Fujitsu Limited (6702.T) Earnings Call Transcript & Summary

So altogether, this is going to be 2-hour and 30-minute session. To introduce the speakers today, Takeshi Isobe, Corporate Vice President, CFO; Corporate Executive Officer, Corporate Vice President, CRO Shunsuke Onishi; Corporate Executive Officer, Corporate Vice President, COO Yoshinami Takahashi; Corporate Executive Officer, Corporate Vice President, COO Megumi Shimazu; Corporate Executive Officer, Corporate Vice President, CTO, Vivek Mahajan. So these are the 5 speakers for today. And my name is [indiscernible] from PR and IR office, I'd like to moderate -- serve as a moderator for this session. Thank you very much for your cooperation. First of all, Mr. Isobe, over to you.

Hello, ladies and gentlemen. My name is Isobe, CFO. First of all, thank you very much for taking the time out of your busy schedule to attend today's Fujitsu IR Day. I will report to you the progress on our midterm management plan and our growth strategy. So this year is the last year of the current midterm management plan. I will talk about the progress towards the targets of midterm management plan and also the growth driver beyond the period of current MTMP. These are the topics I'd like to cover. First of all, I'd like to confirm the positioning of the current midterm management plan as part of our opening session. So this is what I repeat always, but this is our purpose to make the world more sustainable by building trust in society through innovation. This is our purpose. Once again, all of our corporate activities are conducted in order to realize this purpose. So putting this purpose in the center, this is our Fujitsu way or the basic principles of the company. Our values are aspiration, trust and empathy. These are 3 values we cherish. And from this point onward, I'd like to talk about the progress against our midterm management plan. So first of all, we have vision for 2030 and backcast that to the current midterm management plan. And our vision for 2030 is being a technology company that realizes net positive through digital services. And based upon this vision, our current midterm management plan is an important period to prepare for the realization of this vision to achieve the business model and business portfolio transformation, support to customers' modernization efforts and to enhance our international business profitability. This shows the overall performance. Here, including the period of the previous midterm management plan, we have the profit situation for 7 years. And we excluded Device Solutions results, which turn out to be a discontinued business. So while working on the business portfolio transformation, the profitability has increased steadily. On the right-hand side, you see 3-year period starting from 2023, which is the period of the midterm management plan. For the 2 years up to 2024, our revenue and adjusted operating profit has grown steadily, and we are making progress steadily towards the targets of 2025. Consolidated numbers and Service Solutions, so these are the results so far. As I explained so far, the business drivers and the drivers of revenue and profitability is Service Solutions business. At the bottom of the bar graph, you see the annual increment in the profitability, JPY 120 billion altogether over the 3-year period, plus JPY 20 billion, plus JPY 40 billion, plus JPY 50 billion, as you see. And for 3-year period, Service Solutions has a plan to achieve JPY 200 billion increase in profitability. For a single year, plus JPY 70 billion, plus JPY 50 billion, and this year, 2025, we try to achieve JPY 70 billion increase in the profitability. So while achieving the growth through the driving force of Service Solutions, we have made steady progress as compared to the profit midterm management plan. And I'd like to talk about the key strategies here. On the left-hand side, the revenue growth for the domestic service solution. Domestic IT service market is growing, thanks to the increase in the demand for digital transformation and modernization. The CAGR between 2023 through 2028 is supposed to be 6.5% for the general market, but ours is 9%, which is outpacing the market growth. What is driving this growth is, as you see on the right-hand side, Uvance and modernization. In 2022, combining both Uvance and modernization sales together was JPY 280 billion, but it increased up to JPY 680 billion in the past 2 years, 2.5x. Service Solutions accounts for 30%. In 2025, we plan to achieve 36% increase altogether and 40% of the total. Uvance modernization are indeed the key to our growth. Profitability remained quite strong during the period of the current midterm management plan. On the left-hand side, the gross margin ratio in the past 3 years, it has remained at the level of 1% to 2% growth. And there are mainly 3 points here. Number one is the transformation of delivery. As I discussed earlier, standardization and automation of delivery is the key activities. And also, we are paying attention to the utilization of AI. This has just started recently. But at the same time, this means that this shows the growth potential for the future improvement in our profitability going forward. And the value-based pricing strategy and optimization of the human resources portfolio are the important driving force for the improvement of profitability. On the right-hand side, from a different perspective, international regions performance, low profitability in international regions used to be a major issue, but we went ahead with the carve-out of low-profit businesses and transformation. It is not sufficient, but we are getting healthier through these activities. In fiscal 2024, adjusted operating margin was higher than 4%. This year, we have a plan to achieve 5% this year. And of course, we would like to achieve further growth going forward. Now up to this point, I talked mainly about the Service Solutions, but I'm supposed to talk about the other areas that are also related to midterm management plan. On the left-hand side, business transformation. System products business, we have the [ FSAS ] Technologies and the network of businesses, we established [ 1Finity ]. And to make them as the independent entity with the production and sales activities combined, we are trying to speed up the decision-making by the business and to achieve higher efficiency. Right-hand side shows the transformation of the business portfolio carve-out of noncore businesses, Fujitsu general transfer and other activities. Major activities have been completed. It took some time, but we spent sufficient time to identify the best partner and optimal partnering was achieved. Once again, I will come back to the business of Service Solutions. Once again, based upon the annual steps and the targets, I would like to talk a little bit about the goal of 2025. You see on the left-hand side, adjusted operating profit in the 3-year period is indicated. It used to be JPY 160 billion in 2022. And in 2025, it went up to JPY 360 billion, increase of JPY 200 billion. And the breakdown is JPY 155 billion by revenue growth and JPY 120 billion through profitability improvement and the negative JPY 75 billion because of the investment. And the right-hand side shows the progress so far every year. So looking at the total for each year, as you see at the bottom, JPY 75 billion in fiscal 2023, JPY 55 billion in fiscal '24 and JPY 70 billion positive in fiscal '25. Looking at the different elements and factors, year-by-year, we have made steady progress so far, increasing the revenue and the improvement of profitability for both of them in 2025. If we continue the momentum in the past 2 years, we will be able to achieve the target of 2025. And the growth investment is continuing and of course, in 2025 as well. So we are making steady progress in order to achieve the targets. Lastly, I would like to talk about the achievement of the plan as well as the mid- to long-term growth drivers, which are the key points of today's presentation. Well, key to the growth in revenue and profitability are naturally Uvance and modernization, which are in the middle. And what raises the probability of success for these activities is the consulting and also the technology is our competitive edge, which is the driver for acceleration of the growth. Each of these topics will be explained by the business leaders in charge. So to generate the cash through these activities and continuously conduct the capital allocation in an optimal manner will enhance the corporate value of Fujitsu. And this is the management team to realize the growth. There is no change in the membership. To achieve the target of midterm management plan and beyond under the leadership of President and CEO, Takahito, 5 Corporate Vice Presidents will lead and show the initiatives. And these 5 members are the presenters for today. And the major gist of today's presentations and the roles and responsibilities are shown. So how to expand the business based upon consulting and Uvance and modernization and their growth strategy technologies and strategy to support all these activities and also to -- through the profit and growth and the business efficiency, the cash generation and the optimal allocation of capital. So these are the points to be explained by the Corporate Vice Presidents. So so much for my opening remarks. And now we would like to introduce the first speaker to talk about the first driver. For business expansion and based upon consulting, Oni-san, over to you.

