NEC Corporation

Thank you for joining us today. I will present NEC's financial results for the second quarter of the fiscal year ending March 2027 announced today. Today's presentation will follow the agenda shown here. First, the key takeaways. Domestic IT services continue to increase profit through NEC Blue Stellar expansion and profitability improvements. Aerospace and national security and submarine systems in social infrastructure also continue to perform strongly. CSG, a US company newly consolidated from May, contributed to revenue and profit growth in IT services. As a result, both segments achieved significant revenue and profit growth. For the first half, revenue increased 11.7% year-on-year to 1 trillion and 753.9 billion yen. Non-GAAP operating profit increased 60.8 billion yen year-on-year to 188.3 billion yen. Considering recent performance progress and the new consolidation of CSG, we revised our full-year financial forecasts upward. We raised our non-GAAP operating profit forecast by 30 billion yen to 460 billion yen. Next, I will explain the financial results for second quarter of the fiscal year ending in March 2027. First, the company-wide key financial indicators and segment results. On a pro-forma basis, excluding the impact of the acquisition, revenue increased 6.6% year-on-year, while non-GAAP profit increased 46.7 billion yen. Next, the results by segment. I will provide details on the following pages that both IT services and social infrastructure achieved revenue and profit growth. The second quarter results exceeded our expectations by 10 billion yen, each in revenue and non-GAAP operating profit. By segment, domestic IT services exceeded our non-GAAP operating profit expectations by 5 billion yen. In social infrastructure, submarine systems exceeded expectations by 10 billion yen in revenue and 5 billion yen in non-GAAP operating profit. Turning to IT services. Domestic IT services achieved significant profit growth of 20.2 billion yen year-on-year, driven by the expansion of NEC Blue Stellar, particularly its scenario business, and profitability improvements. The profit margin improved by 1.9 percentage points. International IT services recorded revenue growth of 53.1% and a profit increase of 16.9 billion yen year-on-year due to the new consolidation of CSG. Next is a breakdown of domestic IT services into NEC Blue Stellar and Base business. For NEC Blue Stellar, the scenario business, which addresses customer challenges end-to-end, expanded steadily, particularly in modernization and security. ABIM Consulting also maintained strong performance. As a result, revenue increased 29.5% and profit increased 16.4 billion yen year-on-year. In base business, revenue declined due to the termination of low-profit businesses such as PCs, the absence of last year's temporary special demand related to fire and disaster prevention and municipal system standardization, and steady progress in the shift to NEC Blue Cellar. However, profitability improved through revisions to contract terms, the introduction of fees for previously free services, and cost reductions. As a result, profit increased 3.8 billion yen year-on-year. Next, the booking status of domestic ID services. Bookings increased 4% on a real basis, excluding the impact of large-scale projects, temporary special demand, and the termination of low-profit businesses. Demand momentum remained robust, centering on modernization projects. By business area, bookings grew in telecom within public and in finance and retail and services within enterprise, resulting in growth in both areas. Avian Consulting maintained double-digit growth for the second consecutive year up 15%, driven by strong performance in strategic consulting and solutions businesses. In addition, the effective order backlog coverage ratio, which combines first-half revenue and the portion of the order backlog to be recognized as revenue in the current fiscal year relative to annual revenue, increased by 3% year-on-year. Progress toward our full-year revenue forecast remains on track. Next, social infrastructure. Airspace and national security continue to perform strongly, with revenue increasing 19.4% and profit rising 2.8 billion yen year-on-year. Submarine systems recorded significant revenue growth of 80.3% year-on-year. Profit also increased by 17.1 billion yen, particularly or partially due to the elimination of 10 billion yen in one-off expenses incurred last year. Next, I will explain the financial forecasts for the fiscal year ending March 2027. First, the company-wide financial forecasts. As mentioned earlier, Considering recent performance progress and the new consolidation of CSG, we revised our revenue forecast upward by 200 billion yen to 3 trillion and 740 billion yen. We also raised our non-gap operating profit forecast by 30 billion yen to 460 billion yen. For free cash flow, reflecting 390 billion yen related to the CSG acquisition, we forecast negative 90 billion yen for the fiscal year. Next, the financial forecast by segment. I will provide details on IT services and social infrastructure on the following slides. We have maintained the allowance incorporated at the beginning of the fiscal year comprising 100 billion yen in revenue and 30 billion yen in non-GAAP operating profit to account for component shortage risks and macroeconomic uncertainties, including the situation in the Middle East. Regarding component shortages, the impact in the first half was limited thanks to measures such as securing components and price negotiations with customers. However, uncertainties persist, and we will continue taking measures to minimize these risks.

