Fujitsu Ltd

TSE:6702

Earnings Call Transcript 2019-Q1

[Hidehiro Tsukano, executive]

Please turn the page of the presentation materials in front of you. I want to direct your attention to the top half of the page, Slide 3. This is an overview of our consolidated financial results for the first quarter of fiscal 2018.

Please look at the bolded portion. Revenue for the period was JPY 867.6 billion, a decrease of JPY 54.9 million from the previous year. The reduction in revenue, stemming from the restructuring of the Ubiquitous Solutions business was about JPY 48 billion. Excluding this impact, revenue declined by about JPY 7 billion from the previous year.

Although revenue rose in the systems integration business in Japan, the impact of a decline in demand in network products and LSI devices proved significant and revenue fell slightly in relation to last year's level.

We recorded an operating profit of JPY 79.5 billion, an increase of JPY 74.6 billion from the previous year. I will offer an explanation on how this compares with last year in a moment.

In the first quarter, we recorded significant nonrecurring profits from 2 sources. The first was a gain of JPY 91.9 billion from a change to our retirement benefit plan. I will give more details about this at the end of this presentation.

The second was a gain of JPY 11.5 billion from the majority sale of our PC business. The profit from the majority sale of our PC business falls into 2 categories: operating profit; and financial income. The total profit on the sale of the business was JPY 23 billion. The profit on the sale of shares to Lenovo and Development Bank of Japan was JPY 11.5 billion, and that portion was operating profit.

For the portion of the shares we continue to hold, the impact of revaluing them on the basis of the sales price was recorded as financial income, expenses, et cetera. Below that, our financial income expenses, et cetera was JPY 17.4 billion. In addition to a gain of JPY 11.5 billion, on reevaluation of the shares held in our PC business, which I just mentioned, financial income, expenses et cetera rose compared to the previous year, primarily due to foreign currency gains.

At the very bottom is profit for the period of JPY 72.7 billion. This represents a JPY 70.6 billion increase from the first quarter of fiscal 2017.

Please turn to the top of the next page, Slide 5. I would like to briefly comment on the major factors behind the change in operating profit compared to the previous year using the operating profit for the first quarter of fiscal 2017 of JPY 4.9 billion as our starting point.

First, you can see the gain of JPY 91.9 billion on the changes to our retirement benefit plan represented by the arrow pointing upward at the left. Next, there is the impact of business restructuring, which consist of 3 components. The first component is last year's JPY 17 billion gain on the sale of Nifty‘s consumer business, which was not recorded this period, so the arrow is pointing downward.

The second component is the JPY 11.5 billion gain this period on the majority sale of the PC business, illustrated by the arrow pointing up.

The third component is the loss of approximately JPY 7 billion in operating income. This is due to the fact that it is no longer consolidated following the restructuring of our Ubiquitous Solutions business.

Lastly, is the downward arrow representing a decline of JPY 4.8 billion in our actual business, primarily from performance of network products and LSI devices.

Please look at the bottom of the page, Slide 6. This shows revenues and operating profits for each segment.

Please refer to the bottom table on operating profit. I will go through each segment in a minute but here, I would just like to make a point about Other/Elimination and Corporate. The result for this period was in operating profit of JPY 74.6 billion. That represents a positive swing of JPY 83.9 billion from the previous year. The gain on the change in our retirement benefit plan and the gain on the majority sale of a business about which I just spoke are both included here.

Next, please turn to the top of the next page, Slide 7. This is the breakdown by segment. I'll begin with Technology Solutions. Revenue was JPY 664.3 billion, down 1.2% from last year. Operating profit was JPY 4 billion, down JPY 1.1 billion from the previous year. I will explain the factors behind these results in my discussion of the subsegments.

At the bottom of the page is Slide 8, Services. Revenue was JPY 574.5 billion, about the same as last year. Revenue from solutions and system integration was JPY 228.9 billion, an increase of 4.6% over last year. Revenues from the manufacturing industry as well as of the retailing and distribution industry, which were strong last year, continued to increase. And revenue from the public sector also increased. We were also able to secure orders in the first quarter at a level that outpaced the previous year, and we are hopeful that we will be able to further improve on the high levels of revenue we achieved last year in the second quarter and beyond.

Revenue from infrastructure services was JPY 345.6 billion, a decline of 2.7% from the previous year. In Japan, revenue is essentially unchanged on an actual basis, but there was a decline because some projects were shifted into solutions and system integration.

Outside of Japan, revenue in Europe and North America did not meet our expectations and declined. Operating income was JPY 11 billion, up JPY 2.7 billion from the previous year. Operating profit increased in Japan because of the impact of higher revenue. Outside of Japan, although progress has been made in terms of efficiencies, the expansion of revenue in new areas has not yet reached the levels we hoped to achieve.

At the top of the next page is Slide 9, System Platforms. Revenue was JPY 89.8 billion, down 8.7% from the previous year. Revenue from system products was JPY 51.8 billion, an increase of 3.5% from the previous year. Revenue from x86 servers was up, both in Japan and outside Japan.

Revenue from network products was JPY 37.9 billion, down 21.4% from the previous year. Revenue fell significantly, primarily in mobile phone base stations in Japan. With respect to the capital spending constraints of telecom carriers, we expect the current severe conditions to continue until spending on 5G starts.