Thank you very much. Now we would like to start the presentation on business expansion driven by consulting. Over to you, Mr. Onishi.

Hello, everyone. I am Onishi, Corporate Vice President and CRO. Thank you very much for having me. In my part, following Isobe's presentation, I would like to explain how Fujitsu, especially in the domestic market is on the strong growth track. And also to further scale up the growth, we have that -- there are various opportunities. And by improving the consulting capability of Fujitsu as a whole, how we hope to accelerate the growth is something I would like to cover in my presentation. I became the first CRO in 2023. I don't know how much longer I will stay here, but I have been focusing on 6 agendas so far. Isobe touched on this a little bit, pricing strategy is part of this. In spring, we published a book putting together what we have achieved in the past 6 years, the six agenda, how we have been working on these. Of course, there are not always successes, but I would like you to refer to that book for your reference. So what I have focused on as was not always just to sell, but to maximize the value proposition to our customers, which means clarify the portfolio and offer tactics based on scientific data to the team with consulting capabilities and people skills to maximize the value to our customers and as a result, deliver the maximum profit, which means that technology, delivery, service, we have to make sure that there is a consistency with those strategies. Now first of all, I would like to explain how we have realized a strong growth and how we expect to continue such growth. I would like to talk about the Japanese market, which is the majority of our business. As was shown in Isobe-san's slide, the domestic IT market in Japan, the growth rate between 2023 and 2028 is set to be 6.5%. And if you overlay our growth in order intake for whole Fujitsu 10.2%. And if you look at it by sector, financial, manufacturing, automotive, public and defense sector in those sectors, between 2022 and 2024, we have been significantly outperforming the market. This year, we have concerns about the impact of Trump tariff. And with Fujitsu, in automotive manufacturing companies as well as some of the manufacturing customers have being impacted. But our client base in diversified sectors and also those sectors who are impacted, there are different levels of impact. And considering all of these factors, we will be able to offset the impact of Trump tariff. So what has supported the growth is, I am repeating myself once again. But is the business portfolio transformation we have been working on as a whole, which are -- which is modernization. The DX market growth rate in Japan is 17.1%, but these 2 businesses significantly outperformed the market growth. And if you look at each segment, we have been able to deliver good results. In terms of modernization 64%, in Uvance 55%. So we have been able to deliver big results. So going forward, modernization peak is going to continue and Uvance and based on the scenario, Uvance is something that would follow modernization, realization of DX and so on. So therefore, we have a very strong growth trajectory. This is something I believe as CRO of the company. One point I would like to add to that. The CRO mission is not only focusing on solutions, products and network business is something that we -- I need to look at. So new network service, strategic partnership with [ Arrcus ], which was announced last week on Friday, we are working on collaboration with the team. So we would like to achieve a big growth in a comprehensive manner as a group. Now -- so what are new business opportunities? Is there room to grow further? So from here, I would like to talk about the initiatives on how we can scale up the growth, which I believe is enhancing the consulting capability of the company as a whole. And the key will be Wayfinders. So if you look at CRM data, there are some interesting points that we'll be able to identify. We are focusing 2. First is new opportunities, whether it's existing clients or new logo, new area, business area or new proposals where we are requested to provide such proposals. What is the average size of deal, which -- by which I mean deal size? I think there is a room to increase our deal size. On average, with the existing focus customers around 500,000, a little short of 500,000 in terms of overseas customers, almost the same level. However, if it's a new customer, it will be even lower than that. So if we take an average, it will be around 500,000. However, the ratio of deals less than 10 million, it is actually over 30% in some cases. Another point is conversion rate. In pipeline management, we register a project in Stage 2, as we call it, and they're finalized in Stage 7. And when we look at it in an accumulated basis, we would like to increase the conversion rate. Existing customers, contract renewals, the conversion rate is over 60%. But even with existing customers, with the new business line customers, we -- our conversion rate is only 40%. And new logos, new customers, conversion rate is 20% in Japan and less than 10% in overseas. So therefore, conversion rate. So if you take out this number from 100, are we losing in all of the opportunities, but that is not the case. The loss rate is actually in the background with existing customers, it is around 10% with the new logos between 15% and 20%. What we need to focus on more is from Stage 2 to Stage 7, there are cases where customers would decide to withdraw or where the project is terminated or we lose the opportunity to offer proposals, for example, due to lack of resources, which accounts for about 30%. So losing and winning is one thing, but we have to make sure that we'll be able to increase the motivation for the customers to transform. And as a result, we'll be able to increase the conversion rate. In Japan, retention rate is high in Japan, means that we have high share as Fujitsu. But from a customer portfolio perspective, we need to increase the wallet share of existing customers and also to increase the number of new logos, which matches our strategies, which would result in further growth opportunities. Japanese companies are right now going through a reform, comprehensive and composite reform. For companies who are struggling with legacy assets -- huge legacy assets, they would need to start from modernization, but they need to be able to come up with a vision beyond that, which -- for which we can provide Uvance. We have to make sure that this pathway is convincing for the companies and to maintain the motivation for transformation, we have to make sure that there is a storyteller and they need a change agent who will be responsible for the change, which role can be