Fujitsu Limited (6702) Earnings Call Transcript & Summary

Thank you for joining us today. I would like to start by introducing the main points of our financial results for fiscal 2020. Revenue declined because of the impact of COVID-19 and the decline in PC revenue from the unusually high demand of the previous year. Despite this, operating profit and profit for the year were both the highest in Fujitsu's history because of steady progress in improving profitability and a onetime gain on the sale of some assets. Free cash flow was JPY 236.3 billion. Continuing from the previous year, we were able to maintain free cash flow at a high level. ROE was 15.1%. EPS was JPY 1,013.8. And capital efficiency improved over last year. Ordinary dividends were increased for the fifth consecutive year. Together with the purchase of treasury stock, we have returned a total of about JPY 60 billion to shareholders. I will now go through and explain our consolidated profit and loss figures. This is Page 5. Revenue was JPY 3,589.7 billion. As I commented a moment ago, revenue declined 6.9% from the previous year, mainly owing to the impact of COVID-19 and the decline in PC revenue from the unusually high demand of the previous year. Operating profit was JPY 266.3 billion, and the operating profit margin was 7.4%, representing an increase in operating profit of JPY 54.8 billion and an improvement in the margin of 1.09% (sic) [ 1.9% ] from the previous year. Excluding the impact of restructuring and special items, we made great progress in improving profitability and generating cost efficiencies. The impact of restructuring and special items also served to increase profits through gains on the sale of a business and reduction in the burden of business model transformation expenses. Financial income was JPY 25.5 billion, an increase of JPY 8.4 billion from last year. In addition to the gain on the stock market listing of QD Laser, an internal venture spinoff, the increase was mainly from gains recorded from foreign currency conversion adjustments resulting from the depreciation of the yen towards the end of the period. Profit for the year was JPY 202.7 billion. On Page 7, we divide our consolidated results into 3 categories. Our financial results excluding business restructurings and special items, the impact of restructuring and special items. On top, we have our financial results excluding business restructurings and special items. Revenue declined by JPY 174.4 billion from the previous year. The impact of COVID-19 was a significant reduction in revenue of JPY 146.9 billion, mainly in Technology Solutions. Excluding this impact, areas such as services and network products performed well, but revenue in PC significantly declined by around JPY 120 billion from the previous year when demand was unusually high, resulting in an overall decline of JPY 27.4 billion. Despite the decline in revenue, operating profit increased by JPY 18.9 billion, as the impact of lower revenue was more than offset by an improvement in profitability in services and strong performance in both 5G base stations and electronic components. Next is business restructuring. As a result of progress in our business model transformation, revenue declined by JPY 93.6 billion, but in part because we exited low-margin business areas. The loss in terms of operating profit was minimal, resulting in an increase compared to the previous year. The third area is special items. For this fiscal year, we are recording a gain from special items of JPY 18.9 billion. It represents the net amount from the gain of JPY 25.4 billion on the sale of a business and other expenses mainly related to restructuring of factories in Japan. This is an improvement of JPY 32.7 billion from last year. If we total everything up, operating profit increased by JPY 54.8 billion from last year. Page 8. This is a waterfall chart showing factors that caused increases or decreases in operating profit compared to the prior year. On the far left, operating profit in fiscal 2019 was JPY 211.4 billion. I will use this as a starting point for explaining increases or decreases from the prior year. The first upward arrow shows the impact of special items and restructuring expenses, which I just talked about, in comparison with the last year, resulting in a net positive impact of JPY 35.8 billion. The next 3 arrows show the increases in operating profit, excluding the impact of COVID-19. The first downward arrow shows the decline in operating profit from lower sales volumes. While there were higher unit sales in network products and Device Solutions, unit sales of PCs declined from the prior year when there was exceptionally high demand. The next upward arrow is a JPY 34.3 billion increase in operating profit from improvements in profitability. The next upward arrow is a JPY 37.7 billion increase in operating profit from