Fujitsu Ltd

TSE:6702

Earnings Call Transcript 2020-Q1

[Takeshi Isobe, executive]

I will now begin my explanation of the financial results for Q1 fiscal 2019. 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, to Slide 3. This is an overview of our consolidated financial results for the first quarter of fiscal 2019.

Please look at the bolded portion. Revenue for the period was JPY 838.7 billion, a fall of JPY 28.9 billion from the previous year. The decline was caused by the impact of business restructuring and foreign exchange movements. Revenue declined by JPY 50 billion as a result of revenue from certain companies no longer being consolidated primarily in Device Solutions.

Foreign exchange movements reduced revenue by JPY 8 billion. This was caused by the appreciation of the yen against the euro and the pound. Excluding these factors, revenue increased by JPY 30 billion, an increase of 3.5%. Revenue from the Services business in Japan continued to be very solid, particularly in system integration services.

We recorded an operating profit of JPY 3.3 billion, a fall of JPY 76.2 billion from the previous year. Excluding special items, our performance significantly improved compared to the prior year. But in last year's first quarter, we recorded significant nonrecurring profit, including a gain from a change of our retirement benefit plan. So this year's operating profit declined by comparison. I will give further details a little later on with a waterfall chart explanation.

Below that, our financial income was JPY 2.8 billion, down JPY 14.5 billion from the previous year. Here too in last year's first quarter, we recorded a nonrecurring profit due to a reevaluation of stocks using the equity method that accompanied the sale of the PC business, so this year's financial income declined by comparison. At the very bottom is profit for the period of JPY 7 billion.

Please turn to the top of the next page, Slide 5. It shows the factors behind the change in operating profit compared to the previous year. On the far left, we start with operating profit for the first quarter of fiscal 2018 of JPY 79.5 billion. From this, when we subtract the impact of last year's special items of JPY 103.5 billion, we get an operating loss of JPY 23.9 billion in last year's first quarter.

Starting from here, the following arrows indicate the increase or decrease from the previous years that occurred in Q1. The next 3 arrows show the moves excluding special items, for which the combined net increase is JPY 33 billion in operating profit. If we combine the results of Technology Solutions, which is our core business, with Other/Elimination and Corporate, an operating profit increased by JPY 31 billion. Result from Ubiquitous Solutions increased by JPY 4 billion. Device Solutions decreased by JPY 2 billion.

In Technology Solutions, both revenue and operating profit significantly increased. There were 3 reasons for the increase in operating profit. The first is the impact of higher revenues. The Services business in Japan performed very well. The second is profit margin improvements. There are positive shifts in both services and system products. The third is efficiencies in operating expenses.

In addition to the effect of holding down overhead expenses as a result of our resource shift, we promoted a policy of selection and concentration in our spending on investments. There are improvements across the board in revenue, profit margins and operating expenses.

The last arrow pointing downwards represents onetime expenses of JPY 6 billion relating to the restructuring of production facilities in Japan. With such developments, as the sale of our printed circuit board business, we restructured some production facilities in Japan.

As we mentioned at the beginning of the fiscal year, this fiscal year we are planning for JPY 15 billion in business model transformation expenses, and this amount is included in that figure.

Please look at the bottom of the page, Slide 6. This shows revenues and operating profits for each segment. Please look at 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 the first quarter of last year was an operating profit of JPY 74.6 billion. That includes special items, a nonrecurring profit of JPY 103.5 billion. If we exclude that result, the result for the first quarter of last year would have been an operating loss of JPY 29 billion. On the other hand, the result for this year's first quarter is an operating loss of JPY 19.5 billion, a JPY 9 billion improvement over last year's first quarter if the impact of the special items is excluded.

In addition to the effect of holding down overhead expenses as a result of our resource shift, we promoted a policy of selection and concentration in our spending on forward-looking investments. I will provide further details on the impact of the resource shift.

The overall impact improved results by JPY 5 billion. The breakdown was JPY 3.6 billion in Technology Solutions and about JPY 1.3 billion in Other/Elimination and Corporate.