played by consultant. This further growth opportunity to be delivered, there are 3 points that we need to focus on. First point is to build a relationship with a key person for management transformation. And the second is to be able to navigate transformation as a story, which means that we have -- we need to make sure that we maintain the motivation of the customers on transformation. And the third point, I believe this is a very big point. We have to make sure that we have solutions or options backed by technologies so that we can make proposals to the customers. So we have had various discussions on the theme of consulting, but the final objective is to be able to play the role of the company as a whole and enhance the consulting capability as a whole company. And the key to that is Wayfinders and needless to say. And this slide shows the update of Wayfinders, which is the core. We -- some of these contents include what we announced in the press conference, which was held in June, as shown on the left-hand side, Japan, U.S., EU and Oceania. We have highly experienced members joining us who have served as partners in global firms. So we have started the operations globally. On the right-hand side shows the areas that we would like to focus on. It's not fully aligned with our headcount, but what we would like to focus on is the knowledge rooted in each business domain, data and AI with which we will be able to solve issues based on technology. So we did say our strategy to start by gathering captains. And we are now increasing the depth of Wayfinders, and we are providing training and OJT to increase the capability in the sales and delivery departments, which is now ongoing. How are we going to change the project programs and the outputs of the customers. From the perspective of purchased programs and projects, we need to become partners of key persons who are leading the corporate transformation and business transformation, which are mainly executive officers through which we'll be able to be involved in various programs. And Fujitsu has been implementing business transformation and different projects in parallel. So there is a need to implement such transformation scenarios in parallel. And we also need to navigate, and we will be adding technology so we can scale up. On the right hand side, shows our approach for business transformation. In June, we talked about Agentic business foundation. So business foundation, which is output of transformation uses AI. AI Agentic Foundation is not business as usual. Business process need to be aligned with the use of AI. IT architecture, the same thing. Human transaction-based system structure need to be changed. IT architecture need to be established so that agent can be utilized. So for example, cyberattacks are done by AI, human capability is not sufficient. In all domains, AI need to monitor such kind of business foundation needs to be established. And that can only be realized when business and technologies are vertically integrated. The consultants who have such knowledge are the only ones who are able to provide such proposals. In terms of consulting approach, for example, AI should -- are used as bodies to create -- to do researches and create outputs. But in addition to that, analyze challenges to organize the consequences and to come up with prescriptions is something that's often used as an approach by consultants. By utilizing Fujitsu's AI strategy and utilizing our technology, we'll be able to data-driven, realistic output can be provided utilizing AI, which will be incorporated. I would like to share with you 2 examples. The one on the left is a case of new logo, a U.S. automotive manufacturer. We started off with a deal of Palantir, but we -- it ended up being even more than that. We started off with extracting challenges of SCM and we started proposing concepts, and we ended up providing proposals on work application. And the deal size was about 2.5x bigger than the usual deal. And the second is a case of a Japanese major manufacturing -- equipment manufacturer. In the past, this customer is a good customer of Fujitsu of mainframe. But over time, our relationship became weaker and it was taken by a competitor, and we were only working with them in IT and infrastructure services. And with this customer, we established the relationship between the top managements of the 2 companies, and we started off by creating a scenario and transformation on production, procurement and logistics. And we were able to be participate in the program to realize that. This program is ongoing, but this program is not only implemented in Japan, but also in U.S. and Asia. Initial phase was -- deal size was increased to twofolds. And we have seen a number of cases where our gross margin is over 60%. As you can see, consulting capability enhancement focusing on Wayfinders will be pushing the growth of Fujitsu. Conversion rate and also deal size expansion is something that we would like to achieve. For example, conversion rate, even with the existing customer in Japan, we would like to achieve 50% and with new logos, 40% is the ultimate target. Same thing for deal size. And behind this, we have been working to enhance the consulting capability of Fujitsu as a whole. As I have written in the books, the global account leaders, global account directors and AGM they are the people who are working in the front line of sales. They themselves have a certification of Wayfinders, and they are educated by Wayfinders. And in delivery department, SAP service providing leaders are given consulting-related education as well. So they are not working to provide paid consulting services in consulting projects, but including Wayfinders by increasing the number of skilled people will be able to increase the conversion rate and also be able to increase the deal size. So having 500 to 1,000 consultants, if we are able to increase the number to 5,000, we will not be able to achieve a significant growth of Fujitsu. So this is my final slide. To put it in one word, consulting main dish is Uvance's modernization. So therefore, consulting services is actually a spice or a catalyst, I would say. So enhancement of consulting capabilities would not just promote the business portfolio, but it has a role of driving the growth of the company as a whole. The peak of monetization is about to come. And according to the scenario, Uvance would follow. And new technologies would come out as well. And we would like to make best use of the growth driver to achieve big results. With this, I would like to conclude my presentation. Thank you very much for your kind attention. Thank you.

Thank you very much, Mr. Onishi. Now for the growth of Uvance, Mr. Takashi Yoshinami, Corporate Executive Officer, will speak on this topic.