greater efficiencies in operating expenses and so on. Together, the total of the 3 arrows inside the box increased operating profit by JPY 67.1 billion. Broken out by segment, the increase in operating profit in Technology Solutions was JPY 52.8 billion, mainly from profitability improvements. The next downward arrow is the negative impact from COVID-19. The negative impact on revenue was JPY 146.9 billion or a decline in revenue of 4%. The negative impact from operating profit was JPY 48.2 billion. Adding everything together, operating profit for the year was JPY 266.3 billion. Page 9. Here we give some supplemental information on the 3 arrows from the waterfall chart regarding changes in revenue from the prior year. This page shows the increase or decrease in revenue, excluding the impact of restructuring and special items. In the center of the table, we have actual results for the fiscal year and the comparison with the prior year. To the right of the table, we present a breakdown of the changes from the prior year. On the whole, revenue declined by JPY 174.4 billion from the previous year. Excluding the impact of COVID-19, revenue declined by JPY 27.4 billion. The impact of COVID-19 was the reduced revenue by JPY 146.9 billion. Excluding the impact of COVID-19, revenue in Technology Solutions rose by JPY 24.2 billion. For Solutions/Services, there was a decline in revenue from the previous year when there was strong demand for hardware integration services, such as PC setups and deployment support services. In System Platforms, revenue and network products rose mainly from 5G base stations. In international regions, revenue increased partly as a result of winning a large-scale public sector project in Europe. In Ubiquitous Solutions, revenue declined by JPY 122.1 billion, a sharp decline from last year when there was an unusually strong demand for PCs. Revenue increased in Device Solutions on strong results in electronic components. Page 10 shows the status of our gross margin. Excluding the impact of restructuring and special items, our gross margin was 30.5%, a 1 percentage point improvement from the previous year. In Solutions/Services, the profitability improvement was even greater than 1 percentage point. In addition to activities to reduce costs in operational and maintenance services for system integration and services projects, we performed comprehensive profit management and quality assurance starting from upstream process. Delivering system deployment and maintenance service remotely has also contributed to increased productivity. In the second half of the fiscal year, there was an improvement in the product mix in the form of higher unit sales of 5G base stations, and higher demand for electronic components led to greater progress in recovering fixed costs, leading to an overall improvement in the gross margin. Next, the impact of the reduction in operating expenses was JPY 37.7 billion. We note 3 main contributing factors. First, through greater efficiencies, general expenses and development expenses declined by JPY 35 billion. The greater efficiencies in general expenses amounted to JPY 23 billion. Our Work Life Shift initiative was aimed at improving employee well-being, but it also contributed to greater cost efficiencies. Deployment expenses significantly declined because of reforms to streamline our global development organization for x86 servers and because development expenses for Fugaku and 5G base stations had already peaked. The second area is growth investments, in which expenses increased by JPY 15 billion from the prior year. In addition to investments to strengthen our services business and internal DX investments to promote data-driven management, we worked to build a secure network environment and changed our office environment to accelerate our Work Life Shift initiative. The third area consists of one-off items that impacted expenses, the net result of which was the reduced operating expenses by JPY 12.5 billion. It mainly consists of the impact of streamlining real estate, including company apartments and a reduction in the expense burden compared to last year when we recorded expenses to deal with product defects. Page 11. Next, I will comment on the status of orders in Japan. For each industry segment, I will comment on orders in the fourth quarter and for the full year. First is private enterprise. In part, because some projects that were delayed in the first half of the fiscal year were restarted. Orders in the fourth quarter recovered to about the same level as the previous year. For the full year, excluding PCs, orders declined by 7%. Orders declined from the prior year, mainly in the first half because of the significant impact of COVID-19. In manufacturing and distribution, there is a strong demand to upgrade mission-critical systems for the purpose of greater efficiencies