Fujitsu Limited (OTCPK:FJTSF) Q3 2023 Earnings Call January 31, 2024 1:00 AM ET
Company Participants
Takeshi Isobe – Director
Takeshi Isobe
This is Isobe. I would now like to start explanation about the Fiscal Year 2023 Third Quarter Consolidated Financial Results. I will use the presentation material to explain.
Page three, first the financial highlights for the first nine months of fiscal 2023. The most important segment is Service Solutions, revenue in this segment was 1,522 billion yen, an increase of 12.9%, excluding the impact of the PFU restructuring. Primarily for business in Japan, there was a strong increase in orders and revenue. Results were driven by demand related to digital transformation and modernization projects. Adjusted operating profit was 116.3 billion yen, an increase of 61.8 billion yen year-on-year. In addition to the impact of higher revenue, progress was made as expected in improving profitability, such as by transforming the delivery of services. This resulted in an operating profit more than twice as high as that of the prior year. On the other hand, there was a pullback from the previous year’s strong demand for hardware solutions and network products. In addition, demand for device solutions has been decreasing since the second half of last year. Total consolidated revenue was 2,642.7 billion yen, an increase of 1.7% excluding the impact of restructurings. Adjusted operating profit was 118.8 billion yen, a decline of 32.9 billion yen year-on-year.
Page four shows an overview of the financial results for each business segment. This page shows an overall view of the segments, and I will discuss the results for each segment starting with the next slide. At the very top is Service Solutions, our most important segment, which continued to increase in size while also improving profitability. Excluding PFU, which had been included in consolidated results through the first half of the previous year, total cumulative revenue from continuing operations for the first nine months increased by 174.1 billion yen. Operating profit also increased by 13.6% compared to the prior year. On the other hand, revenue and profit in Hardware Solutions, which includes network products and Device Solutions, which both performed well in the prior year, decreased. In Inter-segment Eliminations and Corporate, we are pursuing a plan of increasing growth investments to achieve growth over the medium and long-term.
The following pages show results for each business segments. Page six, Service Solutions. Cumulative revenue for the first nine months was 1,522 billion yen, which, on a continuing operations basis, represented an increase of 12.9% year-on-year. For customers both inside and outside Japan, there was an acceleration in DX initiatives as well as sustainable transformation initiatives. As a result, there was greater demand for consulting services, modernization projects, and cloud migration support. Fujitsu Uvance benefited from this robust demand with a 67% increase in revenue. Adjusted operating profit was 116.3 billion, up 61.8 billion from the prior year. Although we increased growth investments related to Fujitsu Uvance, operating profit rose significantly because of the impact of strongly higher revenue and measures to improve profitability. I will shortly explain the contributing factors of this increase in profits with a waterfall chart.
First I will touch upon the breakdown of results by quarter. At the top, shown in bright blue, growth in revenue was 10% in the first quarter, 17% in Q2, and 12% in Q3, resulting in 13% growth for the first nine months and a continuation of solid results as expected. The blue bars show adjusted operating profit. Adjusted operating profit was 4.5% in Q1, 8.2% in Q2, and 9.8% in Q3, showing a steady increase. Adjusted operating profit for the first nine months was 7.6%, reaching a level twice as high as the prior year. In addition to the impact of higher revenue, we are pursuing progress in profitability improvements.
Page eight, this chart shows the factors that caused increases or decreases in adjusted operating profit in the first nine months in Service Solutions compared to the prior year. On the far left, adjusted operating profit for the first nine months of fiscal 2022 was 54.4 billion. The first factor is an increase of 58.1 billion in adjusted operating profit from the impact of higher revenue. In part because of a solid increase in revenue in Fujitsu Uvance, overall revenue rose by 12.9%. The second factor is an increase of 27.9 billion from improved profitability. We continue to make progress in initiatives to improve productivity, such as the expanded use of Global Delivery Centers and standardization in development work. Although there is an impact from the increase in labor costs, the improvement in profitability fully covers these costs. The third factor is a decline of 24.1 billion from higher expenses, primarily investments in growth areas. As we projected, we actively made growth investments, including investments in the development of Fujitsu Uvance offerings, employee training and development, and enhanced security. Adding these up, cumulative adjusted operating profit for Service Solutions in the first nine months of fiscal 2023 was 116.3 billion yen.
Page nine, I will now provide supplemental information on each of the factors in the previous waterfall chart. First, status of orders, which lead to the increase in revenue. This page shows orders in Japan. Continuing from the first half, orders in Japan remained solid, increasing by 16% in the first nine month compared to the prior year. I will now comment on each industry segment. First is the Private Enterprise Business segment, in which orders were up 7% from the prior year. Growth was driven by orders in the manufacturing, mobility, and retailing and distribution sectors, primarily for modernization projects. Finance Business segment orders were up 21%. In addition to deals to upgrade mission critical systems for megabank and insurance institutions, we also won modernization project deals, resulting in a significant increase in orders compared to the prior year.
