers.) One-time revenue business, in which the company books lump-sum revenue from system integration (SI) services, accounts for nearly 60% of Digital Solutions revenue. Most projects tend to be under JPY100mn. The core of this segment is EmpoweredOffice business, which the company launched in 2007. The EmpoweredOffice business combines ICT and office space design services. A pioneering initiative for “working-style reform” (a set of initiatives under former Prime Minister Abe), the business has gained traction as working in offices gives way to remote work and other means that offer flexibility in terms of work locations and hours. In 2017 (ahead of competitors), NESIC commenced domestic sales of Zoom service bundles. Amid the COVID-19 pandemic, this cloud-based online conferencing system saw widespread adoption in Japan. In autumn 2019, prior to the pandemic, the company made distributed work an in-house practice, establishing satellite offices and adopting various cloud services. This move helped NESIC seize the remote-work demand that surfaced with the pandemic and capture new customers, particularly for its Zoom service. Before developing the EmpoweredOffice business (FY03/07), general companies accounted for around one-third of companywide revenue. By FY03/21, that proportion had grown to about half. Shared Research understands NESIC’s business development efforts in this category contributed to the company’s growth.
In the Network Infrastructure segment (FY03/21 revenue of JPY89.2bn [26.3% of total], accounting for 30.1% of operating profit), the company builds ICT systems that undergird our society. Areas of business include fixed-line telephone networks (a social infrastructure alongside systems for providing electricity, water, and gas), mobile base stations and core networks for telecom carriers, television broadcasting networks, and wireless systems for firefighting and emergency communications. The main customers in this segment are carriers, government and municipal offices, and providers of other public services (such as broadcasters, railways, electric utilities, and water utilities). Most revenue in this segment is one-time revenue. NESIC says that providing social infrastructure requires substantial technological expertise, an area in which the company distinguishes itself from other IT services companies.
In the Engineering & Support Services segment (FY03/21 revenue of JPY114.1bn [33.6% of the total], accounting for 33.1% of operating profit), the company manages and provides technical support for the systems it builds. In this segment, the company also conducts business overseas, mainly in the construction sector. One-time revenue business (mostly construction) accounts for 60% of revenue. As a part of its (recurring-revenue) maintenance business, the company has a network of 400 24-hour support facilities across Japan. Although the company is categorized as an IT services company, in this segment, it engages in construction work. This characteristic differentiates NESIC from other IT services companies. The company has been expanding its network configuration business with non-NEC vendors thanks to its construction capabilities.
Earnings trends
In FY03/21, orders were JPY336.9bn (+10.5% YoY, 101.2% of forecast), revenue was JPY339.1bn (+11.7% YoY, 101.8% of forecast), operating profit was JPY25.6bn (+57.4% YoY, 116.2% of forecast), recurring profit was JPY25.5bn (+60.0% YoY, 115.9% of forecast), and net income attributable to owners of the parent was JPY15.7bn (+67.1% YoY, 116.6% of forecast). Each figure was a record high. The largest increase in revenue occurred in Engineering & Support Services (+17.1% YoY) and was driven primarily by GIGA school projects. At the same time, revenue also increased in Digital Solutions (+11.7% YoY) and Network Infrastructure (+7.4% YoY).
Operating profit was boosted primarily by the increase in revenue, initiatives aimed at expanding high value-added services, improved resource efficiency through interorganizational utilization of human resources, and heightened earning power attained mainly through thorough project management. Provisions for loss on orders received also declined. These factors outweighed downward impact on profit stemming from higher growth-related investments in new service development, personnel training, and other activities. The company raised its annual dividend by JPY6 per share compared to initial projections, deciding upon a figure of JPY35 per share. With this move, the company has achieved YoY dividend increases for 14 consecutive accounting periods.
For FY03/22, the company forecasts orders of JPY330.0bn (-2.0% YoY), revenue of JPY320.0bn (-5.6% YoY), operating profit of JPY26.0bn (+1.7% YoY), recurring profit of JPY26.0bn (+2.0% YoY), and net income attributable to owners of the parent of JPY16.0bn (+1.6% YoY). It projects a YoY decline in revenue due primarily to residual downward impact from the high concentration of GIGA school projects in FY03/21 and the effective completion of previously acquired large-scale mega-solar power plant construction projects. On the other hand, the company forecasts a YoY increase in profit. NESIC bases this forecast on its expectation of an improved revenue mix thanks to revenue growth in more profitable categories such as those associated with its working-style innovation initiatives and projects for telecom carriers. Additionally, the company plans to continue efforts launched in FY03/21 that are aimed at enhancing project and cost management. In FY03/22, the company projects an annual dividend of JPY38.00 per share. If this projection comes to pass, the company will have achieved YoY dividend increases for 15 consecutive accounting periods.
