Fujitsu Ltd

TSE:6702

Earnings Call Transcript 2022-Q1

[Takeshi Isobe, executive]

Hello. Thank you for taking the time to join us today. I'm Takeshi Isobe, Chief Financial Officer for Fujitsu Limited, and I would like to present the first quarter financial results for fiscal year 2021. Before reviewing our financial results, some segment figures have changed, and I'd like to explain these changes to you.

We've made 2 specific changes. The first is a change in certain sales channels because of the establishment of Fujitsu Japan Limited. Starting in fiscal 2021, a portion of revenue for which Fujitsu Japan is responsible from System Platforms and Ubiquitous Solutions will be attributed to the Solutions/Services segment. To increase the effectiveness of prior year comparisons between subsegments, we have restated the results for fiscal 2020.

The second is an organizational change relating to the network products business. System engineers doing work for telecom carriers had previously been spread out between network products and Solutions/Services, but they have now been consolidated within Solutions/Services to improve profitability and expand new business.

To reflect this organizational change in the first quarter, we have revised our fiscal 2020 financial results and fiscal 2021 forecast. The revised results for fiscal 2019 and fiscal 2020 are also included in the Supplementary Materials section of this presentation. So please refer to those figures for details.

Page 5. I will now go over our financial results for the first quarter of fiscal 2021. Revenue was JPY 801.9 billion, essentially unchanged from the previous year. Although business restructurings had a negative impact on overall revenue, revenue rose in Technology Solutions and results in Device Solutions were also strong. Revenue in Ubiquitous Solutions, however, declined relative to the strong performance last year that accompanied sudden demand for telecommuting as well as because of the negative impact of business restructuring.

Operating profit was JPY 33.7 billion, an increase of JPY 11.4 billion from the previous year. Operating profit increased sharply from the previous year because of progress in profitability improvements across all segments. Growth investments, which represent an important initiative for this fiscal year, are progressing as planned.

Page 6. Please look at the column with the bold outline. Overall revenue for the first quarter was JPY 801.9 billion. The negative impact of JPY 13.1 billion from business restructurings is included in this figure. This includes the effects of restructuring low profitability businesses in North America and Europe and the impact of selling the mobile phone retail business in Japan last year. Excluding the impact of restructuring, revenue rose by JPY 12.3 billion. Operating profit was JPY 33.7 billion. In a moment, I will break down the contributing factors behind this increase in a waterfall chart.

Financial income was JPY 5.8 billion. This represents an increase of JPY 2.1 billion from the prior year, primarily owing to a positive turn in income from investments accounted for using the equity method. At the very bottom, profit for the period was JPY 24.1 billion.

Page 7. I will now comment on the factors that caused increases or decreases in operating profit compared to the prior year. On the far left, operating profit for the first quarter of fiscal 2020 was JPY 22.2 billion. I will use this as the baseline for explaining increases or decreases from the prior year. The first upward arrow shows the positive impact of JPY 0.9 billion from restructuring. By restructuring low profitability businesses, there was a negative impact on revenue of JPY 13.1 billion, reducing losses from these, however, led to a net positive effect on operating profit.

The 3 arrows inside the dotted-line box show increases and decreases in operating profit, excluding the impact of restructuring. The first upward arrow shows an increase of JPY 3.7 billion. This is the increase in operating profit from higher revenue in Technology Solutions and electronic components. The next upward arrow is JPY 18.7 billion increase. There was an improvement in profitability in all subsegments of Technology Solutions.

Against the backdrop of strong demand, there was also a significant improvement in profitability in electronic components, partly because of the impact of an improvement in capacity utilization.

Ubiquitous Solutions also saw small improvements meaning that there were ultimately profitability improvements across all segments. The next downward arrow is a reduction in operating profit of JPY 11.9 billion. We have been actively undertaking growth investments as planned. Adding everything together, operating profit for the quarter was JPY 33.7 billion.

Page 8. Here, we give some supplemental information on the 3 arrows inside the dotted line from the waterfall chart regarding changes in revenue from the prior year, excluding the impact of restructuring. Revenue in Technology Solutions rose by JPY 10.6 billion from the prior year. Revenue from Solutions/Services rose by JPY 4.5 billion. The increase was primarily from financial services and telecom carrier customers.

In System Platforms, revenue declined by JPY 6.1 billion. For system products, revenue declined in part due to the falloff in the supercomputer Fugaku revenue from last year. In Network Products revenue rose sharply, mainly from 5G base stations, both in Japan and outside of Japan.

