Q&A at IR Briefing for Financial Results for the 1Q
for the Fiscal Year Ending March 31, 2023
July 28, 2022
NEC Networks & System Integration CorporationQuestioner Ａ

Q： You said that, in the Environmental & Social Solutions (ESS)
Segment, orders for large projects are expected in 2Q and after. In
which sectors do you expect orders and what scale of orders do you
anticipate? Also, how do you see the profitability of the targetedlarge projects?
Ａ： ESS are in demand in various markets, especially construction-relatedmarkets, including government agencies, and orders can be expectedacross the board. Whilst I cannot give you a clear idea of the scale ofindividual projects or the number of orders, the total value ofprospective projects in 2Q is several tens of billions of yen higher
than in the same period a year ago. Though the projects are large, weintend to accept the orders on the precondition that profitability canbe ensured.

Q： It is worrying that orders in the DX Solutions (DXS) Segment
decreased by 10%. Since this segment is mostly service-typebusiness, I imagined orders would also be stable. In your view, what
was the cause of this decrease?
Ａ： In 1Q of the previous year, there were some large projects in theservice business, and this had an impact. The service business issubject to fluctuation in this way depending on the timing of large
orders such as contracts spanning several years but, broadly
speaking, we believe it is expanding comparatively steadily.
However, in areas such as the renewal of existing PBX and such like,due to the business climate, customers seem to be adopting a waitand-see attitude partly because investment is not urgent and they
can afford to wait a little, and SI in existing business has waned. I feelthat semiconductor and ｍａｔｅｒａｌｓ shortages have also affectedorders.

Q： Has demand for Zoom plateaued? Also, what is the situation withregard to DX orders, including multiple cloud services using
Symphonict.
Ａ： Demand for zoom has calmed down after surging temporarily but
originally we have been focusing not only on license sales but also on
the domain on DX-based work style innovation combining various
cloud-based products and services and this domain is about to takeoff and demand is still strong.

Questioner B

Q： How did negative currency impacts compare with your initialprojections? What do you expect the negative currency impacts might
be on a full-year basis? Also, what is the situation with regard topassing on higher costs to selling prices as a means of combatting
negative currency impacts?
Ａ： In 1Q, we recorded a foreign exchange loss of 400 million yen on a
Myanmar project and, in addition to this, each segment reported aforeign exchange loss of around 100 million yen. We made a total
year-on-year foreign exchange loss of 700 million yen and around
500 million yen of this was unexpected.
For the Myanmar project, we have increased the provision for loss due
to exchange rate fluctuations and from 2Q onwards we will not makeany additional losses if the rate stays at the end-of-June level and thenegative currency impact may be slightly less if the yen starts to growstronger. As for the remaining foreign exchange loss of around 300
million yen, we expect there could be a negative impact of between
300 million yen and 400 million yen in 2Q and each quarter
thereafter.
As regards passing on cost increases to selling prices, in the case of
projects for which contracts have already been concluded, it isdifficult to raise selling prices until it is time to renew the contract.
However, in the case of new orders, we will conclude contracts basedon current foreign exchange rates and so we expect to gradually startpassing on higher costs as existing projects come up for renewal inthe future.

Q： Regarding the impact of semiconductor and materials shortages, Iunderstand that the shortages had no impact in 1Q a year ago but hada negative impact of 300 million yen on profit in 1Q this year. Whatimpact will the shortages have in 2Q and after? Could it be the casethat there will be positive impacts in the coming quarters?
Ａ： In 1Q, shortages had negative impacts of 2 billion yen on sales and300 million yen on profit since newly arising impacts were larger thanthe positive impact of revenue from projects postponed from theprevious fiscal year. However, we are proceeding on the premise thatin 2Q positive and newly arising negative impacts will offset eachother.
On a full-year basis, the situation remains unclear, and we still holdthat new negative impacts arising this fiscal year will be on a similar
scale to those last fiscal year.

Q： Regarding your approach to the full-year/first-half forecasts, do you
plan to stick to your original forecast, focusing on controlling costs?
Are there other factors for improvement from the initial plan thatmight offset currency impacts?
Ａ： Our intention is to aim for achievement of the forecasts through theaccumulation of orders and sales and the implementation of measures
such as controlling nonurgent costs. Whilst it is hard to see
improvement this 1Q partly due to significant improvement theprevious 1Q, the GP margin continues to show a tendency towards
improvement when currency impacts are excluded. Improvement in
the GP margin as a result of greater efficiency can continue to beexpected from 2Q onwards and we expect that there will be a further
improvement in profitability once the high added value proposal ｂｕｓｉｎ
ｅｓｓ based on consulting which we are focusing on under the new
Medium-term Management Plan (new MP) successfully gathers
momentum.

