NEC Reports Not So Pretty Q3 Results (NIPNY)

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Includes: EWJ, NIPNF, SNE
by: Steven Towns

No positive earnings surprise for NEC (NIPNY) but "a rising tide lifts all boats" is the theme as Japanese stocks have shrugged off the livedoor Co. scandal and the Nikkei 225 Stock Average (tracking ETF: EWJ) sits just under its 52-wk high. In the 3rd quarter NEC suffered a 47.3% decrease in net income y-o-y to 20.8 billion yen ($176.3 million at Y118/US$1, an approximation of the rate at the end of '05). This caused net income per share (diluted) to fall by 8.96 yen y-o-y to 9.69 yen (.082 cents). Nonetheless, NEC said its making an all-out effort to achieve its full year financial forecast. I question this optimism but after Sony's (SNE) earnings report yesterday, who knows.

Consolidated financial results Q3-05 y-o-y comparison in parentheses:

    • Net Sales: 1,144.7 billion yen (+2.6%)
    • Operating Income: 19.0 billion yen (-8.1%)
    • Income Before Taxes: 24.0 billion yen (-13.0%)
    • Net Income: 20.8 billion yen (-47.3%)
    • Net Income per Share (basic): 10.43 yen (-9.80 yen)
    • Net Income per Share (diluted): 9.69 yen (-8.96 yen)

For the 9-month period ended Dec. 31, 2005 y-o-y comparison in parentheses:

    • Net Sales: 3,377.8 billion yen(-1.2%)
    • Operating Income: 31.9 billion yen (-60.1%)
    • Income Before Taxes: 52.5 billion yen (-47.2%)
    • Net Income: 37.2 billion yen(-42.3%)
    • Net Income per Share (basic): 18.86 yen (-13.95 yen)
    • Net Income per Share (diluted): 17.60 yen (-12.30 yen)

NEC's comments regarding Q3 results:

The 2.6% increase in sales in Q3 y-o-y was "principally due to a significant increase in sales of mobile communications systems and personal computers, despite a significant decrease in sales of mobile handsets in the overseas market, partly due to price decline, and the influence of large orders for fixed-line communication systems acquired in the corresponding period of the previous fiscal year."

The decline in operating income Q3 y-o-y was "due to an increase in selling, general and administrative expenses, despite an increase in sales and an improvement in the ratio of cost of sales."

The decrease in net income Q3 y-o-y was explained as "mainly due to gain on stock issuances of an affiliated company that were recognized in the corresponding period of the previous fiscal year and a decrease in investment profit accounted for by the equity method."

NEC's Q3 performance by business segment with y-o-y comparison in parentheses:

    • IT Solutions
    -Net Sales: 512.3 billion yen (+3.8%)
    -Profit/loss: 16.8 billion yen (-9.2%)

    • Network Solutions
    -Net Sales: 408.3 billion yen (-6.1%)
    -Profit/loss: 13.2 billion yen (+6.3%)

    • Electron Devices
    -Net Sales: 207.5 billion yen (+1.0%)
    -Profit/loss: -2.8 billion yen (-5.0%)

    • Others/Eliminations
    -Net Sales: 16.6 billion yen
    -Profit/loss: -8.2 billion yen

NEC's shares (TSE ticker: 6701) gained 2.16% earlier today in Japan. NEC's ADRs (NIPNY) were down 0.15% in morning trading at the time of publishing.

NIPNY 1-yr chart: