Fujitsu Ltd

TSE:6702

Earnings Call Transcript 2018-Q3

[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 to Slide 3. This is an overview of our consolidated financial results for the third quarter of fiscal 2017.

Please look at the bolded sections. Revenue for the period was JPY 1,003,100,000,000, a fall of JPY 17.6 billion from the previous year. The reduction in revenue due to the sale of Nifty's consumer business was about JPY 13 billion. Even excluding this impact, revenue fell slightly from the previous year.

Despite the effects of higher revenue from increased PC sales and the continued weak yen, this was not able to make up for the fall in the unit sales of network products and mobile phones, which did particularly well in the third quarter of last year.

We recorded an operating profit of JPY 10.5 billion, a decrease of JPY 23.8 billion from the previous year.

Business model transformation expenses recorded in the third quarter of last year amounted to JPY 7.4 billion.

Excluding this, on an actual business basis, operating profit fell by JPY 31.2 billion. In addition to the impact of lower revenue from network products and mobile phones, the recording of onetime losses in Services also contributed to the loss.

Below that, profit for the period before income taxes was JPY 13 billion. The bottom of the table shows the profit for the period attributable to the owners of the parent of JPY 11.9 billion. This includes a gain of about JPY 4 billion from the change in the percentage of our ownership in FUJITSU TEN.

Please turn to the top of the next page, Slide 5. These are the financial results for the first 9 months.

Revenue for the first 9 months was JPY 2,926,300,000,000, more or less on par with the previous year. The impact of lower revenue from the sale of Nifty was about JPY 39 billion. Excluding this, revenue rose by about JPY 37 billion due to higher sales of Services in Japan and Device Solutions in addition to the impact of the weak yen despite the impact of lower revenue from network products.

Operating profit was JPY 38.5 billion, a fall of JPY 15.9 billion from the previous year. The effect of higher profit due to special items, such as the sale of shares as well as the lack of business model transformation expenses that were carried out in the previous year, amounted to JPY 16.4 billion. Excluding this, on an actual business basis, operating profit fell by JPY 32.3 billion. This is more or less the amount that operating profit fell in the third quarter.

Below that, financial income and expenses, et cetera, amounted to income up JPY 33.8 billion, an increase of JPY 29 billion over the previous year. This is primarily due to a JPY 27.3 billion gain on the sale of Fuji Electric shares carried out in the second quarter.

Profit for the period was JPY 55.4 billion. This is an increase of JPY 23.1 billion over the previous year due to a gain from the change in the proportion of shares held in FUJITSU TEN in addition to the financial income.

Next, please turn to the top of the next page, Slide 7. This is the breakdown by segment. The upper table shows revenue. On the far right side of the table, please look at the comparison with the previous year at Technology Solutions. Revenue from Services declined because of the sale of Nifty. But excluding that, revenue increased by 1.6%. Revenue from System Platforms declined, primarily in network products. Revenue from Ubiquitous and Device Solutions increased.

Next is the bottom of the table, operating profit. Here, I would like to make one comment on the comparison with the previous year for Other/Elimination and Corporate. There is an improvement of JPY 3.1 billion compared with the previous year. This is primarily due to the improvement in upfront investment expenses across the whole company.

Please look at the bottom of the page, Slide 8. This is the segment information for Technology Solutions. Revenue was JPY 740.1 billion, a fall of 3.2% from the previous year.

Operating profit was JPY 29.5 billion, down JPY 21.1 billion from the previous year. I will discuss the relevant factors in the subsegments.

At the top of the next page is Slide 9. This is Services. Revenue was JPY 636.9 billion, essentially unchanged from the previous year. Excluding the impact of the sale of Nifty, revenue rose by 1.6%.

Within that, revenue from solutions and systems integration services was JPY 243.1 billion, a fall of 3% from the previous year.

In addition to the impact of a large-scale project in the financial services field and the development of My Number projects in the public sector passing their peak, we were unable to compensate for the fall in revenue in -- for the All-in-One hardware solutions business, which was strong last year.

Although revenue fell for the third quarter, we have been able to maintain a high level of revenues, the second highest to date. There were concerns that fiscal 2017, which fell into an off-season for large-scale projects, would see significant declines in revenue, but we have been able to make up the difference, primarily in the manufacturing industry and retailing and distribution industry. Orders for our systems engineering business for this fiscal year have exceeded the revenue, so we see this fall in revenue is a temporary phenomenon.

