Fujitsu Limited (6702) Earnings Call Transcript

[Interpreted] First of all, I'd like to extend my heartfelt sympathies to everyone affected by the 2026 Kumamoto earthquake that occurred on the 28th of July. The Fujitsu Group will also provide support for the affected areas towards the earliest possible recovery. Now I'd like to explain the financial results for the first quarter fiscal 2026. This page shows an overview of our financial results for the first quarter fiscal '26. The top half of the slide shows Service Solutions. Revenue for the first quarter was JPY 548.9 billion, up 6.7% year-on-year. Out of this, revenue from Japan business was up 7.5%. Service Solutions growth was mainly driven by Uvance and the modernization business. The segment got off to a strong start. Adjusted operating profit was JPY 62.8 billion, up JPY 14.9 billion year-on-year, an increase of 31%. In addition to benefit of higher revenue, we also were able to continue making steady progress in improving profitability. This led to adjusted operating profit margin of 11.4%, improvement of 2.1 percentage point. Bottom half shows the overview of the consolidated total results. Revenue JPY 779.3 billion, up 3.9% year-on-year. Revenue increased in Service Solutions and Hardware Solutions. Ubiquitous Solutions, on the other hand, saw a decline in revenue because of the pullback from the demand for updating Windows software. Adjusted operating profit was JPY 54.9 billion, up JPY 19.7 billion year-on-year, increase of 56%. In addition to the profit increase in Service Solutions, we also recorded a gain on the sale of assets related to Fujitsu Technology Park. Adjusted operating profit was up margin was 7.0%, up 2.3%. Next page shows the overview of the results of each segment. I will go through the results of each segment in detail. As I mentioned, Service Solutions growth driver continued to record higher revenue and profit. Hardware Solutions revenue increased mainly due to the effect of foreign exchange movement in business in Japan. This was despite the decline in revenue in Japan due to pullback of large volume business deals last year. Profit declined due to lower profitability resulting from the changes in revenue composition and the slight delay in passing the cost pass-through. Below that, RIKEN Solutions recorded lower revenue and profit because of the absence of the demand from a discontinuation of support for Windows SE. Intersegment elimination and corporate was a significant improvement from the previous year. And this was mainly because of the development of Fujitsu Kawasaki office area. The next page shows consolidated P&L, the adjusted consolidated results. As I explained already, but there is one point I'd like to mention. In the first quarter of fiscal '25, we recorded a gain of approximately JPY 140 billion from the sale of shares of Shinko Electric and also absence of onetime gain resulted in a significant decline in net profit. Page 7 on the Service Solutions. I will go over Service Solutions. Revenue was JPY 548.9 billion, up 6.7%. As in the previous year, [indiscernible] and modernization continued to drive growth. Revenue in the Enterprise subsegment was mainly driven by the manufacturing industry, public subsegment saw revenue growth across a wide range of areas, including finance, local government, public rating and the defense. Adjusted operating profit, JPY 62.8 billion, up JPY 14.9 billion. Adjusted operating margin was 11.4%. Next page shows the factors behind the changes in adjusted operating profit. Page 8 shows the breakdown of the changes since last year in adjusted operating profit for Service Solutions. On the left-hand side, adjusted operating profit for the first quarter '25 was JPY 47.8 billion. And this is a starting point. As you see on the right-hand side, first of all, there are several factors, but the first factor is the profit increase by JPY 9.9 billion from the benefit of higher revenue. This was mainly due to strong revenue growth in Enterprise and public. The second profit increased by JPY 7.8 billion in profitability improvement. This was a result of the advancement of One Delivery model. And gross margin improved by 1.5 percentage points. Third, profit decreased by JPY 2.8 billion because of the increase in investment and expenses as well as increase in spending on the enhancement of our AI delivery platform. Combining all these profit increased by JPY 14.9 billion. Adjusted operating profit in the first quarter '26 for Service Solutions was JPY 62.8 billion. As shown on the far right, adjusted profit margin was 11.4%, improvement of 2.1 percentage points. Now I will give you some additional information about the waterfall chart. First of all, status of orders in Japan. Total orders for the first quarter '26 in Japan were up 10% from year-on-year. Looking at the trends for orders that will contribute to revenue this fiscal year, which we calculated by replacing full order value of large-scale deals spanning several years with the amount delivered over the most recent 1-year period, orders increased by 8%. First of all, segment basis, enterprise subsegment overall orders were up 1%. Out of this manufacturing industry were up 6% the automotive assembly and chemical fields show strong demand. Growth was mainly driven by digital transformation and modernization projects, but there were increasing number of high value-added projects like AI and orders for sovereign cloud as a next-generation system platform. On the other hand, orders in distribution and retail fell below year-on-year level due to the pullback from large-scale deals recorded last year. But despite of this, demand and order intake remained strong. There are some unevenness among the order situation, but in both manufacturing and distribution retail industry, we saw strong double-digit growth. And the next public subsegment, overall orders were up 14%. Adjusted full year basis, it was up 11%. Finance industry, the order was down 9%. This is because of the pullback