Fujitsu Ltd

TSE:6702

Earnings Call Transcript 2019-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, Slide 3. This is an overview of our consolidated financial results for the third quarter of fiscal 2018. Please look at the bolded portion.

Revenue for the period was JPY 977.3 billion, down JPY 25.8 billion from the previous year. The reduction in revenue stemming from business restructuring was about JPY 37 billion. 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 this restructuring, revenue rose by about JPY 11 billion from the previous year.

Results were impacted by a decline in demand for network products and LSI devices. But revenue rose on growth in services in Japan, primarily in system integration services. We recorded an operating loss of JPY 28.7 billion, a deterioration of JPY 39.2 billion from the previous year. Excluding the impact of special items, operating profit rose by about JPY 9 billion.

In our Technology Solutions business in Japan, profit increased in both services and products. With regard to special items, their impact reduced operating profit by JPY 48.1 billion. I will provide further details on how this breaks down later on with a waterfall chart. So at this point, I will just comment on the JPY 43.6 billion in business model transformation expenses recorded in the third quarter.

This consists of 2 parts: First, we recorded about JPY 39 billion in expenses related to the restructuring of our product business in Europe, the majority of which were expenses related to the closure of our plant in Augsburg, Germany. We are continuing to reorganize the structure that had development and manufacturing distributed across Europe and Japan with the aim of speeding up decision-making and improving efficiency, thereby strengthening the structure of our product business.

Second, we recorded about JPY 4.5 billion in expenses relating to reorganizing our manufacturing structure. We are continuing to restructure the manufacturing locations that supply molded components and accessories for products such as PCs and mobile phones.

Below that, our financial income was JPY 2.8 billion, a rise of JPY 0.3 billion over the previous year. At the very bottom is our loss for the period of JPY 29.6 billion.

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 2,811.8 billion, a decrease of JPY 114.5 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 about JPY 125 billion. Excluding the impact of this restructuring, revenue rose from the previous year as growth in services in Japan, in particular, was able to cover the impact of the lower demand for network products and LSI devices. Operating profit was JPY 66.5 billion, an increase of JPY 28 billion over the previous year.

I would like to comment on the impact of special items. There was a positive impact of about JPY 90 billion as a result of changes in our retirement benefit system, a negative impact of about JPY 44 billion due to the business model transformation expenses and a negative impact of about JPY 28 billion relating to the business divestitures, which is the net impact of both the impact of the restructuring of the PC and mobile phone businesses and the onetime gains from business divestitures. Excluding these special items, operating profit increased by about JPY 9 billion, which is essentially the amount it increased in the third quarter.

Below that, financial income and expenses amounted to income of JPY 24.8 billion, a decrease of JPY 9 billion from the previous year. Although we recorded JPY 11.5 billion as a onetime gain from the sale of the PC business, income fell due to the larger impact of the JPY 27.3 billion in gains recorded last year from the sale of shares, in line with the unwinding of cross-shareholdings. At the very bottom is profit for the period, which was JPY 51.4 billion.

Next, please turn to the top of the next page, Slide 7. I would like to comment on the major factors behind the change in operating profit for the third quarter compared to the previous year using as our starting point the operating profit for the third quarter of fiscal 2017 of JPY 10.5 billion.

First, there is the increase in operating profit excluding special items of about JPY 9 billion, the arrow pointing upward. Excluding special items, adding business profit to the operating profit from last year gives us a total of JPY 19.5 billion.

From here, we have the negative impact on operating profit due to special items. The impact of the JPY 43.6 billion in business model transformation expenses recorded this quarter is the first downward-facing arrow. The next downward arrow represents a loss of JPY 4.5 billion due to other special items. This is the impact of the restructuring of the PC and mobile phone businesses as well as the impact of higher pension plan contributions relating to changes in the retirement benefit plan.

Please look at the bottom of the page, Slide 8. This shows revenue and operating profit for each segment. Please look at the bottom table on operating profit. 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 the third quarter was a deterioration of JPY 7.5 billion from the previous year. This is primarily due to the impact of concentrating AI-related investments as companywide investments.

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 764.3 billion, an increase of 3.3% over the previous year. Operating profit was JPY 18.9 billion, down JPY 10.5 billion from last year. The major reason for the fall in operating profit was the recording of business model transformation expenses. I will explain the details 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 661.3 billion, an increase of 3.8% from the prior year. Revenue from solutions and system integration services was JPY 268.8 billion, an increase of 10.6% over last year.

Continuing on from the first half, we set a new record for revenue in the third quarter as well, led by projects in the public sector as well as in the manufacturing field and the retailing and distribution field. We saw significant growth in the public sector business, not only successfully winning large-scale projects as expected but also steadily building up a number of small- and medium-scale business deals.

In the manufacturing field and the retail and distribution field, which had already seen strong sales in the previous year, we were able to build up even greater results. There was also an increase in our order backlog, so we expect to set a new record for revenue on an annual basis as well.

Revenue from infrastructure services was JPY 392.4 billion, more or less in line with the previous year. While revenue in Japan remains strong, revenue in Europe and the U.S. fell short of expectations, essentially remaining at the same level as the previous year.

Operating income was JPY 37.4 billion, up JPY 7.7 billion from the prior year. Operating profit increased primarily because of the impact of higher revenue in Japan. Outside of Japan, while conditions have improved slightly from the previous year, they are still severe, falling below our expectations which had expected growth in the services business.