in factories and logistics and to better utilize data. So this is an area in which we are hopeful that orders will increase going forward. Next is finance and retail. Orders declined by 9% in the fourth quarter or 6% if PCs are excluded. The impact of COVID-19 was not a big factor here. The decline from the previous year is the result of the cyclical nature of orders for large-scale projects. In addition to orders in new areas, such as online communication services to avoid face-to-face sales activities, in the finance segment, orders are advancing for projects to modernize existing systems. Next is the Japan business group. In the fourth quarter, orders spiked by 25%. This is an area which was greatly impacted by COVID-19 in the first half, but progress was made in the fourth quarter in catching up for projects that are being put on hold and orders significantly increased. For the full year, excluding PCs, orders declined by 4% as there still was a negative impact from COVID-19. For customers in both the local government and health care segments, there is a strong need for digitization, and we would like to meet those needs. Next is public sector addition social infrastructure. Orders in the fourth quarter were down 3%, but rose 7% for the full year. The trend in orders were strong throughout the year from telecom carriers and national government agencies. Orders from telecom carriers rose in the fourth quarter, but large-scale orders from national government agencies are cyclical and they declined, leading to a slight decline compared to the prior year. At the very bottom is the total for all major industries. Orders in the fourth quarter rose 1%, but declined 4% for the full year, or by just 1% if PCs are excluded. There was a large negative impact from COVID-19, mainly in the first half, but orders rallied back in the second half. The patterns varied by industry segment, but for the full year, we reached nearly the level of orders of the previous year. I will now discuss progress on our business model transformation. Business model transformation expenses in fiscal 2020 were JPY 6.4 billion, mainly for restructuring factories in Japan. We recorded large business model transformation expenses in Europe in fiscal 2018 and in North America in 2019. And afterwards, we made actual progress in structural reforms. As we had planned from the start, we completed these reforms in fiscal 2020. In Europe, the closing of the Augsburg plant was completed in September. Production was shifted to electronics manufacturing services and R&D capabilities that were spread inside and outside of Japan have been consolidated. In addition, with regard to the exit from low-profitability countries in Europe, we have completed our exit from the 23 countries in our original plan. The exit from the product business in North America has also been completed this fiscal year. In Japan, we advanced another big step in restructuring our manufacturing plants. We are simultaneously trying to optimize our manufacturing organization and the major reforms were completed this fiscal year. Business model transformation initiatives had a positive impact in fiscal 2020 of about JPY 7 billion. These benefits will also accrue throughout fiscal 2021, and we anticipate another JPY 5 billion in benefits in addition to the JPY 7 billion. Next, I would like to provide additional information on changes in our profits since our last forecast. Operating profit exceeded our forecast by JPY 29.3 billion. Excluding restructuring and special items, it exceeded our forecast by JPY 20 billion. Operating profit in Technology Solutions exceeded our forecast by JPY 2 billion. We were able to thoroughly suppress losses from unprofitable projects. Operating profit in Ubiquitous Solutions exceeded our forecast by JPY 9 billion. Selling prices were firm, and unit volumes were also good, such as from the GIGASchool project. Operating profit in Device Solutions exceeded our forecast by JPY 9 billion. Against the backdrop of strong worldwide demand for semiconductors, there was a high level of demand for electronic components, and the yen was weaker than we had anticipated, boosting operating profit. Overall, though we were apprehensive about the potential for a widening of adverse effects when the Japanese government declared an emergency at the beginning of the fiscal year, we made progress in improving profitability, and we were able to successfully convert that into higher profits. Special items exceeded our forecast by JPY 9 billion. These results were also impacted by the reversal of a revenue on which we had previously recorded a loss because the risks stemming from a dispute were reduced. Page 15. I will now discuss our segment results, primarily in relation to last year's results. First is Technology solutions. Revenue was JPY 3,043.6 billion, down 5.3% from last year. Operating