Net One Systems 7518
ネットワンシステムズ
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Summary
Net One Systems (“Net One”) provides major private corporations, public institutions (municipalities, universities, hospitals, etc.), telecommunication companies, and other customers with information and communication technology (ICT) network infrastructure, cloud infrastructure for data centers, and cyber security systems. Specifically, it undertakes end-to-end services spanning each infrastructure design through device and software procurement, construction, maintenance, and operation. Net One was established in 1988 to specialize in network construction, so has cutting-edge network technology. Its strengths are system design and integration using products of major global manufacturers. The company has a long track record in the domestic market as a distributor for Cisco Systems (US company, NASDAQ: CSCO; Japanese subsidiary is Cisco Systems G.K.), the world’s largest telecom equipment manufacturer. It is also a top domestic distributor for global IT companies such as VMware, Inc. (US company, NYSE: VMW; Japanese subsidiary is VMware K.K.), a supplier of cloud infrastructure software, and Palo Alto Networks, Inc. (US company, NYSE: PANW, Japanese subsidiary is Palo Alto Networks K.K.), a supplier of next-generation firewalls and other cybersecurity solutions. Net One’s principal competitors are major equipment manufacturers and other systems integrators.
Starting in FY03/19, the company has redefined itself as an operator of an “integrated service” business. In ICT infrastructure, one of the company’s business areas, technology is becoming increasingly sophisticated and complex with the development of high value-added fields such as multi-cloud, security, and IoT. The company proactively supports its customers in all phases of planning, introduction, operation, and optimization of ICT infrastructure. In particular, it plans to focus on customer success and strengthening customer relationships by providing consulting services and proposals aimed at optimizing the client company’s IT system from the standpoint of systems operations.
Internet Software & ServicesIT Services
Key dates
2017-04-26
Coverage initiation
Executive summary
Core businesses
Net One Systems (“Net One”) provides major private corporations, public institutions (municipalities, social infrastructure companies such as electric power and gas utilities, universities, and hospitals), telecommunication companies, and other customers with information and communication technology (ICT) network infrastructure, cloud infrastructure for data centers, and cybersecurity systems. Specifically, it undertakes end-to-end services spanning each infrastructure design through device and software procurement, construction, maintenance, and operation. Net One was established as a multivendor (independent of specific manufacturer groups) company specializing in network construction, and is today the largest company of its kind in Japan. It guarantees network performance, reliability, and safety by running facilities such as the quality control center, technical center, expert operation center (XOC), and security operation center (SOC). Founded in 1988, the company posted sales of JPY202.1bn (+8.5% YoY), operating profit of JPY19.7bn (+19.2% YoY), and OPM of 9.7% (+0.8pp YoY) in FY03/21.
The company has cutting-edge network technology. Its strengths are system design and integration using products of major global manufacturers. The company has an outstanding track record of over 30 years in the domestic market as a distributor for Cisco Systems, Inc. (US company, NASDAQ: CSCO; Japanese subsidiary is Cisco Systems G.K.), the world’s largest telecom equipment manufacturer. It is also a top domestic distributor for global IT companies such as VMware, Inc. (US company, NYSE: VMW; Japanese subsidiary is VMware K.K.), a supplier of cloud infrastructure software, and Palo Alto Networks, Inc. (US company, NYSE: PANW, Japanese subsidiary is Palo Alto Networks K.K.), a supplier of next-generation firewalls and other cybersecurity solutions. Net One’s principal competitors are major equipment manufacturers and other systems integrators.
Starting in FY03/19, the company has redefined itself as an operator of integrated services business. In ICT infrastructure, one of the company’s business areas, technology is becoming increasingly sophisticated and complex with the development of high value-added fields such as multi-cloud, security, and IoT amid advances in digitalization. The COVID-19 pandemic also had the effect of accelerating digitalization.The company proactively supports its customers in all phases of planning, introduction, operation, and optimization of ICT infrastructure.In particular, it plans to focus on customer success and strengthening customer relationships by providing consulting services and proposals aimed at optimizing the client company’s IT system from the standpoint of systems operations.