In international regions, excluding Japan, revenue increased by JPY 13.3 billion. Almost all of the increase is attributable to foreign exchange rate movements. Excluding the impact of foreign exchange on an actual business basis, the level of revenue was essentially unchanged from the prior year. There are increases or decreases depending on the country, but there were also some positive developments, including winning a large-scale project in the U.K.

In Ubiquitous Solutions, revenue declined in comparison with the prior year when there was strong demand related to telecommuting. Device Solutions saw extremely strong performance in electronic components in line with the worldwide increase in demand for semiconductors.

Page 9. This shows the improvement in our gross margin and the status of our operating expenses. First is gross margin. Excluding the impact of restructuring and special items, our gross margin was 30.7%, an improvement of 2.4% from the previous year. There was an improvement in profitability in all segments.

In Solutions and Services, we made progress in improving the profitability of systems development work as well as operations and maintenance work. We are continually improving productivity, transforming systems development, including through the expansion in the use of agile development methodologies, the delivery of services with new channels like the Japan Global Gateway, as well as support work through an expansion of remote maintenance, for example.

In System Platforms, there was an improvement in the product mix with higher unit sales of 5G base stations on top of ordinary cost reductions. In Device Solutions for electronic components, where increased demand led to a significant increase in capacity utilization, improving profitability.

Next, our operating expenses. Operating expenses increased by JPY 11.9 billion from the prior year. Growth investments increased by JPY 11 billion. Progress has been as planned from the start of the fiscal year. Our investments are largely centered on the following 2 areas.

First, we are making investments to strengthen our Services business. To improve productivity, we're strictly standardizing our offerings and expanding our use of offshoring through the Japan Global Gateway. We are generating services that resonate globally and seek to expand our business through our global offerings. Those are the 2 main areas in which we're investing in the delivery of our services.

Second, we're investing in Fujitsu's internal transformation. To achieve data-driven management, we are investing in internal DX through our One Fujitsu initiative. We also work to reform our office environments and enhance our network infrastructure in order to transform our ways of working for the purpose of improving employee well-being and productivity.

Page 10. This is the status of orders in Japan. I'll comment on each industry segment separately according to the current business climate. First is the private enterprise segment. Orders were down 9% from the previous year. While there were spikes in sales last year that did not recur this year, the overall recovery remains weak. There are variations among sectors and among customers, but if anything, the distribution sector was weak.

Next is finance and retail. Orders increased significantly, climbing 9% over the previous year. In terms of industry sectors from which we were relatively heavily affected by the impact of large-scale projects, we were able to win several large-scale contracts in the first quarter, primarily from financial services customers. Even though this area was weak last year, we are now seeing active investments in DX in the financial services sector in contrast to the retail sector where the situation remains difficult.

Next is the Japan region. This primarily consists of orders from government ministries and agencies as well as telecom carriers. But in the first quarter, orders from government ministries and agencies were sharply lower, whereas orders from telecom carriers were higher. For government ministries and agencies, this was the off-season for large-scale projects. And from the start, we had anticipated that these would disproportionately emerge in the second half of the fiscal year. Nevertheless, orders from telecom carriers were strong, primarily for 5G base stations.

Next is Fujitsu Japan. Orders are down 7% since last year. The situation remains difficult in health care, education and small and medium-sized enterprises. We get the impression that those areas have been directly hit by COVID-19. This was in line with our expectations when we formulated our target plans, but we did not see a strong overall recovery in the first quarter.

On the other hand, we do anticipate winning large-scale contracts in the second half of the fiscal year, particularly in the fourth quarter, and specific deals are emerging in our deal pipeline. Considerable uncertainties continue to cloud the future outlook, but we remain firmly focused on our pipeline to expand our business.

Page 12. I will now discuss our segment results, primarily in relation to last year's results. First is Technology Solutions. Revenue was JPY 687 billion, up 0.5% from last year. Operating profit was JPY 17 billion, up JPY 3.6 billion from last year. I will explain the factors contributing to these results in each subsegment.

Page 13, Solutions and Services. Revenue was JPY 398.6 billion, up 1.1% from the prior year. Revenue increased primarily from financial services and telecom carrier customers. Operating profit was JPY 20.1 billion, up JPY 1.4 billion from the previous year. By transforming our systems development work and our delivery of services, we significantly improved profitability. On the other hand, accelerating our growth investments to strengthen our Services business meant that operating profit increased only a small amount from the previous year.

System Platforms. Revenue was JPY 140.8 billion, a 4.2% decrease from the prior year. Revenue in system products declined 16.9% and largely due to the falloff from nonrecurring Fugaku revenue recorded last year. If this effect is excluded, revenue increased. Revenue in network products increased by 32.8%, growing sharply both inside and outside Japan, primarily from 5G base stations.