Revenue from infrastructure services was JPY 393.7 billion. Excluding the impact of the sale of Nifty, this represented an increase of 4.6%. In Japan, revenue was solid, particularly from outsourcing services. Outside Japan, the effect of the weaker yen contributed to increased revenue.

Operating profit was JPY 29.7 billion, down JPY 5.2 billion from the previous year. Last year, we recorded business model transformation expenses of JPY 5.8 billion. Excluding that amount, on an actual business basis, operating profit fell by JPY 11 billion.

There are 2 factors behind the fall in operating profit. The first is the impact of lower revenue from solutions and system integration services. The second is the impact of unprofitable projects, both inside and outside Japan. Inside Japan, as revenues continued to be generated at high levels, our profitability management for certain projects, primarily for replacing competitor services, turned out to be insufficient. We are conducting a reexamination of our quality assurance process and implementing measures to prevent this from happening again.

I would like to offer additional information about profits outside Japan. Operating profit fell in Europe due to onetime losses recorded in conjunction with an unprofitable project. In Oceania and Asia, operating profit rose due to continued improvements in profitability.

At the bottom of the page is Slide 10, System Platforms. Revenue was JPY 103.2 billion, down 17.6% from the prior year. Revenue from system products was JPY 54.5 billion, more or less the same as the previous year. Revenue from network products was JPY 48.6 billion, down 30% from the previous year.

In addition to the effect of lower revenue from mobile phone base stations in Japan, which had been strong in the second and third quarters of last year, revenue was also impacted by the increased severity of the competitive environment.

Demand in Q3 was weaker than we originally expected. There was an operating loss of JPY 0.1 billion, a fall of JPY 15.8 billion from the previous year. This was primarily due to the significant impact of reduced revenue in network products.

Next, at the top of the next page, Slide 11, is Ubiquitous Solutions. Revenue was JPY 165.9 billion, up 1.4% from the previous year. For PCs, revenue increased over the previous year. Revenue in Japan rose due to growth in enterprise sales. Outside Japan, despite an environment of fierce competition with other vendors, revenue rose, in part due to the impact of the weaker yen.

Revenue from mobile phones fell from the previous year. This is due to a significant reduction in units shipped for feature phones in the Raku-Raku series.

The segment recorded an operating profit of JPY 0.9 billion, down JPY 5.7 billion from the prior year. In addition to the impact of lower revenue from mobile phones, both PCs and mobile phones were impacted by higher market prices of key components such as memory.

At the bottom of the page is Slide 12, Device Solutions. Revenue was JPY 141.7 billion, up 3.4% from the prior year. Revenue for LSI devices was JPY 68.9 billion, more or less the same as the previous year. Revenue from electronic components was JPY 73.1 billion, up 5.6% over the previous year. This was primarily due to the effect of the weak yen increasing revenue.

Operating profit was JPY 4.2 billion, more or less the same as the previous year.

It is not in your materials, but I would like to comment on our third quarter performance in relation to the internal targets for operating profit announced in October. For the company as a whole, we have fallen behind our targets by around JPY 5 billion to JPY 9 billion, primarily due to Services and network products.

Services has missed its targets by several billion yen due both to the impact of unprofitable projects and to the fact that the expansion in business and increased efficiency we expected from the implementation of our business model transformation outside Japan has not reached expected levels. As I mentioned earlier, the third quarter targets for network products were set quite low to begin with, but results here were also several billion yen.

Please turn to the top of the next page, Slide 13, cash flows. Total net cash provided by operating activities for the first 9 months was JPY 70.9 billion. This represents a fall in inflows of JPY 23.2 billion over the previous year, due in part to the fact that outflows for the business model transformation expenses that were recorded last year, actually occurred in this fiscal year.

Net cash used in investing activities was JPY 37.5 billion. This was centered on investments in the Services subsegments, such as data center-related investments. In addition to the fact that we spent a large amount on data centers in the previous year, our outflows fell significantly from the previous year due to the impact of the JPY 33.6 billion in proceeds from the sale of shares in Fuji Electric this period. Free cash flow was JPY 33.3 billion.