profit was JPY 188.4 billion, up JPY 0.5 billion from last year. This year's outcomes were negatively impacted by COVID-19, but improvements in profitability delivered results on par with the prior year. I will explain the reasons in each subsegment. Page 16, Solutions/Services. Revenue was JPY 1,765.9 billion, down 6.2% from the prior year. As I mentioned earlier, in addition to the impact of COVID-19, revenue was down because last year, revenue was boosted by significant hardware-related services business. Operating profit was JPY 183.5 billion, and operating profit margin was 10.4%. Operating profit increased by JPY 4 billion from the previous year. In addition to profitability improvements in system integration services as well as operations and maintenance services, there was progress in generating greater efficiencies in operating expenses, enabling us to cover the impact of low revenue. Page 17, system platforms. Revenue was JPY 665.4 billion, a 2.8% increase over the prior year. Revenue in system products declined 4.5% due to a significant impact from COVID-19. On the other hand, revenue in network products sharply increased on higher telecom carrier spending on 5G base stations as well as spending to strengthen backbone networks. Operating profit was JPY 41.2 billion, up JPY 13.7 billion from the prior year. Operating profit increased sharply, mainly from the impact of higher revenue from network products and global efficiencies in the development organization for X86 servers. Page 18, international regions, excluding Japan. Revenue was JPY 723.7 billion, down 5.6% from the previous year. The negative impact of COVID-19 was even stronger than in Japan because of lockdowns and other restrictions. On the other hand, there were also some bright signs in Europe, including a major win in the form of a large-scale systems development deal from a public sector customer. Operating profit was JPY 11.6 billion, up JPY 7.7 billion from the prior year. The impact of not having the burden of last year's business model restructuring expenses was JPY 6.3 billion. Excluding that, operating profit was up JPY 1.3 billion. Despite the significant impact of lower revenue, profits increased because of profitability improvements and greater cost efficiencies. Page 19. This shows the common expenses of Technology Solutions. Please look at the top row, which shows the shared expenses, excluding special items. It is JPY 47.8 billion, an increase in expenses of JPY 15.2 billion from last year. This is mainly from growth investments to accelerate internal DX and our Work Life Shift initiatives. From special items, shared expenses increased by JPY 9.6 billion from the prior year because last year, there were onetime gains. Adding these together, shared expenses reduced operating profit by JPY 24.9 billion compared to the previous year. Page 20. This shows revenue results in the 2 areas of value creation in Technology Solutions for growth and for stability. Revenue in Technology Solutions was JPY 3,043.6 billion, comprised of 32% from for growth and 68% from for stability. Revenue from for growth was JPY 988.9 billion, essentially unchanged from the prior year. On the other hand, revenue from for stability was JPY 2,054.7 billion, down 8% from the prior year. In both areas, revenue was reduced by COVID-19, but revenue from for growth managed to be essentially unchanged from the prior year because of the strong demand for 5G base stations. We will achieve increases in revenue from fiscal 2021 from the restart of our projects that have been put on hold and by fully capturing the potential demand for digital transformation. Page 21, Ubiquitous Solutions. Revenue was JPY 334.6 billion, down 26.5% from the prior year. Revenue sharply declined from the prior year because of the impact of lower revenue from business restructurings and because of the extraordinary strong demand last year relating to the end of support for Windows 7. Operating profit was JPY 48 billion. Operating profit increased by JPY 21.2 billion from the prior year. The impact of the gain from the sale of the business was JPY 25.4 billion. Excluding that, the impact of lower revenue reduced operating profit by JPY 4.7 billion from the prior year. Page 22, device solutions. Revenue was JPY 293.8 billion, down 4.7% from the prior year. The impact of the business restructuring was to reduce revenue by JPY 39.1 billion. Excluding that impact, revenue increased by 9.1%, primarily from electronic components. Operating profit was JPY 29.8 billion, an increase of JPY 33 billion from the prior year. There was a positive impact of JPY 10 billion from a reduction in the burden of business model transformation expenses compared to the previous year. Excluding that, operating profit increased by JPY 23 billion. With a high level of demand for semiconductors, electronic components