Fujitsu Ltd

TSE:6702

Earnings Call Transcript 2024-Q1

[Takeshi Isobe, executive]

Thank you very much. This is Isobe speaking. Now I'd like to ask you to take a look at the materials. On the consolidated financial results, please look at Page 3. I will start by presenting our financial highlights for the quarter of fiscal 2023.

As expected, there was a significant variation in performance depending upon the business segment. On a consolidated basis, revenue was JPY 799.6 billion. Excluding the impact of restructuring, this represented a slight increase. Among the segments, the growth drivers, Service Solutions, which achieved double-digit growth, primarily from the business in Japan. And there was a solid increase in DX and modernization deals, and revenue from Fujitsu Uvance increased by 50% from last year's first quarter. The trend has been very solid, particularly in Japan.

For Device Solutions, on the other hand, the weak trend continued since the latter half of fiscal last year, and revenue declined by 35% compared to last year's very solid first quarter results.

Adjusted operating profit was JPY 2.6 billion, down JPY 25.4 billion from last year's first quarter. Adjusted operating profit for Service Solutions was JPY 20.9 billion, 2.3x higher than the prior year, because of the positive impact of the higher revenue, the progress as planned in improving profitability. On the other hand, the profitability for Device Solutions remained at a low level due to a decrease in the production volume and slowdown in the factory operations. Adjusted operating profit declined by JPY 24.1 billion from the previous year's first quarter.

Page 4 shows the consolidated results I just discussed. Business restructuring refers to the impact of the carve-out of the PFU, which had been included in the consolidated results through the first half of last fiscal year. Other than that, I just covered other points. So I will move on.

And starting from Slide 5, I will discuss the financial results for each segment.

Slide 6 shows the financial results for each business segment. I will discuss the results for each segment, starting with the next slide. But this gives you an overview of the segments.

Service Solutions, which have been positioned as a growth driver, got off to a very strong start with the higher revenue and higher profit. On the other hand, since the fourth quarter of last fiscal year, demand in the Device Solutions has remained weak, and there was a significant decline in both revenue and profit.

In Intersegment Eliminations and Corporate, there has been no change in the -- in our stance of increasing investment and the growth over the mid- to long-term horizon.

Please look at Page 7. Service Solutions. Revenue was JPY 465.4 billion, which, on a continuing operating basis, represented an increase of about 10.2% from the first quarter of the previous year. It was an active quarter for DX and modernization deals, primarily in Japan. And the Uvance revenue also increased. Adjusted operating profit was JPY 20.9 billion, up JPY 11.9 billion from the previous year. And I will explain the components of this with the next page.

This shows the factors that caused increases and decreases in adjusted operating profit of Service Solutions compared to the prior year. On the far left, adjusted operating profit for the first quarter of fiscal '22 was JPY 9.0 billion. I will use this as a starting point for explaining the changes to the right, the adjusted operating profit in the first quarter.

The first factor was the increase of JPY 13.3 billion in adjusted operating profit from the impact of higher revenue. We achieved a double-digit growth in revenue in the first quarter to start the fiscal year. The second factor is the increase of JPY 7.5 billion from the improved profitability. We continued to make progress in initiatives to improve productivity.

And the third factor is a decline of JPY 8.9 billion from an increase in expenses, mainly business growth investment. We actively made investment in the Uvance offerings, investment in employee training and development and enhanced security. So on the far right, the Service Solutions operating profit for the first quarter of fiscal '23 was JPY 20.9 billion.

Next page shows the supplementary information about the waterfall chart I showed you earlier. First is the status of orders in the first quarter, which led to increase in revenue. This page shows orders in Japan. First of all, the private enterprise business segment, which was up 7% from the previous year. It was an active quarter for the new deals across a wide range of industries like manufacturing, mobility, retailing and the distribution.

Next, the finance business with a 24% increase in the orders. In addition to large-scale deals to upgrade mission-critical system for financial institutions, we also won deals in such areas as projects to enable a couple banks to process new bank notes.

In the public and health care segment, orders were up 34%. This segment includes government agencies and ministries, local governments and health care institutions. We won multiple modernization deals for next-stage systems. And up until recently, health care field has been impacted heavily by the COVID pandemic that we received large-scale deals for the electronic medical records and health care information.

