NES I C

I N N O VAT I O N

ANNUAL REPORT 2019

CONTENTS
Introduction

Key Issues and Growth Initiatives

02 Our Vision

36 Materiality Issues

03 Our Businesses

38	Human Resources andOrganizational Climate

04 Our Competence

41 Relationships of Trust with Stakeholders

10 Our History
12 Our Connection to Daily Life

Corporate GovernanceMedium- to Long-Term Growth
Strategy, Earnings Trends

43 Message from the Chairman
44 Corporate Governance

14 Message from the President

48 Dialogue on NESIC with Outside Directors

20 Financial & Non-Financial Highlights

52 Directors & Corporate Auditors

22 Social Value Creation Model
24 Medium-Term Management Plan
		Realignment of Offices to Accelerate
Innovation

55 Stock Information

29 Financial and Capital Strategy

Special Feature:
CO-CREATION IN ACTION
32

01 Resolving Customer Issues
NESIC

Tamba City

Innovations in Regional Healthcare

34

02 Creating Business with Business Partners
NESIC
Innovation in Co-Creation WorkANNUAL REPORT 201954 Corporate Overview

56 Financial Section

Editorial Policy
NEC Networks & System Integration Corporation (NESIC) has
published its Annual Report as an integrated report since 2016.
For the Annual Report, NESIC reports on a wide range of corporate
activities, including its business strategy for the creation and provisionof social value and for our growth over the medium to long term, as
well as the initiatives it pursues under that strategy. In Annual Report
2019, based on the themes of ­co-creation and innovation, we introduce our initiatives for continuing to create new value for society
through Groupwide i­nnovation and co-creation with customers andpartners.
With the aim of furthering everyone’s understanding of the NESIC
Group, we endeavor to disclose highly valuable information while
making iterative improvements based on feedback we receive
through dialogue with investors and other stakeholders. Accordingly,
please provide us with your feedback after reading this report.
Full details, including on our financial results and medium-termbusiness strategy, are available on the “Investor Relations” section of
our website. In addition, the “CSR” section of our website provides
more detail on our initiatives relating to corporate social
responsibility.
Period Covered
April 1, 2018 to March 31, 2019
(Certain information related to the period following that noted aboveis also included.)
Scope of Report
NEC Networks & System Integration Corporationand consolidated subsidiaries

NES I CI N N O VAT I O N

ANNUAL REPORT 2019
ANNUAL REPORT 2019A

About the CoverBy bringing together the­technologies and strengths of
its customers and partners, NESIC
is keen to spur innovation while
accelerating co-­creation. The cover
was designed to express these
intentions of NESIC.

Guidelines
	International Integrated Reporting Council (IIRC)
Integrated Reporting Framework	Global Reporting Initiative (GRI)GRI Standards
	ISO 26000 (Guidance on social responsibility)
	Minister of Economy, Trade and Industry
Guidance for Collaborative Value Creation

Contact
	Investor Relations
https://www.nesic.co.jp/english/ir/	Responsible department: IR Group of the Corporate Finance &Controller Division	Sustainability-Related Information
https://www.nesic.co.jp/english/csr/
	Environment-Related Information
https://www.nesic.co.jp/english/csr/environment.html
	Responsible department: CSR Promotion & Corporate
Communications Division
Disclaimer
This report contains forecasts, outlooks, targets, plans, and otherforward-looking statements concerning the business performance,
financial condition, and other aspects of the management of the NEC
Networks & System Integration Corporation Group. These forwardlooking statements are based on information NEC Networks &System Integration Corporation had as of the time this report was
prepared and on certain premises judged to be reasonable. These
judgments and premises, by their nature, are subjective and characterized by uncertainty. Furthermore, forward-looking statements are
not guarantees of future results and actual performance could begreatly affected by various factors.

Company names, product names, and logos contained this report are
the trademarks or registered trademarks of the respective companies.

ANNUAL REPORT 201901

OUR VISION
NEC Networks & System Integration Corporation Group Statement
The NEC Networks & System Integration Corporation Group enables communities throughout the world toenjoy a safe, secure and plentiful tomorrow by continually facilitating more welcoming and convenient
communications, and supporting a connected society, from the floor of the ocean to the far reaches ofouter space, with proven technologies and reliable services cultivated over many years.

Corporate Message

The NEC Networks & System Integration Corporation Group Statement andCorporate Message were crafted based on discussions involving all employees.

OUR BUSINESSES
Since its founding as a telecommunications construction company in 1953, the NEC Networks &System Integration Corporation (NESIC) Group has expanded its business fields in tune with changes inthe times and technology. Today, NESIC creates various communications systems and services
integrating various equipment, software, networks, and services, as well as brand new cutting-edge/
venture technologies for its diverse base of customers, such as companies, telecom carriers,
governments, and social infrastructure providers. Furthermore, the Company is a comprehensive
provider of operating and monitoring, maintenance, and outsourcing services.

Digital Solutions Business
The Digital Solutions Business offers systems and services for information and communications technology (ICT), such as corporate networks
and IT, that are essential for business. Using cutting-edge digital technologies, such as artificial intelligence (AI), the Internet of Things (IoT), androbotic process automation (RPA), NESIC proposes work styles that leadto higher productivity and the evolution of businesses, as well as work
styles that allow employees to work anywhere and anytime. We support
diverse and sophisticated work styles in response to social issues,
such as balancing childcare or nursing care while working to the best of
their ability.

Network Infrastructures Business
The Network Infrastructures Business builds systems and provides services for network infrastructure requiring the latest technology and highreliability, including networks for telecom carriers and ICT infrastructurethat support society, such as national and local governments, broadcasters, and road- and railway-related businesses. We contribute to providing
safe and comfortable daily lives.

Engineering & Support Services Business
The Engineering & Support Services Business provides maintenance,
operating and monitoring, outsourcing, and other support services aswell as construction for our ICT systems and services. Leveraging its construction capabilities, NESIC offers ICT infrastructure to overseas customers as well. We underpin safe and secure systems and services throughour comprehensive domestic service network and strive to build global
infrastructure.

ANNUAL REPORT 201903

COMPETENCE

1Technological Capabilities & Credibility
NESIC has built a unique position as a system integrator with construction capabilities by fusing together
its ICT, which is kept in tune with the changing times, with its telecommunications construction technologies, which have been accumulated since its founding. NESIC has a wide range of technological capabilities centered on communications, from ICT services for corporations, to mission criticalcommunications infrastructure for public use such as networks of telecom carriers and fire and ambulance emergency network systems. The Company offers comprehensive, high-quality services that arehighly dependable, including for system design, integration, installation, operation, and maintenance,from the selection of equipment to outsourcing.
The technological capabilities we have accumulated to satisfy the stringent requirements and expectations of customers of the NEC Group are also utilized in services and various vendor products inside andoutside Japan in tune with the needs of other customers. These capabilities are also being used forcloud-based services, which many companies have begun to adopt lately, and cutting-edge/venturetechnologies, and have led to the provision of optimal solutions for customers.

Technological Capabilities for Integrating Diverse Products and Services

Cloud
services

Domestic
vendorproducts

NECproducts

NESIC
ICT
Construction
capabilities

Cutting-edge/
venturetechnologies

04

ANNUAL REPORT 2019

Provision of optimal solutions

Globalproducts

Companies

Telecom
carriers

Governments
and social
infrastructure
providersExample / Initiative Leveraging
Core Competencies
Development of Network
Infrastructure for Telecom Carriers
NESIC cross-develops assets, including its maintenance service network
in Japan, and deploys network engineers with the advanced technicalskills only found in the NEC Group, tosupport overseas vendors who do nothave these functions inside Japan,
contributing to the creation of advanced
networks for telecom carriers.
Looking ahead, NESIC will work toenhance its capabilities ahead of the
full-fledged rollout of 5G infrastructure
through 5G Pagoda, a Japan–Europe
joint project to create international
standards for 5G, and 5G Lab, which
trains personnel and verifies
technologies.

Employee Qualifications

Employees with managing
engineer or technicalsupervisor qualifications

1,500

approx.

Employees with advanced
ICT qualifications

800

approx.

ANNUAL REPORT 201905

COMPETENCE

2Nationwide Business Capabilities
In order to support infrastructure that underpins safety and security in society and the networks of telecom carriers, including the salespeople and systems engineers who respond to customers across thecountry, we have put into place a service network with more than 400 locations in Japan, in addition to
help desk services for network servers and security; operation centers that collectively address needs for
network operation, monitoring, and maintenance services; and comprehensive technical centers able toprovide one-stop services from technology assessments to repairs with logistics functions. Our 24/7 fullservice structure is able to dispatch people and deliver products within a couple of hours anywhere in
Japan—a unique strength that underpins the development of society forward creating welcoming and convenient lifestyles.

24/7 full-service
structure able torespond withina couple ofhours anywherein JapanDomestic Service BasesOver 40006

ANNUAL REPORT 2019

Example / Initiative Leveraging
Core Competencies
Security Operation Center (SOC)
To combat cyberattacks, which arebecoming increasingly clever andsophisticated, NESIC has established
its Security Operation Center (SOC)
to operate and monitor customer
networks.
In addition to monitoring throughsystems, the SOC is able to identify
risks and assess their degree ofurgency based on analysis by security
analysts who have extensive experience and knowhow, through services
for operating and monitoring the networks of the NEC Group and othercompanies, as well as government
agencies.
Combined with network operation
services, NESIC is able to rapidly provide a complete range of services
from alarm notifications to theirfollow-up.
NESIC offers a full range of services,from security consulting to basic
design and construction of networks,
security services that protect nationwide networks, and security operation services through the SOC. We
address all the cybersecurity needs ofour customers.

ANNUAL REPORT 201907

COMPETENCE

3

Business Creation Capabilities
NESIC has a unique corporate culture defined by its mind-set of providing customer-oriented hospitality,
nurtured from being on the front lines for its customers, and a willingness to always take on the challenge of creating new businesses.
This corporate culture translates into an ability to create unique business models and new businesses.
These unique business models entail fully understanding the issues and needs of our customers, developing solutions through co-creation with cutting-edge companies and startups as partners utilizing thelatest technology, in addition to the use of in-house resources, validating these solutions by ourselves,and evaluating their ease-of-use and effectiveness before delivering them to customers. Using this knowhow, we provide customers with solutions in the form of convenient, easy-to-use service.
Amid advances in digital transformation (DX), we are fully deploying our strengths to properly address
the needs of our customers who are changing their focus from products to services.
Creation of businesses after putting operations into practice in-house

Business Creation

Hardware /Software

Co-Creation
with Partners

SelfImplementation

NESIC

Networks

Technological
Capabilities &Credibility

Startup Firms

Nationwide
Business
Capabilities

Cutting-edge/
VentureTechnologies

ICT /Construction
Partners

Cloud Services

08

ANNUAL REPORT 2019

Customers

Example / Initiative Leveraging
Core Competencies
Provision of In-House Tested Solutions
for Work-Style Innovation
The Company began tackling workstyle innovation in 2007. Through cocreation and by constantly validating
and putting into practice new technologies in-house, the Company aims
to realize innovations that resolve
social issues, such as alleviating labor
shortages and improving productivity.
Beginning in autumn 2019, NESIC
will adopt a distributed work model
for corporate staff departments, inline with the aim of preventing a deterioration in the ability to innovate andreducing the stress of employees who
commute long distances to work in
Tokyo, issues that are peculiar to
Japan (see page 28). We are evaluating the effectiveness of distributed
work models while utilizing cloudbased services and making sweeping
reforms to business processes toresolve issues that arise in communication, management, and administrative work. Validated outcomes andknow-how are then delivered as solutions to our customers.

ANNUAL REPORT 201909

O U R H I S TO R Y
NESIC has continued to change and grow, adding new strengths in tune with the times for its core business of innovating and developing communications technologies. Honing these strengths, the Company is keen to provide newvalue and pursue its vision of becoming a “communication services orchestrator.”

1953–

Founding: Telecommunication
Construction

1960s–

Overseas Infrastructure
Construction

1990s–

System Integrator

History of Honing Core Competencies
Refinement of Construction Technologies as a
Telecom Infrastructure Constructor

Growth through Construction Capabilities andRefinement of ICTNESIC was established in a spin-off of the telecommunications engineering division from NEC Corporation in 1953. The Company has
steadily built up its construction capabilities, centered on NEC
products, while tapping into growing demand for telecommunications infrastructure in Japan and overseas. We have also obtained
and advanced high-quality technologies, which are symbolic of the
NEC Group.

Alongside advances in technology, NESIC broadened its reach in
the telecommunications infrastructure field to such areas as mobile
base stations. The Company also expanded business to provide ICT
to corporations by creating voice networks, enabling it to provide
construction, system integration, and maintenance services.
Accordingly, we have set up sales bases across the country andbroadened our nationwide responsiveness.

Technological
Capabilities(Construction
capabilities + ICT)& Credibility

Technological
Capabilities(Construction
capabilities) &Credibility

Nationwide
Business
Capabilities

Main Initiatives
 ippon Electric Installation
N
Company established in aspin-off from NEC Corporation
 onstructed the first televisionC
broadcasting facility

 onducted first overseas projC
ect (construction and installation of switching equipment in
the Philippines)

Acquired special construction
business and general construction business licenses forseven categories of construction businessC onstructed satellite telecom
infrastructure for the 1968
Olympic Games, in Mexico City

Changed the company nameto NEC System Integration &Construction, Ltd.
Listed on the Tokyo Stock
ExchangeConstructed communications
equipment on Mt. Everest(enabling broadcast fromthe peak of Mt. Everest for the
first time) usiness for New Common
B
Carriers (NCCs) took on significant scale
Received major orders fromnew private-sector communications companies
 xpanded the enterpriseEsystem integration businessStrengthened sales structure
for private sector by creating a
specialized division
Constructed microwave telecom infrastructure for five
Central American countries(simultaneous construction
in multiple countries)

Reinforced nationwide network by setting up a business
unit for regional sales

 stablished S-iDC (Strategic
E
Internet Data Center), NESIC’s
first data centerEstablished the first overseas
affiliate, in Brazil

Net Sales

Over ¥10 billion
1974

Over ¥100 billion
1989

Over ¥200 billion
1997

Changes in the Business Environment

10

1950s

1960s–1970s

1980s–1990s

Reconstruction after World War II.
Era of construction in broadcasting
and telecommunications
infrastructure

Increase in international communications
and satellite communications, expansion indemand for telecommunications infrastructure construction worldwide

Telecom liberalization, birth of New Common Carriers (NCCs)

ANNUAL REPORT 20192010sSolution Provider

2020s

Toward Becoming a Communication Services Orchestrator

Creation of New Businesses through Technological Capabilities andNationwide Responsiveness
NESIC has reinforced its strengths by building a full-service network of more than 400 support and service bases
across Japan through aggressive M&As, including a merger in 2007 with NEC Telenetworks Co., Ltd., a company
with strength in the service field, and turning Q&A Corporation, which operates contact centers, into a subsidiaryin 2013. Furthermore, NESIC has greatly expanded the products and services it offers, including through turning
the innovative technologies of startups into services while advancing co-creation with partners, as well as creating EmpoweredOffice work-style innovation solutions and other new businesses that leverage its unique technological capabilities.

Technological
Capabilities &Credibility

Nationwide
Business
Capabilities

Business
Creation
Capabilities

Changed the company name to NEC
Networks & System Integration
Corporation

NESIC’s industry sector classification in the stock
market changed from “construction” to “information & communication”

EstablishednTOC (Network Total
Operation Center)Established sDOC (Service Delivery Operations
Center) stablished CVC Fund to create new businessesEthrough open innovation with startup firms
L aunched joint business in low-power, wide-area(LPWA) communications protocol for IoT

 stablished K&N System Integrations
E
Corporation as a joint venture in mobile­infrastructure constructionL aunched EmpoweredOffice work-styleinnovation solutions business andimplemented it internally in certain
sections

Implemented initiatives in high-speed mobile
networks and next-generation broadcastingLaunched MVNO service for IoT
Introducted telework system Companywide(spawned from a “Women’s Project Experiment”
idea created by female employees)

Realigned head office to spur further innovation

Practiced EmpoweredOffice in all sections
upon transfer of head office to Bunkyo
Ward Tokyo (Iidabashi Head Office)¥292.2 billion
FY2015/3 (record high)

2000s

2010s

Advance of IP and broadband networks, integration of communications
and broadcasting

Expansion of the use of cloud; IoT and
Fourth Industrial Revolution¥277.9 billion
FY2019/3

ANNUAL REPORT 201911

O U R C O N N E CTI O N TO DA I LY L I F E

NESIC Contributes to a Safe, Secure, and Plentiful
Tomorrow in Various Contexts of Daily Life.
1

Broadcasting

Construction, operation,and maintenance of digital
TV broadcasting facilities
and relay stations, andstudio facilities, as well as
installation of fiber-optic
cable for next-generation
4K and 8K broadcasting.

2 	Work-Style Innovation

3

By bringing together various cloud-based tools and applying
cutting-edge technologies, we make new work styles that
foster innovation a reality, with venues where employees
across organizations and companies can create together asa single team in a work environment free from specific locations. Accordingly, it allows people to work from home orsatellite offices, with a focus on resolving issues that arise incommunication, management, and administrative work.

Visual Docking Guidance
Systems (VDGS), airport
information, and a broadarray of other services.

Airports

4

HotelsComprehensive hotel solutions such as telephones
and switching equipment,room management systems,
and systems for providing
guests with information.

3

1

4

2

5

9

8

6

7
7

5 	Mobile

Communications
Network
Installation of mobile basestations indispensable fordaily communication via
smartphone and flip phone,and overall network support,
together with system integration of core networks.

12

ANNUAL REPORT 20196 	Fire-fighting &Ambulance
Construction of command
systems and radio systems
enabling rapid responses to
119 emergency calls, andthe provision of multilingual
call center services.

7 	Railways andRoads
Support for public transportation by constructing andmaintaining telecommunications networks and othersystems for railway andhighway traffic control.

8 	Disaster

Prevention
Warning systems that provide information at times of
emergency (earthquake,tsunami, typhoon, etc.) via
simultaneous announcements over disaster prevention communication
systems for greater safety
and security in daily life.

9 	Shops and Public

Facilities
Creation of convenient user
environments for customers
including Wi-Fi networks,
information distribution systems, and value-added
video services.

NESIC utilizes its strengths in technological capabilities & credibility, nationwide business capabilities, and businesscreation capabilities to provide customers with total solutions that help increase their productivity and resolve
their issues.

10 Plants

11 Oceans

12 Space

Provision of IoT systems
able to detect and manage
the location of people andthings in real time at plants
and other production sites.

Installation of submarine
cables that support international communication, andsupport for earthquake
warning systems by integrating submarine
seismometers.

Support for control systems
used to communicate withand operate asteroid exploration, and other types ofsatellites and probes.

13 	Local

Governments
Provision of networks usedby local governments toprotect citizens, provide
municipal services, and promote citizen convenienceand security, and tourism
information services for
local revitalization.

12

11

13

10

16
15

17

14

14 	Network Total

Operation
Centers
24/7 customer network
support ranging from security monitoring to network
operation.

15 	Comprehensive

Technical
Centers
Comprehensive technicalservices ranging from distribution control functions
that run 24/7, to newtechnology evaluation andSI, and maintenance andrepair.

16 Data Centers

17 Contact Centers

Keeping of customers’ IT
assets in secure, robust
environments, and provisionof wide-ranging operation,
outsourcing, and cloudservices

ICT system failure response,
help desk, and other support services for customer
system administrators andsystem users, and interpretation services in multiple
languages.

NESIC’s service platform

ANNUAL REPORT 201913

Message from the President

Pushing Forward and Moving
Beyond Borders as aCommunication Services Orchestrator

Yushi Ushijima
President

14

ANNUAL REPORT 2019

NESIC’s Unique Strengths
Two years have passed since I was appointed Presidentof NESIC. During this time, I have deepened my understanding of our strengths and issues in preparation for
future growth. Over the past year, my attention has been
focused on formulating medium- and long-term growthstrategies that leverage our strengths.
In 2017, when I returned to NESIC as President after
serving at a subsidiary, I rediscovered its uniquestrengths, and when fully leveraged, NESIC has thepotential to become a “Strong and Attractive Company”
that is better than its rivals in terms of both services andearnings. NESIC boasts technological capabilities andreliability, derived from its proprietary technologicalcapabilities in construction, installation, and ICT, and theadvanced level of technologies and services it has accumulated as a NEC Group company, which is applied tomultivendor services. Another strength is its nationwide
business capabilities with a sales network spanning theentire country of Japan and the robust maintenance service network required of a company that supports
public infrastructure without experiencing downtime,such as for telecom carriers and government agencies.
Furthermore, NESIC has been gaining the unique ability
to create businesses with these advantages. Taking
EmpoweredOffice work-style innovation solutions as an
example, the Company tests out new products and services on its own and provides them to customers aseasy-to-use solutions. With this ingrained in its corporate culture, NESIC has recently been focusing its energy
on providing new services that incorporate cutting-edge
technologies. Another example is our collaboration with
Zoom Video Communications, Inc. (see page 34). Zoom
Video Communications was approached by a number ofJapanese firms to bring its solutions to the Japanesemarket, but NESIC was able to seal a sales partnershipagreement thanks to it being the first firm to contact
Zoom Video Communications with a passionate
approach. This successful arrangement boosted NESIC’s
profile among other startup firms in the U.S., creating avirtuous cycle of collaboration with new companies. I
believe one of NESIC’s core competencies is its ability to
discover cutting-edge/venture technologies and rapidlytranslate them into new value without encountering
complications.

Vision for 2030:
Communication Services Orchestrator
Within common global frameworks like the Sustainable
Development Goals (SDGs), governments, the private
sector, and even individuals are increasingly expected tochange their attitudes and behavior toward the global
environment and the sustainable development of society. Japan is facing issues that threaten the sustainabilityof society, such as its declining workforce, and companies must step up to address both social issues andeconomic development.
In addition, taking an overhead view of technology
over the next ten years or so until 2030, changes in business and social structures are likely to accelerate with
the increasing adoption of digital technology, including
AI and IoT. In Japan, fifth-generation (5G) telecommunications systems will commence operations in 2020,
offering higher speeds, larger data volumes, simultaneous multiple connections, lower latencies, and greater
reliability. These features could have an unprecedented,
major impact on industries, such as remote medicine
and self-driving cars. Looking further ahead, digital technology will converge with 5G infrastructure to create
innovative new services.
With these significant changes afoot, NESIC aims forsustainable development along with society by leveraging its strengths in the communications domain where it
has had a presence since its founding. “Communication
services orchestrator” is our corporate vision for creating
a more welcoming and convenient society through communications by the year 2030.
Amid the paradigm shift from products to services,
NESIC must transform its traditional business model as asystems integrator that leans towards products, into abusiness model that includes systems integration forcloud-based services. To this end, the Company must
produce a new value chain that incorporates a variety ofservices while accelerating co-creation with business
partners. The meaning of “orchestrator” is to create new
innovations that excite our customers by combining various partners and services into an optimal solution forcustomers to use.