Public and Healthcare segment’s orders were up 26%. In Q3, we received multiple orders for system upgrades from government agencies and ministries, resulting in solid growth. Among customers in the healthcare industry, we are also seeing strong investments in electronic medical record systems and healthcare information systems. In the Mission Critical and other segment, orders were up 15%. Continuing on the first half, orders benefited from multiple large projects in the national security field. Due to sustained, robust demand from the first half of the fiscal year, the order backlog of our business in Japan is increasing, which will lead to higher revenue in Q4 and next fiscal year.
Page 10 shows the orders in regions, international. The Fujitsu Uvance business is solidly expanding globally. Orders for the Europe region for the first nine months of the year declined by 1%, reflecting large-scale project wins concentrated in the third quarter. Orders in the Americas region increased by 35%, a big rise over the prior year, as we won multiple private sector Business Application deals. Orders for the Asia Pacific region were down 17%. There was a pullback from the large-scale public sector deals in the prior year, resulting in the decline.
Page 11 shows the progress of Fujitsu Uvance, which we are positioning as the most vital area for the growth of our business and the transformation of our business portfolio. Fujitsu Uvance consists of a total of seven key focus areas, including four Vertical Areas, which are cross-industry areas that focus on the solution of societal issues, and three Horizontal Areas, which are technical platforms that support the Vertical Areas. In the first nine months of fiscal 2023, we released roughly 40 new offerings, resulting in a total of 110 offerings at present. We are accelerating the release of offerings in Vertical Areas, in particular. Overall revenue for the first nine months was 247.3 billion, up 67% from the prior year. Business is progressing at a pace that should exceed our Fujitsu Uvance revenue target for the full year of 300 billion yen. Fujitsu Uvance now accounts for 16% of total revenue in the Service Solutions segment, up from 11% in the prior year. In our medium-term management plan, we are seeking to achieve revenue of 700 billion yen, representing 30% of total revenue in fiscal 2025. Orders leading to revenue are now 295.6 billion yen, up 79% from the prior year. High demand is continuing from what we call the 3S Business Applications, consisting primarily of SAP, ServiceNow, and Salesforce, and we expect to build on our business in these areas in the fourth quarter and fiscal 2024.
On page 12 I would like to comment on profitability improvements and the status of growth investments. Profitability increased by 27.9 billion and the gross margin improved by 1.5 percentage points. We are making steady progress in the standardization of development work, automation, the expansion of in-sourcing, and use of off-shoring through our Japan Global Gateway and our Global Delivery Centers. Growth investments and expenses increased by 24.1 billion. We continued to proactively invest in areas directly related to business growth, such as the development of Fujitsu Uvance offerings, investments needed to develop specialist human resources, and investments to strengthen our security.
This concludes my supplemental explanation of the increases and decreases in profit outlined in the chart on page eight.
Page 13, I will briefly touch on the status of each sub-segment in Service Solutions. First is Global Solutions. Revenue was 331.5 billion yen, up 18.4% year-on-year. On an adjusted basis, the sub-segment posted an operating loss of 3.3 billion yen, but it is an improvement of 10.1 billion yen compared to the loss in the prior year. Growth of Fujitsu Uvance was faster than anticipated and large-scale sales of software supporting modernization drove revenue growth. We are currently in a phase of making aggressive growth investments, but in addition to the impact of higher revenue, profitability is also steadily improving, which resulted in a large decline in losses.
In regions Japan, revenue from continuing operations was 886.3 billion yen, up 12.2% year-on-year. The adjusted operating profit was 122.8 billion yen, an increase of 49.6 billion yen. DX business deals and upgrades of mission critical systems are increasing in a wide range of sectors, primarily in the public and health care sectors. In addition to the impact of higher revenue, we made steady progress in improving profitability.
In regions International, operating profit was 445.6 billion yen, up 7.5% against the backdrop of the expansion of Fujitsu Uvance and the impact of foreign exchange movements. On an adjusted basis, the sub-segment posted an operating loss of 3.2 billion yen, a reduction in the loss by 2.1 billion from the previous year. In terms of profitability, conditions continue to be difficult, primarily in Europe. We will steadily transform our business portfolio to accelerate the improvement in our profitability.