At the bottom of the page is Slide 14, assets, liabilities and equity. Total equity was JPY 1,119,900,000,000, an increase of JPY 100.7 billion from the end of the last fiscal year. Equity attributable to owners of the parent ratio, shareholders' equity ratio was 33.4%, an increase of 5.8 percentage points since the end of the last fiscal year. We were able to improve this ratio significantly due not only to higher profits for the period attributable to the owners of the parent but also to a recovery in market conditions, including stock prices and foreign exchange.

Please turn to the top of the next page, to Slide 15, financial forecast for fiscal 2017. First, please look at the bottom table. These are the exchange rates on which our forecast is predicated. There has been no change from our projected rates set out previously.

Next, in the top table is our full year financial forecast. There've been no changes to our forecast since our previous announcement. Our forecast for revenue is JPY 4,100,000,000,000. The forecast for operating profit is JPY 185 billion, and our forecast for profit for the year attributable to the owners of the parent is JPY 145 billion.

Please turn to the bottom of the page to Slide 16, financial forecast by segment. I would like to make a few comments on operating profit at the bottom. We have made changes in 3 places: to Services and System Platforms under Technology Solutions; and to Other/Elimination and Corporate. We have reduced the forecast for Technology Solutions by JPY 30 billion. I will give further details for each segment later on, but the forecast for Services outside of Japan and network products have each been reduced by JPY 15 billion.

At the same time, we have increased the forecast for Other/Elimination and Corporate by JPY 30 billion, so there has been no change to the previous forecast for the company as a whole. This represents an amount that takes into consideration factors relating to the sale of our mobile phone business announced today, including profits and risks.

Please turn to the slide at the bottom of the next page, Slide 18, Technology Solutions Services. Our current forecast for revenue is JPY 2,610,000,000,000. This is an increase of JPY 40 billion from the previous forecasts. We have increased the forecast to account for the impact of the continued weak yen on results from the first quarter through the third quarter.

Next, for operating profit, we have lowered our forecast to JPY 187 billion, a reduction of JPY 15 billion. This is due to a reduction in the forecast for Services outside Japan.

In addition to onetime losses due to unprofitable projects and a legal dispute in Europe, we have reduced the forecast for the fourth quarter because the expansion in business and increased efficiency expected from our business model transformation have been slow to arrive. In Europe, there have been signs that the effects of the transformation are beginning to come into view, including orders beginning to pick up. And we are strengthening progress management to ensure that those results arrive.

Please turn to the slide at the top of the next page, Slide 19, System Platforms. The forecast for revenue is JPY 475 billion, a reduction of JPY 25 billion from the previous forecast. The forecast for operating profit is JPY 33 billion, a reduction of JPY 15 billion from the previous forecast. Both revenue and operating profit forecasts have been reduced for network products.

While demand was strong in the second and third quarters last fiscal year, we projected that this fiscal year, demand would be weak in the second and third quarters but would increase greatly in the fourth quarter.

Taking into consideration the investment situation of our customers in the third quarter, however, we expect that demand recovery in the fourth quarter will be subject to severe conditions as well, so we have revised our forecast.

We expect that severe conditions will continue until 5G begins rolling out in earnest, so it will be necessary for us to carefully ascertain a realistic level for customer demand, both inside and outside Japan, for the next fiscal year and beyond. There have been no changes to the forecast for either Ubiquitous Solutions or Device Solutions.

Please turn pages to Slide 22, which is at the bottom, cash flows. Due to the deterioration in profits in our core business, we have reduced the forecast for cash flows from operating activities by JPY 30 billion from the previous forecast. Taking into consideration the sale of our mobile phone business, among other factors, we have revised the forecast for our cash flows from investing activities by JPY 30 billion. There has been no change to our forecast for free cash flow of JPY 120 billion.

Finally, I would like to add a few words about transforming our business structure, as mentioned in the previous management direction progress review.

Continuing on our strategic partnership with Lenovo with regard to our PC business announced in November, today, we announced that we have agreed to transfer our mobile phone business to Polaris Capital Group. We are working toward concluding the transfer of our mobile phone business during this fiscal year. I will immediately update you if any further progress is made on our initiatives.

This concludes my presentation on our financial results.