from mission-critical system projects. In public and health care, up 15% on a full year basis, they were up 14%. Local government standardization projects and the digital transformation initiatives for academic institutions were strong and particularly in the health care and health care digital transformation initiative is the reason. In the mission-critical and national security and others, the orders were up 39%. We won large-scale deal in defense-related sector. We posted double-digit growth last year, but we also exceeded that level this year. The Page 10 shows the status of Uvance, which is the main driver of the business. The figures on top, fiscal 2026 first quarter order, JPY 193.3 billion, up 51% year-on-year. The Uvance for Finance and Uvance for Retail, which we launched last year and the laid foundation for the strong order situation. And the bar graph below shows the revenue, JPY 192.2 billion for first quarter fiscal '26, up 31%. The factors behind this is mostly the same as the order increase. This pie chart shows the ratio of Uvance revenue in Service Solutions, it increased from 29% to 35%. And our annual plan is shown here, JPY 840 billion, an increase of 18% year-on-year, but we expect further step up in the growth beyond this level. Page 11 shows modernization, which is another growth pillar. Orders in the first quarter were JPY 1.6 billion, 23% up year-on-year, continuing strong growth trend. Below that, revenue was JPY 94.9 billion, up 29% year-on-year. Right-hand side shows our annual plan. Our revenue target for fiscal '26 is JPY 470 billion, an increase of 20% year-on-year. And we will expand AI-driven modernization to further improve quality and to shorten system migration times, we will leverage these capabilities, not only for our own modernization, but also to expand our modernization business. Page 12 shows the status of improvements to profitability. Improvements in profitability led to the positive effect of adjusted operating profit increasing by JPY 7.8 billion. The gross margin was 37.2%, an improvement of 1.5 percentage points from the prior year. As shown on the graph, we're making steady progress in achieving sustainable improvements in profitability. There are 3 specific initiatives that have led to this improvement. Through the evolution of our One Delivery model and AI-driven delivery, we are accelerating the standardization, automation of development processes and enhancing value-based pricing. These efforts will enable us to provide services in a way that delivers greater satisfaction for both Fujitsu and our customers. Among these efforts, AI-driven delivery is a key measure that will significantly contribute to shorter delivery times and improve service quality. So we are accelerating our initiatives in this area. We have already expanded AI utilization across a broad range of areas, and we are now at the stage of deepening its application in individual projects. To do so, we are expanding AI adoption across departments and have also launched the AI Top Gun project in which we identify large-scale projects with significant potential for productivity improvements and concentrate personnel with advanced AI application skills on those projects to maximize the impact of AI. Leveraging agentic AI and development will enable us to achieve significant productivity improvements. By applying this expertise to other projects, we can create value with greater speed and at greater scale. The One Delivery model, AI-driven delivery and our pricing strategy are the 3 pillars that will enable us to achieve sustainable profitability improvement. While all 3 areas are essential, AI-driven delivery has the greatest potential, and we are focusing on it as our highest priority initiative. Page 13 provides an overview of each subsegment in Service Solutions. As previously announced, until FY '25, the subsegments of Service Solutions were divided into regions. We essentially manage these subsegments with a region-centered approach. From FY '26, this has changed to an industry-centered management approach that positions knowledge of industry domains at the core of our competitive advantage. As a result, these subsegments have now been divided into enterprise and public. We have also changed our management approach to a global industry-centric approach that is not broken up by region. The enterprise subsegment includes such industries such as automotive, manufacturing and distribution retail. The public subsegment includes such industries as government agencies and local government, defense, finance and health care. Next are the results for each of the subsegments of Service Solutions. First, Enterprise. Revenue in the subsegment was JPY 213 billion, up 7.8% year-on-year. In Japan, there was broad growth in the manufacturing industry, including in the automotive assembly and chemical fields. The positive effects of the integration of BrainPad and GK Software also contributed to the increase in revenue. In terms of profit, in addition to the effects of higher revenue, progress was also made in profitability improvements. Due to this, adjusted operating profit was JPY 19.3 billion, up 12% year-on-year. Revenue in public was JPY 335.9 billion, up 6% year-on-year. In Japan, revenue grew by 7.5%, and there was growth across nearly all industries, including finance, local government, public racing and defense. Outside of Japan, revenue was essentially at the same level as the prior year. The increase was primarily due to the effect of foreign exchange movements. In terms of profit, there were the effects of higher revenue along with profitability improvements. Due to this, adjusted operating profit was JPY 43.4 billion, up 42% year-on-year. Page 14, I will now talk about the other segments besides Service Solutions. First is Hardware Solutions. Revenue was JPY 211.2 billion, up 4.5% year-on-year. There was an adjusted operating loss of JPY 3.7 billion, a deterioration of JPY 5 billion from the prior year. In System Products, revenue