In page 14, I will now explain about the performance of segments besides Service Solutions. First is Hardware Solutions. Revenue for the first nine months of fiscal 2023 was 748 billion yen, a decrease of 6% from the prior year. The adjusted operating profit was 37.1 billion yen, down 19.7 billion yen year-on-year. In system products, revenue increased, largely due to foreign exchange movements. On the other hand, in network products, there was a large pullback from the strong demand of the previous year in both Japan and the Americas, resulting in a significant drop in revenue. Whereas sales are decreasing due to the large-scale demand cycle, we are expanding our development investments for the next growth cycle for network products this fiscal year. This includes investments to achieve high-speed, high-capacity, low-latency and low energy consumption networks.
On the bottom of the slide you can see Ubiquitous Solutions. Revenue was197.5 billion, down 3.2% year-on-year. Adjusted operating profit was 16.7 billion, up sharply by 10.9 billion yen year-on-year. Regarding the higher component costs, including the impact of foreign exchange movements, we are advancing efforts to cut costs and pass on higher costs to customers, and we are steadily increasing our resilience to changes in the external environment.
Page 15, Device Solutions. Revenue was 212.4 billion, down a massive 30.2% year-on-year. Adjusted operating profit was 12.7 billion, down 58.2 billion yen year-on-year. Demand for semiconductor packaging, which had been strong through the first half of the prior year, significantly decreased in the second half of the year. In this year’s Q3, the decline seems to have ended, but demand continues to be weak. In addition to lower capacity utilization from lower product unit volumes, there was a significant decrease in operating profit. We anticipate a recovery towards fiscal 2024, but current conditions in the segment remain severe.
At the bottom, there is Inter-segment Elimination and Corporate. This segment posted an operating loss of 64.1 billion yen, with a 27.7 billion yen increase in expenses year-on-year. We continued to expand our investments in medium to long-term business growth, including enhancing advanced research in cutting-edge areas, such as AI, quantum computing, and energy-saving processors, and promoting the One Fujitsu program for strengthening our management foundation as well as enhanced global security.
Page 16, here I would like to describe our initiatives to transform our business structure. Page 17, first I will describe our initiatives in regions International. We are accelerating the shift in our business portfolio to improve profitability. Our first focus is the growth in Fujitsu Uvance. The ratio of revenue in regions International increased from 20% in fiscal 2022 to 25% in the first nine months of fiscal 2023. Our goal is to increase revenue from Fujitsu Uvance to 45% of total revenue by the end of fiscal 2025. Our second focus is to consolidate our business mainly on Fujitsu Uvance. To this end, we have strategically reformed our Services business. In Germany, we carved out low-margin existing businesses, such as private cloud business and on-premises managed services. As a result, we recorded a one-time loss of approximately 30 billion yen as part of our adjusted items for the third quarter. The loss expected from this business in fiscal 2023 is nearly 10 billion yen, but losses are expected to be eliminated starting from next fiscal year, as a result of the carve outs.
Next is page 18. I will explain about our ongoing initiatives in hardware solutions. In April 2024, we will launch Fsas Technologies, Inc., a dedicated company for servers and storage solutions. Fsas Technologies will integrate product development, manufacturing, sales, and maintenance functions to build an integrated entity, accelerating management decision making and pursuing thorough improvement of business efficiency to provide comprehensive, added-value solutions with advanced technologies. The establishment of Fsas Technologies did not have a direct impact on consolidated financial results. Moving forward, we will achieve improved outcomes by streamlining the business.
Page 19, this is Ubiquitous Solutions. The Client Computing Devices or CCD unit in Europe, which has been facing severe competition and difficulties in maintaining profitability, will be shut down with a target of April 2024. As a result of exiting the business, we recorded a one-time loss of approximately 20 billion yen, recorded as adjusted items to operating profit in the third quarter. The expected loss from this business in fiscal 2023 is expected to be roughly 5 billion yen. Regarding the CCD business, we are planning to redirect our focus on business in Japan.
Page 20n Device Solutions. We concluded the transfer agreement of shares in Shinko Electric. This sale is scheduled to take place in fiscal 2024, after various examinations and a tender offer. Although this will not impact the consolidated financial results for fiscal 2023, in fiscal 2024, we expect to record a one-time gain of approximately 150 billion yen from discontinued operations. In addition, Shinko Electric’s annual financial results for fiscal 2023 are projected to be sales of 230 billion yen and an operating profit of 35 billion yen. Of this, we anticipate that 12 billion yen of Shinko Electric’s net income will apply to Fujitsu, the parent company.
Page 21, of the transformations described above, a one-time loss of approximately 30 billion yen from the sale of the private cloud business in Germany and a one-time loss of approximately 20 billion yen from exiting the CCD business in Europe were major items that were recorded as adjusted items from GAAP operating profit in the third quarter. We will continue to steadily work on reviewing our business portfolio and transforming our business structure to achieve sustainable growth in our corporate value.