ANNUAL REPORT 201915

Message from the President

Focusing on Digital Solutions and5G Infrastructure
Digital solutions and 5G infrastructure are the twodomains where we will concentrate our management
resources in order to achieve our vision for society.
With regard to digital solutions, a variety of cloudbased digital services have begun to be provided in tune
with the shift to the cloud. Regarding 5G infrastructure,
the Company expects capital investments to pick up in
earnest from 2021. With this in mind, we believe themigration to 5G, including measures to deal with greater
data volume, will take place during the current mediumterm management plan. Furthermore, we expect local
governments and companies to roll out their own local
5G service networks. Looking further ahead, we anticipate the arrival of a “digital x 5G” era with new digital
services based on 5G infrastructure, and expect completely new services that utilize cutting-edge networks
to begin emerging. In other words, customers of ordinary
companies will be able to use networks of the same
quality as telecom carriers, and this will create demand
for system integration for cutting-edge backbone

networks, as well as construction of base stations, andeven proposals and provisions of new services based on
this infrastructure. NESIC will be able to fully leverage itscore competencies in this coming era, and build an“Only 1” position.
In order to make steady progress on this road map,
we must come up with ideas that defy conventional
wisdom and transcend existing frameworks. In last year’s
report, I said “I would not mind changing everything
except our core value of contributing to society throughcommunications technologies.” This represents our true
intentions.
In order to latch onto business opportunities amid thewave of digital transformation, NESIC must transition
across borders, from traditional domains centered on
product-based system integration to cloud-based service domains. Technological barriers must also be overcome in order to provide services that customers findeasy to use while taking full advantage of the latest­digital and 5G technologies. Amid the rapid changes
taking place around the world, the Company must further refine its core competencies and move more
quickly in order to survive competition from rivals. In
other words, NESIC must surmount borders drawn by

The meaning of “orchestrator”
is to create new innovations
that excite our customers by
combining various partners andservices into an optimal solution for customers to use.

16

ANNUAL REPORT 2019

the competition. We must also break down walls
between organizations and lift our capabilities aboveand beyond current borders, and clear away the barriers
that exist in various markets and technologies.
Our determination to make this transformation overborders, barriers, or walls happen is mirrored in the
Beyond Borders theme of the medium-term management plan (FY2020/3 to FY2022/3).

First Step Toward Our Vision:
Beyond Borders 2021
Medium-Term Management Plan
With our eyes on the long-term road map, we are building a business structure and framework able to respondto major changes in the business environment. Our current medium-term management plan is positioned as a
stepping stone for a leap ahead in growth under the
next medium-term plan. NESIC will surmount performance barriers by focusing efforts on the reinforcementof existing operations and the creation of new
businesses.
The Company targets ¥310 billion in net sales by thefiscal year ending March 31, 2022. As the top line shifts
above the ¥300 billion level, NESIC aims to achieve targets for operating income of ¥20 billion, operating
margin of 6.5%, and ROE of 10% or higher, to achieve
profitability on a par with its sector peers.
All of these management targets are aimed at recordsetting levels. The Company already started investing in
growth in the previous fiscal year, and is advancing measures to attain these targets under the current mediumterm management plan. We believe these targets areachievable, given the business environment, our ability
to ­execute, and the progress made thus far on measures. In particular, we are keen to reach our operating
margin target, mainly through cost reductions as a resultof increasing management efficiency. NESIC plans tospend ¥13 billion on growth investments over the next
three years with the intention of translating strong topline expansion into profit growth over the medium andlong terms. The Company will also invest heavily inhuman resources while strengthening growth businesses,
co-creation, and alliances.

Measures Based on Our Basic Strategy
One of our basic strategies for moving Beyond Borders
is to strengthen competitiveness and growth potential
for the digital & 5G era. In the digital domain, NESIC
launched the digital transformation (DX) project as a
Companywide initiative in April 2018 to marshal internal
resources and advance initiatives in digital businesses. In
addition to Zoom, we introduced Workato (a workflow
automation service that increases work efficiency bylinking together cloud services), box (a secure storage
service that facilitates online collaboration), and othercutting-edge services. We are accelerating the rolloutof these services. In 5G, NESIC is participating in
5G!Pagoda, a project to create international standards
for 5G between Japan and Europe, and has started creating a foothold for establishing 5G technologies. The
Company is also making steady progress on new business schemes for the future. NESIC has launched a joint
business with Sony Network Communications Inc. and
ORIX Corporation for ELTRES™, a new specification for
LPWA (a low-power, wide-area communications protocol
for remote area communications), which is a promising
platform for IoT. NESIC has also established a joint venture with KDDI Corporation to install mobile base stations, with the aim of expanding business by leveraging
the strengths of both companies.
The second basic strategy is to strengthen the base,schemes, and structure to create advanced technologies
and new businesses. Specifically, a central premise ofthis strategy is the co-creation of businesses with promising startup firms that boast innovative technologies.
In January 2018, NESIC established its own Corporate
Venture Capital (CVC) Fund, and has already invested infour startup firms in the U.S. and Japan. Among thesefirms is Savioke, Inc., a company with autonomous delivery robot technology that can be used in hotels andhealthcare settings. It has also invested in ALE Co., Ltd.,an aerospace venture aimed at applying our expertise inaerospace operations, including satellites and probes, tothe private sector. We hope these investments will leadto the advanced of dream-inspiring new businesses. In
April 2019, NESIC invested in Sozo Ventures, a venture
capital fund in the U.S. that targets startup firms withmore developed cutting-edge/venture technologies. In
May 2019, NESIC partnered with Plug and Play Tech
Center, an accelerator in Silicon Valley, with the intention of ­discovering promising technologies and applying
them to communications platforms (see page 39).

ANNUAL REPORT 201917

Message from the President

Organizational Reforms for Beyond Borders
Our third basic strategy is to accelerate innovation
through All-NESIC. To date, NESIC has grown its businesses with organizations targeting each market, such as
corporations, telecom carriers, and social infrastructure
providers. Since becoming President, I have noticed that,amid the sharing of technologies across organizations,the scattering of engineers with expertise in similar technologies is inefficient. To take full advantage of theresourcefulness and strengths of our engineers, we must
marshal all of our resources and leverage them as a
combined force for the entire company. With this inmind, in April 2019, NESIC reformed its market-focusedorganization into the Digital Solutions Business Unit andthe Network Infrastructures Business Unit to create anorganizational structure that is more specialized andcompetitive with strategies aligned toward digital solutions and 5G infrastructure. The Digital Solutions
Business Unit consolidates businesses that provide services, such as system integration and other work-styleinnovation solutions, with systems engineering for enterprises, system integration for ICT platforms, and otherservice functions. The Network Infrastructures Business
Unit combines system integration functions in the public
network domain, such as social infrastructure and promising 5G-related networks. Bringing together core functions in installation and maintenance that had been
scattered across previous business units, the Engineering& Support Services Business Unit was created to pursue
higher levels of productivity and increase project quality
through collaboration with the two aforementioned business units.
Looking at the business portfolio from another angle,
NESIC plans to increase profitability while growing sales
in the Digital Solutions and Network Infrastructures
Business Units by enhancing competitiveness and­creating new businesses. In the Engineering & Support
Services Business Unit, the Company aims to improve
profitability by enhancing efficiency in resource
deployment.
In addition, the Business Design Operations Unit has
been created with the mission to investigate new technologies and create new businesses with employees
who had been previously scattered across business
units and head office functions, aiming to increase

18

ANNUAL REPORT 2019

co-creation with business partners including startup
firms, and also to create business using digital technologies. This unit is also in charge of Companywide technology strategies, new business planning, partnering,
and alliances. The Business Design Operations Unit will
also develop business in domains where NESIC has not
traditionally had a presence.

Challenging New “Only 1”
Work-Style Innovation
As a catalyst for advancing these strategies, NESIC isrealigning its office locations around the head office in abid to accelerate work-style innovation. One aim of therealignment is to decentralize corporate staffing functions. We plan to reduce floor space at the head officeby 60% and redistribute staff to activity bases in about
10 locations in the Tokyo metropolitan area. Around
60–70% of corporate staff will work at activity bases
within a 30-minute commute, or telework from home,instead of commuting to the head office. The aim of thisrealignment is to turn the disadvantages of decentralization into advantages by using various digital technologies to their fullest potential while rethinking work
processes from scratch. We will then propose this framework as a solution to our customers. Through decentralized work styles, employees will have an opportunity
to achieve a better work–life balance and potentiallybecome more creative. This way of working should
also boost our ability to innovate, a widespread issue
in Japan.
NESIC is also setting up innovation bases with cuttingedge technologies to promote co-creation and the creation of new businesses. With our venture bases in the
U.S., we will demonstrate to our customers new initiatives for communicating, such as between offices withthe feeling of sharing the same physical space.
As a pioneer in work-style innovation, NESIC will continue to come up with new work styles that are two or
three steps ahead of the competition, by utilizing thetechnologies and expertise it has accumulated over the
past 10+ years.

With an eye on 2030, NESIC will strive toovercome various hurdles through unified
efforts and advance toward its 2030 vision
for creating a more welcoming andconvenient society through communications
as a “communication services orchestrator.”
We hope you will support us as we continue
to take on new challenges.

Moving Beyond Borders with Communication
I believe we must move aggressively forward while taking
full advantage of the abilities of each and every employee
in order to steadily push on changes that will allow us toovercome many barriers. Communication in our company
is key to making this happen. With this in mind, I have visited our bases across the country to directly talk to manyof our employees about the concepts behind the
medium-term management plan. I am taking care to communicate with all levels of employees, with eye-catching
digital signage on office floors and by answering questions posed by employees on a talking program called
Ushijima Radio (see page 41). I am proud of the changes
we have made at NESIC over the past two years to facilitate the undertaking of new challenges.

Communication is essential in people’s everyday lives,and I believe advances in communication will lead tosolutions for all issues faced by society. This belief isreflected in “an inclusive and sustainable society createdthrough communications,” the Company’s vision.
With an eye on 2030, NESIC will strive to overcome
various hurdles through unified efforts and advancetoward its 2030 vision for creating a more welcoming
and convenient society through communications as
a “communication services orchestrator.” We hope
you will support us as we continue to take on
new challenges.

President

ANNUAL REPORT 201919

Financial & Non-Financial Highlights

Orders Received / Net Sales

Operating Income / Operating Income to Net Sales(¥ billion)(¥ billion / %)

292.2
299.1

257.9

280.0

279.2

274.9

277.9
284.7

267.9
287.8

16.2
14.1

5.5

2015/3

Orders received

2016/32017/3

2018/3

2019/3(FY)

Net sales

5.0

2015/3

2016/3Operating income

Total Assets / ROA(¥ billion / %)(¥ billion / %)

8.9

8.7

6.5

6.0

2015/3

2016/32017/3

8.7

7.6

7.0

6.5

201.9

7.4

2018/32017/3

196.5

2018/3

207.6

197.4

(FY)

Net income attributable to owners of the parent
ROE (return on equity)

2015/3

2016/3

Total assets

5.4

5.1

2017/3

2018/3

Owner’s Equity / Owner’s Equity Ratio(¥ billion)(¥ billion / %)
57.3

54.4

6.6

2015/3

Free cash flows

2016/3

47.2

45.8

19.9

–1.5

92.7

92.6

43.9

39.0

2017/32.0

2.8

2018/3

2019/3(FY)

Cash and cash equivalents at end of year

2015/3

Owner’s equity

2016/3

Stock Price / TSR*(¥ / %)

(¥)

78

74

72

70

(FY)

216.2

6.1

2019/3

(FYE)

99.5

94.6

47.8

47.9

2017/3

2018/3

104.9

48.5

2019/3(FYE)

Owner’s equity ratio

Cash Dividends per Share / DOE

64

2019/3

ROA (return on assets)

Free Cash Flows /Cash and Cash Equivalents at End of Year
59.6

4.6

8.3
7.1

2019/34.1

3.9

Operating income net sales

Net Income Attributable to Owners of the Parent / ROE

7.8

12.8

11.1

10.0

3,000

2,000

3.8

3.5

3.8

3.8

3.8

1,000

2015/3

2016/3

Cash dividends per share2017/3

2018/3

2019/3

DOE (dividend on equity)

(FY)

0

2015/3

2016/32017/3

2018/3

2019/3(5 years ago)

(4 years ago)

(3 years ago)

(2 years ago)

(1 year ago)

45%

23%

66%

31%

–1%

(FY)

* Figures as of March 31, 2019, assuming investments were made X years ago

20

ANNUAL REPORT 2019

Number of Employees / Number of New Graduate Hires /Number of Mid-Career Hires

Average Overtime (per month) (Non-consolidated)(Employees)(Hours)
7,464

7,572

7,657

7,743

1,136

1,262

1,329

1,368

135
6,310

29
2016/3

20.3

18.9

19.7

2018/3

2019/3

122

135
6,328

24.0

112
6,328

41

8

25
2017/3

6,375

2018/3

2019/3(FY)

2016/32017/3(FY)

Male employees (end of fiscal year)
Female employees (end of fiscal year)
New graduate hires
Mid-career hires (non-consolidated basis)

Employees with Qualifications (Non-consolidated)(Total number of people)

EmpoweredOffice Visitors(Employees)(Companies / Individuals)

2,026

2,177

2,272

2,274

1,515

1,489

10,745
7,599

1,412

1,471

614

706

757

785

2016/32017/3

2018/3

2019/3

6,113

2,248

(FYE)

Companies

3,253

2,427

2,146

2016/3

Employees with advanced ICT qualifications
Employees with managing engineer or technical supervisor qualifications

6,108

2017/3

2018/3

2019/3(FY)

Individuals

Number of Non-Japanese Employees / Ratio of Womenin Management Positions / Ratio of Employees with
Disabilities (Non-consolidated)

Average Length of Service / Ratio of Continued
Employment Past Age 60 (Non-consolidated)(Years / %)(Employees/ %)
16.7

16.2

17.3

19.1

68.1

27

65.5

19

66.6

54.7

2.2
2.1

2016/32017/3

2018/3

2019/3(FYE)

2016/3

Average length of service
Ratio of continued employment past age 60

25

20
3.0

2.8

2.5

2.1

2017/3

3.7

2.3

2018/3

2019/3(FYE)

Number of non-Japanese employees
Ratio of women in management positions
Ratio of employees with disabilities

Outside Evaluations
2016

2017

2018

2019

SNAM Sustainability Index (Announced in June)
Certified Health and Productivity Management
Organization (Announced in February)* Established in February 2017

ANNUAL REPORT 201921

Social Value Creation Model

NESIC’s vision for society is “an inclusive and sustainable society created through communications.” To make this societya reality, we have established a social value creation model based on co-creation with partners and putting new ideas
into practice ourselves, with the overriding objective of integrating various technologies and providing them to customers as easy-to-use solutions.
Based on this value creation model, we will continue to create new businesses and services. NESIC has identified
three core areas (materiality) where it can provide value to society through 2030, namely “create environments inwhich everyone can work more vigorously,” “develop pleasant and plentiful communities with cutting-edge technologies,” and “provide robust services that underpin safety and security in evolving society.”

Vision for Society

An inclusive and sustainable
Means of Creating Value

Customers

Hardware/
SoftwareStartup Firms

Integration
Technological
Capabilities &Credibility

SelfImplementation

Networks

Co-Creation
with
Partners

Competence
Nationwide
Business
Capabilities

Business
Creation
Capabilities

ICT /Construction
Partners

Pursuing a customeroriented approach to businessCutting-edge/
Venture Technologies

Cloud
Services

Materiality Issues (Initiatives for growth at NESIC)Sound and highly
transparent management

22

ANNUAL REPORT 2019

Strengthen innovation
capabilities thatcreate new value

See page 36–37

Create work environments
where employees canwork vigorouslyTo carry on with the creation of value for society, the Company is implementing three important initiatives (materiality) for ensuring growth: “sound and highly transparent management,” “strengthen innovation capabilities to create newvalue,” and “create work environments where employees can work vigorously.”
NESIC aims to increase its corporate value over the long term by contributing to the development of society and theSustainable Development Goals (SDGs) through the continued implementation of this value creation model.

society created through communications

Growth Fields

Materiality Issues(Initiatives to provide value tosociety through 2030)

Create environments in which everyone
can work more vigorously

5G

Develop pleasant and plentiful communities with cutting-edge technologies

Sustain Improvementin Corporate Value

DigitalSee pages 36–37

Provide robust services that underpin
safety and security in evolving society

ANNUAL REPORT 201923

Medium-Term Management Plan

Beyond Borders 2021
Review of Previous Medium-Term Management Plan
Under the previous medium-term management plan, which spanned from FY2017/3 to FY2019/3, NESIC was regrettably unable to achieve its management targets, as growth in business for enterprises did not fully offset the sharp
declines in business for telecom providers and the social infrastructures business during the first year of the plan.
Toward the new medium-term management plan, however, NESIC has seen some results. Looking at profitability, thegross margin reached a record-setting level of 17% and ROE improved more than 2 percentage points. To reinforce ourbusiness foundation, we took steps to strengthen our growth potential and core competencies, launching the DX (digital transformation) business and accelerating co-creation with partners.
Results

Targets of Previous Plan(¥billion / %)280.0

Net Sales

Ratio to Net Sales

Over ¥300 billion

Over 5.5%

Operating Income

ROE

Over ¥16.5 billion

Over 10%

267.9

257.9

6.5

5.0

2016/3

277.9

7.6

7.0

8.7
4.6

4.1

3.9

2017/3

2018/3

2019/3(FY)

Previous medium-term management plan

Net sales

Ratio to net sales

ROE

Positioning of New Medium-Term Management Plan
When devising the new medium-term management plan, we defined the most important initiatives to undertake overthe next three years within the context of our vision for 2030 and our aim of sustaining growth.
The social vision we aim to achieve by 2030 is “a more welcoming and convenient society through communications.”
New technologies and services are constantly being created by startups and other companies. While leveraging its
own strengths, NESIC aims to be a “communication services orchestrator” that creates new social value in collaborative
initiatives with various partners including startup firms. Based on this outlook, our new medium-term management planprioritizes the strengthening of our growth potential and profitability through revisions to the business structure in linewith changes in the business environment over the next five to 10 years.

Positioning of Medium-Term
Management Plan toward FY22/3

2030 Vision
Social vision to realize

A more welcoming and convenient

Strengthen

growth power andearnings powerby enhancing the businessstructure and constitution in anticipation of environmental changes within
the next five to ten years.
Strengthening of competitiveness in existing businesses

2019

24

Creation of new businesses andrevenue sources

ANNUAL REPORT 2019

Renewal of record-highperformancesociety through communications
Our future vision

Communication Services Orchestrator
that produces a new value chain
leveraging our strengths,
through collaboration
with partners

Contribute to achievement of the SDGs by realizing our vision(Aim to maximize both social and economic value)

Medium- and Long-Term Outlook for the Business Environment
Amid the increasingly borderless world, companies are transforming their business models, processes, and work styles
in order to enhance their international competitiveness. On the technology side, advances in digital technology andfaster, more sophisticated networking technology (5G) will lead to the creation of services never seen before, and possibly change the world. Moreover, labor shortages are likely to become a major problem for both NESIC and its customers. While they represent threats to NESIC in the sense that they may undermine existing operations, we also view
them as major business opportunities for creating new services.

Opportunities

Threats

Diversification and leveling of

Changes in existing

Digitalization

earnings opportunities

Creation of new business

SI modelContraction of

5G

opportunities

Need for higher productivity andoutsourcing of operations among

Labor shortage

construction business

Securing of human resources andcustomers

succession of technologies

Measures Taken toward New Medium-Term Management Plan
To ride this wave of change, NESIC has taken Companywide measures to strengthen its growth power, which include
launching digital-related businesses, rolling out advanced services, forging new partnerships, and developing frameworks for co-creation with startups.
Strengthening of Growth PowerStrengthening of Competence

Acceleration of Collaboration
with Partners

Started up DX business &Reorganized into three businesslaunched advanced services

units—Digital Solutions BU,Collaboration with startups forPromoted new businessNetwork Infrastructures BU,

business ­creationand Engineering & Support(Discovery of cutting-edge

Services BU– to exert expertise­solutions and services)

schemes/partnerships
Created a foothold for establishing 5G technologies(Participation in 5G! Pagoda)

and competitivenessConsolidated advanced technologies and business creation
functions, and created Business
Design Operations Unit

Beyond Borders 2021 Medium-Term Management Plan
Under Beyond Borders 2021 medium-term management plan, which commenced in the fiscal year ending March 31,
2020, alongside the achievements we have made to date, we aim to shift to a new business model centered on digitaland 5G, and accelerate the creation of new businesses, with the view that resolving social issues and riding the waveof technological innovation will lead to opportunities for business expansion. NESIC intends to change its businessstructure for the coming era of “Digital x 5G,” a future where digital and 5G technologies converge, while strengthening
systems to create new businesses with cutting-edge/venture technologies and accelerating innovation across organizational boundaries. Through these initiatives, we aim to surmount various borders, realize sustainable growth, and help
resolve social issues through our business activities.

ANNUAL REPORT 201925

Medium-Term Management Plan

Management Targets
While raising the level of net sales to more than ¥300 billion, NESIC has set the following management targets as a
waypoint for achieving higher levels of profitability in line with industry standards.
(¥ billion)

FY2019/3 (Results)

FY2022/3 (Targets)

Net Sales

277.9

310.0

Operating Income(Ratio to net sales)

12.8(4.6%)

20.0(6.5%)(Reference)
Record-high

292.2
FY2015/3

16.2
FY2015/3(5.5%)FY2015/3

ROE

8.7%

10% or more

9.6%
FY2014/3

Reorganization and Positioning of Business Segments
Guided by these objectives, in April 2019, NESIC reorganized its operations into three business segments comprising
the Digital Solutions Business, which provides system integration for office ICT platforms and related services for enterprises; the Network Infrastructures Business, which
offers system integration and related services for highly
Medium-Term Targets for Each Segment
public networks to telecom carriers, governments, andRatio
to netsocial infrastructure providers; and the Engineering &Engineering &sales
Digital Solutions(%)
Support Services Business, which concentrates all conSupport
95.0
Services
struction functions and support service functions, such
10.5
110.0
as maintenance, operations, and monitoring.
10
11.0
In the Digital Solutions Business and Network
99.8
90.4
Infrastructures Business, which are positioned as
8.4 105.0
80.4
8.5
7.2
growth-driving businesses, NESIC aims for growth in
5.9
both net sales and operating income. In the
Network
Infrastructures
6
Engineering & Support Services Business, our focus is
Upper figures: Net sales
FY19/3
on improving profitability through achieving greater efficiencies in Companywide platforms for construction
work and support services.

FY22/380

Lower figures: Operating income

100

120
Net sales (¥ billion)

Additionally, as a part of our business-reform efforts, we are accelerating initiatives to reform work styles and offices
with an eye on speeding up innovation. We are challenging ourselves to come up with cutting-edge ways of working
that go beyond traditional concepts for offices. While accumulating and providing know-how, we are keen to turnEmpoweredOffice into a business that drives innovation in our customers’ businesses (see page 28).

Coming Era of “Digital x 5G”
In the coming era of “Digital x 5G,” the close integration of ICT and networking technologies should bring about innovative changes in services. Against this backdrop, we believe our role will increase significantly as a creative force inbusiness, advancing the EmpoweredOffice work-style innovation solutions and other pioneering businesses, and leveraging our core competencies in business platforms for providing a full range of services, from building mission critical
networks for telecom carriers and social infrastructure providers, to ICT services for enterprises.
NESIC aims to contribute to the realization of a welcoming and convenient society by honing these core competencies and deepening its expertise.

26

ANNUAL REPORT 2019

Business Strategy

Digital Solutions Business

Advancing Business through DX
Leveraging the latest digital technologies, we create unprecedented work-styleand business processes of the like never seen before. And we will evolve thework-style innovation business to further advance services that spur innovationand strengthen the businesses of our customers. With this aim, we are accelerating the creation of business through co-creation with companies that havecutting-edge/venture technologies while putting these new technologies into
practice in-house.

Osamu Noda
Senior Vice President and Member of the Board
Executive General Manager, Digital Solutions Business Unit
Executive General Manager, Business Design Operations Unit

Network Infrastructures Business

Developing 5G across All Businesses, Centered on Operations for
Telecom Carriers
We intend to expand operations for telecom carriers by leveraging our full-layer
system integration capabilities, from mobile communications base stations tobackbone networks, while reinforcing our technological capabilities for moreadvanced communications technologies like 5G. At the same time, we will
accelerate business development in services compatible with 5G technology,
and strengthen our ability to provide innovative solutions combining cuttingedge technologies, such as 5G, in the public infrastructure field.