There was an operating loss of JPY 7 billion representing a deterioration of JPY 3.9 billion from the previous year. The deterioration was primarily due to the impact of lower revenue from network products.

At the bottom of the page is Slide 10, Ubiquitous Solutions. Revenue was JPY 115.3 billion, down 25.1% from the previous year. The impact of business restructuring lowered revenue by JPY 48 billion. This was the effect of the restructuring of the mobile phone business and the fact that revenue from the consumer PC business is no longer consolidated.

Excluding the impact of the restructuring, revenue rose by about 8% as enterprise PC revenue increased. The segment recorded an operating profit of JPY 100 million, down JPY 5.3 billion from the prior year. The impact of the restructuring was to reduce operating profit by about JPY 7 billion.

Other than that, operating profit rose on higher operating profit from enterprise PCs, both in and outside of Japan.

Please turn to the top of the next page. Slide 11, Device Solutions. Revenue was JPY 131.3 billion, down 3% from the prior year. Revenue for LSI devices was JPY 61.5 billion, down 11.7% from the previous year. There was weak demand for LSI devices used in smartphones.

Revenue from electronic components was JPY 70.1 billion. Unit sales of components used in PCs and manufacturing equipment rose with revenue up 6.3% over the prior year.

Operating profit was JPY 700 million, down JPY 2.7 billion from the previous year. In addition to the impact of lower revenues from LSI devices, profit declined on the impact of the higher yen compared to the previous year.

In the first quarter, each segment performed more or less in accordance with our internal projections.

At the bottom of the page, is Slide 12. Cash flows. Total net cash provided by operating activities was JPY 104.6 billion. This represents an increase in inflows of JPY 22.9 billion over the previous year. This positive turn is primarily the result of the change in our retirement benefit plan.

Net cash provided by investing activities was JPY 18.8 billion. Cash inflows exceeded outflows because of the majority sale of the PC business and the sale of shares in a company in China that, until last year, was an affiliate.

Free cash flow was JPY 123.5 billion.

Please turn to the top of the next page to Slide 13. Assets, liabilities and equity. Total equity was JPY 1,253,200,000,000, an increase of JPY 48.3 billion from the end of the last fiscal year. Equity attributable to owners of the parent was JPY 1,134,900,000,000. Equity attributable to owners of the parent ratio, shareholder's equity ratio, was 37.1%, an increase of 2.3 percentage points since the end of the last fiscal year.

Please turn to the bottom of the page to Slide 14. This is the financial forecast for fiscal 2018. Please first look at the bottom table, which shows the exchange rates on which our forecast is predicated. We expect JPY 105 per $1, JPY 130 per EUR 1, and JPY 145 per GBP 1. With a Euro-Dollar cross rate of 1.10. None of these figures has changed from our assumptions at the beginning of the fiscal year.

Current exchange rates are showing a trend toward yen weakness, but there are many uncertain factors and we want to continue to watch these trends.

The table at the bottom of the page is our financial forecast for the full fiscal year. Our forecast of revenue is JPY 3,900,000,000,000. For operating profit, it's JPY 140 billion. And for profit for the year, it's JPY 110 billion. Nothing has changed.

This financial forecast is our forecast of profits from our actual business.

In the first quarter, we recorded gains on nonrecurring extraordinary items in the form of changes to our retirement benefits plan and the majority sale of our PC business, but we are in the stage of considering a variety of measures, including for business model transformation. So we have not made any changes to our full year financial forecast that would include any extraordinary items.

Lastly, I would like to explain more about our retirement benefit plan. Please turn to the top of the next page to Slide 27. On June 21, 2018, the Fujitsu Corporate Pension Fund, which is, Fujitsu's Major Pension Plan in Japan, implemented a change in some of its policies, shifting from a defined benefit plan to a risk-sharing corporate pension plan, also called the third corporate pension plan. Amid changes in the investment environment of pension plans, including a continuation of low interest rates, the purpose of the change is to curb the risk of unanticipated cash outflows, such as special plan contributions caused by deterioration in the funded status of pension obligations in the future and to sustainably maintain a stable pension plan.

In the previous defined benefit plan, employee benefits was set in advance and the company brought all of the investment risk for plan assets. But in a risk-sharing corporate pension plan, the risk is shared between the company and the employees.

To prepare for the risk that the plan may become underfunded in the future, the company will contribute certain amounts in advance that can cover those risks, adding to plan assets.

For employees on the other hand, if the value of the plan assets fluctuates beyond a certain level, their benefits will be adjusted.

From an accounting standpoint, risk-sharing corporate pension plans are classified as defined contribution plans. In accordance with the shift in the pension plan, because of a revision in the way of evaluating pension liabilities, such as the assessment of risk, Fujitsu recorded a nonrecurring gain of JPY 91.9 billion in the first quarter.

The impact on full year operating profit for fiscal 2018 is expected to be JPY 86.9 billion due to risk-reverse contributions, among other factors.

In addition, with the shift to the new plan, there was an adjustment to plan liabilities and plan assets, which has improved underfunding to the JPY 114 billion level from JPY 215 billion at the end of March 2018. The shift to the new plan, while curbing the risk that employee benefits will be curtailed, enables the corporate pension plan to operate on a stable and sustainable basis. It also alleviates the underfunded status of the retirement benefits, which had been a management issue for many years.

This concludes my presentation.