Mission critical and other segments, orders declined by 8%. This segment includes mission critical services and national security-related business. Orders declined from the previous year. But rather than economic conditions, it is mainly because of the pullback from the large-scale projects last year on a quarterly basis. On an annualized basis, we are projecting an increase in both orders and revenues over the prior year and both the order backlog and pipeline is clearly increasing.

Next, on the Page 10, this is about the international regions. Here, the orders increased in every region. First of all, Europe, up 4% over the previous year. We won the public sector deals in the U.K., resulting in the increase in orders. Americas increased by 37%. We won some multiyear services deals, mainly in the U.S. and Canada, resulting in a large increase over the previous year.

Asia Pacific, a 17% increase. In addition to the positive impact of the acquisitions we made last year in Oceania, we also won public sector deals. And the international regions are still not near where we want to be, but we had some positive development in the first quarter.

Page 11 shows the progress of Fujitsu Uvance, which is positioned as the most vital area for the growth of our business and the transformation of our business portfolio. Uvance consists of a total of 7 key focus areas, including 4 vertical areas which are cross-industry areas that solve social issues and 3 horizontal areas which are technology platforms that support the vertical areas.

Overall, revenue in the first quarter was JPY 70.4 billion, up 53% from the prior year. In the first quarter of previous fiscal year, Uvance accounted for 10% of total revenue in the Service Solutions segment. However, that increase, on the right hand -- the graph on the right hand shows the targets we are seeking to achieve. Our revenue target for this year is JPY 300 billion, which is a JPY 100 billion increase from the last fiscal year, and we have made progress towards the target by achieving revenue of JPY 70.4 billion in the first quarter.

In the vertical areas, primarily in the second half of the fiscal year, we will launch offerings that enable customers to achieve sustainability transformation. In addition, in the horizontal areas, there is extremely high demand right now for what we call the 3S business applications, consisting primarily SAP, ServiceNow and Salesforce, and we will enhance our resources in that area to support higher business opportunities there.

We are in the midst of developing and enhancing our offerings in these 7 key focus areas by putting together a full line of offerings. We seek to achieve revenue of JPY 700 billion in fiscal 2025, the final year of our medium-term management plan, with Uvance revenue accounting for 30% of the total revenue for Service Solutions.

Page 13. I will now comment on the status of cost and expenses. Profitability increased by JPY 7.5 billion and the gross margin improved by 1.6%. This was not a result of new measures we have implemented, but rather the results of the steady progress made in the ongoing initiatives we have been working on to date. The standardization of development work, automation and expansion of insourcing has led to improved quality and productivity. We are steadily making progress on expanding insourcing and increasing the ratio of our offshoring work.

As we mentioned in our medium-term management plan, these initiatives will not produce significant results immediately. We are still only halfway to reaching our goal, and we anticipate that we will see improvement in these initiatives through honest, simple hard work.

Growth investments and expenses increased by JPY 8.9 billion. We continued to proactively invest in areas directly related to business growth, such as the development of Fujitsu Uvance offerings, investments needed to develop specialist human resources and investments to strengthen our security.

This concludes my supplementary explanation of the increase and decreases in profit outlined in the chart on Page 8.

On the next Page 14, I will briefly touch upon the status of each subsegment in Service Solutions. First is Global Solutions. Revenue was JPY 104.2 billion, up 11.1% from the prior year. On an adjusted basis, the subsegment posted an operating loss of JPY 1.2 billion, which represents an improvement of JPY 6.9 billion compared to the loss in the prior year.

Fujitsu Uvance experienced steady growth and large-scale sales of software supporting modernization drove revenue growth. The impact of higher revenue and improved profitability significantly contributed to the improvement in the subsegment's operating profit. However, unfortunately, it still has recorded a loss in absolute terms. In regards to Global Solutions, it is still in the upfront investment phase, with a number of Uvance offerings planned for the second half of this year.

In Regions, Japan, revenue was JPY 262 billion, up 8.2% from the prior year, excluding the impact of restructuring. The adjustment operating profit was JPY 25.8 billion, an increase of JPY 6.7 billion. The number of renewal projects for the DX business and mission critical systems is increasing in a wide range of sectors, including the manufacturing, distribution and retailing, finance and public sectors. The impact of higher revenue, in addition to steady progress made in improving profitability, led to a substantial increase in adjusted operating profit from the prior year.