FY03/22 is the final year of “Beyond Borders 2021,” the company’s medium-term management plan, which took effect in FY03/20. Initially (when announced in May 2019), the plan targeted final-year revenue of JPY310.0bn, operating profit of JPY20.0bn, an OPM of 6.5%, and ROE of 10%. The company has made no changes to the qualitative targets of its plan, but has revised quantitative targets for FY03/22, aligning them with the earnings forecast for FY03/22.
In the first year of the medium-term management plan, the company reshuffled its business segments by technological focus rather than along customer lines. The company plans to reorganize its value chain and create solutions that combined network (5G) and digital technologies. In addition, NESIC focuses on the provision of cloud-based and other services, moving from an earnings model based on numbers of engineers and working hours to expand service-based recurring revenue. By improving the sales mix in this way, the company plans to boost profitability and pave the way to future SI businesses (creating a growth cycle). Specifically, the company aims to raise the revenue share from services (a recurring-revenue business) in Digital Solutions from 40% to 60%.
Strengths and weaknesses
NESIC’s strengths, according to Shared Research, are:
1) The ability to leverage the NEC group’s business platform (brands, customers, and technologies) in its own business,
2) An IT services company with technological and construction expertise in telecommunications, and
3) Expertise accumulated as the company deploys “working-style innovation” solutions in its own offices and then sells them to customers, creating a positive cycle
We perceive its weaknesses are:
1) Highly reliant on outsourcing for maintenance and other on-site services, which suppresses profitability,
2) A market latecomer with low recognition in platform-based cloud services (launched in 2019),
3) Aiming to expand its overseas business in the future, but has insufficient resources (personnel and expertise), hampering overseas expansion in business ICT solutions, a key to future growth (See the “Strengths and weaknesses” section for details.)
Key financial data
Notes: Figures may differ from company materials due to differences in rounding methods.
The company conducted a three-for-one stock split of common shares on June 1, 2020. In the table above, EPS and BPS are calculated as if the stock split had occurred at the beginning of FY03/11.
Notes: Figures may differ from company materials due to differences in rounding methods.
The company conducted a three-for-one stock split of common shares on June 1, 2020. In the table above, EPS and BPS are calculated as if the stock split had occurred at the beginning of FY03/11.
Notes: Figures may differ from company materials due to differences in rounding methods.
The company conducted a three-for-one stock split of common shares on June 1, 2020. In the table above, EPS and BPS are calculated as if the stock split had occurred at the beginning of FY03/11.
Notes: Figures may differ from company materials due to differences in rounding methods.
The company conducted a three-for-one stock split of common shares on June 1, 2020. In the table above, EPS and BPS are calculated as if the stock split had occurred at the beginning of FY03/11.
Recent updates
1H FY03/21 flash update
NEC Networks & System Integration Corporation announced earnings results for 1H FY03/22; see the results section for details.
Trends and outlook
Quarterly trends and results
Note: Figures may differ from company materials due to differences in rounding methods.
Note: Figures may differ from company materials due to differences in rounding methods.
1H FY03/22 results (out October 29, 2021)
Overview
* Net income attributable to owners of the parent
The company announced that it is leaving its FY03/22 earnings forecast (out April 27, 2021) unchanged. However, it revised its orders, revenue, and operating profit projections for individual segments (details follow).
Key takeaways
Orders declined 6.7% YoY, coming in at 100.6% of the company’s 1H FY03/22 target. Orders dipped mainly on the absence of large-scale orders such as those received in FY03/21 (GIGA school project orders of about JPY27.0bn) and a reduction in orders of about JPY1.5bn from Q2 FY03/21 on the non-consolidation of a subsidiary.
On the other hand, orders were bolstered by about JPY16.5bn on strength in the DX (working-style innovation) and telecom carrier infrastructure businesses.
Revenue declined 6.8% YoY, coming in at 95.9% of the company’s 1H FY03/22 target. Revenue was helped in part by a boost of about JPY4.0bn from the DX (working-style innovation) and telecom carrier infrastructure businesses, although the absence of GIGA school project orders had a negative impact of about JPY6.0bn, revenue from mega-solar projects decreased about JPY6.5bn, and removal of a subsidiary from the scope of consolidation adversely impacted revenue by about JPY1.5bn.
