Fujitsu Ltd
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Earnings Call Transcript

Earnings Call Transcript
2020-Q2

from 0
T
Takeshi Isobe
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 2019. Please look at the bolded portion.

Revenue for the period was JPY 990 billion, an increase of JPY 23.1 billion from the previous year. The impact of the restructuring of our device business was a fall in revenue of JPY 47 billion due to revenue from certain companies no longer being consolidated.

Foreign exchange movements reduced revenue by JPY 18 billion due to the depreciation of the yen against the dollar, euro and pound. Excluding these factors, revenue increased by JPY 88 billion, an increase of 10%. Revenue increased significantly in Japan due to growth in services, system platforms and PCs. This significant increase exceeded the fall in revenue due to business restructuring and foreign exchange, resulting in an overall increase.

We recorded an operating profit of JPY 67.6 billion, an increase of JPY 51.9 billion from the previous year.

Operating profit, excluding special items and restructuring, increased JPY 46.9 billion, a significant increase, due not only to the impact of higher revenue from our businesses in Japan but also to continued improvements in profitability and greater efficiencies in operating expenses. The increase in operating profit due to restructuring and other special items amounts to JPY 5 billion.

There are 2 main factors. First, the positive impact of the restructuring of our device business amounts to JPY 2 billion. This reflects both the fact that onetime expenses relating to the restructuring recorded in the previous year did not recur this year, combined with the operating profits that were excluded from the consolidated results due to restructuring.

The second factor is a positive impact related to business model transformation in Europe, amounting to JPY 3 billion. As we continue to exit from unprofitable countries, there have been several cases of management buyouts and sales of businesses to business partners. So we have been able to clear part of the reserve set aside last year for severance expenses.

Below that, our financial income was JPY 6.8 billion, up JPY 2.3 billion from the previous year, primarily due to increases in equity in the earnings of affiliates. And the very bottom is profit for the period of JPY 56.5 billion.

Please turn to the top of the next page, Slide 5. This is a summary of consolidated results for the first half. For the first half, I would like to separate my explanation into 3 parts: performance, excluding special items and restructuring, business restructuring and special items.

First, performance, excluding special items and restructuring. Revenue was JPY 1.8287 trillion. Excluding the negative impact of foreign exchange movements, this is an increase of JPY 120.4 billion over the previous year, a rise of 6.9%. We saw significant growth in PCs and services in Japan.

Operating profit was JPY 74 billion, a significant increase of JPY 80.7 billion from the previous year. I will give a further breakdown with a waterfall chart a bit later on.

Second, business restructuring. I would like to comment on the revenue impact of excluding businesses from the consolidated results due to restructuring. The negative impact on revenue due to the restructuring of the device business conducted in the fourth quarter of the previous fiscal year was a fall of JPY 92.7 billion. In addition, our consumer PC business was included in our consolidated results through April last year and the negative revenue impact of this restructuring was a fall of JPY 7 billion.

Adding the 2, we see a negative impact of revenue of about JPY 100 billion.

Third are the special items. In the first half, there were 2 special items. First, there are expenses relating to the reorganization of electronic component factories in Japan conducted in the first quarter, resulting in a fall of operating profit of JPY 6 billion. Second, as mentioned earlier, there was a positive impact of JPY 3 billion due to revision to severance expenses in Europe. Thus, the total reduction in operating profit due to special factors is a fall of JPY 3 billion. In the first half of the previous year, we recorded significant onetime profits from factors such as a change to our retirement benefit system. So our overall operating profit for the first half fell by JPY 103.6 billion compared to the previous year, primarily due to the non-recurrence of the onetime profits.

At the very bottom of the table is our consolidated total operating profit of JPY 71 billion. Although operating profit excluding special items and restructuring grew significantly, this represents a fall of JPY 24.2 billion from the previous year due to the significant impact of special items in the previous year.

Next, please turn to the top of the next page, Slide 7. My previous explanation was broken into 3 parts, but this page shows the usual consolidated totals for profit and loss. I would like to give a further explanation of everything shown below operating profit.

In the upper table, right in the middle, we show financial income of JPY 9.7 billion, a fall of JPY 12.1 billion from the previous year. This reflects the onetime profits relating to the sale of the PC business recorded in the previous year.

At the very bottom, our profit for the period was JPY 63.6 billion.

Next, please look at the bottom of the page, Slide 8. This is a breakdown of the factors behind the changes in operating profit for the first half from the previous year.