Good afternoon. Hello. My name is Takahashi as was introduced. So I would like to talk about the progress of Uvance's business as well as the outlook for the future. For fiscal '24, this is the review of fiscal '24. Talking about the fiscal '24, the revenue -- overall Uvance revenue was JPY 482.8 billion, 31% higher than the previous year, which outperformed the target of JPY 450 billion. And the major driver here is the SAP, ServiceNow and Salesforce, in other words, horizontal. We were able to capture the demand for them and also data-driven business and the intelligence and the demonstration is where we see increase in the demand. R&D horizontal business, we grew by -- and the vertical also grew at a rate of 51%, even though the size is not as big as the horizontal. JPY 700 billion is the target we would like to achieve 45% higher than the previous year, particularly 60% increase from vertical and 37% increase in the horizontal. So these are the major challenges we'd like to take up. But the current -- for the first quarter, I'd like to explain about the first quarter results against this overwhelmingly large number, how are we performing in the first quarter? That is what I'd like to explain. First of all, vertical and horizontal for both of them, the growth rate is higher year-on-year. So they are growing steadily, as you see here. As for the total numbers, the growth rate in the first quarter against the target of 45%, actually, it was 52%, so 7% higher than the plan, particularly for vertical, 60% to 69% horizontal, 37% to 44%. So this is an important point. Actual results and also including the order backlog, already now the first quarter is over, and that accounts for 60% of the annual planned volume of the business. It used to be 53% in the fiscal -- previous fiscal year. So in that sense, we are higher by 7%. And on the right-hand side, you see recurring revenue. Last year, the same time last year, it was 32%, but it went up to 44%. Recurring revenue, why is it important? Because this is a stock type business. So stable and in order to achieve the stable revenue and profit, and we should continuously invest so that we can continue providing value to the customers. So in that sense, recurring revenue is important. And also standardization ratio, currently 63%, as you see at the right bottom. And this is what we achieved in the vertical domain. So the one-to-one business onetime is not what this means. Standardized offering is to be provided because we can offer this to multiple customers. This improves time to market and also to capture the scalability of the business. Standardization is what we are focusing upon in Uvance as well. Next point is -- so we are on the solid path for the future growth. And I'd like to talk about the future opportunities. So the organic value creation between vertical and horizontal is what I'd like to explain. For horizontal, vertical application is supported by horizontal. It is a base. 3S, SAP premium supplier, for example, by utilizing that, SAP ERP data is to be used on the ontology, connecting them and analyzing them to get the output. So from horizontal to vertical application deployment, is possible. For business application, the strategic partners with multiple partners is what we formulated. So by using the horizontal framework, we can connect the vertical and digital shift for DS data path is provided. Fujitsu's IP Kozuchi Takane can be provided on part so that the customers can freely utilize the technology. So this is the nature of the service we provide. By using them, customers will be able to use technologies as their parts and also by the vertical products. It is increasing. So from horizontal to vertical, the coordination between these 2 is important. Now I would like to talk a little bit about the verticals business. Vertical, as you see here, it is growing steadily as you see, particularly in CX. GK Software, we acquired last year, its growth is 33% year-on-year. And also to new customers, we have captured the new customers as well. So stand-alone performance as well as the Fujitsu IP integrated will capture new customers. As for trusted society, City security is the area domain where our R&D image analysis engine can be fully utilized to generate new needs and also the logistics and the optimization. The logistics and the optimization engine can be fully utilized, so that the customers can enjoy the value. As for health care, electronic and medical record on the cloud and also turning the knowledge into the IP and also the providers and the business transformation, these are what we are working on. So these are the projects emerging. So for verticals business, they are growing quite steadily. And as for Uvance solutions, as you know, on cloud application is the main under offerings, to facilitate the expansion of the function and to enhance the value and also one to multiple parties, time to market can be improved. So it is not the one-on-one relationship, but the basic architecture is to be deployed to cover multiple customers in a quick manner so that we'll be able to offer new functions to the multiple customers in a quick manner. Now I will talk about the GK and its growth driver. As I mentioned earlier, 33% on the stand-alone growth of GK year-on-year is what I mentioned. And starting from May this year, we have completed 100% integration. So the utilization of IP will be starting soon. But already in 2024, through Fujitsu collaboration, the GK has captured a new customer base. On the left-hand side, the global apparel brand is one case study. Well, in addition to GK POS, Fujitsu's managed service is provided. Our security and other functions are to be purchased by the customers so that the full values will be enjoyed by the customer. In the middle, this is a case study of Canadian food retailer, Metro. Our image analysis and the fraud detection function will be introduced together with GK's capability. So cross-sell is possible. On the right-hand side, European company, Popken Fashion Group is another example. For GK, the most leading edge which is the POS and the price optimization is another function. Real-time price optimization is introduced to enhance the retention. So now these solutions, it is the time that we can introduce these functions to Japanese customers as well. And the multiple customers have shown interest and place inquiry to us. So by using GK's function, Fujitsu IP is to be integrated to offer higher value so that in the global market, we will be able to make inroad into the global market as well. Next topic is a little conceptual, but by using the -- to enhance the scope of Uvance by utilizing our comprehensive capabilities. Now we have Wayfinders, so we can identify opportunities which can be connected to Uvance. And modernization, it is not just the TCO lifting, but the full shift, the vertical applications to be utilized so that the DX will be promoted. So this is the entry point. And the modernization is the entry point and connecting this to Uvance is one way. And also [ VTEX ] area, technologies, various technology feeds and from the research institute, we get them and embed them into solutions. Takane AI-related guardrail, Agent AI guardrails, these are major technologies are to be incorporated into Uvance to enhance the added value. So that's what is happening. So for the entire company, we are working together so that we will be able to deploy Uvance to as many customers as possible. Next, I would like to talk about the Agentic AI. At the Uvance update the other day, we already explained this, but this is the AI agents and they are specific to business applications and the international R&D organizations have rated highly. From a research analyst, Fujitsu's Agentic AI's top-tier provider, so we are top tier provider in Agentic AI, that is what they recognized. What is important about this is that the market is moving towards AI. And based upon our business and the know-how and expertise, we will be able to work on the Agentic AI, not only on business and experience, but the prompt and the -- so the injection to host nation technology to abate the fraudulent utilized. So the guardrail is to be introduced so that the safer utilization of the agent will be possible. In the field of business expertise, based upon our business expertise, this is the specified AI and the technology with the guardrailing function is to be incorporated. And within the company enterprise, well, not just the AI utilization within the company, but the among or between the company's AI is to be utilized. 