Net One has the largest verification center in Japan, where it carries out system testing and verification. The netone Briefing Center allows customers to explore solutions to digitalization-related network problems with the company by experiencing them in system demonstrations, while Lab as a Service offers opportunities to test and verify the performance and operability of new ICT infrastructure designed for digitalization efforts in a virtual environment. Harnessing its expertise in utilizing IT acquired and verified over many years, the company can present solutions for digitalization initiatives effectively in an easily understood way. It provides solutions for customers’ operation and future expansion after installing new ICT networks with return on investment in mind.
The company’s four segments reflect the markets its customers belong to: Enterprise, Telecom Carrier, Public, and Partner (operated by consolidated subsidiary Net One Partners). FY03/21 sales (and operating profit) broke down by segment into Enterprise 27.0% (25.9%), Telecom Carrier 18.1% (18.7%), Public 34.5% (42.0%), and Partner 19.7% (17.8%).
Telecom companies who had previously been major customers are scaling back investments from the peak in FY03/12, having completed network infrastructure upgrades. As new growth areas, the company has been shifting to security and cloud infrastructure businesses and corporate business support, which have been seeing accelerating demand. The share of sales to customers other than telecom companies grew from about 46% in FY03/12 to more than 80% in FY03/21.
Trends and outlook
FY03/22 full-year results: In FY03/22, orders were JPY231.8bn (+13.9% YoY), sales were JPY188.5bn (-6.7% YoY), the order backlog (at end-FY03/22) was JPY139.2bn (+46.6% YoY), operating profit was JPY16.8bn (-14.7% YoY), recurring profit was JPY16.8bn (-7.6% YoY), and net income attributable to owners of the parent was JPY11.2bn (-8.9% YoY).
Sales were down 14.6% YoY in the Enterprise segment, up 17.6% YoY in the Telecom Carrier segment, down 18.4% YoY in the Public segment, and up 1.2% YoY in the Partner segment. Equipment sales were down 10.5% YoY due to delays in recording sales in all markets caused by late equipment deliveries. According to the company, equipment sales carried over to JPY03/23 amounted to JPY12.0bn. Sales from services fell 1.6% YoY, owing to delays in the recording of sales related to system integration services, which are booked together with equipment sales. Services made up 44.5% of total sales, up from 42.2% in FY03/21.
Profit margins were up YoY in the Partner and Telecom Carrier segments, but down in the Enterprise and Public segments. Gross profit margin fell 0.2pp YoY to 27.5%. SG&A ratio was up 0.7pp YoY to 18.6%, and the operating profit margin fell 0.8pp YoY to 8.9%.
FY03/23 full-year forecast: The company forecast for FY03/22 calls for orders of JPY215.0bn (-7.3% YoY), sales of JPY210.0bn (+11.4% YoY), operating profit of JPY22.0bn (+31.0% YoY), recurring profit of JPY21.0bn (+24.8% YoY), net income attributable to owners of the parent of JPY14.0bn (+24.7% YoY), and annual dividend of JPY74 per share (JPY72 per share in FY03/22).
The company will seek to achieve an operating profit margin of 10.5% by advancing growth strategies and reinforcing the business foundation in line with its new medium-term management plan spanning FY03/23 through FY03/25. To this end, it plans to increase sales while improving the gross profit margin and SG&A ratio.
New medium-term business plan (FY03/23––FY03/25): On April 28, 2022, Net One unveiled a new medium-term business plan spanning FY03/23 through FY03/25, at the time it announced the earnings results for FY03/22. Under the new plan, the company seeks to enhance corporate value by further improving its profitability and efficiency. To do so, it will expand the business domains where it can provide value while shifting its approach to solving social issues.
For the final year of the plan (FY03/25), the company targets sales of JPY226.0bn (versus JPY188.5bn in FY03/22), operating profit margin of 12.0% (8.9%), share of services at 55.0% (44.5%), and ROE of 20.0% (15.8%).
Strengths and weaknesses
Shared Research believes Net One’s strengths to be its cloud infrastructure design and building techniques accumulated as the largest network integration specialist in Japan, its strong relationships with Cisco Systems, VMware, and other major global vendors, owning the largest ICT infrastructure research and verification center in Japan, and its expertise in ICT accumulated by utilizing ICT tools in-house before providing them to customers. Shared Research believes it can utilize similar strengths in the IoT and DX* fields where the company anticipates market growth in the future (*DX is industry shorthand for digital transformation). Weaknesses include difficulty overcoming entry barriers established by competitors with ties to large corporate groups, a smaller scale than rival companies, and damage to its brand caused by fraud incidents (see the Strengths and weaknesses section for details).
