Fujitsu Ltd

TSE:6702

Q1-2026 Earnings Call

[Takeshi Isobe, executive]

I would like to provide you with a briefing on FY '25 first quarter financial results.

Please turn to Slide 3. Slide 3 shows an overview of our results for the first quarter. Service Solutions, one of our most important segments, got a solid start to fiscal 2025 with higher revenue and profit. Revenue in the first quarter was JPY 514.6 billion, up 2.6% from the previous year. For business in Japan, there was continued growth in demand for digital transformation and modernization and revenue was up 6%. Adjusted operating profit was JPY 47.8 billion, up JPY 12.8 billion from the previous year, a 37% increase.

In addition to higher revenue, there was also progress in improving profitability. The adjusted operating profit margin was 9.3%, up 2.3 percentage points from the prior year. In the lower box, consolidated total revenue was JPY 749.8 billion. Consolidated revenue declined by 1.2% because of the impact of exchange rate fluctuations and due to a change in revenue reporting standards in a portion of the Hardware Solutions business in Europe. Adjusted operating profit was JPY 35.1 billion, up JPY 18.5 billion from the prior year, a 112% increase. The adjusted operating profit margin was 4.7%, an improvement of 2.5 percentage points from the prior year. Each business segment posted higher profits and adjusted operating profit was a new record level for the first quarter.

At the very bottom, profit for the period was JPY 171.7 billion. In addition to profit from operations, we recorded a gain on the sale of shares in Shinko Electric Industries, a discontinued operation. Page 4 shows consolidated profit and losses. In continuing operations, profitability improved, mainly in our core segment, Service Solutions. In addition, in discontinued operations, we recorded a gain on the sale of shares in Shinko Electric Industries of roughly JPY 140 billion. At the very bottom, we have profit for the period of JPY 171.7 billion, up JPY 154.8 billion from the prior year.

Page 5 gives an overview of profit and losses for each segment. In the following pages, I will go through results for each segment individually, and the overall view is as shown here. Service Solutions, our growth driver, continue again with higher revenue and higher profit. For Hardware Solutions, revenue declined in our European business due to exchange rate fluctuations and because the revenue reporting standard changed for a portion of revenue, but progress was made on cost efficiencies, resulting in higher profit. In Ubiquitous Solutions, profit increased because we consolidated our business in Japan.

From Page 6, we show a breakdown of results for each segment. Starting from Page 7 is Service Solutions. Revenue was JPY 514.6 billion, up 2.6% from the prior year. For business in Japan, there was continued growth in demand for DX and modernization business and revenue increased by 6% over the prior year. The decline in revenue outside Japan is primarily due to exchange rate fluctuations. Additionally, APAC, which is finalizing its structural reforms in its core business, also experienced a revenue decrease. Adjusted operating profit was JPY 47.8 billion with adjusted operating profit margin of 9.3%, up JPY 12.8 billion from the prior year.

On the next page, I will explain the factors behind the change in adjusted operating profit. Page 8 shows a breakdown of changes since last year in adjusted operating profit for Service Solutions. On the very left, adjusted operating profit for the first quarter of fiscal 2024 was JPY 34.9 billion, and that will be the starting point for factors on the right that impacted results for this fiscal year's first quarter. First, profit increased by JPY 6.4 billion from the impact of higher revenue. The main factor was the increase in gross margin because of higher revenue in Japan. Second, profit increased by JPY 7.6 billion from profitability improvements. This is a result of continuous initiatives to improve productivity, such as standardization and automation of processes for development work.

In addition, outside of Japan, there was the impact of carve-outs of low-margin business as well as structural reforms. Overall, the gross margin improved by 1.5 percentage points. Third, profit decreased by JPY 1.2 billion because of higher expenses. There was an expansion in new investments in Fujitsu Uvance modernization, consulting and security enhancement. On the other hand, we're making progress in bringing greater efficiencies to existing expenses. Bringing these together, adjusted operating profit for the first quarter of fiscal 2025 for Service Solutions was JPY 47.8 billion, as shown on the far right. The adjusted operating profit margin was 9.3%, an improvement of 2.3 percentage points from the prior year.

Next is Page 9. I will now provide some additional information on each of these factors behind the changes in adjusted operating profit. First, we will look at the status of orders, which lead to sales. This page shows orders in Japan. Compared to the previous year, orders for the first quarter rose by 1%. I will comment on each industry segment. Orders in the Enterprise segment were down 3% from the prior year. There was a pullback from large-scale multiyear contracts of the prior year. Excluding this impact, orders were up 9%. Looking at the first quarter by industry, orders in the distribution industry was especially strong.

There continues to be strong flow of inquiries on [ DX-related ] projects and modernization projects. Orders were up 19% in the finance segment. We achieved double-digit increase because we won a large upgrade project for sales location system for financial institutions. In the Public and Healthcare segment, orders were down 4% from the prior year. In the first quarter, governmental institution orders were at a low level, mainly because of a pullback from the prior year. Still, the main reason is the impact of the wide quarterly fluctuations in large-scale projects.

Already, we have a significant pipeline of large-scale project orders we expect to receive in the second and third quarters, and there is no change in our forecast of a growth pathway for the full year. Mission-critical orders were up 14% from the prior year. We continue to see a solid flow of orders, primarily in the national security field in Japan. Looking at the figures for orders in the first quarter, they may not seem very strong, but our sense is that there has been essentially no change in the strong expansion trend of our business in Japan.

