Questions & Answers for NESIC IR Day 2024
June 16, 2024
NEC Networks & System Integration Corporation
Management based on awareness of the cost of capital and the stock price
Q: Regarding capital efficiency, we believe that cash will continue to accumulate as the rateof profit increases and working capital efficiency improves going forward. What do you
plan to use the cash for? You consider DOE to be an indicator for determining
dividends. Is it possible that dividends will be increased?
A: We increased DOE to 5.3% this fiscal year forecast. When our capacity to create cash
has improved further, we will consider increasing DOE accordingly and conducting astock buyback. We are also considering investments including M&A activities. From theviewpoint of capital efficiency, we will use leverage when investing if necessary.
Q: You mentioned that you also aim to improve the asset turnover ratio in the improvementof ROE in the future. What measures do you plan to take to achieve this?
A: Our issue is the long accounts receivable collection period. We will enhance theefficiency of working capital by improving this. As it stands now, the cash conversion
cycle is around 90 days. We would first like to improve it to around 86 days, which is theFY2022/3 level. Regarding the cash generated in this process, we believe that theasset turnover ratio can be improved by using it as I explained when answering theprevious question.
Q: In the Network Solutions (NWS) Business, you intend to increase ROIC first and thenaim to achieve the growth of net sales. We believe that progress in the improvement of
this segment will lead to an increase in the standards of the company as a whole. Whatis your view regarding the time it will take to achieve this?
A: I think that we can move it to the right column (net sales growth) of the portfolio chart if
the capital expenditures of telecom carriers recover several years after we return toprofitability through the structural reform of the business targeting telecom carriers. We
are also working to create a market on our own by enhancing initiatives regarding aunique business that will not be affected by the investment trends of telecom carriers. Ithink that we can move the business to the right column in the not too distant future byreliably managing the portfolio for each of the business divisions and SBUs in thesegment.

Q: Regarding portfolio optimization, do you mean that sale of businesses with low
profitability will not be excluded from your options?
A: The sale of low-profitability businesses is an option. However, we will not sort businesses
based simply on ROIC. If the ROIC of a business is low at present but it is expected togrow in the future, we will choose to enable it to consistently grow. Conversely, if theROIC of a business is high but its growth potential is poor, we will invest in otherbusinesses.
Q: Please tell us your thinking about the protection of minority shareholders, including
outside directors and NEC related business, as a listed subsidiary.
A: From the viewpoint of the protection of minority shareholders, the outside directors are
one-third of the members of our Board of Directors. Regarding our relationship withNEC, we have established and operate a Special Committee. The operations of theSpecial Committee are controlled strictly, and we understand that it is functioning fully.
However, we also understand the requests of investors. We will continue to considerthem.
Q: We feel that the necessity of collaborating with NEC is greater than ever before due tothe change in the growth themes. What do you think?
A: We intend to do businesses by leveraging the technological capabilities and assets of
NEC more than ever. In NWS and Environmental & Social Solutions (ESS), there are
fields where accelerating our collaborations with NEC in the execution of businesswould be more effective. Our relationship with NEC is declining numerically, but wehope that we can reinforce it as win-win relationship.
<DX Solutions (DXS) Business>
Q: Regarding strategic areas, significant expansion was achieved in the previous fiscal
year, and you plan to expand them in the same way this fiscal year. Are we correct inunderstanding that we can expect them to be expanded further from FY2026/3 onward?
If that is the case, what areas do you think will be growth drivers?
A: We believe that we can expect these business areas to continue expanding. At present,
the areas of workstyle innovation through DX, which is appropriate for hybrid
workstyles, and beyond 5G network security associated with the shift to cloudcomputing have grown significantly, and these two areas account for approx. 70% ofthe strategic areas. We believe that these areas will grow further and the other areasthat are still small in scale (data analysis and utilization, digital twins and local
government DX) will also begin to keep pace with them after one or two years.

Q: To what extent do you think the GPM of DXS will improve? In addition, while we believethat expansion of strategic areas is the key to the improvement, how much higher istheir profitability compared to the existing areas?
A: This fiscal year, we would like to improve it by around two percentage points from the22.0% in the previous fiscal year. As it stands now, the GPM of the strategic areas is
two to three percentage points higher than existing areas on average. We will of course
improve the mix by enabling these areas to grow, as you pointed out, but we would liketo make improvements each area, including existing business areas, such as thereduction of equipment-related projects whose profitability is low.
Q: You introduced an offsite BPO initiative (p. 6). How much do you expect this will increase
net sales and improve profitability?
A: While it is difficult to say how much offsite BPO will contribute to the improvement of
profitability by itself, we believe that the initiative, including the improvement of resource
efficiency and the use of AI, will contribute to the improvement of profitability. The target
GPM improvement of approx. two percentage points in the current fiscal year reflects
our expectations that offsite BPO will have this kind of effect. While the initiative is still
small in scale because we have just started it, we would like to continue to go forwardwith it and establish it as soon as possible so that it will begin to produce a certain
volume of net sales.
<Network Solutions (NWS) Business>
Q: What are the differences in profitability of the businesses and what initiatives to improvetheir profitability in the future have been established?
A: “Network business” is basically an SI business, which is affected in part by theoperating rate, but we expect this business to remain on the same level as before. It
was in a difficult situation in the previous fiscal year due to a rapid decrease in theinvestments of telecom carriers. We took countermeasures in the previous fiscal year,
such as a shift of resources. We believe that it will return to the normal profit level in thenear future.
The profitability of social infrastructure does not normally differ from the telecom carrierbusiness. It is possible, however, that we will have more competitors as it expands into
private sector markets in the future, in addition to the public sector. However, wepossess special technologies, so we believe we will be able to improve profitability
further in the future. Additionally, for the beyond 5G network business, we will aim toachieve profitability that is higher than existing businesses partly because we will
operate it as a service business through co-creation with customers.