On the far left, we show our operating profit for the first half of fiscal 2018 of JPY 95.2 billion. From here, if we deduct the JPY 101.9 billion in profits due to special items and restructuring in the previous year, operating loss for the first half of the previous year was a loss of JPY 6.6 billion. This is our starting point and subsequent arrows will reflect increases and decreases in operating profit in this first half compared to the previous year.

The next 3 arrows show increases, excluding special items. The first upward-facing arrow shows an increase of JPY 31.9 billion. This is the increase in profit due to the JPY 120 billion increase in revenue. Strong sales in Japan have continued from the second half of the previous year, resulting in a significant increase in revenue.

The second upward-facing arrow shows an increase of JPY 27.1 billion. This is the increase in profit due to profitability improvements.

In services, we have not only continued to improve development efficiency and solutions and system integration, we have also been able to limit losses due to unprofitable projects, both in and outside Japan.

In system products and Ubiquitous Solutions, profitability improvements have continued, primarily due to lower costs from lower prices on key components.

The third upward-facing arrow shows an increase of JPY 21.6 billion. This reflects not only the impact of limiting fixed expenses due to the resource shift but also continued efficiency improvements in operating expenses, including a downsizing of our indirect or administrative operations and upfront investments.

Combining the 3 arrows, the total was an increase of JPY 80.7 billion. This reflects a total improvement in technology solutions, our core segment and Other/Elimination and Corporate of about JPY 60 billion, while in Ubiquitous Solutions, we saw an improvement of about JPY 20 billion.

Finally, the downward-facing arrow represents the fall in operating profit of JPY 3 billion due to the impact of special items in the first half. Adding that all together, the total operating profit for the period is JPY 71 billion.

I would like to give a further explanation of revenue, excluding restructuring and foreign exchange effect. So please turn to the top of the next page, Slide 9.

Revenue in Japan grew significantly, primarily in services and Ubiquitous Solutions. Revenue in Japan was JPY 146.4 billion, an increase of 14% from the previous year. Below is a breakdown of that revenue.

Revenue from Technology Solutions in Japan grew by 10% over the previous year. Services saw significant revenue growth, primarily in solutions and system integration. Revenue from Ubiquitous Solutions, excluding restructuring, increased 34% over the previous year. Revenue increased significantly, not only because of the end of the support period for Windows 7 but also because of the resolution of problems with insufficient supplies of key components.

Let us next move to the bottom of the page, Slide 10. I would like to give some further information on the status of incoming orders, which is supporting our strong sales in Japan.

For Fujitsu Limited, on an unconsolidated basis, incoming orders for the first half grew 11%. Orders for all industries exceeded those received in the previous year, many of them by more than 10%, remaining on a strong upward trend from the previous year. In addition to modernization projects aimed at adding functionality to a customer's existing assets or at increasing the efficiency of operations, we made strides in our initiatives to transform operations, particularly our efforts to reform work style, with strong demand continuing into the first half of the year.

Next, I would like to comment on the effects of the business model transformation carried out last year. This also contributed to our increased efficiency in operating expenses.

Please turn to the top of the next page, Slide 11. First, the impact of the reduction in fixed expenses related to the resource shift was JPY 10 billion in the first half. The breakdown by segment is shown in the table. The impact of the restructuring of factories in Japan was JPY 1 billion. The total impact of the business model transformation in the first half was JPY 11 billion.

As for the business model transformation in Europe, our various programs are proceeding on schedule, including exiting from unprofitable countries and the closure of the factory in Augsburg.

We are working toward completion in the first half of 2020, and we plan to see the impact of the transformation starting in the second half of 2020.

Next, please look at the bottom of the page, Slide 12. This shows revenues and operating profits for each segment. The top table shows revenue. Please look at the breakdown compared with the previous year.

Excluding restructuring and foreign exchange effect, revenue rose in all segments, particularly services and Ubiquitous Solutions. The bottom table shows operating profit. Again, please look at the comparison with the previous year, excluding special items and restructuring and foreign exchange effect. While Device Solutions has declined somewhat from the previous year, all other segments have seen increases in profits over the previous year.

Next, please turn to the top of the next page, Slide 13. 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 1.4546 trillion, an increase of 3.2% over the previous year. Operating profit was JPY 96.5 billion, up JPY 48.6 billion from last year.

I will explain the details in my discussion of the subsegments.

Next, please look at the bottom of the page, Slide 14, the breakdown of the subsegments.

First, Services. Revenue was JPY 1.2536 trillion, an increase of 3.8% from the prior year. To break that down further, revenue from solutions and system integration was JPY 567.5 billion, an increase of 14.8% over last year. This is also our highest-ever revenue for the first half of the fiscal year. We continue to see very strong sales to customers in the manufacturing and distribution sectors, supporting sustained growth.