Next, please turn to the top of the next page, Slide 7. This is the breakdown by segment. I will explain the results of each segment mainly in comparison to last year's results.

This is Technology Solutions. Revenue was JPY 664.6 billion, more or less in line with the previous year. Operating profit was JPY 26.1 billion, up JPY 22 billion from the last year. I will explain the details by the subsegments.

Next, please look at the bottom of the page, Slide 8, the breakdown of the subsegments. First, Services. Revenue was JPY 581.8 billion, an increase of 1.3% from the prior year. To break that down further, revenue from solutions and system integration services was JPY 251.1 billion, an increase of 9.7% over last year. We saw a significant growth in revenue from public-sector customers, not only from local government and health care projects but also by steadily building up a number of small and medium scale business deals.

Revenue from customers in the manufacturing field and the retailing and distribution field has continued to increase in each quarter since the first quarter of fiscal 2017. Customers have high awareness of, and willingness to invest in issues related to the improvement of work process, efficiency and work style reform, so demand continues to be strong. We are working to further strengthen our structure in this segment in order to continue supporting customers in resolving their issues and creating value with new technology while leading to digital transformation.

Revenue from infrastructure services was JPY 330.6 billion, down 4.3% from the previous year. While revenue in Japan remained strong, particularly in outsourcing, revenue outside Japan continued to be weak, particularly in Europe due in part to the impact of foreign exchange rates as the yen appreciated in value against the euro and pound.

Operating profit was JPY 25.1 billion, up JPY 14 billion from the prior year. In Japan, operating profit rose significantly due to the effects of higher revenue from solutions and system integration as well as improved profitability. Efforts to improve profitability have been making steady progress, including cost reductions through the use of offshoring, development efficiency and limiting losses from unprofitable projects through thorough quality assurance activities.

Outside Japan, despite the impact of lower revenue, operating profit improved as we were able to limit losses due to unprofitable projects as well as increase efficiencies in operating expenses.

Next, please turn to the top of the next page, Slide 9, System Platforms. Revenue was JPY 82.8 billion, down 7.7% from the prior year. To break that down further, revenue from system products was JPY 49.2 billion, down 4.9% from the previous year. Revenue from x86 servers fell, not only due to the impact of foreign exchange rates, but also due to the fact that large-scale public sector business deal was recorded in the previous year.

Revenue from network products was JPY 33.6 billion, down 11.5% from the previous year. Carrier investment spending in mobile phone base stations is quite low in anticipation of 5G. Delivery of equipment for trial 5G services will begin in the second quarter. This will be the beginning, which will subsequently lead to expanded 5G business deals as development ramps up.

Operating profit was JPY 1 billion, an improvement of JPY 8 billion from the previous year. The improvement in operating profit was primarily from system products. There are 2 main factors. The first is improvements in profitability. Not only did sales increase for higher added value x86 servers with large amounts of memory, but profitability also improved due to cost reductions with lower prices for key components. The second factor is greater efficiencies in operating expenses.

In network products, while results were adversely impacted by lower revenue, progress was made in concentrating development expenses and applying them more selectively so operating profit was more or less in line with the previous year.

At the bottom of the page is Slide 10, Ubiquitous Solutions. Revenue was JPY 126.7 billion, up 9.9% from the previous year. Revenue grew significantly due to strong sales of light compact notebook PCs as well as high demand for replacement PCs due to the end of the support period for Windows 7, both inside and outside Japan. The segment recorded an operating profit of JPY 4.5 billion, representing an improvement of JPY 4.3 billion from the prior year. In addition to the effect of higher revenue, operating profit increased due to improved profitability with lower prices on key components such as memory.

Please turn the page, at the top of next page is Slide 11, Device Solutions. Revenue was JPY 84.6 billion. This is a significant deterioration from the previous year due to the impact of business restructuring. The negative impact of excluding the revenues of a semiconductor sales company and an electronic components manufacturing company from the consolidation, as of the fourth quarter of last year, was a decline in revenues of JPY 44 billion. Excluding that, revenue fell slightly primarily in electronic components.

