Fujitsu Ltd

TSE:6702

Earnings Call Transcript 2019-Q2

[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 second quarter of fiscal 2018.

Please look at the bolded portion. Revenue for the period was JPY 966.8 billion, a fall of JPY 33.7 billion from the previous year. The reduction in revenue stemming from business restructuring was about JPY 40 billion. This is the result of excluding both the restructuring of the mobile phone business and the consumer PC business from consolidated revenue. Excluding the impact of this restructuring, revenue rose by about JPY 7 billion from the previous year.

Continuing on from the first quarter, results continued to be impacted by a decline in demand for network products and LSI devices but revenue rose primarily from the services business in Japan. We recorded an operating profit of JPY 15.6 billion, a decrease of JPY 7.3 billion from the previous year.

There are 2 reasons for this decline related to the business restructuring. The first reason is the impact of the restructuring of the PC and mobile phone businesses, a fall of about JPY 10 billion. The second reason is related to the transfer of Fujitsu Electronics, a semiconductor sales company, which resulted in a fall of JPY 2.8 billion. We are moving toward a closing in the fourth quarter, but because it is necessary to recognize losses at the time of the contract agreement if there will be a loss, the loss was recorded in the second quarter.

Excluding these one-off items, operating profit increased by about JPY 5.5 billion. Profits increased primarily in system products and services in Japan.

Below that, our financial income was JPY 4.5 billion, a fall of JPY 24.3 billion from the previous year. This is primarily because last year, we recorded a gain of JPY 27.3 billion on the sale of shares due to the unwinding of our cross-shareholdings, which is not repeated this year. At the very bottom is profit for the period of JPY 8.3 billion.

Please turn to the top of the next page, Slide 5. These are the financial results for the first half. Revenue for the first half was JPY 1,834.5 billion, a decrease of JPY 88.6 billion from the previous year. The impact of lower revenue due to the restructuring of the PC and mobile phone businesses caused revenue to decline by JPY 88 billion.

Operating profit was JPY 95.2 billion, an increase of JPY 67.2 billion over the previous year. There are a number of special circumstances, so I will give a breakdown of the comparison to the previous year a bit later on.

Below that, financial income and expenses amounted to income of JPY 21.9 billion, a decrease of JPY 9.4 billion from the previous year. Although there was a positive factor in the recording of JPY 11.5 billion in the onetime gain from the sale of the PC business, income fell due to the larger impact on the JPY 27.3 billion in gains recorded last year from the sale of shares due to the unwinding of cross-shareholding arrangements.

At the very bottom is profit for the period, which is JPY 81.1 billion.

Next, please turn to the top of the next page, Slide 7. This is the breakdown by segment. I would like to comment on the major factors behind the change in operating profit compared to the previous year using as our starting point operating profit for the first half of fiscal 2017 of JPY 28 billion.

First, there is the gain of JPY 91.9 billion on the changes to our retirement benefit plan, the arrow pointing upward. This is the impact of the partial changes to the Fujitsu corporate pension fund, which is Fujitsu's major pension plan in Japan implemented in June, shifting from a defined-benefit plan to a risk-sharing corporate pension plan, also called the third corporate pension plan system.

Next, there is the impact of business restructuring, which is 3 components. The first component is the JPY 17 billion gain recorded last year on the sale of Nifty's consumer business, which was not recorded this period, so the arrow is pointing down.

The second component is the onetime JPY 8.7 billion gain related to restructuring this fiscal year, the arrow pointing up. This is related to the PC business and the reorganization of the LSI business.

The third component is the loss of approximately JPY 17 billion as a result of the restructuring of the PC and mobile phone businesses, with the arrow pointing down.

Lastly, excluding these one-off items, this puts us more or less on par with the previous year.

Please look at the bottom of the page, Slide 8. This shows revenues and operating profits for each segment. 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 an operating profit of JPY 47.2 billion. That represents a positive shift of JPY 82.1 billion from the previous year. The gain on the change in our retirement benefit plan and the onetime profits and losses relating to the business restructuring, about which I just spoke, are all included here.

Next please turn to the top of the next page, Slide 9. This is the breakdown by segment. This is Technology Solutions. Revenue was JPY 1,409.1 billion, about the same as last year.

Operating profit was JPY 47.8 billion, up JPY 3 billion from last year. I will explain the factors behind these results in my discussion of the subsegments.

At the bottom of the page is Slide 10, the breakdown of the subsegments. First, services. Revenue was JPY 1,207.5 billion, an increase of 0.6% from the prior year. Revenue from solutions and system integration was JPY 494.4 billion, an increase of 5.8% over last year. For the first half, we set a new record for revenue. As we expected, we were able to win large-scale projects in the public sector. And revenues from the manufacturing industry as well as the retailing and distribution industry, which was strong last year, continued to increase.