Key financial data
Note: Figures may differ from company materials due to differences in rounding methods.
Note: The company executed a 200-for-1 share split effective April 1, 2012. Figures for EPS , book value per share, and dividend per share are calculated as if split occurred at end-FY03/11.
Note: The company announced revisions to prior-year results at the time of the Q2 FY03/21 results announcement. The above table reflects these revisions.
Note: Segmentation was changed in FY03/09, FY03/11, and FY03/15. In FY03/13, FY03/15, and FY03/17, the segment expense allocation method was also changed. YoY figures are retroactively adjusted to reflect these changes, so there are no continuity correction factors.
Note: Figures may differ from company materials due to differences in rounding methods.
Note: The company announced revisions to prior-year results at the time of the Q2 FY03/21 results announcement. The above table reflects these revisions.
Recent updates
Reorganization of the Advisory Committee
On April 28, 2022, Net One Systems Co., Ltd. resolved to reorganize its Advisory Committee, a voluntary advisory body to the Board of Directors, by separating its functions into the Nomination Advisory Committee and the Compensation Advisory Committee.
Purpose of the reorganization
Net One established the Advisory Committee as a voluntary advisory body to the Board of Directors on matters concerning the selection, dismissal, and compensation of directors and executive officers. At this time, the company decided to separate its functions into the Nomination Advisory Committee (deliberating on matters concerning the nomination of directors and executive officers) and the Compensation Advisory Committee (deliberating on matters concerning their compensation). The reorganization is aimed at clarifying the objectives of each task based on the varying role required of each committee, and encouraging more in-depth discussions.
Date of reorganization
The company plans to implement reorganization following the Board of Directors meeting scheduled to be held after the general meeting of shareholders on June 22, 2022. At the board meeting, the members of each advisory committee will be selected from the company's directors, and the selected directors will choose the chairperson of each committee through mutual election.
Revisions to full-year earnings forecast
On April 15, 2022, Net One Systems Co., Ltd. announced revisions to its full-year consolidated earnings forecast for FY03/22.
Revisions to full-year earnings forecast
Reasons for revisions
In FY03/22, the company expects orders to reach a record high of approximately JPY231.0bn (previous forecast: JPY217.0bn; actual result in FY03/21: JPY203.5bn) thanks to steady growth mainly in the Telecom Carrier, Public, and Partner segments. Meanwhile, amounts of time required for equipment delivery have lengthened due to semiconductor shortages, and the company expects to book sales for several projects (approximately JPY12.0bn) in FY03/23 instead of in FY03/22, as initially expected. As a result, the company anticipates sales, operating profit, recurring profit, and net income attributable to owners of parent to fall below their previously projected levels.
The company plans to pay a year-end dividend of JPY36 per share, as initially projected.
Cancellation of treasury shares
On March 14, 2022, Net One Systems Co., Ltd. announced the cancellation of treasury shares.
Trends and outlook
Quarterly trends and results
Note: Figures may differ from company materials due to differences in rounding methods.
Note: The company announced revisions to prior-year results at the time of the Q2 FY03/21 results announcement. All of these revisions have been reflected in the table above.
Note: Figures may differ from company materials due to differences in rounding methods.
Note: The company announced revisions to prior-year results at the time of the Q2 FY03/21 results announcement. All of these revisions have been reflected in the table above.
Note: Figures may differ from company materials due to differences in rounding methods.
Note: The company announced revisions to prior-year results at the time of the Q2 FY03/21 results announcement. All of these revisions have been reflected in the table above.
Full-year FY03/22 results (out April 28, 2022)
In FY03/22, orders were JPY231.8bn (+13.9% YoY), sales were JPY188.5bn (-6.7% YoY), the order backlog (at end-FY03/22) was JPY139.2bn (+46.6% YoY), operating profit was JPY16.8bn (-14.7% YoY), recurring profit was JPY16.8bn (-7.6% YoY), and net income attributable to owners of the parent was JPY11.2bn (-8.9% YoY).