Operating profit was JPY 7.9 billion, up JPY 3 billion from the prior year. In addition to the effects of higher revenue from network products, operating profit increased due to ongoing improvements in profitability.

Page 15. International regions excluding Japan. Revenue was JPY 177.2 billion, up 3.6% from the previous year. On an actual business basis, excluding business restructuring and foreign exchange impacts, revenue was more or less in line with the previous year.

Operating profit was JPY 2.2 billion, up JPY 6 billion from the prior year. In the U.K. in addition to securing a highly profitable major contract, the continued transformation of our business model has resulted in a contraction of unprofitable businesses while improvements in profitability also continued into different regions. In addition, we are seeing some other positive signals, including an increase in our pipeline for our North American Services business.

Page 16. This shows the common expenses for Technology Solutions. These expenses reduced operating profit by JPY 13.3 billion, an increase in expenses of JPY 6.9 billion compared to the prior year. Of our growth investments, these expenses include investments aimed at our internal transformation including internal DX and work style reform.

Page 17. This shows revenue results in the 2 areas of value creation in Technology Solutions, For Growth and For Stability. Revenue in the For Growth area was JPY 217.7 billion, down 7% from the previous year impacted by the revenue from the supercomputer Fugaku that occurred last year but did not recur this year. On the other hand, revenue under the For Stability area was JPY 469.3 billion, up 5% from the prior year.

The first quarter of last year was significantly impacted by COVID-19, but we're steadily trending toward recovery in indispensable investments for business continuity. With regards to the DX business, we're beginning to build up our contract pipeline bit by bit and we expect buildup to begin in earnest going forward.

Page 18, Ubiquitous Solutions. Revenue was JPY 53.8 billion, down 25.9% from the prior year. In addition to the impact of business restructuring, revenue fell due to the strong demand for remote working solutions last year that did not recur this year. Operating profit was JPY 1.6 billion, down JPY 1.8 billion from the prior year.

Page 19, Device Solutions. Revenue was JPY 81 billion, up 18.7% from the prior year. Revenue increased significantly, primarily in electronic components. Operating profit was JPY 15.1 billion, an increase of JPY 9.7 billion from the prior year. In addition to the effects of higher revenue, profitability also increased significantly due to the improvements in capacity utilization.

Page 20. This is cash flow. Cash flows from operating activities were JPY 192 billion. In addition to the increase in profits, there was an increase in the collection of accounts receivable and a reduction in outflows for corporate tax expenses, resulting in an increase in inflows of JPY 43.1 billion.

Cash flows from investing activities were a net outflow of JPY 29 billion. Investments were primarily conducted in areas such as electronic components and internal DX. In addition, there were inflows from the sale of businesses the previous year that did not recur this year resulting in an increase in outflows of JPY 19 billion.

Free cash flow was JPY 162.9 billion, an increase of JPY 24.1 billion from the previous year. Cash flows from financing activities were a net outflow of JPY 68.9 billion. Outflows increased due to bond redemptions and treasury stock purchases. Of the JPY 50 billion in treasury stock purchases planned for this fiscal year, JPY 10.1 billion of purchases were conducted in the first quarter.

Page 21, assets, liabilities and equity. Total equity was JPY 1,559.5 billion. This is not shown in the presentation material, but I would like to comment on the gap between internal forecasts and results for the first quarter. In terms of consolidated totals, there's been a slight improvement and Device Solutions exceeded expectations. Our other businesses produced revenue and profits within expected lines.

With respect to the status of the start of the year in Technology Solutions right now, things might give an impression of tardiness particularly in incoming orders and revenue. But the balance of major projects for this fiscal year is largely weighted toward the second half of the year. So the movements in the first quarter are in line with assumptions. In addition, improvements in profitability and expansions in growth investments are both proceeding according to plan.

Page 23, results forecast for fiscal 2021. This is the upper portion of the table with a bold outline. There has been no change to any of our forecast of revenue of JPY 3,630 billion, operating profit of JPY 275 billion, and profit for the year of JPY 205 billion.

Page 24 shows the breakdown by segment. Technology Solutions, Ubiquitous Solutions and Device Solutions are all in line with the forecast announced previously. Page 25 shows the breakdown by subsegment, and Page 26 shows cash flow, all unchanged. Our results for the first quarter showed progress in line with expectations plus a little bit extra, with improvements in profitability proceeding steadily in each segment and subsegment. And we're actively making investments aimed at growth.

As for our sense of the future of the business environment, while there is still an ongoing persistent opacity to the situation, we believe that steadily continuing these sorts of initiatives will lead to growth in our DX business. We will continue to operate the business in such a way that we will reliably achieve our performance goals.

This concludes my presentation. Thank you.

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