The trend of orders in the first half were solid, and we have high expectations that orders in the second half will also rise. Revenue from infrastructure services was JPY 713.1 billion, a decline of 2.7% from the previous year.

In Japan, excluding the impact of some projects being shifted into the solutions and system integration category, revenue on an actual basis rose slightly from the prior year.

Outside of Japan, revenue from Europe and North America fell short of expectations and declined.

Operating income was JPY 46.8 billion, up JPY 4 billion from the prior year. Operating profit increased primarily because of the impact of higher revenue in Japan.

Outside of Japan, the situation is severe as the expansion of revenue in new areas has not yet reached the level we hope to achieve. We believe that stepped-up reforms are needed. I will comment in greater detail about this in the Management Direction Progress Review.

At the top of the next page is Slide 11, System Platforms. Revenue was JPY 201.5 billion, down 4.2% from the prior year. Revenue from system products was JPY 121.9 billion, up 9.7% from the previous year. Revenue from x86 servers was up both in Japan and outside Japan. Revenue from network products was JPY 79.5 billion, down 19.8% from the previous year.

Revenue fell significantly, primarily in mobile phone base stations in Japan. We can expect the current severe conditions in our business with carriers to continue and we'll work on restructuring the business. We will also comment on this in the Management Direction Progress Review.

Operating profit was JPY 1 billion, down JPY 1 billion from the previous year. While results were hurt by lower revenue from network products, progress was made in cost efficiencies, including holding down development expenses which limited the decline in profit.

At the bottom of the page is Slide 12, Ubiquitous Solutions. Revenue was JPY 245.2 billion, down 23.5% from the previous year. Revenue fell by JPY 88 billion on the impact of business restructuring. 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 5% as enterprise PC revenue increased. The segment recorded an operating loss of JPY 2 billion, representing a deterioration of JPY 12.8 billion from the prior year. The impact of the restructuring was to reduce operating profit by about JPY 17 billion.

Other than that, operating profit rose on higher revenue from enterprise PCs and the consolidation of the management of upfront investments relating to AI and IoT, shifting them to Other/Elimination and Corporate as company-wide investments.

Please turn to the top of the next page, Slide 13. Device Solutions. Revenue was JPY 264.1 billion, down 5.5% from the prior year. Revenue for LSI devices was JPY 125.7 billion, down 12.6% from the previous year. There was weak demand for LSI devices used in smartphones. Revenue from electronic components was JPY 138.9 billion, a slight increase over the prior year.

Operating profit was JPY 2.2 billion, down JPY 5 billion from the previous year. In addition to the impact of lower revenue from LSI devices, profit declined on the impact of the high yen compared to the prior year. This is not included in the slides, but each segment performed more or less in accordance with our internal projections at the time of our previous announcement.

At the bottom of the page is Slide 14, cash flows. Total net cash provided by operating activities was JPY 46.2 billion. This represents a decrease in inflows of JPY 8.4 billion from the previous year, primarily stemming from higher income taxes paid on last year's income. Net cash provided by investing activities was JPY 1 billion. Cash inflows exceeded outflows because of the majority sale of the PC business and the sale of common shares in a company in China that, until last year, was an affiliate.

Free cash flow was JPY 47.3 billion.

Please turn to the top of the next page, Slide 15, Assets, Liabilities and Equity. Total equity was JPY 1,287.8 billion, an increase of JPY 82.9 billion from the end of the last fiscal year. Equity attributable to owners of the parent was JPY 1,166.9 billion. Equity attributable to owners of the parent ratio, shareholders' equity ratio, was 37.9%, an increase of 3.1 percentage points since the end of the last fiscal year.

Please turn to the bottom of the page, Slide 16. This is the financial forecast for fiscal 2018. Please first look at the bottom table, which shows our forecast for exchange rates in the second half, on which our financial forecast is predicated. We expect JPY 105 per dollar, JPY 130 per euro, and JPY 145 per pound, 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 trend towards yen weakness, but there are many uncertain factors and we want to continue to watch these trends.

The table at the top of the page is our financial forecast for the full fiscal year. Our forecast of revenue is JPY 3,900 billion; for operating profit is JPY 140 billion; and for profit for the year is JPY 110 billion. None has changed. This financial forecast is our forecast for profits from our core business. In the first half, we recorded gains on nonrecurring extraordinary items in the form of changes to our retirement benefit system and the majority sale of our PC business, but we are considering a variety of measures, including business model transformation measures so we have not made any changes to our full year financial forecast that would include any extraordinary items. When we have further details on the measures we will take and the financial impact they are likely to have, we will quickly explain them to you.

This concludes my presentation.