performed strongly throughout the year. Page 23. This is cash flow for the fiscal year. Cash flows from operating activities were JPY 307.9 billion. The increase in profits benefited cash flows, but there were also negative factors, such as an increase in corporate tax expenses. Cash flows from investing activities were a net outflow of JPY 71.5 billion. In addition to cash inflows from the sale of the mobile phone retail store business and the restructuring of our PC business, there were also inflows from the sale of fixed assets. Free cash flow was JPY 236.3 billion, similar to last year's levels. Cash flow from financing activities were a net outflow of JPY 219.6 billion. This is primarily the result of purchasing the outstanding shares of Fujitsu Frontech in conjunction with that company's delisting. Page 24, assets, liabilities and equity. At the end of fiscal 2020, total equity was JPY 1,546.9 billion. Because of the increase in profit, it increased by JPY 198.4 billion from the end of the previous fiscal year. ROE was 15.1%. EPS was JPY 1,013.8. Capital efficiency is steadily improving. Page 25, returns to shareholders. The ordinary dividend per share, including the interim dividend, is JPY 200, representing plans for the fifth consecutive year of higher dividends. Total shareholder returns, including the purchase of treasury stock, is on the scale of JPY 60 billion. Page 27. I will now discuss our forecast for fiscal 2021. This is the upper portion of the table with a bold outline. We are forecasting revenue of JPY 3,630 billion, a 1% increase from the previous year; operating profit of JPY 275 billion, an increase of JPY 8.6 billion from the previous year; and profit for the year of JPY 205 billion, an increase of JPY 2.3 billion. I will now explain the breakdown by segment on Pages 28 and 29. First, Technology Solutions. We forecast revenue of JPY 3,200 billion, a 5% increase. Our DX business will continue to steadily expand. For operating profit, we forecast JPY 240 billion, a JPY 51.5 billion increase. In addition to the impact of higher revenue, this reflects ongoing improvements in profitability. I will give a further breakdown of this figure later on. Ubiquitous Solutions. Here, we have incorporated decrease in revenue due to the fact that previous year's remote work support and GIGASchool business deal will not recur. For revenue, we are forecasting JPY 230 billion, a 30% decrease. For operating profit, we are forecasting a significant decrease to JPY 5 billion, due in part to the impact of the loss of profits from the sale of businesses in addition to the impact of lower revenue. On Page 29, we have Device Solutions. We foresee that the strong demand from fiscal 2020 will continue, and we expect that we will be able to maintain both revenue and profits at the high level of the previous year. As you can see, broken down by segment, there are both positives and negatives compared to fiscal 2020, but by steadily growing Technology Solutions, our core area, we are continuing to increase profits overall. On Page 30, I will add some more information on the factors behind the increased profits in Technology Solutions. On the far left, we see operating profit for 2020, JPY 188.4 billion, with an operating profit margin of 6.2%. I will use this as a starting point to comment on increases and decreases from the previous year. The first upward-facing arrow shows a JPY 50 billion increase in operating profit, which is due to a JPY 156.3 billion increase in revenue. In addition to the resumption of projects that have been postponed by the impact of COVID-19, we will steadily promote the growth of DX business. The next upward-facing arrow shows profitability improvements of JPY 50 billion. We will significantly improve our profitability due to transformations in our service delivery structure and the effects of structural transformations in regions outside Japan, in addition to reducing the number of unprofitable projects. The next downward-facing arrow represents JPY 50 billion in higher expenses due to expanded growth investments. In fiscal 2021, we will actively make growth investments in order to expand sales and improve productivity. These investments will center on investments enhancing service delivery, investments relating to the Japan global gateway and global offerings, internal DX investments aimed at achieving data-driven management and investments to accelerate the Work Life Shift initiative. On the far right, adding everything together, we have the forecast for fiscal 2021, with operating profit of JPY 240 billion and an operating profit margin of 7.5%. Adding everything together, the increase in operating profit for fiscal 2021 is projected to be JPY 51.5 billion. In addition to higher revenue and improved profitability, we'll be actively conducting growth investments, which will lead to our achieving