Masaya Kadota
Senior Vice President
Executive General Manager, Network Infrastructures Business Unit

Engineering & Support Services Business

Increasing Efficiency of Construction and Maintenance Services,
Nurturing and Advancing Resources
We aim to increase the efficiency of our business operations while reinforcing
our operational capacity in all Companywide functions, such as construction
and maintenance, by consolidating and integrating our construction functions
and maintenance system inside and outside Japan. To this end, we are expanding training for all related engineers and focusing on improvements in project
quality and management capabilities, while encouraging employees to learn
multiple skills and promoting succession of technologies.

Masafumi Gouji
Senior Vice President and Member of the Board
Executive General Manager, Engineering & Support Services Business Unit

ANNUAL REPORT 201927

Medium-Term Management Plan

Realignment of Offices to Accelerate Innovation
Promotion of Distributed WorkAs a leading company in work-style innovation, NESIC decided to take on the challenge of adopting new work styles
from October 2019 in a bid to encourage innovation. We are creating venues for developing new businesses throughco-creation with customers, startup firms, and other partners while leveraging cutting-edge/venture technologies. At
the same time, our corporate staff will work at about 10 locations dispersed across the Tokyo metropolitan area toreassess our business processes from scratch, and put into practice innovative ways of working that maximize the useof digital technologies. Our distributed offices will reduce the hardship of commuting to work, enhancing the motivation of our employees and encouraging them to grow on their own by polishing their skills.
By providing new services that emerge from putting these innovation-driving work styles into practice, we will contribute to improving the innovation capabilities of our customers across Japan. NESIC will also help resolve issues inJapan arising from its declining workforce and overconcentration of population in the Tokyo metropolitan area.

Aims of Office Realignment 	Create new businesses byaccelerating innovation

Creating
New Business 	Increase productivity 	Improve motivation of
employees

NESIC will establish an Innovation Basein Nihonbashi (Chuo Ward, Tokyo) as avenue for creating new business and collaborating with customers and startup
firms through open innovation.
Maximize the use of cutting-edge/
venture technologies
Take on the challenge of putting newprocesses into practice 	Cut time lost from workcommutes	Reduce costs

Promoting Support
Service Businesses

Innovation Base

Improving Technological
Capabilities and Quality

INNOVATION

Service Base

Technical Base

To enhance the delivery of services
to customers, NESIC established thesDOC* Kansai Center in Osaka City,
Osaka Prefecture, in addition to technical service bases in Tokyo andSaitama Prefecture (April 2019).

NESIC will establish a Technical Basein Kawasaki City, Kanagawa
Prefecture as a space for training
engineers and evaluating and verifying new technologies.


Improvecustomer responsivenessacross the nation

Deploying Innovationin Actual Business* sDOC: Service Delivery Operation Center

Create 5G Laboratory to experiment with 5G technologies
Conduct field tests with customers
Acquire new technologies andconstruction technologies

Implement Distributed WorkIn-House and Turn Reform
Processes into Actual Businesses
Business base: C urrent Head Office (Bunkyo Ward, Tokyo)
Activity bases: About 10 locations in the Tokyo metropolitan area
The Company will reduce the floor space currently in use by the Head Office andredistribute work to its approximately 10 office locations in the Tokyo metropolitan
area to keep commuting times within 30 minutes for employees.
 o-creation and communication regardless of locationCShift to highly creative work
Create new work styles and develop new services using this know-how

Strengthen new business creation by accelerating innovation through co-creation andin-house implementation of technologies
28

ANNUAL REPORT 2019

Financial and Capital Strategy

NESIC aims to sustain growth in corporate value by maximizing financial value
focused on improving ROE and increasing
non-financial value centered on materiality issues.
Hiroyuki Sekizawa
Senior Vice President and Member of the Board

NESIC believes that sustained improvements in corporate value result from the enhancement of shareholder value andthe value it provides to society, by addressing the expectations of stakeholders, including shareholders, investors, customers, employees, and business partners.
To this end, the Company will engage in activities to consistently realize and maximize returns that exceed the costof capital while aiming to improve return on equity (ROE), an indicator of capital efficiency. At the same time, NESIC
will take action to improve non-financial value, with a focus on materiality and other key issues affecting the Company,
in a bid to contribute to the resolution of social issues. We understand the importance of accurately disclosing thesevalues to stakeholders.

Maximizing Financial Value Focused on Improving ROE
NESIC has designated ROE as an important management benchmark for enhancing shareholder value by
consistently realizing returns in excess of the cost ofcapital. In the fiscal year ended March 31, 2019, ROE
was 8.7%, a year-on-year improvement for the third consecutive year, thanks to stronger profitability resulting
from greater cost efficiency, a shift to high-value-added
projects, and top-line growth on the back of a stronger
corporate structure. For the new medium-term management plan, we are targeting an ROE of 10% or higher.
To achieve this target, the Company is rolling out measures for each business unit to increase margins andasset efficiency, the basic components of ROE, to guidetheir business activities. These measures are put througha PDCA cycle.
More specifically, management aims to strengthen
existing businesses; expand net sales and added value
by creating new businesses utilizing cutting-edge/venture technologies and partnerships; improve profitability
by strengthening the cost structure through reduction ofmaterial costs and outsourcing costs, increase of inhouse production, and greater efficiencies in selling,
general and administrative (SG&A) expenses; andimprove working capital efficiency by shortening the
cash conversion cycle. I am confident that we canincrease ROE with all employees working together
toward improvement, by setting objectives for each business and employee based on the above.

Under the medium-term management plan, NESIC
intends to invest aggressively in businesses to carry out
its growth strategy for the coming era of “Digital x 5G.”
From the standpoint of improving ROE, however, management will continue to focus on making suitable decisions, by setting appropriate criteria for screening
investments based on their characteristics with due consideration paid to quantitative factors such as future
cash flow, qualitative factors such as strategic positioning, and the time frame for returns on investments within
the context of managing risk from the ICT industry’s
rapid pace of technological change. After investments
are made, management will periodically evaluate andassess their progress, while building investment knowhow with the aim of increasing investment
sophistication.
NESIC has an obligation to consistently provide highly
dependable services, such as building public infrastructure for the national government, local governments,
and telecom carriers. The Company must therefore
maintain a sound financial position. Management
intends to secure cash on hand equivalent to about twomonths of net sales in preparation for sudden capitalrequirements. In the event that more capital is requiredalongside growth or for major investments, management
will prioritize the use of debt, without undermining
financial soundness, in addition to the accumulation of
cash on hand equivalent to more than two months of
net sales, with due consideration paid to shareholder
value.
ANNUAL REPORT 201929

Financial and Capital Strategy

Optimizing the business portfolio with a view to capital efficiency is an important issue for management toaddress in order to sustain improvements in ROE andprofit growth. For this reason, when assessing businesses, management intends to optimize the businessportfolio by selectively concentrating and reshufflingbusinesses while relying on predetermined evaluation
methodologies, including matrixes of return on invested
capital (ROIC) and growth potential, in addition toassessing profits.

Sustain Improvement in Corporate Value

Financial value

MarginROE

Growth in
net sales• Reinforce existing businesses• Create new businesses

Cost ofsales ratio• Improve cost structure(increase efficiency of material
and outsourcing costs,
advance in-house production)

SG&A
expenseefficiency• Increase operating expense
efficiency• Reduce admin. staff expenses

Working
capitalefficiency• Improve cash-conversion cycle

Fixed
asset
efficiency• Further strengthen governanceof investments• Reduce assets

Turnover

FY2022/3
ROE target:
10% or higher
Leverage• Utilize debt while considering
financial soundness

Increasing Non-Financial Value Centered on Materiality
Issues, Improving Engagement
To sustain improvement in corporate value, we believe it
is necessary to focus our efforts on increasing non-financial value, such as ESG and management resources
including personnel and service platforms, the wellspring of our core competencies that create value.
NESIC has identified new materiality issues in line with
its vision for 2030. Human resources and organizational
climate as well as technologies and expertise are particularly important management resources for NESIC as acompany that aims to be a “communication services
orchestrator” that produces new value chains throughopen innovation. Over the course of the medium-term
management plan, NESIC will invest actively in the training of personnel who will underpin business growth and30

ANNUAL REPORT 2019Non-financial value

Through expansionof non-financial
capitalReinforce
portfolio
management

Sharpen core competencies
such as personnel training,
improve ESG

Throughengagement

Improve information
disclosure through IR and
PR activities

the establishment of core bases for training engineersand evaluating and validating new technologies such as
5G, while at the same time investing in businesses. We
will also update our infrastructure to improve working
environments for employees and to enhance our ability
to spur innovation.
NESIC aims to increase both financial and non-financial value. At the same time, the Company will improvethe visibility of this corporate value through two-way
communication with stakeholders, including shareholders, investors, customers, employees, and business partners, from the belief in the importance of portraying its
activities in an accurate manner. For this reason, management intends to improve its engagement with stakeholders through IR, PR, and CSR activities. I will actively
engage in communication even further with investors

and other stakeholders around the world, and will mirror
their feedbacks in management.
* Please see “Materiality Issues” on pages 36–37 for information on ourefforts to increase non-financial capital.
Please see “Relationships of Trust with Stakeholders” on pages 41–42 fordetails on our engagement with stakeholders

Shareholder Returns
Under a healthy financial position, having secured thenecessary funds for investing in growth, NESIC aims toprovide stable returns to shareholders while taking into
consideration shareholder expectations and comprehensive assessments of dividends on equity (DOE), consolidated earnings, and free cash flows. For shareholders
Cash Dividends per Share
(¥)

Stable expansion in shareholder returns
Plans to increase dividends for 13th consecutive year
80
78

14
2007/3 2008/3 2009/3 2010/3 2011/3 2012/3 2013/3 2014/3 2015/3 2016/3 2017/3 2018/3 2019/3 2020/3(Forecast)(FY)

holding NESIC stock with long-term investment horizons,
the Company emphasizes DOE over the dividend payout
ratio, which can be swayed by short-term earnings, as abenchmark for dividends, with the objective of providing
steady returns to shareholders.
Based on this policy, NESIC distributed a dividend of¥78 per share for the fiscal year ended March 31, 2019,an increase of ¥2 per share compared with its planned
dividend and an increase of ¥4 per share over the fiscal
year ended March 31, 2018, and plans to distribute a dividend of ¥80 per share for the fiscal year ending March
31, 2020, representing the 13th consecutive fiscal year of
dividend increases. Regarding share buybacks, anotherform of shareholder returns, the Company bases its decision on a comprehensive analysis of requirements for
growth investments, the current share price, the cost ofcapital, and improvements in shareholder value.
Aiming to Sustain Improvements in Corporate ValueNESIC aims to realize an inclusive and sustainable society created through communications. To achieve thisvision, we must become a “strong and attractive company” that is supported and chosen by shareholders,investors, customers, employees, business partners, andother stakeholders. In addition to maximizing financial
value centered on ROE and strengthening non-financial
value based on materiality issues, I will spare no effort inregard to sustaining improvements in corporate value
with the understanding of my role of engaging with all of
our stakeholders to further their understanding of NESIC
and its business activities.

Review of Consolidated Performance in FY2019/3
In the fiscal year ended March 31, 2019, consolidated
net sales and profits both increased, and we set a
record high for net income attributable to owners of
the parent. Net sales expanded on growth in business for enterprises, centered on work-style innovation fields, and brisk demand in the network field fortelecom carriers. Orders received were almost
unchanged, reflecting the reactionary fall of orders for
major projects in the previous year and cancellationof orders for mega solar projects.
On the earnings front, profits increased on the backof strong improvement in profitability, despite
increased spending on growth, thanks to greater cost
efficiency and a higher ratio of sales of high-valueadded projects, on top of stronger sales overall.

(¥ billion)

FY2018/3

FY2019/3

Orders received

287.8

284.7

Net sales

267.9

277.9

Gross margin

16.5%

17.2%

Operating income(Ratio to net sales)

11.1(4.1%)

12.8(4.6%)Net income attributable to owners of theparent (Ratio to net
sales)

7.4(2.7%)

8.9(3.2%)

ROE

7.6%

8.7%

ANNUAL REPORT 201931

CO-CREATION IN ACTION

NESIC

01

Resolving Customer Issues

Tamba City

Innovation in Regional Healthcare

Tamba City, in Hyogo Prefecture, aims to strengthen its regional healthcare system, which is a pillar of the local community.
Together with Tamba City, NESIC developed a vaccination verification system, the first ever in Japan. Below is an introduction to the “co-creation in action” for this system, which has brought about major innovations to regional healthcare.

Identification of Vaccination-Related Issues

Co-Creation in Action

Mr. Kitano Vaccinations are key to living a healthy life,

Yoshida We began building this system from scratch, aand must be administered 19 times to children between

major challenge for NESIC. Although our direct customer

the ages of 0 and 3 years. Depending on the vaccine,is Tamba City, provided that both doctors and city resi-

the length of time that must pass before the next vacci-

dents, in other words, the customers of our customer,

nation is administered is different. Citizens need to getwould actually be using the system, we knew it would

their vaccinations in due time without forgetting, andhave to be a highly polished system when it rolls out.

doctors must make sure the correct vaccination is given.

During the planning stage, we held discussions withIn Japan, cities are responsible for notifying their resi-

Tamba City all day from morning till night. The city had adents about vaccinations and making sure that doctors

strong sense of mission, and was not looking for a par-administered the vaccinations, which entail a consider-tial solution.

able amount of work. Every year, there are dozens of

Mr. Kitano Since the system touches on the livelihoods

cases involving improper handling of vaccinations,of people, we could not make compromises on its secu-

though this has yet to result in a major health problem.

rity or convenience in any way. During the development

That is why I have long thought that this is a problem inphase, I occasionally expressed some harsh words toneed of a solution.

you, but I was also being grilled by the doctor’s associa-

Ms. Otsuki I also have viewed this as a problem. We

tion. At some points during the project, I could not see

began to look for a solution for managing vaccination-

how it would end.

related administrative work, and have worked with

Yoshida We frequently talked directly with the doctors.

NESIC over the past year or so to roll out a vaccination

Even if doctors spend an extra minute with each patient,verification system.

that means their workload increases by 100 minutes forevery 100 patients. The doctors were therefore keen tominimize their workload as much as possible. This is32

ANNUAL REPORT 2019

Targeted SDGs

System Overview
City Residents

Special tablets are given to medi-

Doctors

Tamba City

cal institutions and IC cards are
distributed to city residents eligible for vaccinations. Tamba City

Tabletand its medical institutions are

IC Cardconnected over secure MVNO

Dedicated server(Mobile Virtual Network
completely closed to ensure

 etermine necessary vaccinaDtions by swiping IC card ona tabletsecurity. With this infrastructure,

Register vaccination history

Operator) networks, which are

the system manages vaccination

Identify vaccination status ateach healthcare provider

E-mail notification for next vaccination

schedules and the status of vaccinations for city residents.

why we put a huge amount of effort into the user inter-

Yoshida The systems engineers I collaborated spent a

face, which is a determining factor for convenience.

considerable amount of time studying up on vaccina-

Following numerous discussions involving the both oftions. Looking back, I truly enjoyed the time I spent talk-you, we finally settled on a system that can finish proce-ing to the doctors and Tamba City officials about how todures with a few taps without requiring any text input.

improve the usability of the system. I was strongly

Ms. Otsuki The finished system has received very posi-

encouraged when I found out that the doctors whotive reviews from doctors. Doctors who were skeptical atwere initially against the system were in support of it at

the development stage gave positive feedback on its

the end. Due to the success of deploying this system

convenience after the system was deployed. In addition

with Tamba City, we have received inquiries from otherto increasing the vaccination rates of residents, themunicipalities about deploying it in their cities.

system eliminated administrative work for the city whileproviding real-time information on the status of vaccina-

Creating Communities That Offer More Pleasanttions to citizens. I strongly believe the system has been

Lifestyles

helpful for everyone involved.

Ms. Otsuki NESIC and Tamba City are currently develop-

Mr. Kitano Looking back, I feel that NESIC worked dili-ing a healthcare information communication system that

gently until the conclusion of the project. When deploy-will support the livelihoods of city residents from theing this system, I was reminded of the importance ofstandpoint of healthcare services. Everyone involved intrial and error when testing out new ideas, as well as ofthis project is cooperating well together, partly because

finding common ground between participants with dif-of the success of the vaccination verification system.

ferent perspectives in order to dive deeper into discus-

Mr. Kitano I hope that this system will contribute to thesions on how to resolve issues together. We would

creation of communities that offer more pleasant life-

not have been able to develop such a system that met

styles by improving healthcare from the standpoint of

our requirements without the commitment of the team“caring” for city residents instead of “managing” them.

at NESIC.

Yoshida Tablets have already been distributed to healthcare providers and new functions can be simply added,
Under our motto of “No
Attack! No chance!!,” we are
creating communities based

enabling various improvements. NESIC is keen to realize
multifaceted solutions for issues faced by society.

on our pillar of strengthening
regional healthcare systems.
Mayor Shinichi Taniguchi

MEMBERS
Ms. Hidemi Otsuki

Mr. Hiroshi Kitano

Yoshitaka Yoshida

Health Section,
Health Department

Health Section,
Health Department

Kobe Branch OfficeTamba City

Tamba City

NEC Networks &System Integration
Corporation

ANNUAL REPORT 201933

CO-CREATION IN ACTION

NESIC

02

Creating Business with Business Partners

Innovation in Co-Creation Work

Mr. Eric S. Yuan, CEO of Zoom Video Communications, Inc., and Osamu Noda, Senior Vice President at NESIC (at Zoom’s office)In September 2017, NESIC began domestic sales of the Zoom video conferencing solution developed by Zoom Video
Communications, Inc., headquartered in Silicon Valley in the U.S. Zoom is an easy-to-use video conferencing systemthat connects people and organizations inside and outside companies anytime and anywhere. This system facilitates
work-style innovation by enabling teleworkers and employees outside of the office to participate in internal meetings,
while offering a new format for meetings and collaborative work with overseas business partners. Zoom, which has
facilitated work-style innovation in a collaborative effort by NESIC and Zoom Video Communications, is already in use
by over 500 companies in Japan.
Zoom Contracts with First Sales Partner in Japan to Roll

Mr. Saga Actually, we were approached by a number of

Out Services

Japanese firms, but NESIC contacted us early on and we

Noda NESIC has had personnel stationed in San Jose,

could sense the Company’s passion for our solutions.

California (U.S.) for quite a while with the objective of

We were also drawn to NESIC by its approach forfinding new products and services to market. When we

deploying communications technologies to improve thecame across the Zoom video conferencing solution, we

productivity of its organization, and therefore decided towere impressed by its extreme convenience, such as its

enter into our first-in-Japan sales partnership agreementcompatibility with any device, its reliable communication

with NESIC in order to bring our solution to thecapabilities, and the technology’s ability to convey aJapanese market.

sense of immediacy and the vibe of meetings acrossNoda In Japan, companies were just beginning to seri-

space and time. NESIC has had experience using other

ously consider telework and remote work options, andvideo conferencing software as a part of its solutions forcustomers were increasingly introducing these innovative

work-style innovation, but because Zoom was the best

work styles. I was really excited to be able to introduce

hands down, we contacted Zoom Videothe Zoom system to customers in Japan. We also

Communications about introducing their solution to theassigned Zoom accounts to all of our employees so thatJapanese market.

the entire Company can experiment with how it can beused more.

34

ANNUAL REPORT 2019

Targeted SDGs

Features of EmpoweredOffice Work-Style Innovation Solutions

Propose integrated
products andtechnologies to resolve
customer issues

Help customers
achieve work-styleinnovation

Major Benefits of Co-Creation

Mr. Saga Yes, I am aware that we have fine-tuned some

Mr. Saga I visited the head office of NESIC and wasservices on the advice we received from NESIC. Our

impressed by its forward-looking development of innova-

CEO Eric S. Yuan is someone who has built his career astive solutions. I thought the concept and technologies

an engineer, and we always want all of our customers tobehind SmoothSpace2 were quite innovative in thatbe happy with the services we provide. We therefore

people are able to connect and conduct conferences

always welcome any feedback that can help make ourwith Zoom in real time and through life-size video. I wasservices better. We highly value NESIC as not just a sales

also very pleased to learn that the entire Company ispartner, but also as a partner for collaboration on thecommitted to creating solutions through iterativetechnology side.

improvements while applying the innovative solutions

Noda I am extremely pleased to hear that. Zoom also

they have developed in their own operations.

offers the extra benefit of enhancing the reputation of

Noda Thank you for those words. SmoothSpace2 is able

the NESIC brand. When we approach a potential new

to simultaneously connect multiple Zoom Rooms (meet-customer and talk about Zoom, this more often thaning rooms), giving you a lifelike experience through large

not heightens the customer’s interest in working with us.

projection screens. It is also possible to broaden therange of applications with multi-region connectivity and

Taking Our Capacity for Co-Creation Globallyinteractions with other Zoom subscribers. NESIC uses

Mr. Saga During the launch phase for Zoom in Japan

Zoom for communication between its bases acrosswith NESIC, I was quite excited to hear that it would

Japan and its overseas locations, and the customers

help realize work-style innovation and create new forms

who visit our premises to see it in action often end up

of communication.

using it the same way. Zoom is a new concept in com-

Noda Yes, we think Zoom can help resolve many issues

munications that goes beyond the evolution of video

in society, and could become a global standard for the

conferencing, as it enables quick customer responses

development of new forms of communication aroundand greater work efficiency, such as through remote

the world, in addition to our partnership in Japan.

instruction and double-checking at local worksites.

Mr. Saga I believe this can be done with NESIC as our

Mr. Saga As a single tool, Zoom can be paired with otherpartner. While mutually increasing value, I hope that we

hardware and innovations to create solutions that meetcan develop new forms of communication never seencustomer needs, and this would not have been possible

before and facilitate communication around the world.

without the help of NESIC. I can see the major benefits
that have resulted from our co-creation with NESIC.
Noda When creating new solutions, on occasion wefind areas that could be improved from a technical

MEMBERS

standpoint, and convey these points to the head officein the U.S.

By projecting video on awall, SmoothSpace2 facilitates communication
through a lifelike experience between people inremote locations

Mr. Fuminori Saga

Osamu Noda

Country General Manager, Japan

Senior Vice President and Memberof the Board
Zoom Video Communications, Inc.
Executive General Manager,
Digital Solutions Business Unit
Executive General Manager,
Business Design Operations Unit
NEC Networks & System Integration
Corporation

ANNUAL REPORT 201935

Materiality Issues

In May 2019, NESIC unveiled its new medium-term management plan, “Beyond Borders 2021.” The Company also
identified six materiality issues that should be addressed in order to contribute to the sustainable development ofsociety and its own sustainable growth.

Vision for Society

An inclusive and sustainable society
created through communications

Initiatives to Provide Value to Society through 2030
Create environments in which everyone can work morevigorously
Develop pleasant and plentiful communities with cuttingedge technologies
Provide robust services that underpin safety and security inevolving society

Initiatives for Growth at NESIC
Sound and highly transparent
management

Strengthen innovation capabilities to create new value

Strengthen governance throughdialogue with stakeholders

Promote a culture that encourages change and embrace of newchallenges

Promote compliance with an eye
on diversity

Materiality Identification Process

The process for identifying materiality issues entailed­discussions from various angles by the secretariat team,which involved the corporate planning, investor relations
and CSR sections, within the context of a long-term standpoint and initiatives unique to NESIC, while taking into
consideration the opinions of investors obtained at
ESG meetings.
Top management also repeatedly discussed the issues,earnestly debating which issues it should address in orderto achieve sustainable development of society and theCompany. After listening to the opinions of outside directors, management determined specific materiality issues
that NESIC should address.

36

ANNUAL REPORT 2019

Accelerate co-creation and theuse of various services in our own
business practices to better
understand the customers’ pointof view

Create work environments
where employees can work
vigorouslyImprove the well-being of
employees
Encourage frank and open
­ iscussions, and enhance thedcorporate culture as a facilitatorof self-growth

STEP1

STEP 2

Confirmation of social issues(overseas / domestic)

Interviews and internal discussion
on important initiatives at NESIC

Global issues such as the SDGs,
ISO 26000, and GRI were confirmed, and megatrends listed byresearch institutions.