As I commented in our management direction progress review in October, we are implementing structural reforms in Europe. With regard to the restructuring of our product business, we have decided on the details and moved to the execution phase. We are also in the midst of determining the details of policy with regard to services as well, and we would ask for your patience at the moment.

At the top of the next page is Slide 11, System Platforms. Revenue was JPY 103 billion, essentially unchanged from the prior year. Revenue from system products was JPY 57.4 billion, up 5.1% from the previous year. In addition to higher revenue from x86 servers, both in and outside Japan, there was higher revenue from software.

Revenue from network products was JPY 45.6 billion, down 6.1% from previous year. Revenue from mobile phone base stations and other products in Japan continue to be weak in the third quarter, resulting in lower revenue.

The operating loss was JPY 18.5 billion, a deterioration of JPY 18.3 billion from the previous year. The impact of business model transformation expenses reduced operating profit by JPY 23.2 billion. Excluding this impact, operating profit increased by JPY 5 billion from the prior year.

In system products, in addition to the positive impact of higher revenue from x86 servers, operating profit increased from a beneficial shift in product mix with higher revenue from software. In network products, while results were adversely impacted by lower revenue, progress was made in raising efficiencies, primarily in product development expenses, leaving operating profit essentially unchanged from the prior year.

At the bottom of the page is Slide 12, Ubiquitous Solutions. Revenue was JPY 123.1 billion, down 25.8% from the previous year. The impact of business restructuring lowered revenue by JPY 37 billion. 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 fell by about 4.5% as enterprise PC revenue in Europe declined.

The segment recorded an operating loss of JPY 18.6 billion, representing a deterioration of JPY 19.5 billion from the prior year. Business model transformation expenses of JPY 18.6 billion were recorded. Excluding that impact, operating profit for the segment was essentially at a breakeven level.

Please turn to the top of the next page, Slide 13, Device Solutions. Revenue was JPY 133.1 billion, down 6.1% from the prior year. Revenue for LSI devices was JPY 64.7 billion, down 6% from the previous year. There was weak demand for LSI devices used in smartphones.

Revenue from electronic components was JPY 68.6 billion, down 6.2% from the prior year. Revenue was weak with regard to components used in semiconductor manufacturing equipment and PCs.

Operating profit was JPY 2.6 billion, down JPY 1.5 billion from the previous year. In addition to the impact of lower demand for LSI devices and electronic components, profit declined because of the expenses recorded to restructure our manufacturing organization.

While this is not in the materials, I would like to comment on our progress in relation to our internal plan. In comparison with the internal plan of last October, our overall consolidated results are essentially as we anticipated.

Within the segments, some areas outperformed while other areas underperformed. Performance in services outside Japan and in Device Solutions was slightly below our plan. On the other hand, mainly in services in Japan, we exceeded our expectations, resulting in overall results being essentially in line with our plan.

Next, at the bottom of the page is Slide 14, cash flows. Cash flows from operating activities for the first 9 months was JPY 16.3 billion. This represents a net decrease in inflows of JPY 54.5 billion from the previous year, primarily stemming from higher income taxes paid on last year's income and an increase in inventories associated with large-scale business deals that will close in the fourth quarter.

Cash flows from investing activities was JPY 17.1 billion. Cash inflows exceeded our outflows because of the majority sale of the PC business and the semiconductor subsidiary and because of the unwinding in cross-shareholdings. Free cash flow was JPY 33.4 billion.

Please turn to the top of the next page, to Slide 15, assets, liabilities and equity. Total equity was JPY 1,187.1 billion, a decrease of JPY 17.7 billion from the end of the last fiscal year. Equity attributable to owners of the parent was JPY 1,066.4 billion. Equity attributable to owners of the parent ratio, shareholders' equity ratio, was 35.6%, an improvement of 0.8 of a percentage point since the end of the last fiscal year.

Please turn to the bottom of the page, to Slide 16. This is the full year financial forecast for fiscal 2018. Please first look at the bottom table, which shows our forecast for exchange rates for the fourth quarter 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.

The table at the top of the page is our financial forecast for the full fiscal year. Our forecast for revenue is JPY 3,900 billion; for operating profit, JPY 140 billion; and for the profit for the year, JPY 110 billion. None of these forecasts have changed. This financial forecast is our outlook for profit excluding any special items.

Please turn to the top of the next page, to Slide 17, our earnings forecast by business segment. Excluding special items, there have been no changes to our forecasts for any of the business segments.

To the right of the column in the middle with the bold outline, we have put in the changes from the previous forecast, but all of these figures simply represent the business model transformation expenses recorded in the third quarter and the impact of reallocating them from Other/Elimination and Corporate.

I would like to comment further on our business excluding special items. As planned from the beginning of the year, we are winning the large-scale business deals that will result in revenue in the fourth quarter. Including these deals, the balance of business orders in Japan for services and products is increasing. While ensuring that we convert the deals we have won into revenue, we are working on winning new deals and holding down operating expenses through greater efficiencies in order to meet our full year targets.

Regarding our business model transformation, as we mentioned at our management direction progress review briefing, we are at the stage of working out the details for each program. We are moving forward, resolved to make significant progress during the fiscal year, and we will inform you of our progress as soon as the details of any of these programs have been determined. Thank you for your attention.