Page 22, this page shows the status of cash flows and the status of assets, liabilities and equity. Page 23, core free cash flow, which excludes one-time expenses, was 75 billion yen, up 39.2 billion yen from the previous year. In addition to the increase in accounts receivable, progress has been made in the contraction of inventories, which increased during the previous year, and working capital has improved. Page 24, core free cash flow and adjusted items from GAAP free cash flow. The breakdown is as shown on the page. As I mentioned previously, in Regions International, we anticipate the impact to cash flow from the sale of the private cloud computing business in Germany and exiting of the CCD business in Europe to come after the fourth quarter. At the bottom of the page is free cash flow, which was 69.5 billion yen, an increase in 19.8 billion yen from the previous year.
Page 25 shows the status of our assets, liabilities, and equity but I will omit an explanation of these figures.
This concludes my summary of the financial results from the cumulative nine months of fiscal 2023. Although each segment had its strengths and weaknesses in terms of performance, we are still progressing in line with our forecast. In Service Solutions, the strong pipeline of orders and business deals, primarily in Japan, in the first half of the fiscal year continued into the third quarter, in line with our forecasts. Against this backdrop, we believe that we can fully anticipate strong growth past the fourth quarter as well. In addition, in Hardware Solutions and Device Solutions, demand continues to be low, but it is within what we expected. We will continue to make solid progress, including further business efficiency improvements.
I would now like to take this opportunity to offer a comment regarding the ongoing inquiry into the UK Post Office Horizon System, which has been covered widely in news reports and media globally since the beginning of the year. First and foremost, on behalf of the Fujitsu Group, I would like to convey our deepest apologies to the sub-postmasters and their families, and reiterate that we regard this matter with the utmost seriousness. Our company’s UK subsidiary has been cooperating fully with the ongoing UK statutory inquiry, which has been investigating complex events that have unfolded over many years, and going forward we remain fully committed to offering our complete support and cooperation. I would also like to emphasize that our global Board of Directors is maintaining strict supervision over the matter, including the handling of the ongoing inquiry. It is our hope that the inquiry allows for a swift resolution that ensures a just outcome for the victims. Thank you.
Now, I will continue with my explanation of our financial results. I will explain our financial forecast for the full year on the following pages.
Page 27, this is our financial forecast for fiscal 2023. We are projecting revenue of 3810 billion yen, adjusted operating profit of 320 billion yen, and adjusted profit for the year of 208 billion yen. There has been no change to these forecasts. Page 28, as you can see, there have also not been any changes in our forecast by segment. Page 29 shows our forecast for the fourth quarter. The only segment I will briefly touch on is Service Solutions. The nine-month cumulative adjusted operating profit is 116.3 billion yen, an increase of 61.8 billion yen from the previous year. Our forecast for the segment’s fourth quarter adjusted operating profit is 138.6 billion yen, an anticipated increase of 30.1 billion yen from the previous year. Although the trend of profit being skewed toward the fourth quarter remains, the progress made during the nine cumulative months of fiscal 2023 was better than the previous fiscal year. We believe that we will achieve our target through ensuring that high levels of order backlogs are converted into sales. This concludes our forecast for adjusted operating profit.
Page 30, I will explain the adjusted consolidated results and adjusted items on this page. First, the nine-month cumulative results on the left. The second item on the column is operating profit. From the left, adjusted operating profit was 118.8 billion yen, in adjusted items, there was a one-time loss of 70.7 billion yen from transformation activities, and the total of these is the profit for the year before adjustments. Next is the forecast for fiscal 2023 on the right. The adjusted operating profit is projected to be 320 billion yen and the adjusted profit for the year is 208 billion yen. As I explained earlier, these remain unchanged from our previous forecast. Adjustments to operating profit resulted in a loss of 70 billion yen in the results through the third quarter, but we plan for further transformation activities in the fourth quarter to offset this one-time loss. We expect that the adjusted profit for the year will remain at the previous forecast’s level of 208 billion yen.
Page 31, we forecast core free cash flow of 215 billion yen. It remains unchanged from our previous forecast. Next, I will explain bringing down the investment unit price through a stock split. Page 33, today, Fujitsu decided to carry out a 1:10 stock split effective April 1, 2024. The purpose of the stock split is to improve share liquidity and further expand the investor base through bringing down the investment unit price. Through this, investment price per share will be lowered from its current price of approximately 2 million yen to approximately 200,000 yen. For details regarding this, please see the timely disclosure announced today. We will continue to implement financial measures while keeping in mind the perspective of the capital market.
This concludes my presentation on our consolidated financial results for the first nine months of fiscal 2023 and the full-year financial forecast for fiscal 2023.
Question-and-Answer Session
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