Interviews with top management
and free discussions among top
management were held on thevision for society and the vision
for NESIC, within the context
of important initiatives that theCompany should undertake.

Vision for Society
When identifying its materiality, NESIC came up with “an inclusive and sustainable society created throughcommunications” as a long-term vision for society.
Our aim is to create, through communications technologies, a society in which people all over the world
can acquire the information they need and have equal access to education and healthcare. This is a society inwhich walls throughout the world will be torn down in order to realize peace through the promotion of open
communication. The society that we aim for will also contribute to resolving various social issues through communications and the sharing of ideas between people all over the world.

Initiatives to Provide Value to Society through 2030
NESIC has selected three initiatives to prioritize in its provision of value to society via communications
through 2030.
 reate environments in which everyone
Ccan work more vigorously
We aim to provide environments where
everyone, regardless of age, gender, or
nationality, can work vigorously and tothe best of their abilities without regard
to location.

Develop pleasant and plentiful communities with cutting-edge technologies

 rovide robust services that underpin
Psafety and security in evolving society

We aim to help develop communities, suchas smart cities, where people can lead
exciting and fulfilling lives with safety andconvenience, and where various information services are provided on robust communication platforms using the latest
mobile technologies, etc.

We will support the development andadvancement of ICT essential for economic
growth by creating safe and secure services
that offer high quality and national reach.

Initiatives for growth at NESIC
To continue growing as a company through such value creation efforts, NESIC must further strengthen its own business foundation. To thisend, the Company has selected the following three priority initiatives. We believe communication, such as through co-creation and dialogue,
is important for our own growth as a company.
Sound and highly transparent
management

Strengthen innovation capabilities tocreate new value
Promote a culture that encourages
Strengthen governance through dialoguechange and embrance of new challenges
with stakeholders
Accelerate co-creation and the use ofPromote compliance with an eye on
various services in our own businessdiversity
practices to better understand theWhile aiming for further growth, NESIC
customers’ point of view
engages in governance and compliance
Innovation is the source of our ability
activities that form the foundation forto continue providing value to society.
­continuing to be a sound company
Management is focusing its efforts on
acknowledged by all stakeholders. Amid
encouraging employees to take on new
advances in diversity and accelerating cochallenges and spur new change throughcreation and innovation, all of us need to
not only iterative improvements, but also
take action based on high ethical standards
various initiatives starting from scratch. We
in order to maintain and strengthen our
intend to offer new value through easier-torelationship of trust with society. To thatuse systems and services by accelerating
end, we will reinforce governance and proefforts to co-create with stakeholders, using
mote compliance through engaging in diavarious services in our own business praclogue with various stakeholders.
tices to better understand the customers’
これらのマテリアリティに沿って事業活動を推進し、本業を通じて目指す社会像の実現や、SDGsへの貢献を果たしていきます。
point of view.

 reate work environments whereC
employees can work vigorously
Improve the well-being of employees
Encourage frank and open discussions,enhance the corporate culture asa facilitator of self-growth
People are the source of innovation. As afront-runner in work styles, NESIC strives tocreate systems that allow employees towork without having to worry about their
physical or mental health and have a balanced social life. Our aim is to nurture a
corporate culture where employees arehighly motivated and engage in frank andopen discussions within an invigorating
environment that facilitates self-growth.
We aim to realize work environments thatallow each and every employee to thrive
and work to the best of their abilities.

STEP 3

STEP 4

STEP 5

Candidate materiality issues andinternal discussions

Interviews with outside directors

Identification of materiality issues

The candidate materiality issues
proposed in Step 3 were explained
to the outside directors, who offered
their insight.

The Executive Committee determined materiality issues based oninternal and external opinions. The
issues were reported to the Boardof Directors.

A list of candidate materiality issues
was created based on the vision forsociety and the Company initiatives
to be undertaken to realize thevisions that were examined in steps
1 and 2, which was followed by discussions with top management

ANNUAL REPORT 201937

Human Resources and Organizational Climate

NESIC’s greatest management resource is its human resources. We identified “create environments in which everyone
can work more vigorously” as one of materiality initiative. While further refining systems so that our diverse workforce
can continue to work with peace of mind, we endeavor to create an open organizational climate that provides venues
for free discussion and encourages employees to take on challenges, in order to accelerate co-creation and innovation
in a bid to create new value, giving all of our employees the opportunity to leverage their abilities to their fullest.

Basic Approach
Based on its basic policy for human resource development, NESIC takes a systematic and effective approach
to training its employees so that they can leverage their
qualifications and abilities to their fullest toward achieving the Company’s management objectives.
Basic Policy for Human Resource Development(1) As a part of its management plan, NESIC continuously, systematically, and strategically trains humanresources based on rank.
(2) NESIC actively nurtures experts with specialized
technical skills, knowledge, and know-how.
(3) NESIC creates a culture that encourages self-innovation and initiatives to develop one’s own capabilities.
(4) NESIC effectively trains personnel through an integrated human resource management system.
Hiring People Who Inspire Innovation
Regarding hiring practices, based on its basic policy of
reliably securing promising personnel by hiring new
graduates, and acquiring human resources with expertise in technologies and businesses by recruiting experienced professionals, NESIC seeks out people who arewilling and have the capability to take on challenges,
who do not impose limits on themselves, and who arekeen to innovate.
NESIC has put in place systems for actively hiring veteran engineers with the expert knowledge and specialized skills and extensive experience in domains different
from those of the Company, in order to take advantage
of cutting-edge/venture technologies, such as AI, cloudcomputing, and robotics, and to continue creating new
businesses in a fast-moving process.
Through these hiring activities, the Company aims tosecure diverse human resources, nurture an innovation
mind-set, and foster a corporate culture where employees can maximize their individual abilities.

Creating Environments That Sustain Confortable
Work Styles
NESIC began its own efforts at work-style innovation
more than 10 years ago. In addition to the introductionof its telework system, the Company combines a variety
of cloud-based tools with cutting-edge/venture technologies to resolve communication issues and various
other problems, creating work environments that allow
employees to work from home or satellite offices­anytime, anywhere. We provide venues that enable cocreation as a single team across organizational and­corporate borders.
Starting in autumn 2019, NESIC will focus on implementing distributed work (see page 28). The Company
has opened about 10 satellite offices in the Tokyo metropolitan area so that employees will not have to commute longer than 30 minutes, thereby reducing thephysical and mental stress of commuting and creating
opportunities for employees to reassess their work–lifebalance. By reducing the physical burden on employees
and freeing up their time, we expect to see improvements in their motivation, more drive to self-improve bypolishing their own skills or adding new skills, andsparks of innovation.
Telework Use (Fiscal year ended March 31, 2019)

2.6 days per month per employee
Realizing a work style that is not bound by time or location, thanks to cutting-edge/venture technologies
PC

MobileVideo conferencing
solution

Communication
platform
Cloud storage(file sharing)38

ANNUAL REPORT 2019

Human Resource Strategy to EnhanceCore Competencies
Ability to Create New Businesses
To achieve the targets in the medium-term management
plan “Beyond Borders 2021,” it is important that we continue to create new businesses while strengthening ourability to co-create.
NESIC established the Business Design Operations
Unit, based on a Companywide digital transformation(DX) project it launched in 2018, with the objective ofenhancing its ability to create new businesses, one of its
core competencies.
In this unit, the Company plans to triple the number of
specialists with the expertise and know-how in DX technology, software, business development, and consulting,which currently stand at 20, over the next three years.
We are focusing our efforts on creating new businesses
in potential growth fields such as the DX business, workstyle innovation, image recognition and analysis, and 5G
services.
2019

2018

Business Design Operations Unit
Strengthen capabilities of cutting-edge/venture technology

Companywide
DX Projectexperts, employees specializing in DX technology, business development, software technology, and consulting

Specialized
Organizations

Toward Accelerating Innovation
Partnership Agreement with Plug and Play Tech Center in Silicon Valley, U.S.
NESIC is accelerating the deployment of cutting-edge/venture technologies inside and outside Japan in
response to major changes in technology. The Company is focusing particularly on business creation withstartup firms, having established its Corporate Venture Capital (CVC) Fund and invested in other venture capitalfunds in the U.S. In July 2019, NESIC signed a partnership agreement with Plug and Play Tech Center (headquarters: California, U.S., founder and CEO: Saeed Amidi) with the intention of further strengthening the creation ofbusiness with startup firms, creating new businesses that go beyond its own boundaries, and advancing innovation. Together, we have taken steps to discover cutting-edge solutions/services.
Along with this new partnership agreement, NESIC set up a booth on the main floor of Plug and Play Tech
Center, and increased the number of employees stationed in the
U.S. Our booth featured SmoothSpace2, a solution for visual andaudio communications between separate spaces, connected toour head office in Tokyo, demonstrating its efficient way of communicating using environments that provide the feeling of being
in the same office space. By sharing a space with startup firms in
the U.S., which have a different work culture, NESIC is able to put
into practice work styles that spur co-creation and new innovation by invigorating bidirectional communication. We will continue to train employees who are able to generate even higher
The Plug and Play Tech Center is connected with NESIC
using SmoothSpace2
value-added services.

ANNUAL REPORT 201939

Human Resources and Organizational Climate

Technological Capabilities
To further refine the broad range of technical skills that
support our operations, we have defined Companywide
high-priority qualifications that employees should obtainin a bid to improve their knowledge of technologies
while covering the educational cost of obtaining thesequalifications and offering courses taught by in-house
instructors.
Companywide High-Priority Qualifications
Information processing engineers (network specialists,
registered information security specialists)
Project management professionals
First-class electrical work operation and management
engineers
Number of employees who acquired qualifications
during the fiscal year ended March 31, 2019:
Total number of employeeswith high-priority qualifications:

49 employees

1,411 employees

Supporting Career Advancement to Improve Motivationand Encourage Self-Growth
NESIC takes an integrated approach to human resource
development that combines personnel systems andcompensation, planned personnel rotations, and training
opportunities at the appropriate time. Employees periodically discuss with their superiors about their careerplans and progress on improving their skills with theintention of enhancing their own careers. We haveframeworks in place to allow employees to take on newroles through an internal job posting system.
SystemSecuring engineers and passing down technical expertise are major issues for NESIC, a company involved in awide variety of business fields.
NESIC aims to expand the scope of activity for elderly
people through its Senior Partner System for employees
who have reached the mandatory retirement age but
wish to continue working.
Since the fiscal year ended March 31, 2016, theCompany has maintained over 50% of continued
employment after mandatory retirement. As more of ourengineers with various qualifications and diverse experiences approach their retirement age, we will expand
their range of opportunities to continue working after
reaching the mandatory retirement age, passing down
their technical knowledge to younger employees in abid to maintain and strengthen our technologicalcapabilities.

Details

Internal Job
Posting System

This system allows employees toapply for internal jobs on their own,
responding to internal needs for personnel resulting from moves into new
business fields and greater focus onpriority businesses.

Job Challenge System

This system encourages employees
to take on new roles (new sections),
mainly through skills development
and career formation.

Position Entry System

This system allows employees toapply for desired positions within the
Company.

Career Reviews

These reviews of work-related interests, aptitude, and desires for transfers of employees are used by theirsuperiors in career development andpersonnel training processes.

Supporting the Success of Women in the Workplace(Promoting diversity)
It is important to promote diversity among employees inorder to accelerate innovation, and our initiatives to promote the empowerment of women in the workplace is
one such initiative.
We are advancing a variety of measures to this end,
including initiatives to increase the ratio of women in
management positions. Every year since the fiscal year
ended March 31, 2017, as a company that believes in
the importance of communication, we have held meetings for female employees to share their opinions witheach other and with female outside directors.
In the fiscal year ended March 31, 2019, we held sucha meeting with directors (the President and two female
outside directors) and 12 female employees (threesenior managers and above, and nine newly appointed
to management positions). The participants talked
about what the Company needs to do to further promote the success of women in the workplace, and theirideas will be reflected in future measures.
Target Ratio for Women in Management Positions

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ANNUAL REPORT 2019

By March 31, 2021

5% (3.7% as of March 31, 2019)

Relationships of Trust with Stakeholders

Maintaining and strengthening relationships of trust with stakeholders important to NESIC, such as its customers,
employees, shareholders, investors, suppliers, and business partners, is essential to sustaining growth of the Company.
We strive to reflect the opinions and requests of our stakeholders in management.

Communication with Customers
Ever since its founding, NESIC has placed a high priority on creating relationships of trust with customers. In order tocontinue growing toward its aim of becoming a “strong and attractive company,” NESIC will continue efforts to win thetrust and support of its customers by providing valuable services and solutions.
Main Initiatives

Topics in FY2019/3

Hold NESIC Customer’s Fair, a private exhibition/seminarfor customers (held in Tokyo and Osaka in 2019)
Conduct customer surveys to implement improvement
measures by sharing the results within the Company(Annual survey and inquiries upon completion ofprojects)
Present awards for outstanding customer satisfaction
activities (once a year)
Invite outside instructors to give presentations on customer satisfaction (once a year)Improvement in customer satisfaction index comparedwith the previous customer survey conducted in
FY2018/3 (achieved highest score)
Examples of awards received from customers
Award for rapidly repairing public communication facilities in the wake of a major earthquake in Hokkaido
Award for ensuring secure transition to modernizedcommunication platform for all customer locations,maintaining a high-quality deployment system over a
six-year period
Award for a system using Wi-Fi and GPS that has contributed to the advancement of regional information
and resolution of tourism issues

Communication between the President and Employees
Since his appointment, the President Ushijima has consistently placed emphasis on his communication with
employees. With more employees working from remote locations, such as through teleworking, and at local
bases distantly located from the head office, it is becoming more important for the President to directly convey
his message and hear the opinions of employees in order to share their thoughts. We aim to make communication even more effective through various techniques and innovations.
Briefing for Medium-Term Management Plan
“Beyond Borders 2021”“Beyond Borders 2021” is the new medium-term management plan that was launched in the fiscal year ending
March 31, 2020. At a total of 15 briefings held in 10 locations, the President conveyed his thoughts behind thenew plan to all employees and explained in his own
words the initiatives he is undertaking.

“Ushijima Radio”
In February 2019, the President started an Internet broadcast (streaming audio) so that everyone can hear his
voice directly. In addition to providing his own thoughts
as President, he aims to share opinions through two-way
communication by addressing the thoughts and opinionsof employees who listen to Ushijima Radio and thethoughts freely written down by employees on the inhouse social network system. He answers questions
about the medium-term management plan and workstyle innovation, as well as inviting employees as guests
to talk about the challenges they face in various fields,
including a young
employee involved in the
Hayabusa 2 project. The
ultimate aim is to promote communication
across boundaries
formed by organization
and rank.

“Ushijima Lunch” Meetings“Ushijima Lunch” meetings are an opportunity for the
President and young employees to openly share theiropinions with each other. By talking frankly and openly
about the President’s thoughts and the dreams of anddaily issues faced by young employees, we aim toincrease the motivation of younger people. In the fiscal
year ending March 31, 2020, we started to have “Ushijima
Lunch” meetings with general managers.

Conveying Messages via In-House Digital Signage
Messages from the President are shown on digital signage
placed around offices as an alternative to bulletin boards.
He posts brief messages such as “Let’s Break! (break stereotypes for creating the future)” and “Challenge!,” todraw the attention of employees to important topics andinspire them.

Message (“Let’s Break!”) from the
President shown on in-house digital signage

Ushijima Radio recording session

ANNUAL REPORT 201941

Relationships of Trust with Stakeholders

Communication with Suppliers
NESIC utilizes labor suppliers who subcontract work for
installation, construction, and network integration orders
received by NESIC, as well as hardware suppliers for procuring equipment used in system integration. NESIC
views labor and hardware suppliers as important stakeholders essential for the operations of NESIC. NESIC
holds briefings on business trends, visits the sites of suppliers, and conducts surveys as part of its efforts forvaluing communication with suppliers. In the fiscal year
ending March 31, 2020, the Company began strengthening its collaborative structure and instilling awareness of
suppliers in a bid to increase contributions to the SDGs
throughout its supply chain, while promoting sustainable
and ethical procurement activities.

Main Initiatives for SuppliersHold business trend briefings (once a year)
Hold safety and quality meetings (every other month)Conduct inspections and surveys (CSR surveys, quality
audits, information security audits) (for a total of 281
companies in FY2019/3)

Briefing on business trends with suppliers

Communication with Shareholders and Investors
NESIC has a disclosure policy of explaining its business conditions and management policies to shareholders and otherstakeholders in an accurate and timely manner. Management periodically engages in dialogue with shareholders andinvestors on capital markets in Japan and overseas, including through briefings and interviews.
In addition to meetings through the investor relations section, NESIC periodically provides opportunities for dialogue
with top management including the President, such as briefings for investors and one-on-one meetings (25 individual
meetings were held with the President and/or Associate Senior Vice President in FY2019/3). Since the fiscal year
ended March 31, 2018, meetings have been held with investors in charge of ESG. In the fiscal year ended March 31,
2019, a total of seven meetings were arranged between domestic and foreign institutional investors and the CSR section. The opinions and requests received from these meetings are directly reported to all Board members, including
independent directors/auditors, from investor relations in an effort to engage in constructive dialogue with capital
market participants.
Examples of Opinions Received at Meetings with Investors and NESIC’s Responses

Opinion (1)Opinion (2)Opinion (3)Investment decisions based on

As it does with its management

In addition to protecting minority

ESG must be considered from astrategy, I want NESIC to identify

shareholders as a listed subsidiary,

long-term perspective.

materiality issues (key manage-

I would like to know more about

The medium-term management

ment issues) that it believes are

the benefits that NESIC stands touniquely important from the stand-gain from its parent company. This

point of creating social value over

information should be stated in its

the long term.

annual report.

plan should be viewed as a milestone for NESIC’s long-term vision
beyond three years.
NESIC’s vision/mission is unclear
due to its many priority
businesses.

Response to these opinions:
Under the medium-term management plan “Beyond Borders 2021,”
which began in the fiscal year
ending March 31, 2020, NESIC aims
to be a company that achieves sustainable growth based on its vision
for the future through 2030. To that
end, the Company established the
medium-term management plan byexamining and drawing up key initiatives that it should undertake in thenext three years (see pages 24–27).

42

ANNUAL REPORT 2019

Response to this opinion:

Response to this opinion:

When reevaluating materiality issues

The annual report now includes an

to coincide with the announcement

explanation of the benefits on beingof its medium-term management

a listed subsidiary in addition toplan, NESIC identified important

protection for the interests of minor-

issues based on two perspectives,

ity shareholders (see page 46).

namely initiatives for providing value
to society and initiatives to achieve
growth through 2030 (see pages
36–37).

Message from the Chairman

NESIC aims to reinforce corporate
governance while prioritizing
dialogue with stakeholders

Maintaining and Improving Our Optimal
Corporate Governance Structure

Reinforcing the Diversity and Oversight
Functions of the Board of Directors

NESIC aims to resolve the issues of its customers andsociety through the design of more welcoming and convenient communications so that everyone around theworld can enjoy a safe, secure, and plentiful tomorrow,as exemplified by the NEC Networks & System
Integration Corporation Group Statement. We believe
corporate governance is the basis for our business activities and a facilitator of sustainable growth and improvements in corporate value over the medium to long term.
NESIC is one-of-a-kind in the sense that it benefits
from being a member of the NEC Group and a listedcompany (see page 46). This also means that it isincreasingly important to protect the rights of generalshareholders, and management has been strengthening
systems to protect their rights. Since 2016, NESIC has
increased the number of independent directors andauditors who do not have any conflicts of interest withgeneral shareholders. Today, three out of 10 directors
are independent outside directors, and two out of four
auditors are independent outside auditors. Over onethird of the members on the Board of Directors are independent outside directors or outside auditors. In orderto ensure transparency in management, in 2016, NESIC
established an advisory panel consisting mainly of outside directors to discuss issues related to the nomination and compensation of directors and auditors. As aresult, in June 2019, the Company introduced a transferrestricted stock compensation system with the objectiveof aligning the values of directors involved in businessexecution with those of shareholders. As the core business activities of NESIC center on communication, dialogue with various stakeholders is highly valued. The
investor relations department reports on the opinions ofgeneral shareholders and investors, and shares themwith management to reflect them in business decisions.
NESIC makes every effort to improve corporate value
and ensure transparency in management by continuing
to strengthen its corporate governance structure.

As the chairman of the Board of Directors, I make surethat all members, including outside directors, participate
fully and enthusiastically in deliberations. To improve thequality of discussions, we have outside directors visit
worksites to further their understanding of our businesses. For important corporate matters and proposals
presented to the Board of Directors, we hold premeeting briefings and exchange opinions while reflecting external opinions in our decision-making. For particularly important matters, discussions are held several
times by the Board of Directors. When creating the
medium-term management plan, we held many lively
discussions.
I believe the makeup of our outside directors shouldemphasize diversity in terms of experience, knowledge,
specialization, and gender, because opinions based on
different backgrounds is important. In June 2019, NESIC
welcomed Ms. Kuniko Muramatsu, who has advanced
knowledge of CSR and corporate ethics, as a new outside director.
It has become increasingly important for companies
to address social issues, including the SDGs. Also, I
believe compliance is at the core of all business activities. The NESIC Group engages in business with compliance as its highest priority in order to earn and maintainthe trust of its stakeholders, including customers, shareholders, and citizens, as a company that works toresolve social issues. We will continue to contribute tosociety through our business activities, and with eachand every employee acting with strong ethical views, wewill make every effort to increase corporate value further.

Chairman of the Board

ANNUAL REPORT 201943

Corporate Governance (As of June 30, 2019)

NESIC believes that enhancing corporate governance is critical for realizing an advanced society with vibrant communication and for sustaining increases in corporate value. We therefore strive to build a management system that enables
quick decision-making so that we can respond promptly to changes in the operating environment, and work to ensure
management soundness and transparency by practicing timely, appropriate disclosure.

History of Enhancing Corporate Governance at NESIC
MeasureObjective

Introduces executive officer system learly separate supervisory function
Cfrom business execution function

Reduces number of directors to ten or fewer from 20 or fewer

Expedite decision-making

Shortens directors’ term of office to one year larify management responsibilities ofCdirectors

2006

Appoints first independent outside auditor (introduces independent director/
auditor (ID/A) system)

Improve management transparency

2008

Appoints an independent outside director, increasing the number of ID/A to twoImprove management transparency

Appoints an independent outside director, increasing the number of ID/A tothreeImprove management transparency

Appoints first female director

Improve the diversity of directors

Appoints an independent outside auditor, increasing the number of ID/A to fourImprove management transparency

Strengthens compliance with Corporate Governance Code: implements evaluation of the Board’s effectiveness and systematizes training for directors and corporate auditors

 trengthen management oversightSfunction

Appoints first independent outside director with experience in corporate
management

Improve diversity of directors

Establishes advisory panel consisting mainly of independent outside directors to
discuss nomination and compensation

Improve management transparency

2017

Appoints an independent outside director (a female CEO from a different industry), increasing the number of ID/A to five
Introduces stock-linked remuneration

Improve management transparency
Improve the diversity of directors
Enhance remuneration system linked to
improvements in corporate value

2019

Introduces transfer-restricted stock remuneration system nhance remuneration system linked toE
improvements in corporate value

2000

2005

2012

2015

2016

Corporate Governance System
Board of Directors
The Board of Directors consists of 10 directors (eight
men and two women), including three outside directors.
NESIC endeavors to strengthen the management structure, such as by clarifying the management responsibilities of each director, who serve one-year terms.

Outside directors

44

ANNUAL REPORT 2019

Board of Corporate Auditors
The Board of Corporate Auditors consists of four auditors, including two outside auditors. The auditors conduct business audits and accounting audits, andsupervise directors on the performance of their duties.