The achievement rate versus the full-year FY03/22 company forecast (revised downward on April 15, 2022)* came to 100.3% for sales, 104.9% for operating profit, 105.2% for recurring profit, and 106.9% for net income attributable to owners of the parent. Sales and all profit items finished above the revised projections.
Orders up 13.9% YoY: Orders were down 7.1% YoY in the Enterprise segment, up 20.6% YoY in the Telecom Carrier segment, up 13.2% YoY in the Public segment, and up 43.7% YoY in the Partner segment. In the Enterprise segment, orders from the manufacturing industry declined due to companies holding back on capital investment amid an uncertain outlook associated with the semiconductor shortage. In the Telecom Carrier segment, some clients placed orders ahead of schedule in anticipation of equipment deliveries taking a long time due to the semiconductor shortage, as they work to enhance network in response to a surge in data traffic resulting from increased teleworking. In the Public segment, orders for local government information security cloud and security enhancement projects were brisk. Orders increased in the Partner segment, because the business of partner companies impacted by the COVID-19 pandemic began to recover overall.
By product category, equipment orders grew 12.1% YoY because of orders of network products placed ahead of schedule in the Telecom Carrier segment as well as orders for 5G-related projects in the Partner segment. Orders for services rose 16.3% YoY, driven by the progress of the integrated services business. The share of services in orders rose from 43.9% in FY03/21 to 44.8%.
Order backlog up 46.6% YoY: The order backlog was up 94.6% YoY for equipment and up 29.8% YoY for services, lowering the share of services in the order backlog from 74.0% at end-FY03/21 to 65.6%. The time required to deliver equipment has lengthened for all markets, causing delays in recording corresponding sales. As a result, order backlog increased significantly.
Sales down 6.7% YoY: Sales were down 14.6% YoY in the Enterprise segment, up 17.6% YoY in the Telecom Carrier segment, down 18.4% YoY in the Public segment, and up 1.2% YoY in the Partner segment. Equipment sales were down 10.5% YoY due to delays in recording sales in all markets caused by late equipment deliveries. According to the company, equipment sales carried over to JPY03/23 amounted to JPY12.0bn. Sales from services fell 1.6% YoY owing to delays in the recording of sales related to system integration services, which are booked together with equipment sales. Services made up 44.5% of total sales, up from 42.2% in FY03/21.
Operating profit down 14.7% YoY: Profit margins were up YoY in the Partner and Telecom Carrier segments, but down in the Enterprise and Public segments. Gross profit margin fell 0.2pp YoY to 27.5%. SG&A ratio was up 0.7pp YoY to 18.6%, and the operating profit margin fell 0.8pp YoY to 8.9%.
Orders, sales, and order backlog by segment
Note: Figures may differ from company materials due to differences in rounding methods.
Overviews by segment
Enterprise
In the Enterprise segment, orders were JPY53.2bn (-7.1% YoY), while sales came to JPY46.6bn (-14.6% YoY) and operating profit JPY3.8bn (-25.3% YoY).
In this segment, orders from the manufacturing industry declined due to companies holding back on capital investment amid an uncertain outlook associated with the semiconductor shortage. In the financial services industry, orders and sales fell in Q2 FY03/22, which was a trough in the investment cycle. However, orders from the manufacturing and financial services industries recovered in Q4. The booking of sales was delayed due to extended delivery times for equipment.
The order backlog rose 23.2% YoY to JPY36.0bn. The segment operating profit margin was 8.2%, down 1.1pp from 9.3% in FY03/21.
Telecom Carrier
In the Telecom Carrier segment, orders were JPY47.6bn (+20.6% YoY), and sales amounted to JPY42.9bn (+17.6% YoY) and operating profit JPY4.5bn (+21.5% YoY).
Some clients continued to place orders ahead of schedule in anticipation of delayed delivery of equipment as they strove to achieve network enhancement in response to a surge in data traffic resulting from increased teleworking. The managed service provider (MSP) and corporate business support services continued to perform strongly. At the same time, the timing of booking sales was delayed due to extended delivery times for equipment.
The order backlog was up 30.8% YoY to JPY22.9bn. The segment operating profit margin was 10.4%, up 0.3pp from 10.1% in FY03/21.