Next, the IT services segment. All forecast revisions in IT services are international. Reflecting the new consolidation of CSG, international revenue is up 170 billion yen to 620 billion yen. Non-GAAP operating profit is up 25 billion yen to 77 billion yen. This incorporates certain investments for future business expansion. Next, social infrastructure. Based on performance progress, for aerospace and national security, revised upward revenue by 10 billion yen and non-GAAP operating profit by 2 billion yen. And for submarine systems, revised upward revenue by 20 billion yen and non-GAAP operating profit by 3 billion yen. For submarine systems, first half non-GAAP operating profit already exceeds the full year forecast. However, we consider the risk of recording one-off expenses. Next, the impact on mid-term management plan 2030 from the consolidation of CSG. First, financial targets for FY March 2031 on a pro forma basis. Non-GAAP OB margin of 15% or more. Non-GAAP operating profit, 2 times the FY March 2026 level. Non-GAAP EPS, KGAR of 15% or more. There is no change from the mid-term management plan. Next, targets for international IT. Revenue JGAR of 3-5% is unchanged. Non-GAAP OP margin was mid-teens. We now aim for high teens. Finally, capacity for growth investments. We had assumed 1.2 to 1.3 trillion yen. Incorporating the earnings contribution of CSG, we now assume 1.3 trillion yen. Finally, moving on to the topics. First, the main topics on AI. At NEC, we are accelerating collaboration with global AI companies such as Anthropic and Google Cloud. At the same time, we are strengthening our domestic AI development. First, collaboration with Anthropic. We started the initiative in April. Actual internal use began in June. At the speed of four months, usage expanded to 15,000 users. In September, we joined Project Glasswing using Cloud Mythos Preview. We started advertising enhanced internal security. Next, collaboration with Google Cloud. In July, we joined Google AI Threat Defense as a launch partner. And in September, we launched Blue Stellar Intelligent Managed Service. This service combines AI and technologies from various partners, including Google Cloud. NEC's strength is that it connects all processes end-to-end and advances risk diagnosis and AI-native operation. In Domestic AI, we joined NUETRA, which has an important position as national policy. NEC Dispatch Development Members led by the Head of Development Strategy Office and is leading joint development. Leveraging NEC's experience and technological capability in developing LLMs from scratch, we will develop next-generation domestic AI foundation models looking ahead to uses such as physical AI. Through such collaboration with partners, we continuously expand the functions of NEC AI Platform Service. In November, we plan to launch Kotomi Gateway, which reflects the know-how from our own token cost management. As AI usage expands and becomes agentic, volume and cost increase. Also, selecting the AI model for each use case is becoming complex. With Kotomi Gateway, we use different AIs by use case, optimizing quality and cost. NEC will incorporate the strengths of both global cutting-edge AI and domestic AI and provide AI suited to customers' use cases and requirements. The second topic is on submarine cables. As announced on September 22nd, we won an order for a petal, the world's first commercial petabit-class optical submarine cable system. Petal is a transatlantic submarine cable connecting the United States and France, leading digital hubs of the world. Its total length is approximately 7,000 kilometers. Operation is scheduled to start in 2029. The biggest feature is the adoption of multi-core fiber-compatible technology. This achieves high-capacity transmission of 1 petabit per second, the world's first for a commercial system. Thank you for your attention. This contributes to reducing lane costs per transmission capacity. This means customers can obtain more communication capacity with the same investment. It also leads to reducing total cost of ownership, including not only initial investment, but also subsequent maintenance and operations. NEC will sharpen multi-core capture communication demand in regions worldwide and aim to expand orders. Finally, announcement on NEC Innovation Day. It will be held on December 7th at the NEC Tamagawa office for media and IT analysts and for capital markets. In addition to presentations, we plan demonstration exhibits of the latest technologies, including AI. We sincerely hope you will join us at Innovation Day. That concludes my presentation. Thank you very much.