our management targets for fiscal 2022. Page 31. As I just mentioned, this is our pathway to achieving our management targets for fiscal 2022. As I explained in the part about our financial results, we made significant progress in our improvements to profitability, but due to the impact of lower revenue from COVID-19, the overall result was a very slight increase in profits. For fiscal 2021, we are forecasting a JPY 50 billion increase in operating profit as we expand the scope of our business, continue to improve profitability and proceed with well-balanced growth investments. For fiscal 2022, we'll implement a similar scale of growth investments to fiscal 2021. We are expecting an increase of JPY 110 billion in profits from the effects of our growth investments up to that point. Page 32. This shows our forecast for cash flow. For free cash flow, we are forecasting JPY 210 billion. While this is a decrease compared to the previous year because we will not have the one-off inflows recorded in fiscal 2020 from the sale of businesses and other factors, we expect to maintain free cash flow above JPY 200 billion. Page 33. I would like to touch on our capital allocation policies. First, this page reprints the capital allocation policy announced last year. Over the 5 years, from fiscal 2020 to fiscal 2024, we will create over JPY 1 trillion of free cash flow. And by optimizing the allocation of this between growth investments and shareholder returns, it will lead, as I have said, to business expansion, enhancing earnings capacity and improved capital efficiency. Page 34. Here, I would like to explain this allocation more specifically. First, strategic growth investments. Growth investments in fiscal 2020 amounted to about JPY 40 billion, but for fiscal 2021, as I explained earlier, we will significantly increase this amount and execute about JPY 100 billion worth of investments in the form of OpEx and CapEx. For fiscal 2022 and beyond, we will continue at this high level or higher. In addition, we are also considering supplementary investments on the order of JPY 100 billion for responding to ESG and risks such as the pension system. This means that we plan to conduct investments amounting to a total of between JPY 500 billion and JPY 600 billion over 5 years. The details of the individual investments are, as I explained earlier. Page 35. This is the other target for allocations, shareholder returns. In addition to our stable dividends up to now, we will be actively conducting purchases of treasury stock with an awareness of capital efficiency and expand the total amount of shareholder returns. We plan to deliver total shareholder returns on the order of JPY 400 billion to JPY 500 billion in total over 5 years. Through active growth investments, we expect not only to expand our businesses and enhance our earnings capacity, but also expand our shareholder returns. Page 36. In accordance with the policy I have just laid out, these are our forecasts for shareholder returns for fiscal 2021. Dividends per share will be JPY 220, split between interim and an end-of-year dividend. This will be a JPY 20 increase over the prior year. This represents the sixth year in a row in which we will have increased dividends. In addition, we have set aside JPY 50 billion for purchases of treasury stock for fiscal 2021. The total amount of shareholder returns, including both dividends and purchases of treasury stock, is JPY 93.1 billion. This represents an increase of JPY 33.1 billion over the prior year. Page 37 summarizes what I've just laid out. Despite the difficult business environment in fiscal 2020, we were able to achieve our highest ever operating profit and profit for the period, but this is just a step on the path to achieving our medium-term targets. For fiscal 2021, we will step on the accelerator, expanding our businesses and enhancing our earnings potential through active growth investments, delivering both higher revenue and profits. We will also expand our shareholder returns. We are aware that in order to achieve our financial targets for which fiscal 2022 is the final year, we still face difficult hurdles. But by using the growth we achieved in fiscal 2021 as a springboard, we will accomplish our targets. With regard to earnings per share, which we set forth as a target KPI in last year's capital allocation policy, we have now quantified growth targets for this indicator. We aim to achieve an average annual growth rate in earnings per share of over 12% for the period of the policy, which runs through fiscal 2024. By working simultaneously to expand our businesses, enhance our earnings potential and increase capital efficiency, we will continually increase corporate value and achieve our purpose. This concludes my presentation. [Statements in English on this transcript were spoken by an interpreter present on the live call.]