Public
In the Public segment, orders were JPY80.6bn (+13.2% YoY), while sales amounted to JPY57.0bn (-18.4% YoY) and operating profit JPY5.5bn (-33.6% YoY).
Orders for local government information security cloud and security enhancement projects were strong, compensating for the dropout of orders associated with GIGA School Concept projects a year ago. However, the timing of booking sales was delayed due primarily to extended delivery times for equipment.
The order backlog grew 59.8% YoY to JPY63.5bn. The segment operating profit margin was 9.6%, down 2.2pp from 11.8% in FY03/21.
Partner
In the Partner segment, orders were JPY48.7bn (+43.7% YoY), while sales amounted to JPY40.2bn (+1.2% YoY) and operating profit JPY3.7bn (+5.7% YoY).
The business of partner companies impacted by the COVID-19 pandemic in FY03/21 began to recover overall. The company also won a 5G-related project worth approximately JPY3bn in Q1 FY03/22, and the MSP support business was brisk. However, the timing of booking sales was delayed due to extended delivery times for equipment.
The order backlog was up 101.9% YoY to JPY16.8bn. The segment operating profit margin was 9.2%, up 0.4pp from 8.8% in FY03/21.
Company forecast for FY03/23
Note: Figures may differ from company materials due to differences in rounding methods.
Overview
Company forecast for FY03/23
The company forecast for FY03/22 calls for orders of JPY215.0bn (-7.3% YoY), sales of JPY210.0bn (+11.4% YoY), operating profit of JPY22.0bn (+31.0% YoY), recurring profit of JPY21.0bn (+24.8% YoY), net income attributable to owners of the parent of JPY14.0bn (+24.7% YoY), and annual dividend of JPY74 per share (JPY72 per share in FY03/22).
The company will seek to achieve an operating profit margin of 10.5% by advancing growth strategies and reinforcing the business foundation in line with its new medium-term management plan spanning FY03/23 through FY03/25. To this end, it plans to increase sales while improving the gross profit margin and SG&A ratio.
Breakdown by business (market)*
Enterprise market
The company projects orders of JPY54.0bn (+15.1% YoY) and sales of JPY51.0bn (+23.5% YoY).
In the manufacturing industry, Net One expects smart manufacturing to drive recovery. Among the non-manufacturing industries, the company plans to achieve growth by focusing on industries where digitalization is expanding. In the financial services industry, it expects business to remain largely flat YoY with a mixed outlook of investment into digitalization by some clients and cost curtailment by others.
Telecom Carrier market
The company forecasts orders of JPY52.0bn (-3.5% YoY) and sales of JPY50.0bn (+3.7% YoY).
Net One will focus on supporting telecom carriers through its corporate and MSP support businesses that cater to the needs among private companies and public institutions to digitalize and strengthen security. It expects orders to decline YoY, as some clients placed orders for network enhancement ahead of schedule in FY03/22.
Public market
The company projects orders of JPY63.0bn (-21.9% YoY) and sales of JPY64.0bn (+12.4% YoY).
The company will continue to focus on winning orders for local government information security cloud and security enhancement projects. It plans to focus on orders for high-margin projects and forego projects that center on equipment. It expects orders to fall YoY on the account of two large projects (worth JPY8.0bn in total) placed ahead of schedule in Q4 FY03/22.
Partner business
The company forecasts orders of JPY44.0bn (-9.6% YoY) and sales of JPY43.0bn (+7.0% YoY).
The company will continue bolstering collaboration with partner companies. It expects orders to decline YoY, as orders for some 5G projects (worth JPY3.0bn) and MSP support services were placed ahead of schedule in FY03/22.
New medium-term business plan
Overview
On April 28, 2022, Net One unveiled a new medium-term business plan spanning FY03/23 through FY03/25, at the time it announced the earnings results for FY03/22. Under the new plan, the company seeks to enhance corporate value by further improving its profitability and efficiency. To do so, it will expand the business domains where it can provide value while shifting its approach to solving social issues.
For the final year of the plan (FY03/25), the company targets sales of JPY226.0bn (versus JPY188.5bn in FY03/22), operating profit margin of 12.0% (8.9%), share of services at 55.0% (44.5%), and ROE of 20.0% (15.8%).