The segment posted an operating loss of JPY 7.7 billion, a deterioration of JPY 8.4 billion from the previous year. The impact of restructuring expenses for factories in Japan primarily for the printed circuit board business, was JPY 6 billion. In addition to that, overall demand for electronic components continued to be low.

At the bottom of the page is Slide 12, cash flows. Cash flow from operating activities for the year were JPY 116.3 billion. This represents a net increase in inflows of JPY 11.7 billion from the previous year. The revenue level in the fourth quarter of the previous year was extremely high and the collection of those accounts receivable carried over into the first quarter. Outflows relating to resource shift increased but compared to the previous year, the increase in inflows exceeded the increase in outflows.

Cash flows from investing activities were a net outflow of JPY 10.7 billion. Last year, cash inflows exceeded outflows due to inflows relating to the majority sale of the PC business and an affiliated company in China. Excluding those factors, investment in the first quarter was about the same level as the previous year primarily centered in services in Japan. Free cash flow was JPY 105.6 billion.

Please turn to the top of the next page to Slide 13, assets, liabilities and equity. Total equity was JPY 1,236.8 billion, a decline of JPY 16.7 billion from the end of the last fiscal year. In addition to the payment of dividends, total equity was also impacted by foreign exchange rates as the yen appreciated from the end of the previous fiscal year.

Equity attributable to owners of the parent was JPY 1,119.2 billion. Equity attributable to owners of the parent ratio, shareholders' equity ratio was 37%, an increase of 0.5 percentage points since the end of the last fiscal year.

As noted outside the table, these figures reflect the change in the accounting basis for leases as of the first quarter of fiscal 2019. By moving operating leases onto the balance sheet, assets and liabilities as of the beginning of the period both increased by JPY 170 billion.

Before we get to the financial forecast, I would like to comment on our progress in relation to our internal projections, although there is no slide for this. For the consolidated total, we slightly exceeded our internal projections. The main improvements were in Technology Solutions. Our performance in both services and system products exceeded our projections. For services in Japan, the strong performance we've achieved since the second half of the last fiscal year is continuing, and there have also been improvements in profit margins, resulting in an outcome that exceeded our projections.

The other segments were essentially consistent with our projections. In Ubiquitous Solutions, there was a slight improvement because of higher revenues from PCs. There was some replacement deals in the first quarter that were expected to occur in the second half with the ending of support for Windows 7. Device Solutions slightly underperformed because of weak market conditions for electronic components.

Please turn to the bottom of the page to Slide 14. This is the full year financial forecast for fiscal 2019. If you refer to the bottom table, you'll see the exchange rates on which our forecast is predicated. We expect JPY 105 per dollar, JPY 130 per euro and JPY 145 per pound, with the euro-dollar cross rate of 1.10. None of these figures have changed from our assumptions at the beginning of the fiscal year.

Our forecast for revenue is JPY 3,750 billion. For operating profit is JPY 130 billion. And for the profit for the year is JPY 105 billion. None of these have changed.

Looking at our performance excluding special items in the first quarter, the solid results posted in the second half of last fiscal year have continued, and overall we're off to a good start.

Particularly in Japan, our performance trends continued to be strong, centered on our main Services business. We are moving ahead with initiatives to transform our growth strategy such as strengthening our approach in consultation, reforming our service delivery capabilities and strengthening the competitiveness of our products in order to take growth to a new level.

Outside of Japan, on the other hand, we continue to focus on initiatives that will transform our business structure. On an accounting basis, the provisions for this essentially were recorded during the last fiscal year, but on the front lines we are currently in the midst of executing these structural reform initiatives such as streamlining our locations and bringing greater efficiency to our administrative and support functions.

As we mentioned at the beginning of the fiscal year, the financial forecast represents the minimum targets we intend to meet. There are still some uncertainties relating to the second half, but we will move forward with growth initiatives, both in Japan and outside Japan. And will continue efforts to ensure that we make steady progress in our performance results.

This concludes my presentation. [Statements in English on this transcript were spoken by an interpreter present on the live call.]