Outside auditors

NESIC’s Business Execution, Management Oversight, and Internal Control Framework
General Meeting of Shareholders
Elect/Dismiss

Elect/Dismiss

Elect/Dismiss

Management andSupervision
Audit

Board of Directors (Directors)

Cooperate

Board of Corporate Auditors(Corporate Auditors)

Supervise

Audit
Cooperate

Business Execution

Executive Committee

Accounting
Auditors

Business Execution
Committee
Management Quality Improvement
Committee

Corporate Auditing
Division

Cooperate(Executive Officers)

Corporate Staff, and Marketing &Sales and Business Operations Units
and Divisions

Cooperate

Management Section of
Affiliated Companies

Audit

Manage/Monitor
Affiliates

Corporate Ethics Hotline (Hotline for internal reporting and consultation)

Independent Directors / Auditors
To further strengthen its corporate governance, since2006, NESIC has nominated qualified independent
directors and auditors who do not have any conflicts ofinterest with general shareholders.
NESIC has a total of five independent directors andauditors, comprising three directors and two auditors,
who satisfy the requirements for independent directors
and auditors, as defined by the Tokyo Stock Exchange.

Name

This represents more than one-third of the total numberof directors and auditors.
Regarding the composition of independent directors,
NESIC aims to strengthen its corporate governancestructure by promoting diversity, including the appointment of a new director in June 2018 who has specialized
knowledge in business administration and accounting,as well as a director in June 2019 who has advanced
knowledge of corporate ethics and CSR.
Attendance during
FY2019/3
Board ofBoard ofCorporate
Directors
Auditors

Reason for Nomination

Main Concurrent Positions

Hisayoshi
Fuwa

Hisayoshi Fuwa has extensive experience as a corporate manager, which has been
benefit to management at the Company. He also has the ability to provide appropriate advice and ideas on the Company’s overall management from a standpoint independent from the managers who execute business. He is expected to continue tosupervise management toward improvements in the Company’s corporate value.

—

13/13

—

MichikoAshizawa

Michiko Ashizawa has the ability to provide appropriate advice and supervise
the Company’s management from an objective standpoint, backed by her specialized knowledge in business administration. She is expected to continue tosupervise management toward improvements in the Company’s corporate value.

• Associate Professor, School of Economics andBusiness Administration, Yokohama City University• Associate Professor, Graduate School ofInternational Management, Yokohama City
University• Part-Time Instructor, Graduate School of Business
Administration, Keio University• Outside Director (audit and supervisory committee
member), Netyear Group Corporation

11/11

—

KunikoMuramatsu

Kuniko Muramatsu has the ability to provide appropriate advice and supervise theCompany’s management from an objective standpoint, backed by her advanced
knowledge of CSR and compliance and her global insight.

• Representative Director of the Board,
Wellness Systems Institute• Senior Researcher, Business Ethics Research Center• Outside Director, YOKOWO CO., LTD.

—

—

Yuji
KikuchiYuji Kikuchi has specialized knowledge of the Companies Act and corporate governance as an attorney. He is expected to supervise business execution from a fair andobjective standpoint as an outsider through his extensive knowledge andexperience.

• Partner, Tokyo Hatchobori Law Office

13/13

15/15

Masayuki
Horie

Masayuki Horie possesses deep insight on internal controls and IT risk management
in corporate management as a university professor. He has the ability to monitor thebusiness execution of directors from a fair and objective standpoint as an outsider.

• Professor, College of Commerce, Nihon University

12/13

14/15

Notes:
1. Michiko Ashizawa’s attendance at the Board of Directors meetings is for after her appointment as director at the 86th General Meeting of Shareholders heldon June 21, 2018.
2. Kuniko Muramatsu was newly appointed as director at the 87th General Meeting of Shareholders held on June 21, 2019.

ANNUAL REPORT 201945

Corporate GovernanceDirector Remuneration
To maintain competitiveness in the industry and provide
incentives to improve performance, remuneration for theCompany’s directors is based on a compensation structure set at appropriate levels while taking into accounttheir duties and achievements in order to link their performance to corporate results.
Remuneration consists of a monthly salary set at alevel commensurate with rank, a bonus that reflects anevaluation of personal performance in the previous fiscal
year, and incentives to improve medium- and long-term
performance. For incentives to improve medium- andlong-term performance, the Company has provided
remuneration linked to its share price in the past.
Starting in June 2019, however, NESIC introduced
restricted-transfer stock remuneration with the objectiveof aligning the values of directors with those of shareholders, and increased the ratio of this remuneration toabout 10% of the total.
Remuneration for directors in non-executive positions
is a fixed amount not linked to the Company’s performance in light of their role of supervising businessexecution.
Director remuneration is determined by a representative director authorized by the Board of Directors, within
an upper limit for total remuneration set by resolution of
the General Meeting of Shareholder based on compensation standards, while referring to the opinion of anadvisory panel, which consists mainly of independent
Board members (outside directors).

Transfer-restricted
stock remuneration

Breakdown of Director
Remuneration

About
Fixed
compensation
About

10 %

Short-term
performancelinked
compensation

55%

About

35%

* Theoretical values
calculated from­standard amounts

Fiscal Year Ended March 31, 2019
Category

Directors
Outside directors
Auditors
Outside auditors

No. of Recipients

Total Amount(¥ million)

13

185

4

26

4

44

2

10

Notes:
1. Directors who also serve as employees do not receive a salary (including
bonus) as an employee.
2. Includes three directors who retired as of the 86th General Meeting of
Shareholders held on June 21, 2018.
3. The director retirement bonus system was discontinued as of the conclusion of the 75th General Meeting of Shareholders held on June 26, 2007.

Shares Held for Strategic Reasons
NESIC may own shares in other companies for the purpose of building, maintaining, and strengthening business ties and relationships. Shares held for strategic
reasons are examined in detail every year by the Boardof Directors in terms of whether the aim and meaningof owning these shares align with their cost of capital.

Regarding the execution of voting rights for these strategic shareholdings, management decides whether to votein approval or disapproval of matters based on a comprehensive evaluation that centers on whether it
contributes to medium- to long-term improvements inthe corporate value of the NESIC Group and the company in which it holds shares.

Relationship with Parent Company
As a member of the NEC Group, NESIC benefits greatly fromthe privilege of being in charge of system building and maintenance services among the services provided by NEC
Group companies, and from being able to tap into recognition of the NEC brand and having access to businessresources, such as technological capabilities and humanresources. In addition to the field of 5G, which has drawn
attention of late NEC has exceptional technological capabilities in the digital realm, including facial recognition technology, which NESIC can actively deploy to increase corporate
value.
With that said, however, NESIC is an independent listedcompany that engages in business while making businessdecisions on its own accord. This translates into credibility
as a listed company from our customers and business

46

ANNUAL REPORT 2019

partners, while improving the morale of our employees andmaking it easier to hire talented human resources. With awide range of products and services that go beyond NEC
products, NESIC is able to develop business in tune with theneeds of its customers and society. Independent businesses
generate over 70% of net sales. In particular, one of NESIC’s
unique strengths is its application of the NEC Group’s relentless focus on quality to the development of multivendor
services.
In order to benefit from these advantages as a member of
the NEC Group and as a listed company, NESIC must havesystems in place for protecting the rights of general shareholders. With this in mind, the Company is strengthening its
corporate governance structure by, for example, enhancing
the composition of its independent directors and auditors.

Evaluation of the Board of Directors’ EffectivenessIn accordance with the Corporate Governance Code, NESIC evaluates the effectiveness of its Board of Directors every
year, and makes diligent efforts toward its strengthening and improvement.

Evaluation method

Evaluation criteria

Evaluation results

Every year, all members

Composition of the

In FY 2019/3, the evalua-of the Board of Directors

Board of Directors

tion concluded that thefill out questionnaires on

Operational methods

Board of Directors is

the overall effectivenessof the Board offunctioning effectivelyof the Board of Directors,

Directors

and operating appropri-

and interviews are con-

Role of the Board of

ately overall.

ducted with certain

Directors

members.

Support systems for
Board members

Initiatives tofurther increase
effectivenessEnhance discussions on
medium- to long-termbusiness strategy, andprovide more opportunities to follow up andexchange opinions onthese discussions
Expand opportunities
to provide the knowledge necessary fordirectors to properly
perform their expected
duties andresponsibilities

Message from the Newly Appointed Outside Director
I have served as the manager of the corporate communications department, headof the corporate ethics office, and leader of diversity promotion at a foreign semiconductor manufacturer. They were followed by my role as an advisor for corporate
ethics, diversity, and corporate governance based on the concept of creating foundations that enable organizations to drive sustainable growth.
At NESIC, top management has made a commitment to giving compliance thehighest priority, and I believe management has struck a balance between offensive
and defensive approaches to business, clarifying the Company’s direction in themedium-term management plan. Management intends to accelerate innovation withan eye on longer-term growth, and I believe the spread of diversity and inclusion isfundamental to achieving this. An environment in which all employees can express
their diverse viewpoints and leverage their skills will lead to improvements in theirproductivity as individuals and growth as a team. The Company’s operations areclosely tied to resolving social issues, and communication is key to co-creation withsuch a diverse base of stakeholders, in my opinion.
Utilizing the practical experience and specialized knowledge I gained from working at a global company, I aim to help NESIC improve corporate value by providing
advice from diverse viewpoints in order to heighten the effectiveness of theCompany’s corporate governance even further.

Kuniko Muramatsu
Outside Director

ANNUAL REPORT 201947

Dialogue on NESIC with Outside Directors

NESIC held a dialogue between two outside
directors where they exchanged their opinions on changes in the Board of Directors
over the past year, with a focus on corporate
governance and strategic issues.
Key Changes in the Board of Directors
over the Past Year

Ashizawa
Looking back over the past year, there
were a large number of matters related to new business,
including partnerships with other companies. For
instance, there were discussions on whether common
goals existed with partner firms, and the nature of ourcomplementary relationships. I believe NESIC began totake steps toward making solid advances.
Fuwa
The Company’s Board of Directors takes theirtime discussing matters. When deliberating on new businesses, certain proposals were occasionally revised toreflect the opinions of the Board of Directors.

Hisayoshi Fuwa
Outside Director
2011 President, Representative Director of the Board andChief Executive Officer (CEO),JVC KENWOOD Holdings, Inc.
(currently JVC KENWOOD Corporation)
President and Representative Director of the Board,
Victor Company of Japan, Limited
President, Kenwood Corporation
President, J&K Car Electronics Corporation
President and Representative Director of the Board,
JVC KENWOOD Corporation2012 Senior Adviser, JVC KENWOOD Corporation
2016 Outside Director of the Company (present position)

48

ANNUAL REPORT 2019

Ashizawa
For developing new business, while properly identifying risks, I believe the members of the Boardof Directors take an “offensive” corporate governanceposture of encouraging people to take on new
challenges.
Fuwa
Compared with last year, the pre-meeting briefings on matters presented before the Board of Directors
were more helpful this year. I believe this translated into
more efficient and lively meetings of the Board of
Directors. Furthermore, I see improvements in the management of investment risks, an issue that was raised inlast year’s annual report. From the standpoint of an outside director, I shared my views on risks for each projectwith the Board of Directors, and during deliberations ofmatters, I made sure there was adequate discussion on
specific issues in risk management.
Ashizawa
Speaking of risks, I think management
should conduct further discussions on the burden
placed on each company by the risks associated withNESIC’s increased collaboration with partner companies.

Further Strengthening “Offensive”
Corporate Governance

Ashizawa
I believe NESIC’s Board of Directors is gradually evolving from a management approach to monitoring business execution. In order to strengthen “offensive”
corporate governance, I think management should
spend more time discussing strategies. For example,
more time needs to be spent on talking about broader
strategies, even for individual projects. Instead of thinking about risks and returns on an individual projectbasis, management should take a broader view that
includes other businesses as well. It is also important todiscuss the Companywide use of management resources
within the context of management and financial strategies. I have already conveyed my concerns about theseissues, and they have been shared with all members of
the Board of Directors.
Fuwa
The executive officers have an abundance ofknowledge and experience in specialized fields, while
the outside directors have a duty to examine matters at

a distance from these fields, giving them a fresh perspective, in my opinion. In management, the situationalawareness, ability to take action, and decisiveness totackle issues of the management teams in charge ofactual business execution are tested on a daily basis.
By assessing these abilities from a comprehensive standpoint aligned with corporate governance, outside directors are able to detect from a different angle importantmatters that may be overlooked by management.
Ashizawa
I have asked the Company to examine
increasing the ratio of outside directors to at least onethird of the total, because diverse opinions are also valuable for the Board. I believe there are two points todiscuss with regard to corporate governance for a listed
subsidiary like NESIC. The first is whether more synergies
can be generated with its parent company. Directors
from NEC have talked excitedly about this topic, anda lively discussion ensued. From the standpoint ofenhancing corporate value, I believe it is also vital tohold discussions on NEC’s proposals for assets that
could feasibly be utilized in projects, as well as onrecent case studies at NEC. However, such discussions
should always be framed within the context ofMichiko Ashizawa
Outside Director
1996 Joined Century Audit Corporation(currently KPMG AZSA LLC), International Department* Retired in May 2001
2003 Joined Industrial Revitalization Corporation of Japan
2006 Joined Advantage Partners LLP(currently Advantage Partners, Inc.)
2013 Associate Professor in Faculty of Liberal Arts (currently
the School of Economics and Business Administration)
at Yokohama City University (present position)
Associate Professor in Graduate School of International
Management at Yokohama City University(present position)2016 Part-time instructor in Graduate School of Business
Administration at Keio University (present position)2018 Outside Director of the Company (present position)

ANNUAL REPORT 201949

Dialogue on NESIC with Outside Directors

protecting minority shareholders and, on this point, I am
keenly aware of my responsibilities as an outside director. On the rare occasion, I criticize comments when I
feel that they lean too much toward NEC’s perspective.
Fuwa
It is my understanding that the discussion on
having outside directors represent more than one-thirdof the Board of Directors is not just about the ratio ofmembers, but also about exercising the leadership ofeach Board member to create a governance frameworkthat shareholders can accept. I am paying close attention to this point. The directors from NEC comment fromthe viewpoint of their approach to corporate governance of the Company. Outside auditors also freely
state their opinions at meetings of the Board of
Directors with the intention of maintaining and improving the Company’s corporate governance structure.
Ashizawa
Various discussions were held by the­advisory panel, and I voiced my opinions on diversity inparticular. For example, the age group of directors tends
to be the same generation as the President, so I would
like to see more discussions on age diversity. Moreover,I think the Company should improve diversity in terms ofgender representation and international experience. Thisapplies not only to the makeup of the Board of Directors,
but also to employees in order to spur innovation into
the future. It is generally the male employees who cometo the pre-meeting briefings for outside directors aboutbusiness and other matters, but I believe the female
employees I have met at periodic meetings for female
employees also provide valuable opinions on various
matters. As a first step, I would like to see the appointment of a female executive officer as soon as possible.
Fuwa
The advisory panel also discusses director
compensation, which has been linked to performance.
In the discussion we had this fiscal year, we talked
about the link between NESIC’s long-term vision andcompensation, and I proposed grants of stock withrestrictions on transfer. As a result, although the overall
compensation framework does not change, the General
Meeting of Shareholders approved the provision of a
portion of compensation as stock grants. NESIC is acompany with a high public utility and social profile, so I
thought it would be effective to motivate directors toenhance corporate value from a longer-term perspective.

Vision for 2030 & Beyond Borders 2021
Medium-Term Management Plan

I am excited to see how
the management plan willleverage NESIC’s corecompetencies.
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ANNUAL REPORT 2019

Ashizawa

Ashizawa
I give high marks to the Beyond Borders
management plan, which aims to overcome existing
frameworks from a variety of perspectives amid significant changes in the external environment. This mediumterm management plan can truly leverage the Company’s
capabilities such as its ability to take the lead over rivals
to propose work-style innovations or platforms for discovering new products in Silicon Valley, for example. I
think it is an exciting plan.
Fuwa
I agree. I believe now is the time for a drasticchange in business structures, including business portfolios. The Company was not aware of this when drawing
up the medium-term management plan, but when it was
testing access in new markets several years ago, it
examined how its existing technologies could be further
refined. About two years ago, NESIC identified the specific business domains on which to focus its energy andthe combination of these domains (its business portfolio). That has led to strategic partnerships in recent
years. The new medium-term management plan takes
this momentum a step further, in my opinion.

Ashizawa
We voiced our opinions when the mediumterm management plan was being formulated. The
expression “ability to create business,” one of theCompany’s core competencies, is emblematic of NESIC’s
strengths from the external standpoint of an outside
director, and an example of its uniqueness. For example,
NESIC employees discovered Zoom, a highly competitive product in the U.S., and turned it into a successful
business in Japan. Although NESIC thinks this is a naturalprocess, from an outsider’s perspective, I believe it is asource of its unique ability to create value. I believe
pointing out strengths and weaknesses unaware to
NESIC is an important role played by outside directors.
Fuwa
I think the medium-term management plan isa road map for achieving the Company’s vision of leveraging its core competencies in pursuit of new businesscreation. Naturally, as the Company targets new domains
with rivals also entering the fray, NESIC must reinforce
its ability to analyze competitive factors of the market.
In order to prosper in a fiercely competitive environment, I believe the executive officer team needs to constantly ask themselves what NESIC’s value propositionis from a broad viewpoint, while leveraging its core competencies in both new and existing businesses. Our discussions frequently include talk about the attractive
aspects of markets or potential business partners. In my
opinion, NESIC needs to think about what kinds of value
it can provide through their highly compelling products
and services. The other day, I talked with some managers in the EmpoweredOffice business, and I am confident
in their ability to create new value with the abundantknow-how they have accumulated in the business.
Ashizawa
I believe NESIC should address two issues.
The first is getting all employees, not just directors, onboard with the Company’s strategic direction in order toensure steady progress. To this end, the President needs
to sound like a “broken record” and constantly talkabout the strategic framework with employees at every
opportunity for discussion. The second issue is theimportance of conveying how NESIC provides value andcontributes to society. I therefore think more emphasis
needs to be placed on the Company’s message about
contributing to the SDGs. It may be hard for people tounderstand how IT services can contribute to society,but taking EmpoweredOffice as an example, theCompany can state its contribution to the SDGs in thecontext of reducing energy consumption while supporting job satisfaction and economic growth. I intend tohave more in-depth discussions at the Board of Directors
on encouraging NESIC employees to think of themselves
as global players and actively seek out knowledge outside of the Company.

Fuwa
I agree. Regarding the SDGs, I think it is important for NESIC to explore an open society and discovervalue that will be necessary to society in the future
while expanding across the borders of current markets.
This rings true in its Beyond Borders slogan. Together
with the executive officers, I will do my best to reflect
this on management going forward.

I think now is the time fora drastic change inbusiness structures.


Fuwa

ANNUAL REPORT 201951

Directors & Corporate Auditors (As of June 21, 2019)

Directors

52

Masao Wada

Yushi Ushijima

Masafumi Gouji

Osamu Noda

Chairman of the Board

President

Senior Vice President
and Member of the
Board

Senior Vice President
and Member of the
Board

Hiroyuki Sekizawa

Hisayoshi Fuwa

Michiko Ashizawa

Kuniko Muramatsu

Senior Vice President
and Member of the
Board

Member of the Board(Outside Director)

Member of the Board(Outside Director)

Member of the Board(Outside Director)

Junji Ashida

Morihiko Kudo

Member of the Board

Member of the Board

ANNUAL REPORT 2019

Corporate Auditors

Komei Sakanashi

Naoki Iwasaki

Corporate Auditor(Full-Time)

Corporate Auditor(Full-Time)

Yuji Kikuchi

Masayuki Horie

Corporate Auditor(Outside Auditor)

Corporate Auditor(Outside Auditor)

Backgrounds and Specializations of Outside Directors and Outside Auditors
Corporate
management

Business
administrationand planning

Finance andaccounting

Legal affairs

Internal
controls and risk
management

CSR

Hisayoshi Fuwa
Member of the Board(Outside Director)

Michiko Ashizawa
Member of the Board(Outside Director)

Kuniko MuramatsuMember of the Board(Outside Director)

Yuji Kikuchi
Corporate Auditor(Outside Auditor)

Masayuki Horie
Corporate Auditor(Outside Auditor)

ANNUAL REPORT 201953

Corporate Overview (As of March 31, 2019)

Name

NEC Networks & System Integration Corporation

Head Office

Iidabashi First Tower,
2-6-1 Koraku, Bunkyo-ku, Tokyo
112-8560, Japan
URL: https://www.nesic.co.jp/english/

Established

December 1, 1953

Registered as a Stock Company

November 26, 1953

Capital¥ 13,122,000,000

Number of Employees

4,841 (Non-consolidated), 7,743 (Consolidated)

Fiscal Year

April 1–March 31

Ordinary General Shareholders Meeting Annual meeting held in June
Listing

Tokyo Stock Exchange, First Section

Ticker Code1973

Accounting Auditor

KPMG AZSA LLC

Transfer Agent

Sumitomo Mitsui Trust Bank, Limited
1-4-1, Marunouchi, Chiyoda-ku, Tokyo
100-8233, Japan

Major Consolidated Subsidiaries
Japan

Overseas

NEC Magnus Communications, Ltd.

NESIC BRASIL S/A

NICHIWA Co.

NESIC (Thailand) Ltd.

NEC Net Innovation, Ltd.

NESIC PHILIPPINES, INC.

Q&A Corporation

Networks & System Integration Saudi Arabia Co. Ltd.

K&N System Integrations Corporation

ICT Star Group Myanmar Co., Ltd.

NEC Networks & System Integration Services, Ltd.

Outside Evaluations

SNAM Sustainability
Index

Certified Health andProductivity Management
Organization 2019

Top Hundred Telework
Pioneers“Kurumin” certification
mark*1Highest-grade “Eruboshi”
certification*2*1 The “Kurumin” mark is a symbol of the certification granted to companies that have established an action plan and achieved targets in accordance withJapan’s Act on Advancement of Measures to Support Raising Next-Generation Children.
*2 The “Eruboshi” logo is a symbol of the certification granted to companies that have formulated an action plan in accordance with Japan’s Act on Promotionof Women’s Participation and Advancement in the Workplace, and are implementing initiatives to a high standard.

54

ANNUAL REPORT 2019

Stock Information (As of March 31, 2019)

Number of Shareholders

7,591

Common Stock Authorized 100,000,000 shares
Issued49,773,807 shares

Trading Unit

100 shares

Major Shareholders (Top 10)
Number of
Shares Held(Thousands)

Percentage ofTotal Shares
Outstanding(%)

19,106

38.49

Japan Trustee Services Bank, Ltd.* (Sumitomo Mitsui Trust
Bank, Limited beneficiary trust account, NEC Corporation
retirement benefit trust account)

6,400

12.89

Japan Trustee Services Bank, Ltd. (Trust account)

3,852

7.76

The Master Trust Bank of Japan, Ltd. (Trust account)

2,899

5.84

Sumitomo Realty & Development Co., Ltd.

1,200

2.42

Japan Trustee Services Bank, Ltd. (Trust account No. 9)

1,034

2.08

Employees’ Stock Ownership Plan

697

1.41

GOVERNMENT OF NORWAY

649

1.31

THE BANK OF NEW YORK MELLON 140044

502

1.01

SSBTC CLIENT OMNIBUS ACCOUNT

491

0.99

Name of Shareholder

NEC Corporation
1*1 Shares held by Japan Trustee Services Bank, Ltd. (Sumitomo Mitsui Trust Bank, Limited beneficiary trust account,
NEC Corporation retirement benefit trust account) give NEC Corporation material voting rights because NEC
Corporation has contributed shares of the Company to its retirement benefit trust. The percentage of material
voting rights held by NEC Corporation as of March 31, 2019 was 51.48%.
*2 Percentage of total shares outstanding is calculated based on the total number of shares outstanding minus treasury stock (138,615 shares) and effectively non-held stock (100 shares) despite the Company being listed on theshareholder registry for this stock.