3S, SAP, ServiceNow, we're working together with our partners, agent-to-agent collaboration or the coordination is something that we would like to look into. Next, I'd like to give you some of the specific examples. This is the example. Last year, I already indicated this and used this, but this is the utilization of AI agent for disaster response, light-sized earthquake and other disasters. And we will be able to forecast the potential damage at the customers' sites and integrate such information to the procurement data and visualize the vulnerability of entire supply chain, not just visualization, but actionability, how to evade such potential risks. That is what we are also offering. So the parts to be supplied by some other suppliers potentially in order to evade the impact of such a disaster. So that is what we can offer. So Agentic AI is actually being used for this purpose. So this is the most leading -edge example of the customers utilizing this function. So the seamless connection via Agentic AI and get the information, visualize them and make output. This is one example. As for next example, this is on the health care case I'd like to introduce to you. Annual medical expense is to be JPY 47 trillion in Japan annually and 1/2 of that expenses are personnel expenses and the P&L for the hospitals and the medical institutions, actually, nearly 70% of the hospitals are suffering from the fiscal deficit losses. So the -- unless the business process is improved and the turnaround, the medical institutions of Japan will face difficulty. And so recently, we made announcement of our work with NVIDIA. So it is shown here. So whether it is the medical examinations, the diagnosis and the prescriptions. So aside from these core medical activities, all the other hospital operation related processes are to be turned into AI. So to multiple hospitals, we would like to introduce specific proposals like this, not only this, but the telemedicine at the remote islands, for example, for the medical care transformation is what we'd like to offer. Lastly, I'd like to talk about the future outlook. First of all, by the penetration of AI agent, new market of services and software is expected to emerge. So from a fiscal '25 to '35 for 10-year period, JPY 300 trillion will be the size of such market emerging right now. So the high-level services, which were carried out by the human beings, are to be offered by AI through automation and software. So this is a new model. Software as a Service, which is a traditional services to be used by operators. Of course, that part of the market will remain, but that will become smaller and the AI doing the implementation to create the output, that is expected to emerge. And the conventional IT services, the labor-intensive services are to be replaced by Agentic AI. That's what is said generally. So to us, Agentic AI, based upon our technologies, and working together with our partners, we would like to accomplish the perfection of this approach. So to create the market and become the leader by fully utilizing AI to create the Uvance solution, that's what we aspire to do. And ultimately, our target is a service solution. This shall -- the Uvance shall account for 50% of our service solution and for gross margin vertical 50% horizontal, the 40%. That's what we try to achieve. And another important point is recurring ratio. Currently, it is around 40%. By raising this to 70%, stable revenue and profitability are to be secured. And by working on this cycle in an effective way, we will be able to enhance the value that we can offer to the customers. So the -- and the recurring nature of this business shall be maintained in Uvance. Lastly, going forward, we would like to continue introducing innovation and leading-edge technologies in order to solve the societal and the technological issues. So the AI, how to offer AI as well as quantum computing, these are leading-edge technologies. By offering them, utilizing them, we would like to achieve the sustainable evolution of industry society and the planet earth. People progress, AI progress together so that we will be able to create the new world, new society. Thank you very much so much for my part. Thank you.

Now on the next presentation, the expansion of the modernization. Our presenter is Ms. Shimazu. Ms. Shimazu over to you, please.

Hello everyone. I am Shimazu, CEO of Fujitsu in charge of Service Delivery. I would like to thank our shareholders and investors for your continued support to Fujitsu. I will talk about expansion of modernization, further delivery transformation. I joined Fujitsu in 1987 as a system engineer and I have been working and serving customers in the field for a long period of time. I continue to be responsible for service delivery in this fiscal year. First, I would like to talk about our business progress towards achieving the current midterm plan. I would like to take a little time to talk about the definition of modernization. There are different definitions for modernization, simple upgrading of infrastructure or infrastructure migration. But Fujitsu defines modernization as moving away from legacy assets. The market surrounding modernization since Fujitsu's full-fledged rollout of the business has grown in size to over JPY 1 trillion with new players coming into the market. Furthermore, many companies started active use of generative AI and their legacy systems are the bottlenecks for AI use and to achieve data-driven businesses. To overcome this challenge, customers are accelerating their initiatives on modernization. Fujitsu announced its termination of legacy platform in 2022 and the entire company is promoting modernization business. The consulting business that Onishi talked about and Uvance that Takashi talked about will be linked with modernization to approach the market and our proprietary generative AI that Mahajan will explain after this is implemented to modernization to improve productivity and competitiveness. I would now like to talk about the performance in FY '24. In FY '24, our revenue was an increase of 86% against the previous year. Our gross margin was 38%, achieving our initial target. We are leading the legacy modernization market in Japan and our market share increased from 22% in FY '23 to 26% in FY '24. Furthermore, we are also making a steady progress in terminating our legacy platform. And now here is the plan for FY '25. We are expecting another strong year with revenue target of JPY 330 billion and gross margin target of 2% increase from the previous year to 40%. As of today, the pipeline building is progressing above our target with a high probability of achieving the target. We will increase our share in Japan for legacy modernization, and we will be maintaining the #1 presence in the market. We also plan to continue to work to terminate the legacy platform. Now I would like to talk about initiatives for further growth. Fujitsu's source of competitive advantages consists of services, engineers and knowledge, 3 elements as was explained at last year's IR Day. In FY '25, with these elements in the center, our plan is to further increase value and expand the market. In increasing our value, we'll be linking with the consulting business, strengthen