In this first half, we also saw growth in the local government and health care fields, with major public sector projects maintaining a similar scale to the previous year, resulting in significant overall growth.

Revenue from infrastructure services was JPY 686 billion, down 3.8% from the previous year. While revenue in Japan remains 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 72.4 billion, up JPY 25.6 billion from the previous year.

In Japan, operating profit rose significantly due to the effects of higher revenue from solutions and system integration as well as improved profitability. In addition to improving the efficiency of the development process such as through greater use of offshoring, we were also able to keep losses from unprofitable projects to a low level with thorough assurance activities.

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

Next, please turn to the top of the next page, Slide 15, System Platforms. Revenue was JPY 201 billion, more or less in line with the prior year. Excluding foreign exchange impacts, revenue rose 0.9%. To break that down further, revenue from system products was JPY 120 billion, down 1.6% from the previous year. Excluding the impact of foreign exchange, revenue was more or less in line with the prior year. Revenue from x86 service fell, not only due to the impact of foreign exchange but also due to the fact that a large-scale public sector business deal was recorded in the previous year, while revenue from mainframes rose. Revenue from network products was JPY 81 billion, up 1.8% from the previous year. Revenue rose, in part due to carriers starting to purchase base stations for 5G preservices, but also with several contracts for improvements in optical transmission networks in advance of the full-scale 5G rollout. The purchase of base stations in the second quarter are beginning and will subsequently lead to expanded 5G business deals as deployment ramps up.

Operating profit was JPY 24.1 billion, an improvement of JPY 23 billion from the previous year. There are 3 main factors that contributed to this boost in operating profit. The first is improvements in the profitability of system products. This improvement is due not only to improvements in our product mix, such as an increase in large mainframe orders from customers, but also because of cost reductions stemming from lower prices for key components.

The second factor is the effect of higher revenue in network products.

The third is greater efficiencies in operating expenses.

At the bottom of the page is Slide 16, Ubiquitous Solutions. Revenue was JPY 292.3 billion, up 19.2% from the previous year. Excluding the effects of restructuring and foreign exchange movements, revenue rose 24.2%. Revenue grew significantly with high demand for replacement PCs in response to the end of the support period for Windows 7 as well as the resolution of supply problems for key components.

The segment recorded an operating profit of JPY 19.7 billion, representing an improvement of JPY 21.8 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 the next page is Slide 17, Device Solutions. Revenue was JPY 171.7 billion. This is a significant decline 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 electronics component manufacturing company from the consolidated results as of the first quarter of last year contributed to a decline in revenues of JPY 93 billion. Excluding that, revenue is essentially unchanged from the previous year.

The segment posted an operating loss of JPY 6.6 billion, a deterioration of JPY 8.9 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. Excluding this, results were negatively affected by lower demand for electronic components and the effects of foreign exchange movements.

As for the Mie plant for semiconductors. The sale was completed as scheduled on October 1. It will no longer be consolidated starting in the second half of this fiscal year.

At the bottom of the page is Slide 18, Other/Elimination and Corporate. In this segment, we record upfront investments that are shared company-wide and shared company-wide expenses that cannot be allocated to other segments.

Excluding special items, the results for the first half were an operating loss of JPY 38.6 billion, an improvement of JPY 14.8 billion from the previous year. In addition to the effect of lower fixed costs because of the resource shift, we made progress in reducing indirect overhead costs.

In addition, while pursuing selection and concentration in upfront investments, there were also projects that shifted out of the investment phase into the revenue-generating phase, leading to a larger reduction in overall costs.

Below that, you can see special items. In the first half of the previous year, we recorded onetime gains on a revision to the retirement benefit plan and a gain on the sale of businesses. In the second half of the previous year, we recorded expenses relating to the resource shift.

At the bottom are the total figures.

At the top of the next page is Slide 19, cash flows. Cash flows from operating activities were JPY 115.2 billion. This represents a net increase in inflows of JPY 68.9 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 half.

In addition, the revenue level in the first half was also high. As a result of these factors, net cash inflows increased. In addition, as a result of adoption of IFRS 16 leases, cash flows from operating activities increased by approximately JPY 28 billion.

Cash flows from investing activities were a net outflow of JPY 47.8 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 half was about the same level as previous year.

Free cash flow was JPY 67.3 billion.