Breakdown of Shareholders by Type
(%)

100

0.3
8.0

0.3
8.6

0.3
8.2

0.3
7.1

80

23.6

21.2

18.7

21.9

41.0

41.1

41.2

41.2

0.6

1.0

26.6

27.8

30.7

28.8

2015/3

2016/32017/3

2018/3

60

0.3
7.4
17.2

41.1

40

20

0.9

0.7

0.4

33.6

0
2019/3(FYE)

Financial institutions
Investment securities firms
Other institutions
Foreign entities (institutions, individuals)
Individuals and others
Treasury stock

ANNUAL REPORT 2019

55

56

ANNUAL REPORT 2019

Financial Section
58

CONSOLIDATED TEN-YEAR SUMMARYCONSOLIDATED FINANCIAL STATEMENTS
60

CONSOLIDATED BALANCE SHEETS

62

CONSOLIDATED STATEMENTS OF INCOME

63

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

64

CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS

66

CONSOLIDATED STATEMENTS OF CASH FLOWS

68

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

88

INDEPENDENT AUDITOR’S REPORTANNUAL REPORT 201957

CONSOLIDATED TEN-YEAR SUMMARYFY2010/3

FY2011/3

FY2012/3

FY2013/3

Orders received¥222,046¥212,277¥215,373¥241,271

Net sales

217,727

217,948

204,658

235,716Gross profit

32,93833,132

32,07937,182

Operating income

9,867

10,835

9,747

12,483

4.5

5.0

4.8

5.3

5,644

4,660

4,474

7,246

Total assets*2¥146,543¥149,464¥149,130¥167,472

Net assets

73,84977,00580,07485,974

Owner’s equity

73,21376,44579,50385,266

Cash flows from operating activities¥16,070¥ (1,595)¥18,595¥ (1,723)

Cash flows from investing activities(1,885)(1,904)(2,648)(3,429)

Free cash flows

14,184(3,499)15,946(5,152)

Cash flows from financing activities(1,382)(337)(3,979)(2,066)

Cash and cash equivalents at end of year

29,51425,58737,45630,315EPS¥   113.50¥   93.72¥   89.98¥   145.73

BPS

1,472.14

1,537.19

1,598.77

1,714.74

25.00

26.00

28.00

45.00

ROE*3

8.0

6.2

5.7

8.8

ROA*4

6.7

7.3

6.3

7.7

Owner’s equity ratio

50.0

51.1

53.3

50.9

DOE

1.8

1.7

1.8

2.7

Payout ratio

22.0

27.7

31.1

30.9

5,998

5,939

5,936

6,024

49,773,807

49,773,807

49,773,807

49,773,807

Performance Indicators (Millions of yen)

Operating income to net sales (%)
Net income attributable to owners of the parent
Financial Condition (Fiscal year end) (Millions of yen)

Cash Flows (Millions of yen)

Per-Share Indicators (Yen)

Cash dividends
Key Indicators (%)

Other
Number of employees
Number of shares outstanding (FYE)*1 U.S. dollar amounts have been translated from yen, for convenience only, at the rate of ¥110.99 = US$1.00 as of March 31, 2019.
*2 Partial revisions to accounting standards for tax-benefit accounting (Corporate Accounting Standard No. 28, February 16, 2018) have been adopted fromthe fiscal year ended March 31, 2019. Accordingly, the figures for the fiscal year ended March 31, 2015 to the fiscal year ended March 31, 2018 have been retroactively
adjusted to comply with this revision.
*3 ROE (Return on Equity): Net income attributable to owners of the parent / Owner’s equity during the term [Average of owner’s equity at the beginningof the term and at the end of the term] x 100*4 ROA (Return on Assets): Ordinary income / Total assets during the term [Average of total assets at the beginning of the term and at the end of the term] x 100

58

ANNUAL REPORT 2019

FY2014/3

FY2015/3

FY2016/3

FY2017/3

FY2018/3

FY2019/3(Thousands of U.S. dollars) *1¥280,071¥299,097¥274,946¥279,241¥287,831¥284,739$2,565,447

270,326

292,164

279,961

257,912

267,939

277,9492,504,270

44,69048,11045,162

42,58544,26547,681

429,597

14,41816,158

14,111

9,974

11,057

12,774

115,091

5.3

5.5

5.0

3.9

4.1

4.6

—

8,257

7,791

5,996

6,549

7,357

8,885

80,052(Thousands of U.S. dollars) *1¥189,059¥201,904¥196,505¥197,386¥207,643¥216,171$1,947,661

89,166

94,173

94,397

96,674

101,732

107,608

969,528

87,51492,55992,73894,611

99,473

104,888945,022(Thousands of U.S. dollars) *1¥23,313¥ 2,460¥ 9,435¥22,634¥ 4,779¥ 8,396$ 75,646(5,504)(3,929)(2,822)(2,697)(2,802)(5,604)(50,491)

17,809

(1,469)6,613

19,936

1,976

2,791

25,155(3,824)(4,127)(1,402)(4,144)(4,366)(5,615)(50,590)

44,43438,95143,88959,64857,28154,354

489,719(Thousands of U.S. dollars) *1¥   166.06¥   156.72¥   120.80¥   131.94¥   148.23¥  179.02$ 1.61

1,760.06

1,864.61

1,868.25

1,906.03

2,004.04

2,113.19

19.04

60.00

64.00

70.00

72.00

74.00

78.00

0.70

9.6

8.7

6.5

7.0

7.6

8.7

—

8.2

8.3

7.1

5.1

5.4

6.1

—

46.3

45.8

47.2

47.9

47.8

48.5

—

3.5

3.5

3.8

3.8

3.8

3.8

—

36.1

40.8

57.9

54.6

49.9

43.6

—

7,164

7,260

7,464

7,572

7,657

7,743

—

49,773,807

49,773,807

49,773,807

49,773,807

49,773,807

49,773,807—

ANNUAL REPORT 201959

CONSOLIDATED BALANCE SHEETSNEC Networks & System Integration Corporation and Consolidated Subsidiaries
As of March 31, 2019 and 2018

Thousands of
U.S. dollars(note 3)

Millions of yen
2019

2018

2019

¥ 54,354¥ 57,281$  489,719

Notes and accounts receivable (notes 4 and 23)

106,553

103,911960,023

Electronically recorded monetary claims (note 4)

606

494

5,459

Inventories (note 7)

13,181

8,237

118,758

Other current assets

6,423

5,414

57,870

(82)

(121)

(738)

181,036

175,218

1,631,101

ASSETS
Current assets:
Cash and cash equivalents

Allowance for doubtful accounts
Total current assets

Non-current assets:
Property and equipment
Land

2,410

2,410

21,713

Buildings and structures

10,033

9,763

90,395

173

182

1,558

15,016

14,826135,291

499

222

4,495

Machinery, equipment and vehicles
Tools, furniture and fixtures
Construction in progress
Other
Accumulated depreciation
Property and equipment, net

Intangibles, net of accumulated amortization (note 8)

392

258

3,531

(18,309)(17,570)(164,960)

10,217

10,09392,053

6,234

5,384

56,167

635

516

5,721

Investments and other assets
Investment securities (notes 5 and 6)

364

444

3,279

Deferred tax assets (note 10)

13,60012,714

122,533

Other assets (note 23)

4,144

3,309

37,336

Asset for retirement benefits (note 11)

(62)

(37)

(558)

Total investments and other assets

18,682

16,947

168,321

Total non-current assets

35,13432,425316,551¥216,171¥207,643$1,947,661

Allowance for doubtful accounts

Total assets

60

ANNUAL REPORT 2019

Thousands of
U.S. dollars(note 3)

Millions of yen
2019

2018

2019

¥  2,284¥  4,086$   20,578

LIABILITIES AND NET ASSETS
Current liabilities:
Short-term bank loans (note 9)
Current installments of long-term debt (note 9)

231

3,171

2,081

Notes and accounts payable (notes 4 and 23)

40,27439,574362,861

807

728

7,270

Advances received (note 23)

6,290

3,811

56,671

Accrued income taxes (note 10)

3,175

3,768

28,606

Accrued bonuses to directors

117

102

1,054

Accrued warranty on products

113

116

1,018

Electronically recorded obligations

Accrued losses on sales contracts (note 7)

1,980

557

17,839Other current liabilities

17,053

16,957

153,644

Total current liabilities

72,32872,874

651,662

Non-current liabilities:
Long-term debt (note 9)

3,896

842

35,102

Liability for retirement benefits (note 11)30,60930,428

275,781

1,729

1,765

15,577

Total non-current liabilities

36,23433,037

326,461

Total liabilities

108,562

105,911

978,124

13,122

13,122

118,226

Capital surplus

16,65916,655150,094

Retained earnings

79,52074,357

716,460

(279)

(276)

(2,513)109,022

103,858

982,268

Other liabilities (notes 10 and 12)

Shareholders’ equity (note 13):
Common stock:
Authorized 100,000,000 shares; issued and outstanding
49,773,807 shares at March 31, 2019 and 2018

Treasury stock, at cost; 138,615 shares at March 31,
2019 and 137,435 shares at March 31, 2018
Total shareholders’ equity
Accumulated other comprehensive income:Net unrealized holding gains on other securities (note 5)
Foreign currency translation adjustments
Accumulated adjustments for retirement benefits (note 11)
Total accumulated other comprehensive income
Non-controlling interests
Total net assets
Total liabilities and net assets

31

42

279

(471)

(374)

(4,243)(3,694)(4,053)(33,282)(4,134)(4,385)(37,246)

2,719

2,258

24,497

107,608

101,732

969,528¥216,171¥207,643$1,947,661

The accompanying notes to consolidated financial statements are an integral part of these consolidated financial statements.

ANNUAL REPORT 201961

CONSOLIDATED STATEMENTS OF INCOME
NEC Networks & System Integration Corporation and Consolidated Subsidiaries
Years ended March 31, 2019 and 2018

Thousands of
U.S. dollars(note 3)

Millions of yen

Net sales (note 23)
Cost of sales (notes 7 and 23)
Gross profit
Selling, general and administrative expenses(notes 16 and 17)
Operating income

2019

2018

2019

¥277,949¥267,939$2,504,270

230,268

223,674

2,074,673

47,681

44,265429,597

34,90633,208314,496

12,774

11,057

115,091

Other income (expense):
Interest income

40

35

360

Interest expense

(95)

(127)

(855)

Dividends income of insurance

193

197

1,738

Insurance benefit

70

41

630

Gains on sale of investments in subsidiaries
and affiliates

—

38

—

Gain on sales of non-current assets (note 18)

—

283

—

Loss on disposal of non-current assets

(53)

(120)

(477)

Foreign exchange loss

(43)

(51)

(387)

Business restructuring expenses for subsidiaries
and affiliates

—

(56)

—

Other, net

136

(18)

1,225

Subtotal

248

222

2,234

13,023

11,279117,334

Current

4,894

4,548

44,094

Deferred(1,052)(790)(9,478)

3,842

3,757

34,615

9,180

7,521

82,710

Income before income taxes
Income taxes (note 10):

Subtotal
Net Income
Net Income attributable to:Non-controlling interests
Owners of the parent

295

164

2,657

¥  8,885¥  7,357$   80,052

The accompanying notes to consolidated financial statements are an integral part of these consolidated financial statements.

62

ANNUAL REPORT 2019

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
NEC Networks & System Integration Corporation and Consolidated Subsidiaries
Years ended March 31, 2019 and 2018

Thousands of
U.S. dollars(note 3)

Millions of yen

Net Income

2019

2018

¥9,180¥7,521

2019$82,710

Other comprehensive income arisingduring the year (note 19):
Net unrealized holding loss on other securities

(11)

7

(99)

Foreign currency translation adjustments

(143)

81

(1,288)Adjustments for retirement benefit

359

1,101

3,234

Share of other comprehensive income of entities
accounted for using equity method

(1)

0

(9)

Total other comprehensive income arisingduring the year

203

1,190

1,828

¥9,383¥8,712$84,539¥9,136¥8,486$82,313

247

225

2,225

Comprehensive income
Comprehensive income attributable to:
Owners of the parent
Non-controlling interests

The accompanying notes to consolidated financial statements are an integral part of these consolidated financial statements.

ANNUAL REPORT 2019

63

CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETSNEC Networks & System Integration Corporation and Consolidated Subsidiaries
Years ended March 31, 2019 and 2018

Numbers ofshares ofcommon stock(Thousands)

Balance at April 1, 2017

49,773

Millions of yen
Shareholders’ equity
Commonstock

CapitalsurplusRetainedearnings¥13,122¥16,652¥70,622

Treasury
stock

Total

¥(272)¥100,124

Changes arising during the year:
Cash dividends(3,623)

Profit attribute to owners of the parent

7,357

Purchase of treasury stock
Disposition of treasury stock0

Change in ownership interest of parent due to transactions with
non-controlling interests

3(3,623)
7,357
(4)

(4)

0

0
3

Net changes in accounts otherthan shareholders’ equity
Total changes during the year
Balance at March 31, 2018

—
—

—

3

3,734

(4)

3,733

49,773

13,122

16,65574,357(276)

103,858

Changes arising during the year:
Cash dividends(3,722)

Profit attribute to owners of the parent

8,885

Purchase of treasury stock
Disposition of treasury stock0

Change in ownership interest of parent due to capital increaseof consolidated subsidiaries

4(3,722)
8,885
(3)

(3)

0

0
4

Net changes in accounts otherthan shareholders’ equity
Total changes during the year
Balance at March 31, 2019

—
—

—

4

5,163

(3)

5,164

49,773¥13,122¥16,659¥79,520¥(279)¥109,022

Non-controllinginterests

Total
net assets

Millions of yen
Accumulated other comprehensive income

Balance at April 1, 2017

Net unrealized
holding gains
on othersecurities

Foreigncurrencytranslation
adjustments

Accumulated
adjustments
for retirement
benefits¥    35¥(394)¥(5,154)

Total¥(5,513)¥2,062¥   96,674

Changes arising during the year:
Cash dividends—(3,623)

Profit attribute to owners of the parent

—

7,357

Purchase of treasury stock—(4)

Disposition of treasury stock—0

Change in ownership interest of parent due to transactions with
non-controlling interests—

3

Net changes in accounts otherthan shareholders’ equity
Total changes during the year
Balance at March 31, 2018

7

20

1,101

1,128

196

1,324

7

20

1,101

1,128

196

5,057

42

(374)

(4,053)(4,385)

2,258

101,732

Changes arising during the year:
Cash dividends—(3,722)

Profit attribute to owners of the parent

—

8,885

Purchase of treasury stock—(3)

Disposition of treasury stock—0

Change in ownership interest of parent due to capital increaseof consolidated subsidiaries—

4

Net changes in accounts otherthan shareholders’ equity
Total changes during the year
Balance at March 31, 201964

ANNUAL REPORT 2019

(11)

(97)

359

250

460

711

(11)

(97)

359

250

460

5,876

¥   31¥(471)¥(3,694)¥(4,134)¥2,719¥107,608

Thousands of U.S. Dollars (note 3)
Shareholders’ equity

Balance at April 1, 2018

Commonstock

CapitalsurplusRetainedearnings$118,226$150,058$669,943

Treasury
stock

Total

$(2,486)$935,741

Changes arising during the year:
Cash dividends(33,534)

Net income

80,052(33,534)
80,052

Purchase of treasury stock
Disposition of treasury stock0

Change in ownership interest of parent due to capital increaseof consolidated subsidiaries

36

(27)

(27)

0

0
36

Net changes in accounts otherthan shareholders’ equity—

Total changes during the year
Balance at March 31, 2019—36

46,517(27)

46,526$118,226$150,094$716,460$(2,513)$982,268

Non-controllinginterests

Total
net assets

Thousands of U.S. Dollars (note 3)
Accumulated other comprehensive income

Balance at April 1, 2018

Net unrealized
holding gains
on othersecurities

Foreigncurrencytranslation
adjustments

Accumulated
adjustments
for retirement
benefits$378$(3,369)$(36,516)

Total$(39,508)$20,344$916,587

Changes arising during the year:
Cash dividends—(33,534)

Net income—

80,052

Purchase of treasury stock

—

(27)

Disposition of treasury stock—0

Change in ownership interest of parent due to capital increaseof consolidated subsidiaries—

36

Net changes in accounts otherthan shareholders’ equity
Total changes during the year
Balance at March 31, 2019

(99)

(873)

3,234

2,252

4,144

6,405

(99)

(873)

3,234

2,252

4,144

52,941$279$(4,243)$(33,282)$(37,246)$24,497$969,528

The accompanying notes to consolidated financial statements are an integral part of these consolidated financial statements.

ANNUAL REPORT 201965

CONSOLIDATED STATEMENTS OF CASH FLOWSNEC Networks & System Integration Corporation and Consolidated Subsidiaries
Years ended March 31, 2019 and 2018

Thousands of
U.S. dollars(note 3)

Millions of yen
2019

2018

2019

Net income before income taxes¥13,023¥ 11,279$117,334

Depreciation and amortization

2,764

2,526

24,903

Amortization of goodwill

247

251

2,225

Increase (decrease) in allowance for doubtful accounts

(11)

12

(99)

Cash flows from operating activities:(Increase) decrease in asset for retirement benefits

251

310

2,261

Increase (decrease) in liability for retirement benefits

517

872

4,658

Increase (decrease) in accrued bonuses to directors

14

34

126

Increase (decrease) in accrued warranty on products
Increase (decrease) in accrued losses on sales contracts

(7)

(18)

(90)

12,811(522)

Interest and dividend income

(58)

(46)

Interest expense

95

127

855

(Increase) decrease in notes and accounts receivable(2,934)(13,061)(26,434)(Increase) decrease in inventories(4,951)

266(44,607)

824

3,801

7,424

Increase (decrease) in notes and accounts payable
Other, net
Subtotal

2,724

2,326

24,542

13,927

8,604

125,479

Interest and dividend received

58

47

522

Interest paid

(95)

(127)

(855)

(5,495)(3,744)(49,508)

8,396

4,779

75,646

Income taxes paid
Net cash provided by operating activities

66

(2)
1,422

ANNUAL REPORT 2019

Thousands of
U.S. dollars(note 3)

Millions of yen
2019

2018

2019

Cash flows from investing activities:
Purchase of property and equipment
Proceeds from sale of property and equipment(1,922)(1,628)(17,316)

5

386

45

(2,578)(1,532)(23,227)

Proceeds from sales of intangibles

15

11

135

Purchase of investment securities

Purchase of intangibles

(162)

(27)

(1,459)Loans receivable made

—

(2)

—

Collection of loans receivable

1

3

9

Proceeds from sales of investments in subsidiaries
and affiliates

—

74

—

Other, net
Net cash used in investing activities

(962)

(87)

(8,667)(5,604)(2,802)(50,491)

Cash flows from financing activities:
Net increase (decrease) in short-term bank loans(1,750)(111)(15,767)

Repayments of long-term debt

(3,186)(171)(28,705)

Proceeds from long-term debt

3,300

—

29,732

(2)

(4)

(18)

(3,717)(3,620)(33,489)

Dividends paid to non-controlling interest

(27)

(23)

(243)

Proceeds from share issuance to non-controlling interest

245

—

2,207

Proceeds from sale and purchase of treasury stock, net
Dividends paid to shareholders

Other, net
Net cash used in financing activities
Effect of exchange rate changes on cash andcash equivalents

(474)

(435)

(4,270)(5,615)(4,366)(50,590)

(104)

22

(937)

Net increase (decrease) in cash and cash equivalents(2,927)(2,366)(26,371)

Cash and cash equivalents at beginning of year

57,28159,648516,091¥54,354¥ 57,281$489,719

Cash and cash equivalents at end of year

The accompanying notes to consolidated financial statements are an integral part of these consolidated financial statements.

ANNUAL REPORT 201967

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NEC Networks & System Integration Corporation and Consolidated Subsidiaries
March 31, 2019 and 2018

1. BASIS OF PREPARATION
NEC Networks & System Integration Corporation (the“Company”) and its domestic subsidiaries maintain theirbooks of account in conformity with accounting principles generally accepted in Japan. Its foreign subsidiaries
maintain their books of account in conformity with thoseof their countries of domicile.
The accompanying consolidated financial statements
have been compiled from the consolidated financial
statements prepared by the Company as required under
the Japanese Financial Instruments and Exchange Law
and, have been prepared in accordance with accounting
principles generally accepted in Japan, which are different
in certain respects as to the application and disclosure
requirements of IFRSs.
As permitted by the Japanese Financial Instruments
and Exchange Law, amounts of less than one million yen
have been omitted. As a result, the totals shown in theaccompanying consolidated financial statements (both inyen and U.S. dollars) do not necessarily agree with thesum of the individual amounts.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(a) Consolidation
The Company has 17 subsidiaries (companies over which
the Company has the ability to control their operations)as of March 31, 2019 (17 subsidiaries as of March 31,2018) (the “Group”).
(Changes in the scope of consolidation)
K&N System Integrations Corporation has been established in May 2018, and it is included in the consolidated
financial statements from the current fiscal year.

68

prevailing at the balance sheet dates. All revenues andexpenses associated with foreign currencies are translated at the rates of exchange prevailing when suchtransactions were made. The resulting exchange gainor loss is credited or charged to income.
The revenue and expense accounts of the foreignsubsidiaries are translated into yen at the average­exchange rates prevailing during the year, and, except
for the components of shareholders’ equity, the balance
sheet accounts are translated at the rates of exchange
in effect at the balance sheet date. The components
of shareholders’ equity are translated at their historicalexchange rates. Translation adjustments, except forthe portion included in non-controlling interests, are­presented as a separate component of net assets inthe accompanying consolidated financial statements.
(c) Cash equivalents
Cash and cash equivalents include all highly liquid investments – generally with original maturities of three months
or less – that are readily convertible to known amountsof cash and have negligible risk of changes in value dueto their short maturities.
(d) Investment securities
Marketable securities classified as other securities aremeasured at fair value with any changes in unrealized
holding gain or loss, net of the applicable income taxes,
included directly in net assets. Non-marketable securities
classified as other securities are carried at cost. Cost of
securities sold is determined by the moving-averagemethod.
(e) Inventories
Work in process is stated at the lower of cost or net
selling value determined on a specific project basis.
Purchased goods and materials are stated at the lowerof cost or net selling value determined primarily by themoving-average method.

The accompanying consolidated financial statements
include the accounts of the Company and the significant
companies controlled directly or indirectly by theCompany. All significant intercompany balances andtransactions have been eliminated in consolidation.
The financial statements of the 6 subsidiaries with
year-end of December 31 have been used for consolidation. All material transactions that occurred in the period
from such year-end to March 31, which is the Company’s
year-end, have been adjusted.
The difference between the carrying amount andthe underlying net assets at fair value at the respective
dates of acquisition is allocated to identifiable assets
and liabilities based on fair market value at the dates ofacquisition. The unallocated portion of the difference,
which is recognized as goodwill, is amortized by thestraight-line method over a period of up to 20 years inwhich the future benefit of each investment is expected.
The Company also has 2 affiliates accounted for using
equity method.
If the year-end of affiliates differs from that of theCompany, financial statements prepared by their yearend are utilized in consolidation.

Intangibles are amortized by the straight-line method
over their estimated useful lives.
Software for sale is amortized based on projectedsales volumes over the estimated effective periods(within 3 years). Software for internal use is amortized by
the straight-line method over the estimated useful lives(within 5 years).

