Q&A at 14th CLSA Japan Forum
NEC Networks & System Integration Corporation(TSE: 1973 / NESIC)
Date & Time: February 23, 2017 (Thursday) 13.00~14.00
Q: In the current business environment in Japan, productivity has slowed and it isexpected that investment demands related to ICT and social infrastructure may besomewhat bearish on the part of customers. Could you elaborate on yourassumptions with respect to the business environment used as a basis for yourMedium-Term Business Plan?
A: We anticipate that capital expenditures among telecom carriers will remain weakduring the period defined by our Medium-Term Business Plan. Meanwhile, we areenjoying healthy business with respect to ICT investment that is underway amongcorporate customers, with significant business opportunities expected in the field ofsocial infrastructure. When it comes to services addressing Japan’s productivity
issues, we promote EmpoweredOffice Business with the aim of enhancing
productivity by facilitating a shift in conventional work styles. We take this as asignificant business opportunity in view of the government initiatives that arecurrently underway with the aim of transforming working styles in Japan.
In the area of social infrastructure business, we expect that investment demand fordisaster prevention systems will remain strong among customers in view of Japanas a country being hit frequently by natural disasters. Investment demand related tobroadcasting systems and cable TV networks will continue to grow toward the Tokyo
Olympics in 2020. Moreover, we are currently enjoying strong demand for business
related to hotel operators seeking to accommodate the various demands of inboundtourists. We aim to achieve business growth by focusing on these areas, which willcontinue to see active investments by business operators.
Q: What is your approach to 5G, the next-generation mobile communications system?
What is your future outlook regarding the new system?
A: We will take active steps toward the 5th generation wireless system, but it will not
create as much demand as in the case with 3G or LTE for our installation services
related to mobile base stations because a shift to the 5G technology will primarily
involve building additional/replacement modules for the existing antenna towers orstations. With the introduction of new technologies, it is expected that there will be
more extensive areas of applications and services, leading to a surge in traffic andthe enhancement of core network capabilities.
Q: The Company has achieved a significant recovery in its operating margin over thepast ten years. The current Medium-Term Business Plan, however, expects only
5.5% as an operating margin for the period covered, which does not suggest asignificant improvement over the preceding years. What could be the reason forthis? Do you expect a further improvement in the operating margin in the comingyears?
A: The significant improvement in the operating margin over the past ten years waslargely attributable to a series of operational efforts such as improvement ofbuilding and procurement methods and streamlining service stations providing
maintenance services. In the Medium-Term Business Plan, we anticipate that it will
not be feasible to achieve a profitability improvement comparable to the one
actually achieved in recent years because the business for telecom carriers, whichhas previously enjoyed relatively high profitability with fewer competitors, isexpected to lose momentum, and price competition will become even more fierce inthe business areas related to enterprises networks and social infrastructure, both ofwhich are positioned as key drivers for the future growth of the Company.
In the Medium-Term Business Plan, it will be of significant importance for us toachieve a substantial recovery in the operating margin back to a level close to thehistorical record high by remaining focused on the operational efforts seeking tooffset the challenges mentioned earlier.
Q: It appears that your cash position has increased. What would an appropriate cash
position be for you at the moment?
A: We believe that it is necessary for us to maintain working capital totaling at least
20-30 billion yen, or one month’s sales, just in case. We will use other cash
resources for investing in business growth areas or M&A opportunities. We willremain active in executing investment decisions for any M&A opportunities that willlead to future growth for the Company.
Q: As a measure to reward your company’s stockholders, you seem to place greater
emphasis on paying dividends than on reacquiring treasury stock. What is thereason behind that strategy?
A: The Company considers it important to reward its long-term shareholders in astable manner, seeking to achieve consistent shareholder returns regardless ofchanges in profit. In our opinion, repurchasing treasury stock is just a temporary
measure to reward shareholders who own equity shares of the company at the timeof the repurchase. Accordingly, we believe that it is more important to reward ourshareholders with stable dividends, regardless of temporary fluctuations inbusiness results.

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