increased by 4.7%. The increase in revenue outside of Japan was mainly due to movements in foreign exchange. Revenue in Japan decreased due to pullback from large-scale business deals in the prior year. Although profit outside of Japan increased. There was a decline in profitability in Japan due to changes in revenue composition, including pullback from highly profitable large-scale business deals and a delay in passing the cost increase of memory chips and other components on to customers. These factors resulted in a decrease in profit. For fluctuations in the cost of components, we have made changes to contracts and able to promptly pass price increase along to customers after new orders are received. There was a portion of past orders in which this mechanism was not implemented, which had a negative impact on results in Japan for the first quarter. This measure is progressing as expected and the negative impact of the first quarter is also expected. We believe that we will catch up in the second quarter onwards with the cost reduction and negative impact is minimal. Network products saw an increase in revenue mainly from base stations in Japan. However, even though the first quarter results tend to be lower than the other quarters, the level of revenue in the segment was still low. As a result, it posted a loss in the first quarter and only showed slight improvement from the prior year. Both system products and network products are progressing in line with our plan. Page 15, the top part of the page shows Ubiquitous Solutions. Revenue was down by 28.1%, adjusted operating profit was JPY 4.4 billion, representing a decrease in profit of JPY 3.7 billion year-on-year. This is the result of pullback from the update-related demand and a large volume business deal for a financial institution in the prior year. On the bottom half of the page, the intersegment elimination corporate and operating loss of JPY 8.6 billion was recorded. This was an improvement from the prior year, represented JPY 13.6 billion reduction in expenses. We're currently making progress on the redevelopment project of Q2 Technology Park project Japan, which is where our headquarters is located. As part of the project, we sold a portion of the land and record gain on its site. Development of such technology as fiscal AI, next-generation CPUs and quantum computers is also progressing according to plan. I will now talk about the status of cash flows and balance sheet. Page 17, first is cash flows. Excluding onetime inflows and outflows Corp, free cash flow was JPY 217.7 billion. Although there was the inflow from the sale of properties assets that I mentioned earlier, there was also a higher amount of tax payout and bonus payout due to increased profits. Due to this, there was a decrease in inflows of JPY 12.5 billion in the first quarter. Towards the bottom of the table, free cash flow, including onetime inflows or outflow was JPY 214.4 billion, a decrease in inflows of JPY 187.3 billion from the prior year. This is due to the pullback from inflows from the sale of Shinko Electric Industries in the first quarter of FY '25. Page 18 shows the status of assets, liabilities and equity. Although I will not explain special items, the figures for the end of FY '25 have been revised due to finalization of intangible assets from the allocation of the acquisition costs related to BrainPad Inc., which we acquired last year. More details about this can be found in the consolidated financial results. So please refer to if necessary -- we refer to them if necessary. This concludes my overview of our first quarter results. The gains and losses in each segment that I shared with you were largely in line with our expectations and the progress made in them aligned with our internal plan. With Service Solutions, in particular, we were able to confirm that the sustainability of growth in demand across each market is as we anticipated. For productivity improvements, we kept up the pace of the optimizations that we have maintained until now, and we're able to make progress in line with our plan. Of course, the uncertainty around the broader business environment outlook has not changed significantly. So we are trying to take a realistic view. We will continue to closely watch the business environment and make progress toward achieving our plan. Page 19, I will talk about our financial forecast for FY '26. Page 20 shows our adjusted financial forecast. As I mentioned earlier, the actual results for the first quarter and all future indices are progressing in line with our plan. As such, our revenue forecast remains unchanged. Our full year revenue forecast for FY '26 is the following: Revenue is projected to be JPY 3.510 trillion, an increase of JPY 7 billion. Adjusted operating profit is projected to be JPY 425 billion, an increase of JPY 34.4 billion. Adjusted net profit is projected to be JPY 320 billion, an increase of JPY 21.7 billion. All of these figures remain unchanged. We will continue working hard to ensure to achieve another fiscal year of record high profits. The figures from Page 21 onwards also remain unchanged from our prior announcement. This page shows adjusted consolidated results, adjusted items and the results part adjustment. This page shows, Page 22, the information by business segments. Page 23 is the breakdown by subsegment. Page 24, our projection for cash flows. All of these figures remain unchanged from our prior announcement. Lastly, I would like to inform all of you about Fujitsu IR Day 2026. On September 16, we plan to set up an opportunity to explain our growth strategy to achieve the management Vision 2035 we recently announced. During the event, you will be able to speak directly with senior Fujitsu executives. We believe it will be a valuable opportunity to understand Fujitsu's path to sustainable growth. We will share further information regarding the details of the event in a separate announcement. We look forward to seeing you there. This concludes my presentation.