(b) Foreign currency translation
Monetary assets and liabilities denominated in foreign
currencies are translated into yen at the exchange rates(g) Allowance for doubtful accounts
The allowance for doubtful accounts is provided at an
amount determined based on the historical experience

ANNUAL REPORT 2019(f) Depreciation and amortization
Depreciation of property and equipment is principally
computed by the straight-line method.
Significant renewals and improvements are capitalized.
Maintenance and repair costs are charged to expense.
The useful lives of property and equipment are­summarized as follows:
Buildings and structures3 to 50 years
Machinery, equipment and vehicles
2 to 17 years
Tools, furniture and fixtures
2 to 20 years

of bad debt with respect to ordinary receivables, and an
estimate of uncollectible amounts determined by reference to specific doubtful receivables from customers
which are experiencing financial difficulties.
(h)Accrued warranty on products
Accrued warranty on products is provided for at the estimated warranty cost.
(i) Accrued losses on sales contracts
Accrued losses on sales contracts are provided for at theamount of estimated losses for work in process at thebalance sheet date. Among sales orders of the Company
on hand at the balance sheet date, for projects in which
the estimated cost is expected to exceed the amountof the sales order, such excess costs on sales contracts
are accrued.
(j) Leases
Leased assets related to finance lease transactions­without title transfer are depreciated by the straight-line
method, with the lease term as their useful lives and noresidual value.
(k) Research and development costs
Research and development costs are charged to expense
as incurred.
(l) Retirement benefits
Liability for retirement benefits is provided mainly at an
amount calculated based on the retirement benefit obligation and the fair value of the pension plan assets atthe balance sheet dates, as adjusted for the actuarial
gain or loss and past service costs that are yet to berecognized. The retirement benefit obligation is attributed
to each period by the straight-line method over the estimated years of services of the eligible employees.
Actuarial gain or loss is amortized from the subsequent
year that it occurs by the straight-line method within the
average remaining years (11 to 18 years) of service of theemployees. Past service costs are amortized beginningfrom the year it is incurred by the straight-line method
within the average remaining years (12 to 18 years) ofservice of the employees.
Certain consolidated subsidiaries use a simplified
method for calculating retirement benefit asset and liability and retirement benefit costs.
For lump-sum payment plans, the payment for voluntary retirement at fiscal year-end is deemed as retirement
benefit obligation, and for annuity payment plans, theactuarial obligation on pension finance calculation in the
recent years is deemed as the retirement benefit
obligation.
(m) Income taxes
Deferred tax assets and liabilities are determined basedon the differences between financial reporting and thetax bases of the assets and liabilities and are measured
using the enacted tax rates and laws which will be ineffect when the differences are expected to reverse.

(n) Derivative financial instruments
Derivatives are recorded at their fair value with any
changes in unrealized gain or loss charged or credited
to income, except for those which meet the criteria fordeferral hedge accounting under which unrealized gainor loss, net of the applicable income taxes, is directly
included in net assets.
Methods for significant hedge accounting(i) Hedge accounting method
	Deferral hedge accounting is applied. For forward
exchange contracts, the allocation method is applied
if the criteria for the allocation method are met.
(ii) Hedging instruments and hedged items
	Hedging instruments: Forward exchange contracts
	Hedged items: Any monetary receivables and payables and planned trading transactions that are­denominated in foreign currencies.
(iii) Hedging policy
	The Company uses derivative transaction in accordance with internal policies to mitigate and avoid
the foreign exchange fluctuation risk.
(iv) Hedging evaluation
	Hedge effectiveness is evaluated by comparing thetotal changes in values of hedging instruments andhedged items for the periods from the commencement of hedge contracts to the evaluation dates. For
forward exchange contracts which meet the criteria
for the allocation method, the evaluation of hedge
effectiveness is omitted.
(o) Revenue recognition
The percentage-of-completion method is applied if theoutcome of the construction activity can be estimatedreliably, otherwise, the completed-contract method isapplied. The percentage of completion as of the end of
the reporting period is estimated based on the percentage of the cost incurred to the estimated total cost.
(p) Accrued bonuses to directors
The Company and its domestic consolidated subsidiaries
provide accrued bonuses to directors based on the­estimated amounts to be paid in respect of the year.
(q) Accounting for consumption taxes
Consumption taxes generally withheld upon sale, as
well as those paid for purchases of goods or services,
are recorded as a liability or an asset, and are excluded
from relevant revenue, costs or expenses.
(r) Reclassifications
Certain reclassifications have been made to the consolidated financial statements for the year ended March 31,2018 to conform to the presentation for the year ended
March 31, 2019.
(s) Accounting standards and guidance issued but not
yet adopted
The following accounting standards and guidance were
issued but not yet adopted.

ANNUAL REPORT 201969

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS“Accounting Standard for Revenue Recognition” (ASBJ
Statement No. 29, March 30, 2018)“Implementation Guidance on Accounting Standard for
Revenue Recognition” (ASBJ Guidance No. 30, March 30,
2018)(1) Overview
	International Accounting Standards Board (IASB) andthe Financial Accounting Standards Board (FASB) had
jointly developed comprehensive accounting standards on revenue recognition and had issued“Revenue from Contracts with Customers” (which iscalled “IFRS 15” in IASB, and “Topic 606” in FASB) in
May 2014, and IFRS 15 applies to an annual reporting
period beginning on or after January 1 2018, andTopic 606 applies to an annual reporting period beginning after December 15, 2017. In these circumstances, the ASBJ has developed comprehensive
accounting standards on revenue recognition and has
issued the above accounting standard and implementation guidance.
	  The ASBJ followed two policies in developing a newrevenue standard. Basically, incorporate all IFRS 15
requirements for international comparability as one of
the benefits from conformity with IFRS 15, and consider additional alternative treatments where theywould make application easier for the practice ofbusiness in Japan, within the extent of that would not
significantly hinder international comparability.
(2) Effective date	Effective from the beginning of the fiscal year ending
March 31, 2022.
(3) Effects of the application of the standards
	The Company and its consolidated domestic subsidiaries are currently in the process of determining theeffects of these new standards on the consolidated
financial statements.
(t) Changes in presentation(Changes in consolidated statements of income)“Insurance benefit”, which was included in “Other, net”
under “Other income (expense)” in the previous fiscal
year, is presented separately in the current fiscal year due
to an increase in materiality. To reflect this change inpresentation, the amount of ¥41 million included in“Other, net” in the previous fiscal year is reclassified into
“Insurance benefit”.
In addition, “Relocation expenses in subsidiaries andassociates” under “Other income (expense)”, which waspresented separately in the previous fiscal year, is included in “Other, net” in the current fiscal year because
its materiality has declined.
Also, “Foreign exchange loss”, which was included in“Other, net” under “Other income (expense)” in the previous fiscal year, is presented separately in the current
fiscal year due to an increase in materiality. To reflect thischange in presentation, the amount of ¥51 million included in “Other, net” in the previous fiscal year is reclassified into “Foreign exchange loss”.

70

ANNUAL REPORT 2019

(Changes following the adoption of “Partial Amendments
to Accounting Standard for Tax Effect Accounting”)
The Group adopted “Partial Amendments to AccountingStandard for Tax Effect Accounting” (ASBJ Statement No.
28, February 16, 2018) and changed the classification of“Deferred tax assets” to “Investments and other assets”,
and “Deferred tax liabilities” to “Non-current liabilities”.
Simultaneously, footnotes for “Income Taxes” are alsochanged.
As a result, in the previous fiscal year, “Deferred tax
assets” of ¥4,524 million classified as “Current assets” isreclassified into “Investments and other assets”.
In addition, the Group set off “Deferred tax assets”
against “Deferred tax liabilities” of the same taxable
entity, and “Total assets” are decreased by ¥406 million
compared to the amount before the change.
As for the notes related to tax effect accounting,those specified in notes 8 (excluding total amount ofvaluation allowance) and 9 of “Accounting Standard forTax Effect Accounting”, which are required in paragraphs
3 to 5 of Statement No.28, are additionally included.
However, this additional information corresponding to
the previous fiscal year is not disclosed, in accordancewith the transitional treatments prescribed in paragraph 7of Statement No.28.

3. U.S. DOLLAR AMOUNTS
The translation of yen amounts into U.S. dollar amounts
is included solely for the convenience of readers outside
Japan and has been made, as a matter of arithmetic
computation only, at ¥110.99 = U.S.$1.00, the approximate rate of exchange on March 31, 2019. The translation should not be construed as a representation thatthe yen amounts have been, could have been, or couldin the future be, converted into U.S. dollars at that or
any other rate.

4. NOTES AND ELECTRONICALLY RECORDED MONETARY CLAIMS MATURING
Notes and electronically recorded monetary claims are settled on the clearing date. As financial institutions in Japan
were closed on March 31, 2019 and 2018, the following notes and electronically recorded monetary claims maturingon these fiscal year-ends and collected or paid on their following business days, are included in the consolidated balance sheets.
Thousands of
U.S. dollars

Millions of yen
2019

2018

2019

¥146

¥75

$1,315

Electronically recorded monetary claims

36

18

324

Notes payable

31

30

279

Notes receivable

5. INVESTMENT SECURITIESThe components of unrealized gain or loss on marketable securities classified as other securities at March 31, 2019and 2018 are summarized as follows:
Millions of yen
March 31, 2019

Carrying
value

Acquisition
cost

Thousands of U.S. dollars
Unrealized
gain (loss)

Carrying
value

Acquisition
cost

Unrealized
gain (loss)

Securities whose carrying value
exceeds their acquisition cost:
Equity securities
Subtotal

¥144

¥ 96

¥47

$1,297$  864

$423

144

96

47

1,297

864

423

31

32

(1)

279

288

(9)

31

32

(1)

279

288

(9)

¥175

¥129

¥45

$1,576$1,162$405

Securities whose acquisition costexceeds their carrying value:
Equity securities
Subtotal
Total

Millions of yen
March 31, 2018

Carrying
value

Acquisition
cost

Unrealized
gain (loss)

Securities whose carrying value
exceeds their acquisition cost:
Equity securities
Subtotal

¥179

¥ 98

¥    80

179

98

80

49

74

(25)

49

74

(25)

¥228

¥172

¥    55

Securities whose acquisition costexceeds their carrying value:
Equity securities
Subtotal
Total

ANNUAL REPORT 201971

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Sales of securities classified as other securities for the years ended March 31, 2019 and 2018 are summarized
as follows:
Thousands of
U.S. dollars

Millions of yen
2019

2018

2019

Proceeds from sales

¥18

¥4

$162

Gain(Loss) on sales

18

3

162

Unlisted equity securities of ¥373 million ($3,360
thousand) and ¥223 million at March 31, 2019 and 2018,
respectively, are not included in the above table because
there is no market value thereof and future cash flows
cannot be estimated therefor, thus, making it extremely
difficult to measure the fair value.
Impairment loss recognized on investment securities
During the fiscal year ended March 31, 2019, theCompany recognized impairment losses of ¥25 million($225 thousand) and ¥3 million ($27 thousand) on available-for-sale securities with and without market value,

respectively. During the fiscal year ended March 31, 2018,
the Company recognized impairment losses of ¥11 million and ¥0 million on available-for-sale securities withand without market value, respectively.
Securities with market value are fully impaired if theirmarket value as at fiscal year-end falls below 50% of their
original cost. If the decline in their market value is between 30% and 50%, the recoverability of their market
value is taken into account to determine the amount oflosses. Securities without market value are impaired if the
net asset per share falls below 50% of original cost due
to deterioration of issuers’ financial conditions.

6. INVESTMENT IN AN AFFILIATEThe aggregate carrying amount of investment in an affiliates as of March 31, 2019 and 2018 are ¥86 million ($774 thousand) and ¥64 million, respectively,

7. INVENTORIESa) Inventories at March 31, 2019 and 2018 are as follows:
Thousands of
U.S. dollars

Millions of yen
2019Work in process
Purchased goods and materials
Total

2018

¥ 6,827¥5,8582019$ 61,510

6,354

2,379

57,248¥13,181¥8,237$118,758b) Losses from revaluation of the lower of cost or net selling value included in cost of sales for the years ended March
31, 2019 and 2018 were ¥260 million ($2,342 thousand) and ¥149 million, respectively.
c) Losses on sales contracts included in cost of sales for the years ended March 31, 2019 and 2018 were ¥1,588 million ($14,307 thousand) and ¥338 million, respectively.
d) Accrued losses on sales contracts and work in process corresponding to the loss contract are not offset in the­accompanying consolidated balance sheets.
Work in process inventories corresponding to accrued losses on sales contracts at March 31, 2019 and 2018 are
as follows.
Thousands of
U.S. dollars

Millions of yen
2019Work in process

72

ANNUAL REPORT 2019

¥642

2018

¥263

2019

$5,784

8. GOODWILL
Goodwill at March 31, 2019 and 2018 is recorded in the accompanying consolidated balance sheets under the following captions:Thousands of
U.S. dollars

Millions of yen
2019

Intangibles, net of accumulated amortization¥1,14620182019¥1,394$10,325

According to Article 32 of the “Practical Guidelines on Accounting Standards for Capital Consolidation Procedures in
Preparing Consolidated Financial Statements” (Accounting Practice Committee Statement No. 7 amended on November
28, 2014 by the Japan Institute of Certified Public Accountants), goodwill is amortized.

9. SHORT-TERM BANK LOANS AND LONG-TERM DEBT
Short-term bank loans and long-term debt are unsecured.
The weighted average interest rates of current installments of long-term debt for the years ended March 31, 2019and 2018 were approximately 0.4% and 0.4% and those of long-term debt for the years ended March 31, 2019 and2018 were approximately 0.4% and 0.4%, respectively.
The annual maturities of long-term debt at March 31, 2019 are as follows:Year ending March 31,Millions of yen

Thousands of
U.S. dollars$ 2,0812020¥  231

2021

231

2,081

2022

3,231

29,110

2023

231

2,081

2024

202

1,819

—

—

2025 and thereafter

As of March 31, 2019 and 2018, the Group have entered into contracts for committed credit lines totaling¥9,000 million ($81,088 thousand) with two domestic banks and have unused committed lines of credit amounting to¥9,000 million.

10. INCOME TAXES
Income taxes applicable to the Company and its domestic subsidiaries comprise corporation, enterprise and inhabitants’ taxes, which, in the aggregate, resulted in a statutory tax rate of approximately 30.6% and 30.9% for 2019 and2018, respectively. Income taxes of the foreign subsidiaries are based generally on the tax rates applicable in theircountries of incorporation.
The effective tax rates reflected in the consolidated statements of income for the years ended March 31, 2019 and2018 differed from the statutory tax rate for the following reasons:
2019

2018

30.6%

30.9%

Expenses not deductible for tax purposes

1.4

1.5

Inhabitant tax per capita levy

1.1

1.2

Tax credit

(2.2)

(0.3)

Increase/(Decrease) in valuation allowance

(1.6)

(0.3)

Amortization of goodwill

0.2

0.2

Other, net

0.0

0.1

Effective tax rate

29.5%

33.3%

Statutory tax rate
Effect of:

ANNUAL REPORT 201973

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Tax effects of significant temporary differences and tax loss carry-forwards that resulted in deferred tax assets or
liabilities at March 31, 2019 and 2018 are as follows:
Thousands of
U.S. dollars

Millions of yen
2019

2018

2019

Deferred tax assets:¥ 2,409¥ 2,211$ 21,704

Social security contribution on employees’ bonuses

346

316

3,117

Allowance for doubtful accounts

29

33

261

Accrued employees’ bonuses

Accrued enterprise tax
Loss on revaluation of inventories

282

282

2,540

1,307

1,278

11,775

Unrealized profit on inventories

17

17

153

Accrued losses on sales contracts

603

162

5,432

Depreciation

228

200

2,054

Asset retirement obligations

271

240

2,441

Liability for retirement benefits

9,390

9,304

84,602

Stock dividends

106

106

955

Impairment loss on investment securities

31

29

279

1,290

1,696

11,622

495

408

4,459

Subtotal

16,80916,288151,446

Valuation allowance on tax loss carry-forwards (Note)(1,101)—(9,919)Valuation allowance on total deductible temporary differences and other(1,540)—(13,875)

Tax loss carry-forwards (Note)
Other

Subtotal(2,641)(2,975)(23,794)

Total

14,167

13,313

127,642

Deferred tax liabilities:
Asset for retirement benefits

(60)

(56)

(540)

Restoration cost for asset retirement obligations

(164)

(151)

(1,477)

Goodwill

(201)

(251)

(1,810)Liability adjustment account

(136)

(147)

(1,225)

Other

(17)

(26)

(153)

(580)

(634)

(5,225)¥13,587¥12,678$122,416

Total
Net deferred tax assets(Note) The amounts of tax loss carry-forward and related deferred tax assets by carry-forward period
Millions of yen

Due within
one year

Due after
one yearthrough
two years

Due after
two years
throughthree years

Due after
three years
throughfour years

Due after
four years
throughfive years

Due after
five years

Total

¥   1

¥   7

¥   9

¥   0

¥152

¥   1,119¥   1,290

Valuation allowance

(1)

(7)

(9)

(0)

(0)

(1,082)(1,101)

Deferred tax assets

—

—

—

—

151

37

Due within
one year

Due after
one yearthrough
two years

Due after
two years
throughthree years

Due after
three years
throughfour years

Due after
four years
throughfive years

Due after
five years

Total

Tax loss carry-forward (*1)$   9$   63$   81$   0$1,369$10,081$11,622

Valuation allowance

(9)

(63)

(81)

(0)

(0)

(9,748)(9,919)Deferred tax assets

—

—

—

—

1,360

333

1,702(*2)

March 31, 2019

Tax loss carry-forward (*1)

189(*2)Thousands of U.S. dollars

March 31, 2019(*1) Tax loss carry-forward is after multiplying the statutory tax rate.
(*2)	Deferred tax assets of ¥189 million ($1,702 thousand) are recognized for tax loss carry-forward of ¥1,290 million ($11,622 thousand), which is after multiplying the statutory tax rate, of the consolidated subsidiaries.
		 As for the above tax loss carry-forward, valuation allowance has not been recognized for the part that deemed to be recoverable since future taxable
income will be available.

74

ANNUAL REPORT 2019

11. RETIREMENT BENEFIT PLANS
The Company and its consolidated subsidiaries havefunded or unfunded defined benefit plans and defined
contribution plans.
Lump-sum or annuity payments are paid from thecorporate defined benefit pension plans, all of which
are funded based on the employees’ job grade andlength of service.
Lump-sum payments are paid from unfunded lumpsum payment plans based on the employees’ job grade,
performance and length of service.

Certain consolidated subsidiaries use a simplified
method for calculating retirement benefit asset and­liability and retirement benefit costs
For lump-sum payment plans, the payment for voluntary retirement at fiscal year-end is deemed as retirement
benefit obligation, and for annuity payment plans, theactuarial obligation on pension finance calculation in the
recent years is deemed as the retirement benefit
obligation.

The information for the Company’s and the consolidated subsidiaries’ defined benefit plans at March 31, 2019 and2018 for the years then ended is as follows.
(1) Movement in retirement benefit obligations
Thousands of
U.S. dollars

Millions of yen

Retirement benefit obligation at beginning of year
Service cost

2019

2018

2019

¥59,929¥59,713$539,949

2,596

2,585

23,389Interest cost

537

541

4,838

Actuarial gain or loss

(614)

(989)

(5,532)(2,421)(1,948)(21,812)

175

—

1,576

Benefits paid
Changes arising from the changes in accounting policy fromthe simplified method to the standard method

22

27

198

¥60,226¥59,929$542,625

Other
Retirement benefit obligation at end of year
Note: The above table excludes certain plans that have adopted the simplified method.

(2) Movements in plan assets
Thousands of
U.S. dollars

Millions of yen

Plan assets at beginning of year

2019

2018

2019

¥30,471¥29,407$274,538

751

722

6,766

Expected return on plan assets
Actuarial gain or loss

(986)

127

(8,883)Contributions paid by the employer

1,117

1,116

10,063

Benefits paid

(992)

(900)

(8,937)

(3)

(2)

(27)

¥30,358¥30,471$273,520

Other
Plan assets at end of year
Note: The above table excludes certain plans that have adopted the simplified method.

(3) Reconciliation of changes in liability for retirement benefits whose plans adopted the simplified method
Thousands of
U.S. dollars

Millions of yen
2019

2018

2019

¥  526¥576$  4,739

Retirement benefit costs

36

60

324

Benefits paid

(5)

(42)

(45)

(165)

—

(1,486)

Liability for retirement benefits at beginning of year

Changes arising from the changes in accounting policy fromthe simplified method to the standard method
Other
Liability for retirement benefits at end of year

(15)

(67)

(135)

¥  376¥526$  3,387

ANNUAL REPORT 201975

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(4) Reconciliation from retirement benefit obligations and plan assets to liability (asset) for retirement benefits
Thousands of
U.S. dollars

Millions of yen

Funded retirement benefit obligation
Plan assets

2019

2018

¥  32,316¥  32,417$  291,161

2019(30,817)(30,919)(277,655)

1,498

1,497

13,49628,74528,486258,987

Net liability for retirement benefits¥  30,244¥  29,984$  272,493

Liability for retirement benefits¥  30,609¥  30,428$  275,781

(364)

(444)

(3,279)¥  30,244¥  29,984$  272,493

Unfunded retirement benefit obligation

Asset for retirement benefits
Net liability for retirement benefits
Note: The above table includes certain plans that have adopted the simplified method.

(5) Retirement benefit costs
Thousands of
U.S. dollars

Millions of yen
2019

2018

2019

Service cost

¥2,596¥2,585$23,389

Interest cost

537

541

4,838

Expected return on plan assets

(751)

(722)

(6,766)

Net actuarial loss amortization

1,377

1,534

12,406

Past service costs amortization

(500)

(574)

(4,504)Retirement benefit costs calculated by the simplified method

36

60

324

Other

(1)

(0)

(9)

¥3,295¥3,424$29,687

Retirement benefit costs(6) Adjustments for retirement benefit
Thousands of
U.S. dollars

Millions of yen
2019

Past service costs
Actuarial gains and losses
Total

2018

2019

¥  (500)¥  (574)$(4,504)

1,005

2,652

9,054

¥   505¥2,077$ 4,549(7) Accumulated adjustments for retirement benefit
Thousands of
U.S. dollars

Millions of yen

Unrecognized prior service costs
Unrecognized actuarial gains and losses
Total

76

ANNUAL REPORT 2019

2019

2018

2019

¥(1,724)¥(2,224)$(15,532)

7,001

8,006

63,077¥   5,276¥   5,782$   47,535

(8) Plan assets(a) The components of plan assets
Thousands of
U.S. dollars

Millions of yen
2019

2018

2019

Debt securities¥14,100¥15,376$127,038

Equity securities

4,562

4,645

41,102

General account

3,623

3,612

32,642

Alternative

68,555

7,609

6,368

Other

463

468

4,171

Total

¥30,358¥30,471$273,520

Note: Total plan assets include ¥318 million ($2,865 thousand) and ¥413 million in a retirement benefit trust established for the corporate pension plan as ofMarch 31, 2019 and 2018, respectively.
Alternative is mainly investment to hedge fund.

(b) Long-term expected rate of return
Current and target asset allocations, historical and expected returns on various categories of plan assets have been
considered in determining the long-term expected rate of return.
(9) Actuarial assumptions
The principal actuarial assumptions at March 31, 2019 and 2018 (expressed as weighted averages) are as follows:


2019

2018

Discount rate

0.9%

0.9%

Long-term expected rate of return

2.5%

2.5%

Expected increase rate of salary

4.1%

4.1%

The amounts to be paid by the Company and its consolidated subsidiaries to the defined contribution plans were¥472 million ($4,252 thousand) and ¥479 million for the years ended March 31, 2019 and 2018.