Operating profit rose 13.2% YoY, reaching 87.6% of the company’s 1H target. The company’s OPM reached 5.4%, up 0.9pp from 4.5% in 1H FY03/21. Operating profit rose YoY, since a better revenue mix and improved efficiency made it possible to absorb an increase in SG&A expenses.
Achievement rates versus the company’s full-year forecasts (and performance in 1H FY03/21 versus full-year results) are as follows.
Orders: 49.8% (52.8% in 1H FY03/21); revenue: 44.1% (44.6%); operating profit: 29.3% (26.3%); recurring profit: 30.3% (26.6%); net income attributable to owners of the parent: 29.4% (25.2%)
Performance by segment
Digital Solutions
Revenue was JPY52.4bn (-7.6% YoY). In connection with the mainstay working-style innovation field using DX technologies, there was expansion in ICT services. On the other hand, revenue was negatively affected by removal of a group company (that was included in consolidated results through Q1 FY03/21) from the scope of consolidation and by the delayed posting of revenue due to the shift to a service provision model.
Operating profit was JPY5.6bn (+5.4% YoY), with OPM improving to 10.6% (+1.3pp YoY). Profitability in the business improved as a result of progress in shifting the business model.
Network Infrastructure
Revenue was JPY42.8bn (+12.3% YoY). There was expansion in both businesses for telecom carriers and for social and public infrastructure projects.
Operating profit was JPY2.8bn (+26.3% YoY), and OPM was 6.5% (+0.7pp YoY). The positive impact from revenue growth and an improved revenue mix served to bolster operating profit YoY.
Engineering & Support Services
Revenue was JPY42.3bn (-17.9% YoY). Revenue from mega-solar projects and GIGA school project work declined and there was a negative impact from semiconductor shortages.
Operating profit was JPY3.4bn (-0.8% YoY), and OPM was 8.1% (+1.4pp YoY). Although the decline in revenue had a negative impact, the absence of the impact of unprofitable mega-solar projects left operating profit essentially flat YoY.
For details on previous quarterly and annual results, please refer to the “Historical financial statements” section.
FY03/22 full-year company forecast (out April 27, 2021; 1H forecast revised July 29, 2021)
Note: Figures may differ from company materials due to differences in rounding methods. Shared Research has calculated 2H forecasts by subtracting 1H forecasts from corresponding full-year forecasts.
Note: Figures may differ from company materials due to differences in rounding methods.
Note: 2H forecasts are calculated by Shared Research by subtracting the company’s 1H forecast from its full-year forecast.
The company announced that it is leaving its FY03/22 earnings forecast (announced on April 27, 2021) unchanged. However, it revised its orders, revenue, and operating profit projections for individual segments.
Digital Solutions
Network Infrastructure
Engineering & Support Services
The following content is as of August 19, 2021. Shared Research plans to update this content following interviews with the company.
Overview of the company’s full-year FY03/22 forecast
* Net income attributable to owners of the parent
The company projects a decline in revenue due to the tapering off of GIGA school projects, which were heavily concentrated in FY03/21, and the effective conclusion of large-scale mega-solar construction projects won previously. Despite the overall decline in revenue, the company projects continued revenue growth in the DX business (ICT investment in the working-style innovation field) and projects targeting telecom carriers.
Factors contributing to revenue decline: Disappearance of GIGA school projects (downward YoY impact of about JPY28.0bn) and mega-solar projects (downward impact of about JPY12.0bn)
Factors driving revenue increase: Upward JPY21.0bn impact mainly on revenue from DX business and projects targeting telecom carriers
Meanwhile, the company projects a YoY increase in FY03/22 profit (operating profit growth of JPY447mn, or 1.7%, YoY). This forecast partly rests on the company’s expectation of an improved revenue mix achieved through expansion of high-margin businesses in the working-style innovation field and those targeting telecom carriers. Additionally, the company plans to continue the efforts made in FY03/21 such as enhancing project and cost management. It also projects that the drop-off of unprofitable mega-solar projects will contribute to profit growth. The company forecasts that these factors will outweigh downward impact from a decline in revenue associated with GIGA school projects. As a result of the conditions above, it projects OPM of 8.1% in FY03/22, up 0.6pp from 7.5% in FY03/21.
