Q&A at IR Briefing for Financial Results for the First Half of Fiscal Year Ending
March 31, 2016 (FY 2015)
NEC Networks & System Integration Corporation
Date and Time: Friday, October 30, 2015 from 10:30-11:30
Person A
Q: Do you view the investment cuts by telecom carriers as a temporary lull in
their capital spending activities? Or do you see this as more of a structural
phenomenon that will linger for the time being?
A: At the beginning of the current fiscal year, we expected the businessenvironment with telecom carriers to be severe, but in reality it grew farworse than even we anticipated. We believe that the current businessenvironment with telecom carriers will remain severe in the immediate future,
stretching even beyond the second half of the current fiscal year, because thearea coverage rate has already reached a necessary and sufficient level,
making it unnecessary for telecom carriers to further intensify investments tobeat the competition. We think that it will take some time before investments
start recovering, backed by the introduction of new technologies such as 5G.
Until then, we expect the business environment with telecom carriers remainchallenging.
Q: Please tell us about your cost reduction initiatives and growth strategy for thecarrier networks business.
A: In the business with telecom carriers, investments in mobile communications
base stations represent one of the key areas we consider to be extremelyimportant. Compared with the corresponding period of the previous fiscal
year, in terms of revenue the performance of this business area for the firsthalf of this fiscal year fell by half. We expect the severe environment for thisbusiness area to continue for the time being in the future, and thus we find it
necessary to move management resources to other growth business areas inorder to further reduce fixed costs. Furthermore, we are committed to
improving profitability by implementing measures aimed at achieving greater
operational efficiency, such as initiatives to reduce outsourcing costs while
promoting in-house business operation.
We believe that the business with telecom carriers will not be strong enoughto drive and achieve overall sales growth for the time being. Given thissituation, we will seek to build up businesses with government administrationoffices and corporate customers, leveraging the expertise in large-scale
network construction, highly reliable technologies, and maintenance service
capabilities that we have acquired through the business with telecom carriers.
These businesses include the Internet-of-Things (IoT)* business, whichtakes advantage of the services we can provide as a mobile virtual network
operator (MVNO). In this business, we will optimize our knowhow related tothe business with telecom carriers.
Q: Am I correct in understanding that you will remain focused on moving
management resources, rather than merely trying to reduce fixed costs byconducting business restructuring measures?
A: That is correct. We will move our management resources to growth areas,such as businesses related to corporate customers and social infrastructure.
Q: Are there any new developments in your business related to next-generation
4K/8K TV broadcasting?
A: As far as 4K/8K TVs are concerned, our main focus is related to the CATVbusiness. The 4K broadcasting services were launched on an experimental
basis this year for only the CS channels. We expect to see noticeable
developments in this business, beginning in or after the next fiscal year.
Meanwhile, we have started seeing replacement demand emerge in thebroadcasting industry for studio equipment used to provide terrestrial digital
broadcasting services. We expect to see replacement demand from regional
TV stations at some point over the next year because they traditionally tend
to follow the lead of the major key broadcasting companies in Tokyo whenreplacing their studio equipment.
Person B
Q: You stated earlier that you expect capital spending by telecom carriers toremain severe for the time being. Do you see any difference among telecom
carriers in their stance towards capital spending? What is your idea about theschedule for 5G?
A: In general, we expect capital spending among telecom carriers to remain
severe. We think that carriers are likely to only make the minimum
investment necessary, if they make any investments at all. In any case, wecertainly believe that the scale of future investments made by telecom

carriers will not be as significant as it was before.
The schedule for 5G will be made in view of factors such as the TokyoOlympics. There are still a few years between now and then, and until thenthere will be no major investment theme.
Q: You mentioned that the replacement demand for voice network systems is apositive factor. Could you provide us with a rough idea of its potential impact
on business?