Basic policy
Reinforcement of business foundation
Build a solid business foundation based on the three pillars of corporate culture reforms, thorough visualization, and maximization of human asset value
Growth strategy
Expand business domains by entering into fields that present significant room for resolving social issued through digitalization
Link support service for formulating digital transformation strategy with cutting-edge cases, offering them in a package, in order to build a highly profitable service lineup
Pursue optimal capital structure by maintaining balance between strategic investment and proactive shareholder returns
Reference: Previous medium-term business plan
On April 25, 2019, at the same time as it announced its FY03/19 earnings results, Net One announced a new medium-term business plan covering the years FY03/20 through FY03/22.
The company revised its forecast for FY03/22 at the beginning of the fiscal year. The sales forecast was lowered by JPY11.0bn from the initial forecast of JPY220.0bn, but operating profit and OPM are expected to surpass medium-term plan targets as a result of sustained efforts to accelerate high value-added businesses and improve productivity.
The forecast for FY03/22, the final year of the medium-term business plan, calls for orders of JPY217.0bn (+6.6% YoY), sales of JPY209.0bn (+3.4% YoY), operating profit of JPY22.0bn (+11.8% YoY), recurring profit of JPY22.0bn (+20.8% YoY), and net income attributable to owners of the parent of JPY15.0bn (+21.7% YoY).
The initial plan set the following targets for FY03/22: Sales of JPY220.0bn (versus JPY174.8bn in FY03/19), operating profit of JPY21.0bn (JPY11.8bn), OPM of 9.5% (6.8%), share of services at 50.0% (42.6%), and ROE of 16.8% (7.4%).
Note: FY03/19 results were adjusted to reflect impact of fraudulent transactions.
Business
Business description
Company overview
Net One supplies private corporations, government agencies and municipalities, telecommunication companies, and other customers with information and communication technology (ICT) network infrastructure, cloud*1 infrastructure services for data centers, and cybersecurity systems. Specifically, it undertakes end-to-end services from infrastructure design through device and software procurement, construction, maintenance, and operation. It builds information infrastructure incorporating some of the most advanced technology worldwide and provides infrastructure-related services. In addition, the company accumulates expertise and knowledge in-house as a user in its own right in relation to the strategic use of ICT, and provides this expertise to external customers. Net One was established as a joint venture between Mitsubishi Corporation (TSE Prime:8058) and Ungermann-Bass, Inc.*2 (now Alcatel-Lucent Enterprise in US) in February 1988 to distribute products related to Local Area Networks (LANs). Currently it has no capital ties with these two companies.
Net One is Japan’s largest independent company specializing in ICT infrastructure building, including construction of cloud and security infrastructure, in addition to network infrastructure. Its strengths are in system design and construction using telecom equipment of major global manufacturers such as Cisco Systems*3. Net One has a proven track record in the domestic market handling equipment from Cisco. It is also a top domestic distributor for VMware, Inc. (US company, NYSE: VMW; Japanese subsidiary is VMware K.K.), a major global supplier of cloud infrastructure software. Net One’s principal competitors are systems integrators and the major equipment manufacturers.
Business model
Net One supplies major private corporations, government agencies and municipalities, telecommunication companies, and other customers with information and communication technology (ICT) network infrastructure, cloud infrastructure services for data centers, and cybersecurity systems. Specifically, it undertakes end-to-end services from infrastructure design through devices and software procurement, construction, maintenance, and operation. Based on its technical capabilities developed through many years as a network specialist, the company offers multi-vendor solutions* and a multi-cloud environment that include networks, security, platforms (virtualization software and servers, storage and other hardware on which a system operates), and unified collaboration (communication systems that link a variety of networks and are provided as a shared platform), all indispensable for cutting-edge ICT systems.
Net One acts as an intermediary for Japanese companies, which have been slower to adapt to change than their US and European counterparts. The company also cooperates with major US and European IT equipment and software manufacturers, customizing their products to suit the needs of Japanese corporations.
Net One group companies verify and test new products from vendors in Japan and overseas, combining worldwide leading-edge products and technologies to build and operate next-generation ICT systems. As a value-added reseller (VAR), based on its accumulated knowledge it combines the optimal equipment and services for its corporate customers.