Factors driving profit increase: Upward impact of JPY2.5bn mainly from the DX business and projects targeting telecom carriers, as well as the drop-off of unprofitable mega-solar projects (resulting in upward impact of approximately JPY1.0bn)
Factors contributing to profit decline: GIGA school projects tapering off (downward impact of about JPY3.0bn)
Shared Research has calculated operating profit in Q2 (three months) to be JPY5.8bn (+0.5% YoY) based on the company's revised 1H FY03/22 forecast. It is expected to slow down compared to the operating profit growth rate (192.7% YoY) in Q1. In Q2, the company plans to increase its investment for future growth (solution development and education and training) by JPY5.0—6.0bn YoY. It expects restrained operating profit growth due to the investment.
The company forecasts annual dividends of JPY38.00 per share (up from JPY35.00 per share in FY03/21). If this projection comes to pass, the company will have achieved YoY increases in dividends for 15 consecutive accounting periods. According to the company, these dividend increases are reflective of improved earning power. Specifically, the company cites ROE of 13.5% in FY03/21, which marked a 4.7pp improvement from its level of 8.8% in FY03/20. Until FY03/20, the company had based its decisions regarding dividend levels on a target DOE (ROE × dividend payout ratio) of 3.8%. In FY03/21, the company raised this target DOE to about 4.5%, reflecting the increase in earning power (ROE).
The company believes that this improvement in earning power is not a temporary condition stemming from GIGA school projects. Rather, it attributes this improvement to heightened internal resource efficiency achieved in part through organizational restructuring performed in FY03/20, the first year of the company’s current medium-term management plan. The company maintains that revenue growth is possible in FY03/22 despite the disappearance of GIGA school projects, indicating that it believes it can secure this growth by capturing demand related to DX and 5G. Aided by these conditions, the company aims to first steadily maintain its ROE (13.5% in FY03/21) at around 12–13%.
Segment forecasts
Digital Solutions
The company expects a YoY order drop-off of about JPY14.5bn in GIGA school projects, which were significant contributors to segment performance in FY03/21, but also forecasts an order boost from the recovery in ICT projects, driven mainly by continued growth in DX-related orders. It also expects residual impact from the deconsolidation of a second-tier subsidiary in Q2 FY03/21(downward impact of about JPY1.5bn) but expects this impact to be limited to Q1.
NESIC forecasts that segment operating profit in FY03/22 will increase by JPY237mn YoY. The drop-off of GIGA school projects is expected to weigh down companywide profit by JPY3.0bn. The company expects that about half of this downward impact (roughly JPY1.5bn) will be in the Digital Solutions segment. On the other hand, the company forecasts the emergence of nearly equivalent upward impact from the DX business.
Company forecast concerning DX-related orders
In FY03/22, the company aims to achieve JPY30.0bn in total DX-related orders (versus JPY13.0bn in FY03/21) companywide. In the Digital Solutions segment, the company also targets a double-fold increase in orders YoY.
Changes in ICT investment
Although non-essential and non-urgent investment fell off in FY03/21, the company projects that some of the demand will reemerge as DX-related investment beginning in FY03/22. As such, rather than pursuing conventional PBX replacement demand (hardware upgrades and voice-related system integration work), for example, the company will work to promote services that integrate cloud-based PBX systems (covered by the company’s own voice cloud service platform, Nets Voice). Alternatively, it plans to encourage customers to replace their existing platform with cloud-based PBX systems.
Network Infrastructure
The company projects that seismometer installation projects (orders of JPY3.0bn in FY03/21) will not factor into orders in FY03/22 but forecasts that orders from telecom carriers will continue to increase, rising JPY8.0bn YoY.
Engineering & Support Services
The company projects that GIGA school projects (orders of JPY14.5bn in FY03/21) will not factor into orders in FY03/22 but also predicts that it will capture other public infrastructure projects in regional areas. It forecasts recovery in ICT investment associated with projects that were postponed due to the COVID-19 pandemic.
NESIC expects that revenue will be weighed down by the drop-off of both GIGA school projects (downward impact of JPY13.5bn) and mega-solar projects that generated JPY12.0bn in revenue in FY03/21.
Beyond Borders 2021 (medium-term management plan for FY03/20 to FY03/22)
As of end-FY03/21, roughly two years had passed since May 8, 2019, when the company announced “Beyond Borders 2021,” a three-year medium-term management plan ending in FY03/22. The company offered the following explanations regarding current progress associated with this medium-term management plan at a financial results briefing held on May 7, 2021.
