Q&A at IR Briefing for Financial Results for the First Quarterof Fiscal Year Ended March 31, 2021
July 30, 2020
NEC Networks & System Integration CorporationQuestioner A
Q: Orders received increased about 10 billion yen in the first quarter from the same
period of the previous year, and it seems that large orders from educational
institutions were received particularly in Digital Solutions (“DSL”). How didorders in DSL contribute to the growth in orders received?
A: Orders from educational institutions were largely related to the GIGA School
project, which contributed to approximately 6 billion yen company-wide and 4.5
billion yen in DSL.
Q: The forecast for the second quarter (three months) after subtracting the result for
the first quarter from the forecast for the first half of the fiscal year suggests thatprofit will decrease in Network Infrastructures (“NWI“) and Engineering &Support Services (“ESS”). What impact do you expect COVID-19 to have on thebusiness?
A: We expect that COVID-19 will reduce sales in NWI by approximately 200 million
yen and in ESS by 1 billion yen, which is expected to have a slightly negative
effect on profit in NWI and reduce profit in ESS by about 300 million yen in thesecond quarter (three months).
Questioner B
Q: Orders received in DSL grew substantially. What is the status of orders other thanthose from educational institutions?
A: Besides orders from educational institutions, orders for workstyle innovation
continued to grow significantly.
By industry, while orders from the financial service industry increased, thosefrom the manufacturing and service industries decreased year on year. Although
there was concern that investment would fall in the hotel industry, from whichlarge orders had been received in the last several years, due to the impact of
COVID-19, no significant impact was evident in the last first quarter. In our case,orders from hotels consist largely of luxury facilities, and we assume that thoseare capital expenditure based on long-term plans and will not have a significantimpact.
Q: You stated that the manufacturing and service industries were already showing

signs of a slowdown. What are your prospects for the future environment forreceiving orders?
A: While we do not expect that investment in the manufacturing and service
industries will be resumed soon, there are considerable opportunities in thebusiness for educational institutions such as GIGA School. In addition, in view ofmeasures against COVID-19, we expect that inquiries for teleworking using
Zoom and other systems and solutions, such as distributed work, will increase.
Q: How do you define the impact from COVID-19? What are the risks that you expect
to face from now on?
A: The impact of COVID-19 includes the consequences of suspending on-site
operations in April and May, which are being gradually resumed. Although we do
not expect to see any more significant impact if the current condition continues,
we are assuming a decrease of 1 billion yen (in elimination) company-wide as therisk of resurgence of COVID-19.
Q: You incurred expenses for office realignment in the previous fiscal year. How
much do you expect the growth expenses to be during the current fiscal year?
A: Approximately 2 billion yen out of the growth expenses of 5 billion yen in theprevious fiscal year was temporary expenses for office realignment. Excluding
that, we are considering the addition of approximately 4 billion yen to growth
expenses, which would total 7 billion yen this year. That includes approximately 1billion yen for DSL, slightly more than 1 billion yen for NWI, slightly less than 1billion yen for ESS, and approximately 4 billion yen for the entire company.
Q: NESIC has already implemented advanced workstyles. An increase in teleworking
and distributed work from now on is expected to cause office downsizing incentral Tokyo, which may result in a decrease in rents for real estate. What are
your prospects for future needs of customers and real estate trends in view ofcost reduction?
A: Although our distributed work mainly aims to facilitate employees’ well-being andnot to reduce office rents, a decrease in rents can be expected by downsizing
offices in central Tokyo as a result. Some customers are paying attention to our
distributed work for the appeal of measures against COVID-19 combined withcost reduction.
Questioner C
Q: As for the growth potential of DSL, in the past you mentioned that resources wereincreasingly restricted. What is your outlook for the next fiscal year andthereafter in terms of whether sales growth could be maintained using thecurrent resources? How about trends related to DX?
A: Orders related to DX received during the first quarter amounted to approximately
3 billion yen and we are aiming for a total of 9 billion yen during the current fiscal
year (up 3 billion yen year on year).
In the aspect of resources, we are working to shift DSL to types of services thatwill not easily rely on the number of SEs. In the process of business change,
however, sales growth may temporarily become moderate.
Q: The operating margin of NWI is expected to decline in your financial forecasts.
What is in the background of this? Do you intend to maintain the current level ofprofit margin in the next fiscal year and thereafter?
A: The most significant cause of a fall in profitability is an increase in growth
expenses particularly for 5G communication, which will start in the current fiscalyear. While we will continue to realize the effects of reorganization, operating
income for the current fiscal year will remain unchanged year on year due to theplan to raise nearly 1 billion yen of growth expenses from the amount in theprevious fiscal year and, as a result, profit margin is expected to decrease.
Although prospective businesses such as 5G and local 5G will be added in andafter the next fiscal year, we do not expect to see improvement in profitability
soon.
Questioner D
Q: I assume that you have been acquiring new customers through Zoom. What is
the status of cross-selling and upselling to such customers?
A: As you mentioned, we expect Zoom to expand in terms of need for distributed
work and related businesses and are currently acquiring new customers. Atpresent, we are allocating all of our time for selling the license and have yet tostart specific activities to develop new businesses from such customers. We will
implement these activities as soon as we are able.
Q: Did the business of KNSI, a joint venture with KDDI, steadily grow during the firstquarter? What is the status of the telecom business?
A: In addition to the steady growth of KNSI, orders received in the telecom businessincreased substantially, or approximately 50% year on year, partly thanks to alarge order for a submarine seismometer system that would use technologies forsubmarine cables.