Q: What ideas do you have about the net sales and profitability of NWS in and after
FY2026/3? While we expect that it will continue to be affected by the difficult
circumstances regarding the investments of telecom carriers, we believe that the social
infrastructure business will pick up steam. What do you think about each of thesethings?
A: It is believed the telecom carrier business will begin to recover around 2026 to 2027.
However, we believe that the overall amount invested will remain almost flat. For
example, if the amount being invested in base stations recovers, the amount being
invested in other areas will be reduced. Only K&N System Integrations Corporation(KNS), our subsidiary, is working on base stations. While other areas mainly include
businesses attributed to the increase in data traffic (construction of optical networks andmaintenance and operation areas), we believe that we can keep this area around thecurrent level without significant fluctuations. We believe that we can achieve the growthof the business by expanding areas including services for local NCCs as well as
mission-critical areas for governments and public areas, which I explained today andwhich are new areas, in addition to base stations.
Regarding social infrastructure, it is difficult to make short-time forecasts partly
because there are cases where a major project is delayed by one or two years.
However, because we work in an area where large investments are made in both thepublic and private sectors, we believe that it will expand in the long term.
Profitability declined in the previous year partly because the telecom carriers
suddenly stopped investing. We believe, however, that profitability will not decline any
further and we can improve it because the structural reform has been completed to acertain extent and strategic areas will be expanded in the future.

<Environmental & Social Solutions (ESS) Business>
Q: What is the background behind the improvement of the backlog GPM? Can we expectthat the GPM during order acceptance will continue to improve?
A: Regarding the increase of orders and backlogs, we believe that we are receiving many
projects, including large-scale projects, by allocating resources more efficiently. On theother hand, regarding the improvement of profitability, we understand that initiatives
including the strengthening of project management and stricter evaluations during orderacceptance have enabled us to prevent unprofitable projects and enhance our businessexecution capacity. We will work to continue to improve.
Q: Is it possible to improve the GPM of ESS to a level above 20% as in the othersegments?

A: There are high barriers to overcome to quickly catch up with the other segments, such as
the large number of projects that we must bid for. However, regarding the provision ofservices after introduction, the renewal of projects, and other aspects of the business,
we work to get it close to the other segments, including improvements implemented byleveraging existing strengths. This fiscal year, we will make these and other efforts toimprove our GPM as an improvement in the operating margin.
Q: When will immersion cooling take shape as a real business?
A: We need to conduct further verifications to provide high-quality services as a realbusiness, partly because of the evolution of CPUs and the resulting evolution ofservers, such as the increase in the amount of heat generated. Having said that, wewould like to launch it as a business around the second half of the period of the next
medium-term management plan.
Q: You mentioned that the expansion of strategic business areas has been delayed. Do you
think you can aim for the initially planned value of 40 billion yen during the next
medium-term management plan?
A: While the medium-term management plan is being considered, I would like to aim toexpand to the level of the previous target. Regarding strategic areas, we think it isimportant to expand both strategic and existing areas by adding DX to existing
businesses to provide high value-added services instead of simply expanding DX
business. We believe this will also enable us to improve profitability.
Q: I have a question about the green business. What is in high demand, other than thedemand related to data centers (which use immersion-cooling technologies)?
A: At present, building management is attracting increasing attention, among other areas.
The visualization of power reveals issues, and we link them to our proposals. We would
also like to work on PPA services, among other efforts, from this perspective.
Q: I have a question about fire-fighting networks. What competitors do you have? What are
your competitive advantages over them?
A: Regarding fire-fighting networks (command boards and radios), our major competitors
include Fujitsu General, Hitachi and Oki Electric Industry. Our strengths lie in that NEC
products are highly competitive and that we need to customize products before
providing them instead of only delivering standard products, which means that we arefamiliar with our customers operations.
Q: Regarding immersion cooling, it seems that you will provide container-type products.

Why did you choose container-type products, which it is assumed will be used
outdoors, in moving forward with the business?
A: We offer both services for container-type products and for products for indoor use. We
will proceed with both. Regarding container-type products, we believe they areappropriate for responding to distributed computing with a view toward the progress inthe shift to edge computing.