Progress under the medium-term management plan
Early achievement of numerical targets
The company achieved the revenue and operating profit targets it set for FY03/22 (the final year of the plan) ahead of schedule in FY03/21. Accordingly, the company has replaced prior targets for the final year of its plan with its earnings forecast for FY03/22 (the previous targets can be found below).
Unexpected factors
When the company formulated its medium-term management plan, it did not account for the COVID-19-induced postponements to ICT investment, the resulting emergence of DX-related investment, or the earnings contributions from GIGA school projects. The company attributes its early achievement of numerical targets to upward impact from its successful acquisition of DX-related projects and GIGA school projects. It indicates that this upward impact offset hindrances associated with the COVID-19 pandemic.
NESIC also recognizes that its customer and business bases expanded further than initially expected. Through GIGA school projects, the company was able to add the education field to its service offerings targeting government and municipal offices, which have historically been a major customer base for the company.
With regard to the DX business (ICT services associated with working-style innovation), the company acquired orders for Zoom and other remote work products from small and medium-sized enterprises that were previously not included in the company’s customer base. The total number of customer companies in the DX category increased by 14,500 companies from about 1,200 companies at end-FY03/20, eventually reaching approximately 15,700 companies by end-FY03/21. The majority of the increase in DX customers comes from newly acquired customers, predominantly small and medium-sized companies that mainly purchase Zoom licenses, which are relatively small in value. However, the company intends to raise the customer spend moving forward through up-selling and cross-selling.
Progress toward qualitative goals
DX and 5G
The company has indicated that, under this medium-term management plan, it will focus on expanding the DX business and establish communication networks grounded in the fifth-generation mobile communication system (5G).
As mentioned above, the customer base targeted by the company’s DX business expanded more than initially expected. Meanwhile, in terms of value provided (services), the company is striving to expand services for new customers while maintaining focus on working-style innovation and urban development. The provision of web conferencing system Zoom has added many new customers (small and medium-sized enterprises) to the company’s client pool. Moving forward, the company plans to provide other cloud services (Wrike, Docusign, etc.) as well as multicloud services that integrate various cloud-based products for improved usability.
Enhancing business strength (initiatives to improve profitability)
In FY03/21, two years into the Beyond Borders 2021 medium-term management plan, overall gross profit margin improved from 17.2% in FY03/19 (a year before the start of the plan) to 18.9%. Operating profit margin rose from 4.6% to 7.5% over the same period, with the FY03/21 result surpassing the company’s target of 6.5% for the final year of its medium-term management plan.
The company attributed these profitability improvements to enhanced operational efficiency and cost control as well as efforts to add more value to its services.
To rein in costs and make operations more efficient, the company said it improved resource efficiency by taking full advantage of the benefits of organizational restructuring. It also pushed forward its working-style innovation initiatives (took measures to improve in-house productivity through the use of DX). According to the company, these efforts have led to better resource efficiency and improvements in project quality.
To add greater value to its services, the company developed and launched services through collaboration with customers, business partners, and other companies (startups). Through such services, NESIC was able to capture DX-related demand, which in turn expanded orders and improved profitability for the company. Additionally, NESIC is working to strengthen its consulting business, utilizing employees with hands-on (in-house) experience and expertise in working-style innovation that leads to operational improvement. It maintains that this business also contributes to higher-margin orders.
Reference: Previous numeric targets of the company’s medium-term management plan (as announced on May 8, 2019)
For the final year of the plan (FY03/22), the company targets revenue of JPY310.0bn (actual revenue of JPY303.6bn in FY03/20), operating profit of JPY20.0bn (JPY16.2bn), OPM of 6.5% (6.5%), and ROE of 10% or higher (8.7%). These targets represent all-time highs for revenue and profits.
The company plans to introduce several measures to raise profitability. In addition to reorganizing to benefit from greater resource consolidation, in Digital Solutions the company intends to promote the DX business with a concentration on cloud-based services (discussed later in this section). In addition, the company aims to shift from its current one-time revenue earnings model (under which results are linked to the number of engineers and working hours) to a recurring-revenue model (under which compensation for services is booked as revenue). The company thinks this move will increase one-time revenue still further.
In the Digital Solutions segment, recurring-revenue business accounted for 40% (approximately JPY40.0bn) of revenue in FY03/19, before the plan was introduced. By FY03/22, the company plans to raise this figure to 60% (JPY66.0bn), improving OPM.