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Overview of the Three Months Ended December 31, 2004
In the three months ended December 31, 2004 the global economy began to slow but still showed signs of overall growth. Solid capital investment and an improved employment situation pushed the American economy out of a temporary decline, but an increase in the policy interest rate and a jump in crude oil prices stunted growth. The Asian economy started to decline slightly because of a slowdown in exports of IT-related and digital consumer products. European exports, which had driven a previous economic recovery, began to wane, and stagnant consumer spending and capital investment led to weak growth. In the Japanese economy, consumer spending and capital investment remained steady, but with the slowdown in exports and the impact of natural disasters, there are increasing indications of an economic slowdown.
In this business environment, where the overall economy declining, the semiconductor market showed strength in the first half of the fiscal year buoyed by strong demand for digital consumer products, but headed into an adjustment phase. Demand for semiconductors declined as inventories of IT and digital consumer products were adjusted after the Olympics, and shipments of mobile phones with cameras decreased in Japan due to high market penetration.
Summary of Consolidated Financial Results
NEC Electronics posted consolidated net sales of 165.3 billion yen for the three months ended December 31, 2004, down 10.0 billion yen year on year. This was due to a decrease in the company's consignment businesses such as the resale of LCDs, as well as a substantial decrease in sales of LCD driver ICs for mobile phones and personal computers. Sales of LSIs for general purpose devices declined in keeping with lower market demand, but sales of semiconductors for the automotive market were strong.
Operating income was 1.2 billion yen, a 14.4 billion yen decrease year on year. The company implemented measures such as improved cost efficiency, productivity, and cost reductions. Although they were not enough to completely absorb the losses from lower sales, higher depreciation associated with increased capital investment, and reduced prices, the company did secure profitability. Income before income taxes was 0.2 billion yen, down 13.7 billion yen year on year. Net income totaled 0.5 billion yen, down 7.9 billion yen year on year.
Consolidated Forecasts for the Fiscal Year Ending March 31, 2005
For the second half of the fiscal year ending March 31, 2005, NEC Electronics anticipated a temporary adjustment phase because of adjustments in manufacturing and parts procurement for digital AV equipment and Japanese mobile phones. Accordingly, the company announced a downward revision to its financial forecast on October 27, 2004, and simultaneously implemented measures to improve earnings, such as making adjustments in manufacturing, and reducing costs further.
However, since October 2004, the global economy declined further than the company anticipated. Although the temporary adjustment phase is leveling off, recovery of semiconductor demand is taking longer than expected. In particular, the adjustment of inventory (including distributors' inventory) for end products manufactured for the Olympics is coming to an end, but adjustments during the third quarter were larger than anticipated.
In the market for electronic devices, the adjustment phase is expected to continue for the time being, leading to a cautious outlook on the business environment. Although NEC Electronics originally expected the semiconductor market to head toward recovery at the outset of 2005, the company now believes this recovery will take place in mid-2005.
In this business environment, NEC Electronics is promoting solutions more proactively to valued customers with the aim of increasing customer orders, as well as implementing measures such as cost reduction to improve earnings. However, due to the difficulty in overcoming the decrease in demand, NEC Electronics revises its full-year forecast for the fiscal year ending March 31, 2005 as follows:
Net sales are expected to reach 710.0 billion yen, remaining almost unchanged from the previous fiscal year. This figure is 35.0 billion yen lower than the company's previous forecast announced on October 27, 2004. Net sales from the company's core semiconductor business are expected to increase 1.8% to 684.0 billion yen.
Operating income is expected to reach 33.0 billion yen. This figure is 17.0 billion yen less than previously forecasted, and 42% less year on year. Income before income taxes is expected to reach 30.0 billion yen, a 16.0 billion yen decrease from the previous forecast and 32% decline year on year. Net income is expected to reach 18.5 billion yen, a 9.5 billion yen decrease from the previous forecast and 34% decline year on year.
Current forecasts are calculated at the rate of U.S.$1=105 yen, and 1 Euro=130 yen for the fourth quarter of the fiscal year, based on currently available information which involve risks and uncertainties. Actual results may differ materially from such forecasts due to several important factors.
Breakdown of Net Sales by End-Market Application
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Communications
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Products
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Semiconductors for broadband networking equipment including routers and
mobile-phone base stations; semiconductors for mobile handsets.
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Net sales
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31.4 billion yen (Down 5.6 billion yen, 15.0% year on year)
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Sales of semiconductors for mobile phones decreased year on year. Although
sales of baseband LSIs were solid, owing to demand for high performance
baseband LSIs in shifting from second generation to third generation mobile
phones, sales of system memory, which had been strong in the corresponding
period of the previous fiscal year, declined, and sales of LCD driver
ICs also declined as a result of declining mobile phone markets in Japan
and Korea, where TFT color LCD screens are widely used. Sales of semiconductors
for broadband networking equipment increased year on year, mainly due
to higher sales of semiconductors for mobile phone base stations.
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Computing and Peripherals
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Products
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Semiconductors for servers, workstations, personal computers, and PC
peripherals.
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Net sales
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32.7 billion yen (Down 4.2 billion yen, 11.5% year on year)
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Sales of semiconductors for PC peripherals declined year on year mainly
due to a decline in sales of LCD driver ICs used in computers and monitors,
caused by the temporary adjustment phase in the market for large LCDs.
Sales of semiconductors for workstations also declined.
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Consumer Electronics
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Products
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Semiconductors for digital AV equipment and game consoles.
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Net sales
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25.3 billion yen (Up 2.1 billion yen, 8.9% year on year)
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Although sales of LSIs for digital camcorders and televisions declined,
sales of system LSIs for digital cameras and graphics processing LSIs
for DVD recorders increased, as well as semiconductors for game consoles,
resulting in a year-on-year increase.
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Automotive and Industrial
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Products
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Semiconductors used in automobiles and industrial systems, including
medical equipment.
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Net sales
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24.6 billion yen (Up 3.0 billion yen, 13.7% year on year)
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Sales of microcontrollers for car electronics and audio increased as
automotive systems became increasingly complex, pushing sales higher year
on year.
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Multi-market ICs
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Products
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General purpose microcontrollers, gate arrays and multi-purpose SRAM.
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Net sales
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18.2 billion yen (Up 0.1 billion yen, 0.8% year on year)
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Although sales of general purpose microcontrollers increased, sales of
gate arrays declined with the decreasing demand in the market, resulting
in little change in net sales year on year.
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Discrete, Optical and Microwave Devices
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Products
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Discrete devices such as diodes and transistors; optical semiconductors
such as semiconductor lasers for optical communications equipment and
semiconductors for optical storage devices; and microwave semiconductors
for mobile handsets and other applications.
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Net sales
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28.4 billion yen (Down 1.4 billion yen, 4.6% year on year)
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Sales decreased year on year as a result of lower sales of discrete components
as a result of lower market demand, as well as a decrease in sales of
compound semiconductors such as microwave devices for the Japanese and
Asian mobile phone markets.
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Other
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Products
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Non-semiconductor products such as color LCDs, sold on a consignment
basis by NEC Electronics' sales subsidiaries.
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Net sales
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4.6 billion yen (Down 4.0 billion yen, 46.2% year on year)
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Consignment sales of non-semiconductors (such as the resale of LCDs)
are not part of NEC Electronics' core business, and will be further reduced
in the future.
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