NEC Corporation Q2 FY2027 earnings call

• Financial Performance: Revenue increased 11.7% YoY to 1 trillion 753.9 billion yen for the first half. Non-GAAP operating profit rose 60.8 billion yen YoY to 188.3 billion yen. The second quarter exceeded expectations by 10 billion yen in both revenue and non-GAAP operating profit.
• IT Services Domestic: Profit grew 20.2 billion yen YoY, driven by NEC Blue Stellar’s scenario business (modernization/security) and profitability improvements in the base business despite revenue declines from terminated low-profit lines.
• IT Services International: Revenue surged 53.1% YoY and profit increased 16.9 billion yen YoY due to the full consolidation of CSG starting in May.
• Social Infrastructure: Aerospace and national security revenue grew 19.4% with a 2.8 billion yen profit increase. Submarine systems saw an 80.3% revenue surge and a 17.1 billion yen profit increase, aided by the absence of last year's 10 billion yen in one-off expenses.
• AI Strategy: Accelerating collaborations with global partners like Anthropic and Google Cloud. Internal AI usage expanded to 15,000 users within four months. Launching 'Kotomi Gateway' in November to optimize AI model selection and costs. Developing next-generation domestic AI foundation models via NUETRA.
• Submarine Cable Innovation: Won order for 'Petal,' the world's first commercial petabit-class optical submarine cable system connecting the US and France. Uses multi-core fiber technology for 1 petabit/second transmission, scheduled for operation in 2029.

The company reported strong growth across both major segments. IT Services achieved significant revenue and profit growth, driven by the new consolidation of CSG (US) in international operations and the expansion of NEC Blue Stellar in domestic operations. Social Infrastructure also performed strongly, with Aerospace and National Security showing robust results and Submarine Systems exceeding expectations due to high demand and the elimination of prior one-off expenses.

• Full-Year Revenue Forecast: Revised upward by 200 billion yen to 3 trillion 740 billion yen, reflecting recent performance and CSG consolidation.
• Full-Year Non-GAAP Operating Profit: Revised upward by 30 billion yen to 460 billion yen.
• Free Cash Flow: Forecasted at negative 90 billion yen for the fiscal year, accounting for 390 billion yen related to the CSG acquisition.
• Mid-Term Plan (FY March 2031): No changes to targets; aiming for Non-GAAP OB margin of 15%+, Non-GAAP operating profit 2x FY2026 level, and KGAR of 15%+. International IT revenue JGAR target remains 3-5%, with Non-GAAP OP margin target raised to high teens.
• Growth Investments: Capacity assumed at 1.3 trillion yen (previously 1.2-1.3 trillion), incorporating CSG earnings contribution.
• Risk Allowance: Maintained allowance of 100 billion yen in revenue and 30 billion yen in non-GAAP operating profit for component shortages and macroeconomic uncertainties.

• Component Shortages: While impact was limited in H1 due to securing components and price negotiations, uncertainties persist, particularly regarding supply chain stability.
• Macroeconomic Uncertainties: Ongoing risks from global economic conditions and geopolitical situations, including the conflict in the Middle East.
• One-off Expenses: Potential risk of recording additional one-off expenses in the Submarine Systems segment, although H1 profit already exceeds the full-year forecast.

Q: How does the consolidation of CSG alter the mid-term management plan targets, specifically regarding international IT margins and investment capacity? / A: Management confirmed that while the financial targets for FY March 2031 remain unchanged (OB margin >15%, 2x profit growth), the strategic outlook has improved. Specifically, the target for International IT Non-GAAP operating profit margin has been raised from 'mid-teens' to 'high teens.' Additionally, the assumed capacity for growth investments has been adjusted to 1.3 trillion yen, reflecting the earnings contribution of CSG, up from the previous range of 1.2-1.3 trillion yen.

Q: What are the key operational details behind the massive 80.3% revenue surge in the Submarine Systems segment? / A: The surge is attributed to strong demand for submarine systems, which exceeded internal expectations by 10 billion yen in revenue. The 17.1 billion yen profit increase was significantly boosted by the elimination of 10 billion yen in one-off expenses incurred in the same period last year. Management noted that H1 non-GAAP operating profit already surpassed the full-year forecast but cautioned about the potential risk of future one-off expenses.

Q: Can you elaborate on the strategic significance of the 'Petal' submarine cable project and its technological advantages? / A: NEC won the order for 'Petal,' the world's first commercial petabit-class optical submarine cable system connecting the US and France. It utilizes multi-core fiber-compatible technology to achieve 1 petabit per second transmission, reducing lane costs per capacity and total cost of ownership for customers. This positions NEC to sharpen its competitive edge in capturing multi-core communication demand globally, with operations scheduled to start in 2029.

Q: How is NEC balancing global AI partnerships with domestic development efforts? / A: NEC is accelerating collaborations with global leaders like Anthropic and Google Cloud, evidenced by rapid internal adoption (15,000 users in 4 months) and joint launches like 'Blue Stellar Intelligent Managed Service.' Simultaneously, through NUETRA, NEC is leading joint development of next-generation domestic AI foundation models. The strategy involves combining global cutting-edge AI with domestic capabilities, using tools like 'Kotomi Gateway' to optimize model selection and costs based on specific customer use cases.