engineers and use generative AI, which are our focus themes. We'll be leveraging the source of competitive advantage that we developed with our legacy modernization as a weapon to expand to non-Fujitsu legacy and open markets to capture new growth opportunities. After this, I would like to explain each theme. First, linking with consulting to approach customers. To promote modernization, customers' IT team is struggling to work on the following with management and business perspectives, such as to create stories to convince the management, defining value in investing in modernization, also optimal modernization planning targeting data and AI. At Fujitsu, together with the consulting team, we established a methodology called modernization action planning. Ourselves, SE, who know well about our customers' IT is joined by Fujitsu Consulting to offer a proposal of a ground design that bring in management perspective where IT challenges are enhanced by business challenges. This enables acceleration of decision-making on the execution of modernization, which tends to be pushed back and promote modernization to evolve as a management project with an objective of DX. Secondly, we are working to strengthen engineers to increase value. To avoid declining of business opportunities because of the shortage of assignment of staff needed for modernization projects, we are making monthly forecast on the number of engineers needed in the short term to midterm to -- based on information on opportunities. Engineers needed -- assigned with a group-wide approach internally and including partners. Furthermore, with productivity improvement utilizing Gen AI, we are trying to minimize the number of engineers needed. The third point to increase value is application of Gen AI to modernization. As shown on the right-hand side, we are using generative AI technology in all of our businesses, which is also true for modernization. The challenges of legacy systems include system becoming a black box or legacy systems becoming the bottlenecks for the data-driven approach and a longer time needed for projects. We at Fujitsu have our own proprietary generative AI technology, Fujitsu Kozuchi. And together with the practical knowledge we have gained in business negotiations, we are offering new values such as more efficient and higher quality modernization projects. I would like to explain the generative AI application cases that only Fujitsu was capable of. First is the technology to automatically generate design documents that are easy for human to understand from program. This is a payroll calculation program. But in the general auto generation, the design documents includes fixed length input files that are hard to understand for human. On the other hand, when using the knowledge graph, outputs are shown as employee number, base salary and job types in plain Japanese, which are easily understood by human. With this technology, even with the system without the design document, modernization projects can be appropriately executed. This technology enables us to work in non-Fujitsu market where we have no knowledge on the operation. The second technology, is quite effective in modernizing. In the past, when we are to do monetization, we are to use tools after converting to Java program, we remove redundancy and complexity and this process was done manually. But on the other hand, by utilizing Fujitsu proprietary technology from the design document that I talked about using the previous slide, the challenges are extracted by AI and automatically generate program source. And with that, in a short period of time, the execution time can be shortened. And using this slide, I would like to talk about how Fujitsu is using generative AI in the whole delivery business and not only in modernization. Already in delivery, we are utilizing generative AI, and we are trying to improve efficiency by 20% to 50% for each project. In mid- to long term, the current waterfall development will change significantly. We will come up with a new business model, assuming the use of generative AI and we will be leading the industry in transforming the delivery model. Currently, Fujitsu legacy modernization domain is JPY 130 billion, which is expected to peak out in FY '29. However, with initiatives to increase value, which I just explained and by rolling out the knowledge we will gain with Fujitsu legacy to non-Fujitsu and to the open market, we will further increase our share. Lastly, let me explain our future outlook. Going forward, we will pursue both market share increase and profitability improvement. With the enhancement of the source of competitive advantage and expansion to non-Fujitsu legacy and open market, our target is to achieve monetization market share of 30% in Japan. And the market growth is 20%, and we would like to outperform the market and grow by 30%. On the other hand, to improve profitability, we will be utilizing generative AI and roll out our practical knowledge that we have gained to increase gross margin by 10% to 50% in mid- to long term. We started our modernization business in full scale since the announcement to end the legacy platform business in 2022 and modernization business will continue to grow and drive our next business stage. Fujitsu modernization is regarded as a starting point of innovation that will continue to transform and create the future with our customers. This concludes my presentation on modernization business. With a short presentation, there may have been points that were not fully explained, but I sincerely hope this presentation has helped you understand better about the business. Thank you very much for your continued support. Thank you very much for listening.

Thank you very much. Now let us move on to the next part, which is about the technology strategy to support business growth and the speaker is Vivek Mahajan. Now CTO, Mr. Vivek Mahajan, over to you.

Hello. Ladies and gentlemen, my name is Mahajan, CTO of Fujitsu Limited. I would like to talk about the technology strategy to support business growth. Since 2021, I have served as CTO of the company. And what was important to me, there are 2 things that I regard important. Now we are talking about AI, but since 2020, we have already introduced and implemented strategy focusing upon AI, computing network, security, converging network related to AI. We have been working on that continuously since then. Second point, which was important to us, is made in Japan technology. So by using made in Japan technology, and we would like to help customers' growth, customers' profit and also Fujitsu's growth shall also be supported by our technologies. Made in Japan technologies, naturally, it is to be used in Japan, naturally, but it is something that we caught attention on a global stage as well. I will touch upon this point later. From Onishi-san, Yoshinami-san and Shimazu-san, they already explained about the consulting, U.S. and the modernization. So Fujitsu Technology supports all these activities. Fujitsu Technologies. We have 5 key technologies. We have been explaining about 5 key technologies, Fujitsu Kozuchi converging technologies, security. So combining them, these are Fujitsu AI. And what supports them is computing. Why are we working on computing? It is to support AI plus network. Last Friday, we talked about Arrcus working together with Arrcus. Next network will be created, based upon AI. That's what we have been doing. So these are the technological areas that are important to us. I do not go over everything, but the AI and computing strategy, these are points I'd like to explain today. First of all, AI total picture. So why are we handling AI? Why Fujitsu is working on AI? Three corporate Vice Presidents have already explained about how we can offer services to the customers. Our customers, important customers are enterprise customers and what they value is data. Talking about