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NEC Corporation (NIPNY)

F1Q08 Earnings Call

July 31, 2007, 6:00 AM ET

Executives

Takao Ono - Sr. VP

TRANSCRIPT SPONSOR
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Takao Ono - Senior Vice President

So good evening. My name is Takao Ono, Senior Vice President. I would like to give you the financial results for the first quarter of fiscal year ending March 2008.

So let me give you the summary for the first quarter. The results for the first quarter indicates a solid start toward achieving our targets for the fiscal year ending March 2008. Operating income went down as a result of changes in the product mix of the Network Systems division and IT Network Solutions business which was particularly satisfactory the previous year, but we made steady improvements in semiconductors and mobile terminals business.

Although we have made a solid start, the weight placed on the first quarter for the full year tends to be rather small for our company, and therefore the business performance from the second quarter onwards becomes very important for us. In order to regain confidence from the marketplace, it is imperative that we achieve the targets for the full year without slowing down the momentum.

Next, the overview of the financial summary. The result of the first quarter is indicated in this table. Net sales was 1,007.8 billion yen, down 2.3% year-over-year. Although IT and Network Solutions business made solid sales increase, the shipments for mobile terminals or receipts was terminated and the sale of the consumer PC business in Europe impacted the results.

Operating income was 11.3 billion yen, up 3.4 billion yen year-over-year. Ordinary income was 8.2 billion yen, up 5.5 billion yen year-over-year. However, net income was 1 billion yen, up 0.7 billion yen year-over-year due to a decrease in extraordinary profits. There were no changes in the first half and full year forecasts from the original plan.

Next I would like to give you the segment information.

Unidentified Company Representative

On the following page you can see the summary of the first quarter financial performance by segment. I'll give the details later.

There is no change in the forecast for the first half of the year from the original forecast, so allow me to skip the explanation.

Next, let me describe the situations by each business segment. First, the IT Network Solutions business. The first quarter sales were 572.5 billion yen, a 4% growth year-on-year. Operating income was 15.6 billion yen, down by about 14 billion yen year-on-year. This is mainly due to declining profit in the Network Systems segment which we recorded very good results in the 2006 first quarter.

We believe that the trend in the first quarter to continue for the remainder of the first half of the year with the sales of 126 billion yen, no growth year-on-year and the operating income of 41 billion were down 15 billion from the same period a year before.

Now, let me elaborate segment by segment. First, the IT Services and System Integration, IT investment in Japan continues to recover gradually thanks to recovery in macro economic conditions and improvement in corporate business performance. Against such a backdrop the sales in the first quarter increased 9% year-on-year. We saw sales increase in finance and communications and most of other areas. Although the first quarter usually has less weight than others we do see positive indicators such as growth in sales in the local and SME market.

Operating income equally fared well and posted close to 4 billion yen thanks to production before measures in system integration as expected.

In the second quarter onward, in addition to steady sales growth, we aim at improved operating profit ratio by further cost reduction efforts such as improved efficiency in outsourcing, standardization of developmental and promotion of internal production.

In IT platforms, the first quarter sales dropped 9% year-on-year. This is due to a transfer of DVD sales function to a joint venture with Sony. If we exclude that factor the sales were about the same as last year. While fierce price reduction pressure continued, we focused on our own original products. As an example of actual contracts we successfully landed the first set of order for the thin client systems from Daiwa Securities Group for about 1,500 terminals with the ultimate orders expected to be in the order of 10,000 terminals.

Operating loss amounted to a little over 4 billion yen which was about the same as a year before.

Next Network Systems. Sales increased 9% year-on-year. This is largely thanks to a two digit growth in the non-carrier network business. In addition, sales for carrier market also grew somewhat.

Operating income totaled 15 billion yen which is about 10 billion yen less than a year ago. The main reason is a major fluctuation in the product mix of sales for the carrier segment. The first quarter of last year was when carriers made investments ahead of schedule to prepare for the mobile number portability and accordingly NEC's mobile business for carriers also enjoyed good business generally speaking.

Profits therefore concentrated in the first quarter of last year but these investments have subsided and consequently our sales in the domestic carrier market dropped. But this was compensated by growth in overseas sales of Passlink [ph] and fixed line systems. The first quarter drop in offering profit is in line with the original budget which it seems a 10 billion yen drop in profit during the first half of the year.

Next in the situation in the Mobile and Personal Solutions business. Sales totaled 211.3 billion yen, down 17% year-on-year due to the close to 30 billion yen impact of the sales of European consumer PC business.

Operating profit, on the other hand, posted a 9.6 billion yen profit thanks to major year and year improvement in both mobile and personal businesses. This marks a good start to a full year profitability.

As for Mobile Terminal business, the first quarter shipment totaled 1.2 million units or a 30% drop year-on-year. This is due to elimination of shipment to the overseas market resulting from business restructuring during last fiscal year.

The fiscal quarter operating profit was positive into heading [ph] a good start. However, seasonal decline in shipment is expected during the second quarter. As we expect an increase in development cost for products to be launched in the second half, we have not revised our projection to be breakeven in the first half of the year.

In terms of enhancing product design capability, N703i mu and N904i are examples of products that have been well received in terms of quality design and functionality as indicated by improved user satisfaction. We will continue to focus on quality products and brand strength so that product appeal would directly translate into purchasing. And the personal solutions sales struck 21% year-on-year due to the sales of the European consumer PC business but we managed to make the profit through cost reduction efforts,

Domestic PC business faced harsh market conditions with intensified competition but we did manage to maintain the top share in the retail market. It's been almost a year since Big Globe was divested and had some equity partnership. It has strengthened business activities for further growth including the start of an operation of the new EC site together with Semi Terminal [ph] corporation. The company also succeeded in landing and executing a contract to build a mobile site for TBS.

Finally but not the least, Electron Devices business. The first quarter sales were 205.9 billion yen about the same as in the previous year. Operating loss also saw no change at 4.4 billion yen.

NEC electronics results were as predicted. With the increase in semiconductors for game equipment and reduction in R&D and other fixed expense, the loss has been reduced. As orders are increasing in recent months, we will continue to make steady offers for improvement so as to break even in the second quarter.

As for electronic components and others, declined in demand for LCDs due to militarization [ph] sales dropped 20% year-on-year. NEC tokens saw a favorable growth leisure business.

Then we conclude my presentation by saying that we consider it imperative to regain market trust and confidence which entails steady execution of targets for this fiscal year. We're committed to making every effort to improve problematic business so as to bring about tangible growth. We ask for your continued support and understanding. Thank you for your attention.

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Source: NEC Corporation F1Q08 (Qtr End 6/30/07) Earnings Call Transcript
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