Responding flexibly to changes in ICT networks
Since its establishment in 1988, the company has flexibly adapted and evolved its business portfolio to include cloud infrastructure and security infrastructure in addition to its network activities, as ICT networks have changed. The professional principle of its business is the provision of technology to safely and securely “link” and “connect” through leveraging its ICT expertise.
Four business segments
The company’s four segments reflect the markets its customers belong to: Enterprise, Telecom Carrier, Public, and Partner (operated by consolidated subsidiary Net One Partners). Net One has responded flexibly to market changes since its establishment and grown by changing its focus areas.
Changes in the business portfolio: Increased proportion of Enterprise, Public, and Partner sales
Initially, the sale of LAN equipment was the company’s main business, but as the internet and mobile developed the company turned to building large scale telecommunication networks for major telecom companies to grow sales (in FY03/12 when the telecom companies’ LTE investment expanded, revenue from telecom carriers accounted for 53.8% of sales).
From around 2012, Net One has focused on virtualization and cloud computing as new technologies that offer increased efficiency. It expanded sales to major private companies, as well as government agencies and municipalities. The company has also been involved in helping major telecom companies establish their cloud services. Net One is currently focused on growing customer-centered services by becoming a user of its own ICT products. The company set up a prototype office called Innovative Office in May 2013 when it relocated headquarters. Net One is spearheading the push to develop new work styles that leverage ICT. Using this prototype office as an example, Net One can better provide services that meet the needs of its customers, such as improving labor productivity and adapting to changing work styles.
Furthermore, as digital transformation* has become more widespread since 2016, and the importance of data collection and analysis, and R&D has increased, Net One has focused on developing software.
Increasing share of sales from services
In FY03/21, equipment sales accounted for more than 50% of the company’s total sales, and services just under 50%. The company aims for equipment and service sales to account for 50% of total sales each. On the order front, the service orders rose steadily from 30.8% of total orders in FY03/12 to 43.9% in FY03/21. In FY03/20, service orders accounted for 43.4% of total orders (-0.6pp YoY) as the company received JPY11.9bn worth of 5G-related orders from Japan’s fourth mobile network operator, with most of this consisting of orders for equipment. The company expects services to account for 45.2% of total orders in FY03/22.
According to the company, its gross profit margin is around 21% for equipment and around 35% for services. Multiplying these margins by the share of sales for equipment and services gives us the company’s overall gross profit margin. As the share of sales for services rises, the overall gross profit margin increases. Although the Public segment has typically been in the red due to its low level of sales, improved productivity driven by an increasing number of projects, the development of expertise in this industry, and the growing proportion of services to total sales pushed the segment into the black in FY03/17, and is expected to contribute to earnings growth.
In equipment sales, the company is aiming to improve margins by selling original value-added products (combinations of multiple products) as add-ons to its systems, making it a more competitive value-added reseller (VAR). Although product sales are key to building systems, margins are low because it only involves reselling manufacturers’ products. While still small in scale, these new services are expanding.
Profitability by segment
Net One’s segment classifications are based on its customers’ markets, but as cloud infrastructure and security measures spread, operations in the Public, Enterprise, and the Telecom Carrier markets are becoming increasingly similar in terms of the services involved. Although the specifications vary depending on the customer, the products sold and the technology involved are almost identical.
Integrated services business
In FY03/19, the company redefined itself as an operator of integrated services business. The company’s previous business model was simple: it sold vendor products and undertook the maintenance for these. However, the company has adapted to the market transition to the information and communication technology (ICT) networks, and has expanded its business to provide integrated services that proactively support its customers in all phases of planning, introduction, operation, and optimization of their ICT infrastructure.
What customers require are cloud and security capabilities, and not the tangible hardware or software products. Net One is involved in the entire process of building information infrastructure for its customers: in the planning stage, it acts as a consultant to design infrastructure that can best meet the needs of customers; in the construction stage, it acts as a project manager; and after the project is completed, it serves as an operator to address the needs of customers and solve any problems, and participates in planning for the next project as a consultant again. Through this cycle, the company builds long-term relationships with its customers. Further, it launched a new range of services in October 2017, the Net One All In Platform, which shifts the emphasis from “ownership of equipment” to “use of functions.” This includes hardware leasing and other services, such as providing financial services to customers.