data, naturally, the data on Open AI is one data, but there are others customers and the specific work specified data is another aspect. And also security is quite important to the customers as well. Next third point is customers. The customers' work shall be considered in AI or the type of AI that makes customers' business easier. So our enterprise customers, and that's what they want. And Sovereign AI. Sovereign AI platform, it is what they want, Fujitsu can offer important value. Well, the financial services, administration, defense, medical services and manufacturing, Sovereign AI is what customers value in these areas. And Fujitsu Kozuchi was touched upon by the previous speakers. But the enterprise AI framework, generative AI framework and the reconstruction once the qubit, even with one quantum bit, we were able to generate this framework. Why is this important? Enterprise in the private domain, we were able to achieve a high level of performance. And also zero hallucination is what we'd like to realize. And also, we have Takane and Gen AI technology together with Cohere since last year, it is expanding. From our customers, many customers are there, but for example, Panasonic, they are using our technology and also the Takane is also used by the agricultural customers and also the Toyota related companies using our knowledge graph and they are creating their own systems. So on the global -- these are the global customers as well. So the area of enterprise and Sovereign AI that is what we would like to offer. And this is our road map. Certainly every year, AI milestones are defined for each year. For AI Kozuchi, first of all, we have Takane. Takane is the extension of Gen AI, which is specific to customers' business. And the second is agentic AI, and it will progress going forward. As Yoshinami-san mentioned, AI agents are being utilized and will be utilized in various industry segments and AI to AI conversation and exchanging information between AI, that is what we would like to enhance higher value. And what supports that is security, knowledge graph, LLM scanners, guardrail, hallucination. So these are where we would like to focus upon. And one more point, which will be important is physical AI or device and AI combined to be used for robots. So this is where we would like to make progress to create the world model to be used at the customers' factories or the stores. So in a device, we would like to introduce our technologies to make this possible for the future progress. So certainly, we have already worked on this road map and the significant progress every year, and that's what we'd like to take up as a challenge. And what supports AI computing, I'd like to explain about computing. Computing and processor technologies is what we have been worked on for many years because to support AI industry, it is computing, NVIDIA, AMD, as you know, naturally, they are supporting AI enhancement. And here in Japan, we need to support FUJITSU-MONAKA. To support AI, we have FUJITSU-MONAKA. So value here, as I mentioned, confidential computing and the power consumption is very good in this processor. This is a leading-edge technology and the CPU, GPU combined to maximize the performance. So that's what we try to do. Processor will come out the 2-nanobit chip for the first time in the world next year. It will be available. So it is totally different from the situation 5 years ago. The market is expanding and NVIDIA and Arm technology to be used for their application, NW, Graviton. So these are the cases, and we are working on FUJITSU-MONAKA. So FUJITSU-MONAKA, how is it progressing? Is it growing? In Japan, naturally and also globally from important partners globally, they are paying attention. Supermicro, we are creating super server. The Supermicro CEO is working closely with us to create server based upon FUJITSU-MONAKA. And the AMD and the GPU and our CPU combined to work on the AI, NVIDIA as well. Jensen in Taiwan back in the April, May. He talked about the processor and he mentioned about FUJITSU-MONAKA. And last month, on the 22nd of August, RIKEN and NVIDIA [indiscernible]. And I myself, 3 of us mentioned about the CPU to support with NVIDIA's GPU and they try to aspire in the HPC industry. So naturally in Japan, but also in the global stage, the global AI-related partners are approaching to us. And this is the road map of MONAKA and the exit point of MONAKA. Just like Sovereign AI. Sovereign AI -- Sovereign infrastructure is important. Confidentiality, high security infrastructure are important to the customers. They are going to treat them highly. And so data center business, confidential. Computing is important to the defense and the administration, financial services, life science, and they are expected to be a large targets of MONAKA. And last month, Fugaku NEXT was announced, as I mentioned on that occasion, 2 nanobit and also the 4.7 nano and the GPU collaboration will be important. So what we would like to [indiscernible] is the reasoning and inference. So these are where we would like to focus upon. And every 2 years, the next processor of MONAKA will be launched. And what supports computing is our quantum technology, Fujitsu's quantum technology. So when it comes to quantum, digital [indiscernible] quantum simulator and quantum computing, we have looked into that. At the end of July, we announced the road map of quantum technology. 10,000 qubit, 250 logical qubits by 2030. That's what we talked about. So this is the world-leading road map, which is a challenging road map, but these are what we aspire to do. And why? As is written at the bottom, we have a large market, and we'd like to play in the large market. Well, the process simulation, the medical care and the manufacturing, there is a high expectation to the quantum computing on a global scale. And the joint research is done, for example, the Fujifilm, Tokyo Electron and the CESGA, which is using our technology and AIST together with them, we are using the technologies. And we'd like to make a steady progress in our work with them as well. And this is the road map of quantum computing. Naturally, we will fully utilize quantum in Japan, but it is not sufficient if we only stick to Japanese market. We'd like to do this on a global scale. As you know, Google, IBM, [ AAW ], so these companies are focusing upon quantum computing, quantum technologies. By 2030, 10,000 physical bit and 256 logical qubits and the 1,000 logical qubit is what we'd like to achieve. And the error correction and the application as well and also HPC and quantum combined so that the customers will be able to use such technologies immediately to their operations. So in HPC and quantum, we have both of these areas of technologies. So we hope to work on this road map certainly. Well, the star architecture and diamond spin technologies are our uniqueness and the high superconducting the quantum, the capability shall also be connected. Quantum and AI to be combined and they are looking for 2035, I'd like to share with you some of the images towards 2035. Fujitsu have the quantum technology, network and computing. We have 3 of these technologies. This is quite rare that the company -- one company has all of these 3 technologies. Some companies may have 2 of them, but we have 3. Thinking about the robotics world and the future deployment of robotics, well, having these 3 technologies together is important in that regard. Fujitsu and our focus is the brain of the robot, sensory perception and security. In these areas, this is where we'd like to pay close attention to because the AI computing network -- computing and network, we have 3 of them. And with them, we would like to support the growth of our customers. Thank you very much so much for my presentation.

Thank you. Lastly, I would like to ask Mr. Isobe to present strengthening cash generation capacity and optimizing capital allocation.