At the bottom of the page is Slide 20, assets, liabilities and equity. At the end of the first half of fiscal 2019, total equity was JPY 1.287 trillion, an increase of JPY 33.4 billion from the end of the previous year. The main reasons for the increase are the increase in profits for the first half and fluctuations in the payment of dividends. Equity attributable to owners of the parent was JPY 1.170 trillion. Equity attributable to owners of the parent ratio, shareholders' equity ratio was 37.6%, an increase of 1.1 percentage points since the end of the last fiscal year.

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, compared to the internal projections publicly stated last time, we exceeded our projections in the second quarter by JPY 15 billion. If we add the amount we exceeded internal projections in the first quarter compared to our internal projections at the beginning of the year, we have exceeded our projections for the first half by JPY 20 billion. Broken out by segment, Technology Solutions exceeded our projections by JPY 10 billion. By subsegment, services in Japan exceeded projections by JPY 5 billion, mainly in solutions and system integrations. System products also exceeded projections by JPY 5 billion. Ubiquitous Solutions exceeded projections by JPY 10 billion.

Please turn to the top of the next page to Slide 21.

This is the full year financial forecast for fiscal 2019. This time, we have changed our full year financial forecast. The new revenue forecast is JPY 3.800 trillion, an increase of JPY 50 billion. The new operating profit forecast is JPY 160 billion, an increase of JPY 30 billion.

The new forecast for profit for the year is JPY 125 billion, an increase of JPY 20 billion. Each has been adjusted upwards.

I will explain the main reasons for the upward adjustments. We factored in higher demand and improved profitability in services in Japan and system products in Technology Solutions as well as in the Ubiquitous Solutions. We adjusted operating profit upward by JPY 10 billion each in services in Japan, system products and Ubiquitous Solutions.

I will comment on the details of these adjustments with separate pages for each segment or subsegment. Please turn to the bottom of the next page, to Slide 24, the Services subsegment and Technology Solutions. We have increased our revenue forecast by JPY 20 billion. That breaks down as follows. The forecast for solutions and system integration has been increased by JPY 35 billion. In light of orders received in the first half and continued strong revenue performance, we are increasing our revenue forecast for the entire year. The forecast for infrastructure services has been reduced by JPY 15 billion. This reduction reflects the continued greater-than-expected impact of the strong yen on services outside Japan in the first half. Excluding foreign exchange impacts, our forecast has not changed.

For operating profit, we have increased the forecast by JPY 10 billion. As I mentioned earlier, profits have exceeded our forecast from the beginning of the year by JPY 5 billion due to increased demand and improvements in profitability. We expect this situation to continue into the second half. So we have increased our forecast by JPY 5 billion.

Next, please turn to the top of the next page, Slide 25. This is the breakdown for System Platforms. We have increased our revenue forecast by JPY 10 billion due to increased prospects for system products. Here again, we have increased the full year revenue forecast in light of orders received in Japan in the first half and continued strong revenue performance.

For operating profit, we have increased the forecast by JPY 10 billion. Profit from the first half exceeded our initial estimates by JPY 5 billion. The increase in overall demand and the reduction in the prices of key components both exceeded our assumptions when the forecasts were made. We expect these factors to continue into the second half as well. So we are increasing the forecast by JPY 5 billion.

For network products, forecast for both revenue and profit are unchanged from the previously announced forecast.

Next, please look at the bottom of the page, Slide 26. This is Ubiquitous Solutions. The forecast for revenue has been adjusted upward by JPY 20 billion. Compared to our assumptions and our internal projections at the beginning of the year, market demand is strong. So we have adjusted our full year revenue forecast. In particular, orders and upgrade purchases relating to the Windows 7 issue got off to a much faster start than we had assumed. And there was also an increase in revenue from small-scale deals in the first half, which we believe were purchases made in advance of the recent increase in the consumption tax in Japan. The forecast for operating profit has been adjusted upward by JPY 10 billion.

Compared to our internal projections at the beginning of the year, operating profit was up by JPY 10 billion in the first half, and we expect it to be in line with our projections in the second half.

For the second half, we took into consideration that discussions about the purchase upgrades are over and sales prices might have to be lowered, stemming from the decline in prices of key components.

Please turn to the bottom of the next page, to Slide 28. The full year forecast for cash flow. Our new forecast for free cash flow is JPY 100 billion, an increase from the previous forecast of JPY 50 billion. In addition to our expectation of higher profits, the upward adjustment reflects the fact that revenue in the first half of fiscal 2019 was much higher than in the previous year. Our business in the first half was very strong, particularly our business in Japan, and we will work hard to meet our targets for the second half.

This concludes my presentation.