Regions International revenue was JPY 141 billion, up 8.4% from the prior year. On an adjusted basis, the subsegment posted an operating loss of JPY 3.6 billion, a deterioration of JPY 1.7 billion from the previous year. Revenue increased from the positive impact of foreign exchange movement as well as an increase in revenue from public sector customers in Europe. However, despite this, on an adjustment basis, there was a significant deterioration due to lower profit from the ending of highly profitable projects in the APAC region.

Page 15. From here, the slides are a different color and show the status of segments other than Service Solutions. First is Hardware Solutions. Revenue was JPY 216.8 billion, a decrease of 3.3% from the prior year. The adjusted operating profit was JPY 2.6 billion, down JPY 2.3 billion from the previous year.

System Products had an increase in revenue due to the resolution of the chip shortage. However, Network Products had a significant drop in revenue with both mobile systems and photonics having a pullback from the prior year's strong demand in North America. For this year's Network Products, there will be a decrease in sales due to the large-scale demand cycle. However, we are expanding our development investments for the next growth cycle, including our investments, to achieve high-speed, high-capacity, low-latency and low energy consumption networks.

In terms of operating profit, it has been a very challenging year for the subsegment. But on a positive note, we plan to use this year to enhance our capabilities in order to grow profits in the future. We are already implementing this plan.

On the bottom, slide showed the Ubiquitous Solutions. Revenue was JPY 59.8 billion, down 3.2% from the prior year. Adjusted profit -- operating profit was JPY 4.5 billion, an increase of JPY 3.6 billion from the previous year. Although component costs have continued to rise, including factors such as the impact of foreign exchange movements, our efforts to cut costs and pass on higher costs to customers contributed to this increase in operating profit.

Page 16 is Device Solutions. Revenue was JPY 67.4 billion, down 35.2% from the prior year. The adjusted operating profit was JPY 2.2 billion, down JPY 24.1 billion from the previous year.

The demand for semiconductor packaging, which had been very strong until the first half of the prior year, significantly decreased in the second half of the year and the trend has continued into this fiscal year. Compared to the same quarter of the previous fiscal year, lower unit sales and a decline in capacity utilization contributed to a significant decline in profit. We anticipate that there will be a mild recovery in the second half of this fiscal year, but we are off to a rough start, as we originally expected.

On the bottom of the slide is the Intersegment Elimination and Corporate. The segment posted an operating loss of JPY 27.8 billion, with a JPY 14.4 billion increase in expenses from the previous year. We continued expanding our investments in the medium- to long-term business growth, including enhancing advanced research in cutting edge areas, such as AI and quantum computing, promoting the One Fujitsu program for enhancing our management foundation and strengthening our global security services.

Page 17 is the status of cash flows. Consolidated free cash flow was JPY 125.6 billion, up JPY 59.5 billion from the prior year. This is due to the progress in the first quarter in collections from the high concentration of sales in last fiscal year's fourth quarter. The core free cash flow was JPY 182.8 billion.

This concludes my presentation of the first quarter financial results. This quarter results represent a start that is essentially in line with our planning. Performance varied considerably between the business segments. However, both the content and level of the results are as we expected.

Particularly, in Service Solutions, our order and pipeline of projects, orders have significantly increased, again, as expected. As a result, we are accumulating a backlog of orders to expand sales in the second quarter and beyond. So it is essential that we make sure to execute thoroughly on each project.

By making thorough progress on launching our Fujitsu Uvance offerings and through simple hard work, transforming our delivery services, we think we can expand, as we have planned, both the volume and profitability of our business in Service solutions, which is our growth driver.

Page 19. I will discuss our financial forecast for fiscal 2023.

Page 20. This is our financial forecast for fiscal 2023. We are projecting revenue of JPY 3.86 trillion and adjusted operating profit of JPY 340 billion and an adjusted profit for the year of JPY 218 billion. All are unchanged from our previous forecast, nor have there been any changes to our forecast for our business segments or cash flow in the following pages. We are progressing according to the plan.

This concludes my presentation. Thank you.

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