Questioner C

Q： I understand that this fiscal year the plan was to increase growthinvestment from the previous fiscal year for achievement of the new
MP targets but you also mentioned controlling costs in 1Q
presentation. Which is the priority and what is your approach toexpenses?
Ａ： There is no change in our policy of making necessary investment, but
we are considering delaying the timing of investments if pushing back

a little would have no impact. We also intend to make efforts such as
cutting back in areas such as staffing and other ordinary expenses
where greater efficiency is possible.

Questioner D

Q： You explained your first half order forecast for the DXS Business bysaying that there will be large projects in 2Q and after, but it is also
conceivable that this will be a phase where business confidence
deteriorates further. Is the decrease in orders in 1Q really a fleeting
decrease attributable to the timing of large contracts or is theworsening business climate already starting to have an impact? Whatis your outlook for DXS orders, including your impression about thesecond half and beyond?
Ａ： The outlook for the business climate is extremely difficult, but I get
the impression that customers are delaying their orders because of
the uncertain business climate. On the other hand, the DX/workstyleinnovation domain is a domain that will also help improve businessresults, as customers seek to improve efficiency through investment.
Investments that can be put off a little such as the renewal of PBX,
for example, may also wane but we intend to expand orders byproperly responding to domains in which customers will invest even if
the business climate worsens.

Questioner E

Q： Regarding foreign currency impacts, the yen must have alreadyweakened to some extent as of the April results announcement but
the impact on business results probably could not be envisaged,
right?
Ａ： When we announced the full-year forecasts in April, we thought wewould be able to offset currency impacts in the period between theformulation of the budget and the results announcement through theimplementation of various measures throughout the year but this timecurrency impacts emerged in an even shorter period from then due tothe sharp depreciation of the yen.

Questioner F

Q： Looking at DXS orders during 1Q over the past three years, orders
have not grown even taking the impact of GIGA school into
consideration. I expect that the DX/workstyle innovation domain is anarea in which demand can be expected above and beyond thebusiness climate and imagine it is a domain that will grow even withfluctuation in large-scale projects but this is not the case. Are thecurrent order difficulties attributable to the external environment(business climate) or to issues with your strategies? What is yourview?
Ａ： When you make a comparison based on 1Q alone, growth is probably
difficult to see but, on a full-year basis, the DXS segment has grown
and, in our view, it is difficult to get a sense of the trend over theperiod of a quarter due to the timing of large projects.
However, I believe that the current situation is attributable to boththe external environment and issues at the Company. My impression
regarding the business climate is that customers are waiting andseeing to some extent and that nonurgent investment (renewal ofexisting systems) is being reined in. In our view, we must further
expand the DX/workstyle innovation domain so that we can overcome
any investment restraint in the existing system renewal business andwe must put even more effort into strategic sales.

Q： Demand for NW Solutions (NWS) for telecommunications carriers
decreased in 1Q, partly due to the impact of a large project in theprevious fiscal year. I recognize that demand fromtelecommunications carriers is waning at all communicationconstruction companies but what are your views on capturing demand
from telecommunications carriers in the future?
Ａ： We recognize that base station investment will be reduced but,looking at NWS as a whole, unlike communication construction
companies, we have a small volume of base station business and we
expect that investment restraint among telecommunications carriers
will impact us less than other companies. Since we intend to expand
the proposal-type business field that will help improve the internal
efficiency of telecommunications carriers through the use of DX inaddition to the SI of core networks, we believe that, withtelecommunications carriers thinking about reducing costs, this is anarea where, if anything, demand for such efficiency improvement canbe expected.

Questioner G
Q： The bar set for 2Q orders seems high compared to the previous year.
In your view, what is the probability of achieving it?
Ａ： We believe it is an achievable level given projects postponed to 2Q
from 1Q amounting to several billion yen and the current outlook,though some projects depend on tender results.

Questioner H

Q： Please give details of growth of DX orders in 1Q and the scale oflocal 5G orders and sales, if known.
Ａ： In the multi-connectivity field overall, which includes local 5G,orders, which amounted to several hundred millions of yen last fiscal
year, came to around 3 billion yen this 1Q and drove growth in DX
orders. In addition, solutions involving DX also increased forgovernment agencies in anticipation of digital towns.

End