12. ASSET RETIREMENT OBLIGATIONS
The asset retirement obligations are based on estimated future restoration obligations related to leasehold contracts ofhead office and other facilities.
The obligations are calculated based on the estimated office rental period of mainly 20 years and a discounted rateof 1.7%.
The following table provides Company’s total asset retirement obligations for the years ended March 31, 2019and 2018:
Thousands of
U.S. dollars

Millions of yen
2019

2018

2019

¥777

¥781

$7,000Obligations incurred by asset acquisition

91

8

819

Obligations settled

(5)

(42)

(45)

Accretion expense

10

10

90

Remeasurements

—

18

—

¥873

¥777

$7,865

Balance, beginning of year

Balance, end of year

ANNUAL REPORT 201977

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

13. SHAREHOLDERS’ EQUITY
Under Japanese laws and regulations, the entire amount
paid for new shares is required to be designated ascommon stock. However, a company may, by resolution of
the Board of Directors, designate an amount not ­exceeding
one half of the price of the new shares as additional paid-in
capital, which is included in capital surplus.
The Companies Act provides that an amount equal to
10% of distributions from retained earnings paid by theCompany and its Japanese subsidiaries be appropriatedas a legal earnings reserve. No further appropriations are
required when the total amount of the additional paid-in
capital and the legal earnings reserve equals 25% of theirrespective stated capital. The Companies Act also

provides that additional paid-in capital and legal earnings
reserve are available for appropriations by the resolutionof the shareholders. The legal earnings reserve amounted
to ¥546 million ($4,919 thousand) as of both March 31,
2019 and 2018. Legal earnings reserve is included inretained earnings in the accompanying consolidatedbalance sheets.
Cash dividends charged to retained earnings for theyears ended March 31, 2019 and 2018 represent dividends paid out during those years. The amount available
for dividends is based on the amount recorded in the
Company’s non-consolidated books of account in­accordance with the Companies Act.

The movement of treasury stock is as follows:
Shares


2019

2018

At beginning of year

137,435

135,911

1,277

1,534

Increase - purchase of odd lot shares
Decrease - sale of odd lot shares
At end of yeara) Dividends paid during the year ended March 31, 2018
The following was approved by the Board of Directors on April 27, 2017.
(a) Total dividends¥1,786 million(b) Cash dividends per common share¥36(c) Record date
March 31, 2017(d) Effective dateJune 2, 2017
The following was approved by the Board of Directors on October 31, 2017.
(a) Total dividends¥1,836 million(b) Cash dividends per common share¥37(c) Record date
September 30, 2017(d) Effective date
December 4, 2017b)	Dividends to be paid after March 31, 2018 although record date for payment falls
within the year ended March 31, 2018
The following was approved by the Board of Directors on April 27, 2018.
(a) Total dividends¥1,836 million(b) Dividend source
Retained earnings(c) Cash dividends per common share¥37(d) Record date
March 31, 2018(e) Effective date
May 31, 2018c) Dividends paid during the year ended March 31, 2019
The following was approved by the Board of Directors on April 27, 2018.
(a) Total dividends¥1,836 million ($16,542 thousand)(b) Cash dividends per common share¥37 ($0.33)(c) Record date
March 31, 2018(d) Effective date
May 31, 2018
The following was approved by the Board of Directors on October 30, 2018.
(a) Total dividends¥1,886 million ($16,992 thousand)(b) Cash dividends per common share¥38 ($0.34)(c) Record date
September 30, 2018(d) Effective date
December 4, 201878

ANNUAL REPORT 20199710

138,615

137,435d)	Dividends to be paid after March 31, 2019 although record date for payment falls
within the year ended March 31, 2019
The following was approved by the Board of Directors on April 26, 2019.
(a) Total dividends¥1,985 million ($17,884 thousand)(b) Dividend source
Retained earnings(c) Cash dividends per common share¥40 ($0.36)(d) Record date
March 31, 2019(e) Effective date
May 31, 2019

14. CONTINGENT LIABILITIESAt March 31, 2019 and 2018, the Company was contingently liable as guarantor of indebtedness of the Company’s
employees in the aggregate amount of ¥1 million ($9 thousand) and ¥4 million, respectively.

15. LEASES(1) Finance leases
Under finance leases that do not transfer ownership of the leased property to the lessee
Most of finance lease transactions are telecommunications equipment in Enterprise network business, and capitalized lease assets and lease obligations in the balance sheet. Finance lease assets that do not deem to transfer ownership of the leased property to the lessee are depreciated using the straight-line method over the period of the lease,with zero residual value.
(2) Operating leases
Future minimum operating lease payments subsequent to March 31, 2019 and 2018 for non-cancelable operatingleases are summarized as follows:
Thousands of
U.S. dollars

Millions of yen
2019

2018

2019

Due within one year

¥2,966¥2,521

Due over one year

5,440

3,064

49,013¥8,407¥5,585$75,745

Total$26,723

16. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
The significant components of selling, general and administrative expenses for the years ended March 31, 2019 and2018 are as follows:
Thousands of
U.S. dollars

Millions of yen

Employees salary
Provision for bonuses to directors
Retirement benefit costs
Provision of allowance for doubtful accounts

2019

2018

2019

¥16,584¥16,035$149,418

56

38

504

1,181

1,232

10,640—13—

17. RESEARCH AND DEVELOPMENT COSTS
Research and development costs included in selling, general and administrative expenses amounted to ¥784 million($7,063 thousand) and ¥425 million for the years ended March 31, 2019 and 2018, respectively.

18. GAIN ON SALES OF NON-CURRENT ASSETS
Gain on sales of non-current assets are due to the sales of buildings and land of company dormitory for the year
ended March 31, 2018.

ANNUAL REPORT 201979

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

19. OTHER COMPREHENSIVE INCOME
The reclassification adjustment and the related income tax effects allocated to each component of other comprehensive income for the years ended March 31, 2019 and 2018 are as follows:
Thousands of
U.S. dollars

Millions of yen
2019

2018

2019

Net unrealized holding gain on other securities:¥   (48)¥   (0)Reclassification adjustment for gain/loss realized in net income

29

11

261

Before tax amount

(19)

10

(171)

Unrealized holding gain(loss) arising during the year$    (432)

7

(3)

63

(11)

7

(99)

Foreign currency translation adjustments arising during the year

(137)

83

(1,234)

Reclassification adjustment for gain/loss realized in net income

(8)

—

(72)

(145)

83

(1,306)

Tax effectNet-of-tax amountForeign currency translation adjustments:

Before tax amount

2

(2)

18

(143)

81

(1,288)Tax effectNet-of-tax amount
Adjustments for retirement benefit:
Adjustments for retirement benefit arising during the year

(371)

1,117

(3,342)

Reclassification adjustment for gain/loss realized in net income

877

960

7,901

Before tax amount

505

2,077

4,549

Tax effect

(146)

(976)

(1,315)Net-of-tax amount

359

1,101

3,234

(1)

0

(9)

¥    203¥1,190$    1,828

Share of other comprehensive income of entities accounted for using equity method
Share of other comprehensive income of entities accounted for using
equity method arising during the year
Total other comprehensive income

20. AMOUNTS PER SHARE
Yen

U.S. dollars

2019

2018

2019

Net income per share¥   179.02¥   148.23$ 1.61

Net assets per share

2,113.19

2,004.04

19.04

The basis of calculation for net income per share and net income per share is as shown below.
Thousands of
U.S. dollars

Millions of yen
2019

2018

¥ 8,885¥ 7,357$80,052———

Net income attributable to owners of the parent related to common stock

8,885

7,357

80,052Average number of shares during the term (thousands of shares)

49,63549,637

49,635

Net income attributable to owners of the parent
Amounts not attributable to common stock

80

ANNUAL REPORT 20192019

21. FINANCIAL INSTRUMENTS
Conditions of Financial instruments(1) Management policy
The Group makes short-term deposits or uses high-security
financial instruments for fund management purposes.
The Group obtains funding for capital expenditureplans mainly through bank loans.
The Group utilizes derivative financial instruments
to hedge various risks as described in detail below anddoes not enter into derivatives for trading or speculative
purposes.
(2) Financial instruments and risks
The notes, accounts receivable and electronically­recorded monetary claims are exposed to credit riskof customers. Operating receivables and payables­denominated in foreign currencies are exposed to foreign
currency fluctuation risk.
Marketable and investment securities, except for
short-term investments, are held for business and capitalalliances with business associates, and are exposed tostock market fluctuation risk.
Maturities of notes, accounts payable and electronically recorded obligations are within one year.
Debts are for funding capital expenditure, and theirmaximum maturities are 5 years and 6 years after thebalance sheet date for the years ended March 31, 2019and 2018, respectively. Part of the obligations has floatinginterest rates and is exposed to interest rate risk.
In order to hedge the foreign exchange rates fluctuation risk associated with operating receivables and payables denominated in foreign currencies, forward foreignexchange contracts are used.
Hedge accounting is applied for certain derivativetransactions. Please refer to note 2 (n).
(3) Financial instruments risk management
1) Credit risk
To mitigate and quickly capture collectability issues, theGroup regularly monitors customers’ credit status, andperforms due date controls and balance controls foreach customer.

When the Group utilizes derivatives or deposits
money and purchases securities for cash management
purposes, to mitigate the counterparty risk, the counterparties to these transactions are financial institutions
with high credit ratings.
2) Market risk
The Group comprehends foreign currency fluctuation risk
by currency and by month, and to mitigate the risk, theGroup enters into a forward exchange contract for hedging the cash flow fluctuation risk associated with operating receivables and payables denominated in foreign
currencies.
To mitigate the stock market fluctuation risk, theGroup regularly monitors stock prices and financial statusof its business associates and continuously considers
whether the Group should hold the stock.
Derivative transactions entered into by the Group arein accordance with policies and rules that provide for risk
management, approvals, reporting and verifications.
3) Liquidity risk
To mitigate the liquidity risk, the Group prepares andupdates its funds management plan on a timely basis,and maintains an appropriate level of liquidity through its
cash and cash equivalents and unused committed lines.
(4) Supplemental explanation regarding fair value of­financial instruments
Fair value of financial instruments is measured basedon the quoted market price, if available, or reasonably
assessed value if a quoted market price is not available.
Fair value of financial instruments for which quoted
market price is not available is calculated based on certain assumptions, and the fair value may differ if different
assumptions are used. In addition, the contract amountof the derivative transactions described below in note 22(DERIVATIVES) does not represent the market risk of thederivative transactions.
(5) Concentration of credit risk
At both March 31, 2019 and 2018, 30% and 24% of­operating receivables were receivables from a certain
major customer.

ANNUAL REPORT 201981

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Fair value of financial instruments
The carrying amount on the consolidated balance sheets, fair value and differences as of March 31, 2019 and 2018 are
as follows.
Financial instruments, of which the fair value is extremely difficult to measure, are not included. (Please see (2)“Financial instruments of which the fair value is extremely difficult to measure”)
Millions of yen
March 31, 2019

Carrying
amountFair value¥ 54,354¥ 54,354

Thousands of U.S. dollars
Carrying
amountFair value$ 489,719$ 489,719$——

Differences

Differences

Assets:(1) Cash and cash equivalents(2) Notes and accounts receivable

960,023

606

5,459

(3) Electronically recordedmonetary claims(22)

Allowance for doubtful accounts(198)

107,138

107,138—

965,294965,294

175

175

—

1,576

1,576

—

¥161,667¥161,667¥—$1,456,590$1,456,590$—(4) Investment securities
Total

¥—

106,553

Liabilities:¥ 40,274¥ 40,274¥—$ 362,861$ 362,861$—(2) Electronically recorded
obligations

807

807

—

7,270

7,270

—

(3) Short-term bank loans

2,284

2,284

—

20,57820,578—(4) Current installments oflong-term debt

231

231

—

2,081

2,081

—

(1) Notes and accounts payable

3,896

3,896

—

35,10235,102—

Total¥ 47,494¥ 47,494¥—$ 427,912$ 427,912$—

Derivative transactions

¥

¥

¥—

$

$

$—

March 31, 2018

Carrying
amountFair value(1) Cash and cash equivalents¥ 57,281¥ 57,281(2) Notes and accounts receivable

103,911(5) Long-term debt

—

—

—

—

Millions of yen
Differences

Assets:(3) Electronically recordedmonetary claims

494

Allowance for doubtful accounts(55)
104,350

104,350

—

228

228

—

¥161,860¥161,860¥—(4) Investments securities
Total

¥—

Liabilities:
39,57439,574¥—(2) Electronically recorded
obligations(1) Notes and accounts payable

728

728

—

(3) Short-term bank loans

4,086

4,086

—

(4) Current installments oflong-term debt

3,171

3,171

—

842

842

—

Total

(5) Long-term debt

¥ 48,403¥ 48,403¥—

Derivative transactions

¥

¥

¥—

—

—

(Note) 1. Allowance for doubtful accounts are deducted from the above Notes and accounts receivable, and Electronically recorded monetary claims.
2. Derivative receivables and liabilities are on a net basis.

82

ANNUAL REPORT 2019

(1) Fair value measurement of financial instruments
Assets:1) Cash and cash equivalents

Liabilities:
1) Notes payable, accounts payable2) Electronically recorded obligations

2) Notes receivable, accounts receivable3) Short-term bank loans3) Electronically recorded monetary claims
The carrying amount approximates fair value because of
the short maturity of these instruments.
4) Investment securities
The fair value of equity securities is calculated by thequoted market price. Please see note 5 (INVESTMENT
SECURITIES) for information by category.

4) Current installments of long-term debt
The carrying amount approximates fair value because of
the short maturity of these instruments.
5) Long-term debt
Fair value of long-term debts is based on the present
value of future cash flows discounted using the current
borrowing rate for similar debt with comparable maturity.
Derivative transactions:
Please see note 22 (DERIVATIVES).

(2) Financial instruments of which the fair value is extremely difficult to measure
Thousands of
U.S. dollars

Millions of yen
2019

2018

¥460

Unlisted equity securities

2019

¥287

$4,144

The above securities are not included in ”Assets:(4) Investment securities”, as market prices are not available and also
future cash flows cannot be estimated reliably. Thus, the fair value cannot be reasonably obtained.
(3) Projected future redemption of monetary claims and securities with maturities at March 31, 2019
Millions of yen

Cash and cash equivalents
Notes and accounts receivable
Electronically recorded monetary claims

Due within
one year

Due after
one year throughfive years

Due after five
years throughten years

Due after
ten years¥ 54,354

¥—

¥—

¥—

106,553

—

—

—

606

—

—

—

¥161,514

¥—

¥—

¥—

Thousands of U.S. dollars
Due after
one year throughfive years

Due after five
years throughten years

Due after
ten years

Due within
one year

Cash and cash equivalents$  489,719

$—

$—

$—

960,023

—

—

—

5,459

—

—

—

$1,455,212

$—

$—

$—

Notes and accounts receivable
Electronically recorded monetary claims

ANNUAL REPORT 201983

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(4) The annual maturities of long-term debt and other interest-bearing debt at March 31, 2019
Millions of yen
Due after one
year throughtwo years

Due after two
years throughthree years

Due after three
years throughfour years

Due after four
years throughfive years¥2,284¥   —¥     —

¥   —

¥   —

¥—

231

231

3,231

231

202

—

Due after one
year throughtwo years

Due after two
years throughthree years

Due after three
years throughfour years

Due after four
years throughfive years$20,578$     —

$     —

$     —

$     —

$—

2,081

2,081

29,110

2,081

1,819

—

Due within
one year

Short-term bank loans
Long-term debt

Due after
five years

Thousands of U.S. dollars
Due within
one year

Short-term bank loans
Long-term debt

Due after
five years

22. DERIVATIVESThe Company enters into forward exchange contracts with major Japanese banks in order to manage certain risks
arising from adverse fluctuations in foreign currency exchange rates.
At March 31, 2019 and 2018, there is no derivative transactions to report.

23. RELATED PARTY TRANSACTIONS(1) The Company’s balances with related parties and related transactions
NEC Corporation owned 51.48% and 51.49% of the Company’s outstanding common stock as of both March 31, 2019and 2018, respectively.
Balances with NEC Corporation at March 31, 2019 and 2018, and related transactions for the years then ended aresummarized as follows:
Thousands of
U.S. dollars

Millions of yen
2019

2018

2019

¥63,859¥60,855$575,358

Accounts receivable¥30,791¥25,250$277,421

Advances received¥   313¥      386$  2,820¥46,191¥44,171$416,172

Accounts payable¥13,615¥12,533$122,668

Advance payments¥   408¥        —

$  3,676

Construction and maintenance of network system:
Transactions:
Sales
Balances:

Purchases of communication device:Transactions:Purchases
Balances:

84

ANNUAL REPORT 201924. SEGMENT INFORMATIONThe reported segments of the Company are the business
units for which the Company is able to obtain respective
financial information separately in order for the Board of
Directors to conduct periodic investigation to determine
the distribution of management resources and evaluate
their business results.
The “Enterprises networks business,” “Carrier networks business” and “Social infrastructures business” are
the Company’s reportable segments. The Company combines business segments which have similar economic
characteristics into these reportable segments. The business segments are based on the operation headquarters
by service lines, which are the units used for internalreporting for performance management.
The Enterprises networks business mainly renders service
integration relating to ICT solution for enterprises. The
segment renders total office solution services based on
ICT with securities or environmental solutions and related
operating/monitoring services, as well as outsourcing

services using our own data centers and contact centers.
The Carrier networks business mainly renders service
integration for telecom carriers’ ICT platforms (frommobile communications base stations to core networks),
including systems integration, installation, and related
services such as operations and monitoring, and systems
integration of large-scale, wide-area, carrier-grade ICT
platforms and data centers and the related operations/monitoring services.
The Social infrastructures business mainly renders
service integration of ICT infrastructure for governments
and public utilities (broadcasters, electric power companies, etc.), such as systems integration, installation andoperation/monitoring services, and these services provided by foreign subsidiaries.
Segment sales, income, assets and others are calculated by accounting methods similar to those employed
to prepare the accompanying consolidated financial
statements.

The reported segment information for the Company and its consolidated subsidiaries for the years ended March 31,
2019 and 2018 is summarized as follows:
Millions of yen
Carrier networks

Socialinfrastructures¥122,775¥70,529¥77,260¥7,383

—

—

—

—

Total

¥122,775¥70,529¥77,260¥7,383¥

Segment income¥ 13,408¥ 4,714¥ 3,454

Segment assets¥ 52,593¥35,161¥49,112¥¥¥

March 31, 2019

Enterprisenetworks

OthersAdjustments

Total

Sales:(1) Sales to third parties(2) Intersegment sales¥—¥277,949———¥277,949¥ 276¥ (9,078)¥ 12,774¥2,766¥76,537¥216,171¥¥¥

Others:Depreciation and amortization
Purchases of property and equipment, andintangible assets

1,543

351

169

—

698

2,764

1,975

672

210

1

1,718

4,578

41

—

45

—

—

86

Carrier networks

Socialinfrastructures$1,106,180$635,453$696,098$66,519

—

—

—

—

Total

$1,106,180$635,453$696,098$66,519$

Segment income$  120,803$ 42,472$ 31,119

Segment assets$  473,853$316,794$   13,902$

Investment to entities accounted
for using equity method

Thousands of U.S. dollars
March 31, 2019

Enterprisenetworks

OthersAdjustments

Total

Sales:(1) Sales to third parties(2) Intersegment sales$—$2,504,270

—

—

—

$2,504,270$ 2,486$ (81,791)$  115,091$442,490$24,921$689,584$1,947,661

$

$

$

6,288

$   24,903

Others:Depreciation and amortization
Purchases of property and equipment, andintangible assets
Investment to entities accounted
for using equity method

3,162

1,522

—

17,794

6,054

1,892

9

15,47841,246

369

—

405

—

—

774

ANNUAL REPORT 201985

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Millions of yen
March 31, 2018

Enterprisenetworks

Carrier networks

Socialinfrastructures¥64,902¥85,192

OthersAdjustments

Total

Sales:(1) Sales to third parties¥110,887(2) Intersegment sales¥6,957¥—¥267,939

—

—

¥

—

¥267,939

—

—

—

—

¥110,887¥64,902¥85,192¥6,957

Segment income¥ 10,797¥ 5,021¥ 3,399¥263¥ (8,424)¥ 11,057

Segment assets¥ 44,999¥30,750¥54,383¥1,862¥76,054¥208,050

¥

¥

¥

¥

¥

¥

Total

Others:Depreciation and amortization
Purchases of property and equipment, andintangible assets
Investment to entities accounted
for using equity method

1,418

361

131

—

615

2,526

1,469

288

229

16

1,746

3,750

40

—

24

—

—

64

Notes: 1. “Others” includes purchases of information and telecommunications equipment, etc., which are not included in the reported segments.
2.	“Adjustments” of ¥–9,078 million ($–81,791 thousand) and ¥–8,424 million in segment income for the years ended March 31, 2019 and 2018, respectively, are mainly administrative operation expenses.
3.	“Adjustments” of ¥76,537 million ($689,584 thousand) and ¥76,054 million in segment assets at March 31, 2019 and 2018, respectively, mainly consistof surplus funds (cash and deposits), land, long-term deposits and assets relating to the administrative operations of the parent company.
4.	Segment income is adjusted with operating income in the consolidated statements of income.
5.	“Purchases of property and equipment, and intangible assets” for the years ended March 31, 2019 and 2018 include long-term prepaid expenses andtheir amortization.
6.	The Company has reorganized the business structures as of April 1, 2019 and will change the reportable segments from the year ended March 31,
2020 from “Enterprise Networks Business”, “Carrier Networks Business” and “Social Infrastructures Business” to “Digital Solutions Business”, “Network
Infrastructures Business” and “Engineering & Support Services Business”.

Related information
Related segment information for the years ended March 31, 2019 and 2018 are as follows:(1) Information by products and services
Please refer to the reported segment information.
(2) Geographical information
1) Sales		Disclosures are omitted because sales to Japanese customers are over 90% of sales in the consolidated statements of income.
2) Property and equipment
		Disclosures are omitted because property and equipment located in Japan are over 90% of property and equipment in the consolidated balance sheets.
(3) Information by major customers
Thousands of
U.S. dollars

Millions of yen
2019

2018

2019

¥68,808¥67,203$619,947

Customer name:
NEC Corporation
Sales

The above sales are related to the “Enterprise networks” segment, “Carrier networks” segment and “Social infrastructures” segment.

86

ANNUAL REPORT 2019

Information of impairment loss on fixed assets by reported segments for the years ended March 31, 2019 and 2018
There are no amounts to report.
Information of amortization of goodwill and balances of goodwill by reported segments as of and for the years ended
March 31, 2019 and 2018
Millions of yen
March 31, 2019

Amortization of goodwill
Balances of goodwill

Enterprisenetworks

Carrier networks

Socialinfrastructures¥ 22¥  224¥—¥—¥—¥   247

127

1,018

—

—

—

1,146

OthersAdjustments

Total

Thousands of U.S. dollars
Carrier networks

Socialinfrastructures

Amortization of goodwill$  198$2,018$—$—$—$ 2,225

Balances of goodwill

1,144

9,171

—

—

—

10,325

March 31, 2019

Enterprisenetworks

OthersAdjustments

Total

Millions of yen
Carrier networks

Socialinfrastructures

Amortization of goodwill¥ 27¥  224¥—¥—¥—¥   251

Balances of goodwill

150

1,243

—

—

—

1,394

March 31, 2018

Enterprisenetworks

OthersAdjustments

Total

Negative goodwill incurred by reported segments for the years ended March 31, 2019 and 2018
There are no amounts to report.
(Subsequent events)
Change of the reportable segments
The Company has reorganized the business structures as of April 1, 2019 to accelerate the Company’s growth as well
as strengthen the business structures for the Company’s competitiveness and, accordingly, will change the reportablesegments from the year ended March 31, 2020 from “Enterprise Networks Business”, “Carrier Networks Business” and“Social Infrastructures Business” to “Digital Solutions Business”, “Network Infrastructures Business” and “Engineering &Support Services Business”.
The Group is currently in the process of determining each reportable segment’s sales revenue, profit or loss, andother effects on the consolidated financial statements in the newly designed reportable segments.

ANNUAL REPORT 201987

INDEPENDENT AUDITOR’S REPORT88

ANNUAL REPORT 2019

2-6-1 Koraku, Bunkyo-ku, Tokyo
112-8560, Japan
Telephone: +81-3-6699-7000
Website: http://www.nesic.co.jp/english/

191100400-EI-00