Thank you very much for being very patient. It's been over an hour, and you've been listening to different presentations. We are a little behind our schedule. However, I would like to start the final presentation. In each part, numbers, performance, growth rate that are often explained, the actual initiatives and strategies to achieve those targets were partially explained. And I hope that you were able to get the feel at least of what we are doing. So I would like to start my final session. So in this session, I would like to try to explain how things that were explained today feed into the overall financial plan. I would like to explain the likelihood of achieving the midterm management plan, enhancement of cash generation capacity by the mid- to long-term profit growth beyond the plan and the direction for sustainable growth with optimal capital allocation. This slide shows, I don't think I need to explain this anymore, but I've already explained this slide in the first part. And the 4 officers just explained the details of this content. In the center, we have Uvance modernization, which are accelerated by consulting to solve the challenges of the customers and the societal challenges, which supports the growth of the company and accelerated by AI and computing, the evolution of technology. And this is a profit plan in our midterm management plan, which I explained in the first part. What is driving the revenue and the profit is the service solutions and the 4 growth drivers that are key to the growth of Service Solutions, which were explained today. Overall, things are moving steadily to achieve the plan. According to my understanding, there are various changes in the business environment, but we have been responding flexibly to those changes, and we have been shifting to high value-added services and the structural reform of the business is on track. Cash generation capacity is also strengthening. As shown on the graph on your right, the base cash flow, which is the source for capital allocation was about JPY 650 billion in the 3 years during the previous midterm plan. But in the current midterm, we are expecting JPY 930 billion, JPY 1.3 trillion growth by twofold. We are expecting profit growth with Service Solutions business in the center and adjusted operating income in the previous 3 years was JPY 660 billion, but in the current 3 years, we are expecting to achieve JPY 930 billion. And second is improvement of business efficiency by shifting to the service business, investment returns and capital circulation have become more efficient. Thirdly, asset recycling by carving out noncore assets. With all of these initiatives, during the previous midterm, cash generated was about JPY 650 billion in 3 years, average of over JPY 200 million a year is increasing to about JPY 1 trillion in 3 years after taking out the income from the sale of noncore businesses, which is an increased generation -- cash generation capacity of over JPY 300 billion a year, although there are some ups and downs. Cash generation capacity is steadily increasing and cash allocation is also on track. The base cash flow of about JPY 1.3 trillion to be generated during the current midterm will be JPY 700 billion allocated to business growth and JPY 600 billion to shareholder returns. The plan remains unchanged, enhance cash generation capacity and optimally allocate the generated cash to business growth investment and shareholder returns. By running this cycle, we will further increase the cash flow and achieve sustainable growth of corporate value. The progress of the current midterm plan has been explained so far. Revenue, profit plan, generation of cash flow and capital allocation, everything is in line with the plan and on track. The current midterm is approaching the final corner, but we will stay focused and make sure we achieve our targets. And lastly, I would like to talk about the direction and the perspective for the post midterm plan period. In the previous sessions, we had corporate executive officers explain mid- to long-term revenue growth and margin improvement strategies and targets for each growth driver for sustainable profit growth. Key quantitative targets are once again shown here on the slide. Consulting will accelerate the growth of Uvance modernization business by improving the conversion rate and increasing the deal size and improve gross margin and profitability by increasing recurring business. Modernization will increase the market share by attacking non-Fujitsu system and open markets. And through the use of generative AI and by rolling out the practical knowledge, gross margin will improve. All of these business growth will be supported by technologies, especially enhancement of one of the 5 focused technologies, AI and computing will enable competitiveness and high profitability. We believe that these growth drivers will sustainably grow the revenue, profit and gross margin of Service Solutions as shown on the graph on the right-hand side. We will achieve the midterm plan targets and also realize a higher profit business and strong growth beyond the current midterm plan. Now about capital allocation. On the left-hand side is the -- shows the initiatives to enhance the cash flow generation capacity. As was explained earlier, the base cash flow during the previous midterm from 2020 was JPY 650 billion in 3 years, an average of over JPY 200 billion a year. During the current midterm plan, excluding the income from the sale of the noncore business like Shinko and Fujitsu General, base cash flow has increased to JPY 1 trillion in 3 years, an average of over JPY 300 billion a year. Going forward, through sustainable high profit growth, continuous business transformation and improvement of business efficiency, we will accelerate the cruising speed of cash generation to achieve an average of over JPY 400 billion a year and over JPY 500 billion beyond that. We will carefully identify investment opportunities and be flexible in using leverage if that would result in the growth of business. On the right-hand side, we have a bar for the allocation. And there has been no major change in the approach. We will allocate appropriately the cash to investments for growth for sustainable business growth and shareholder returns considering capital efficiency. Our priority is investment in growth. We would like to be proactive in investing, focusing on further growth based on stable profit increase and strong financial base. Needless to say, execution and investment based on financial discipline and the pursuit and tracking of ROI are essential. On the other hand, we will expand the shareholder return base in the mid- to long term. Further increase in the dividend level and consider flexible share buyback while executing investments for growth. The whole cycle of strengthening of cash generation capacity and optimal cash allocation will be carefully monitored to realize sustainable growth in corporate value. Here are the main financial KPIs where we are today and beyond the current midterm. First, the progress. And on the left is adjusted EPS. During the current midterm plan period, CAGR is double digit as we had planned. On the right-hand side is the adjusted ROE. With the profit growth and better capital efficiency, we expect ROE to be about 14% in FY 2025. And beyond the current midterm, by executing the sustainable profitability increase strategy and optimally allocating the cash generated, we believe we can continue to improve the KPIs. Adjusted EPS to grow by double digits, a CAGR of 10% to 15% to continue and adjusted ROE to be over 20% are the likely levels for our targets. By bringing positive impacts to the society, we will realize sustainable increase in corporate value. This is what we will always keep in our minds as we operate the business. Details of quantitative targets will be disclosed in the next midterm management plan announcement. This is my final slide. Today, we had Onishi talk about consulting business, Takahashi about Uvance, Shimazu talked about modernization and delivery transformation and Mahajan talked about technologies. We provided the updates on the future growth strategies for each. The progress of the business model and portfolio transformation that Fujitsu is working on, which are at the center of our path forward. Through these initiatives, we will increase the profit and cash generation capacity. We will allocate optimally the cash to disciplined execution of investment and further business growth and proactive shareholder returns. By running the cycle, we will realize sustainable increase in corporate value. In our previous midterm, we worked on portfolio transformation and improved profitability as shown at the bottom. During this midterm plan period, we have completed the work and delivered results and increased profit. Going forward, we have the skeleton in place with some muscles in place, we will accelerate the strong business growth. The growth drivers will continue to be Consulting, Uvance Modernization and Technology. We will continue to refine the growth drivers, and we'll work on the transformation in response to the changes in business environment. Fujitsu will be working towards the 2030 vision and the 100th anniversary in 10 years and beyond to realize sustainable improvement of corporate value. The future vision that we shared with you today will be explained with higher resolution when we announce our next midterm management plan. This concludes our presentation. Thank you very much for listening. [Statements in English on this transcript were spoken by an interpreter present on the live call.]