A: We have enjoyed our competitive advantage in voice network systems foryears. It just so happens that around 800 of our corporate customers using
voice network systems will need to update their current systems in the very
near future. We expect to see this replacement demand emerge between
now and the next fiscal year, totaling around JPY20 billion. Needless to say,
expectations for replacement demand will all come to nothing if they are nottransformed into actual business. We will pursue every possible means toensure we cash in on the replacement demand because we are targeting ourexisting customers in this business.
Q: It seems to have become more evident recently that the fire-fighting network
system business is leveling off. Despite this recent trend, you still expressed
expectations for growth in related business area such as disaster-prevention
radio systems. Please tell us more about your expectations here.
A: There are two important points for us to remember regarding the fire-fighting
networks system business. One is related to the fire-fighting emergency radio
systems, for which demand has been leveling off in recent months because of
the progress made in the migration to digital fire-fighting systems ahead of
the May 2016 deadline. The other point is related to the systems used in thecommand and control centers that receive one-one-nine (119) emergency
calls. The command system is also designed to tackle widespread disasters
by integrating pre-merger discrete systems belonging to individual fire
departments that are to be consolidated as a result of municipal mergers. We
expect a certain level of demand for the command system to remain for thetime being because there is no fixed deadline for system migration.
In addition, there are quite a few municipal governments that have not yet
introduced a disaster prevention radio system for providing local residents
with information in times of emergency. We expect to continue seeing new
demand for this system related to a variety of municipal projects in terms ofscale and the timing for completing system introduction because there is also
no fixed deadline for introduction for this product either.
Person C
Q: Please elaborate on the state of competition and profitability in relation to theIoT business.
A: The IoT consists of extensive areas of applications, with a large number ofcompetitors in this field. In this business environment, we take advantage of
our strength as an MVNO operator that provides network operation services.
We understand that today we are only one of the few system integrators who
can provide network operation services. To be more specific, our competitiveedge lies in the optimal connection fee for using the IoT system. For example,
we can offer reduced rates in a flexible manner to customers who wish to only
use our network operation services at night for surveillance purposes.
Furthermore, we will promote partner alliances to enhance service channels.
We do not consider network operation services to be our main source ofrevenue. We would rather try to cash in on our services related to system
integration as well as maintenance/operation, things that our customers willneed when they introduce the IoT system. We only recently launched thisbusiness in October this year. We will take further steps to expand sales andreduce costs, aiming to enhance revenue and profitability in the future.
Q: NESIC is in a strong financial position, with an equity ratio of around 50%. It
also has more than JPY40 billion in cash and deposits, indicating that it has asufficiently high cash position. Please tell us about expected uses of this cash.
A: We intend to keep around JPY20 billion cash on hand as working capital. The
rest will be used for M&As and other investment opportunities in a flexible
manner, aiming to achieve further growth.
Person D
Q: You stated that given the increasingly severe business environment for
telecom carriers, you would try to improve profitability by implementing
measures to reduce costs, such as reforming the business structure formaintenance services. What do you predict for the carrier networks businessin terms of its profitability on a full-year basis?
A: Based on the results for the first half of this year, we will further intensify andimplement initiatives to reduce costs in the second half. Given the extremelysevere business environment for telecom carriers in the second half, we haverevised our original estimate for operating income in the carrier networks
business downward by JPY2.0 billion to JPY4.9 billion on a full-year basis at
this time.
Q: I understand you are doing well in the space-related business. Do you expect
any big deal projects to come up in the near future?
A: Infrastructure works related to satellite earth stations temporarily boosted thesegment’s revenue in the first half of the current fiscal year. That said, we do
not expect for the revenue to continue expanding in the years to come.
Q: You have announced your intention to increase dividends for the ninth
consecutive business year. Please tell us about management’s resolve
regarding future dividend increases beyond the current fiscal year.
A: Basically, I would like to increase dividends beyond the current fiscal year justas we have done in the past, but we also need to take into consideration thechanging market environment and capital needs for large-scale investment
opportunities.
End