From the second quarter onward, we expect the size of the pipeline of orders we seek to receive for the fiscal year will exceed the growth rate of 15% achieved during the same period in the prior year. Although we have some concerns about securing sufficient delivery resources, we will work to do so, and we expect it to lead to an expansion of orders from the second quarter onward. Page 10 shows our order backlog in Japan. As of the end of the first quarter, the order backlog of sales scheduled for fiscal 2025 was JPY 883 billion. That is JPY 101 billion higher than the same period last year, an increase of 13%. Together with the actual revenue, we are within the sight of achieving sales revenue of JPY 1,260 billion in fiscal 2025. This is JPY 120 billion higher than the same period in the prior year, an increase of 11%.

Our revenue forecast for the full year is JPY 1,800 billion, so our coverage ratio between actual sales and order backlog is 70%. To achieve our full year target, we only need approximately JPY 540 billion in orders received starting in the second quarter to be converted into sales in fiscal 2025. Considering the current status of our order backlog, along with the orders we seek to receive in the second quarter and beyond in an expanded project pipeline, we are currently making steady progress toward achieving our full year revenue target.

We will not let up in the second quarter and beyond as we move forward. Page 11 shows orders from outside of Japan. Orders in Europe are up 77% from the prior year. The growth is from large-scale data center-related multiyear contract renewals. Orders in the Americas are down 49% from the prior year. The decline is from a pullback from the prior year when there were a large-scale multiyear contracts. Because the region's overall scale of business is small, quarterly fluctuations can be large. Orders in Asia Pacific were up 17% from the prior year. The step-up in growth was from winning a retail-related multiyear upgrade project contract in Oceania.

Page 12 shows the progress of Fujitsu Uvance, which is positioned at the heart of business growth and portfolio transformation. Overall orders in the first quarter were JPY 127.6 billion, up 70% from the prior year. The bar graph shows revenue, which was JPY 146.7 billion, representing very strong growth of 52% from the prior year. Vertical areas grew by 69% and horizontal areas grew by 44%. The share of revenue from the horizontal areas has been larger since before, but revenue from offerings in the vertical areas are also growing strongly. The pie charts at the bottom show the share of revenue from Fujitsu Uvance in the total revenue of Service Solutions. It grew from 19% last year to 29%.

The graph on the right side of the page show our revenue target for fiscal year 2025. Our revenue target is JPY 700 billion, which would be up 45% from the prior year. Our progress in the first quarter was essentially in line with our plans. Page 13 shows the status of our modernization business. This business also continued to strongly expand. The level of orders at the top shows that orders declined in this fiscal year's first quarter, but this is an issue of the quarterly structure of projects. Below that, revenue was JPY 73.8 billion, up JPY 22.5 billion from the prior year, representing growth of 44%. The portion of the revenue because of overlaps with Fujitsu Uvance was up 25% from the prior year.

The graph on the right side shows this fiscal year's revenue target, which is JPY 330 billion, exceeding the revenue target of JPY 300 billion established in our medium-term management plan. In other words, our forecast calls for an increase in revenue of JPY 33 billion from the prior year, and we have already achieved an increase of JPY 22.5 billion in the first quarter. As a major trend, expansions in orders continued to exceed expansions in revenue. In other words, demand for modernization projects continues to be very strong. We expect the increase in revenue to continue next fiscal year and beyond. We will need to further strengthen our delivery capabilities.

With Page 14, I would like to provide additional information on the improvements in profitability. Adjusted operating profit increased by JPY 7.6 billion from profitability improvements. The gross margin moved up a step, improving by 1.5 percentage points from the prior year to enhance our delivery capabilities. In addition to continuing the initiatives we have taken to date, we are also promoting the wide use of AI -- in terms of application areas, of course, we can use AI to replace certain types of daily tasks, such as creating meeting minutes. In addition, we can also use it in modernization work to analyze the structure of existing applications or in overall system integration work, such as support in designing or improving applications, generating code and creating testing data and the realm of AI application is growing every day.

We have already provided usage environment of generative AI tools to our 30,000 system engineers in Japan as well as our partner companies. The objectives and effects of using AI in delivery are not limited to securing resources to meet growing demand and simply making work more efficient. The most essential part of it lies in increasing the speed in which we provide services to customers and improving the quality of our services. In other words, it is none other than increasing the value of the services we provide. In reality, the scope of applications for AI is still quite limited and AI usage is still in its early days. But on the other hand, we believe that if we are able to fully utilize the rapid evolution of AI in delivery, then there will be considerable room for increasing the value of the services we provide.

We will continue to work at an even faster pace to expand the scope of applications for AI and increase its speed. In addition, we will also continue to work to improve productivity through pricing strategies and optimizing our human resources portfolio. Page 15. I will briefly touch on the status of each subsegment in Service Solutions. First is Global Solutions. Revenue was JPY 120.7 billion, although sales were down 6.4% due to the impact of factors such as the sale of the contact center business in the fourth quarter of the prior year.

We made progress on making delivery more efficient and in the selection and the concentration of the development of offerings. Due to this, the adjusted operating loss was reduced by JPY 1.3 billion compared to the prior year. In Regions Japan, revenue was JPY 289.4 billion, up 6% from the prior year. Adjusted operating profit was JPY 41.6 billion, up 10% from the prior year. Demand for modernization-related projects such as DX and upgrades of mission-critical systems continued to increase. Due to this, revenue increased in a wide range of sectors, such as the public sector, finance, manufacturing and retailing. In addition to the impacts of higher revenue, profitability improvements also remained steady, and the adjusted operating profit margin was 14.4%, an improvement of 12.5 percentage points.

In Regions, International, revenue was JPY 133.7 billion, down 6% compared to the prior year. Adjusted operating profit was JPY 7.1 billion, up JPY 7.7 billion from the prior year. The main reason for the decline in revenue was the impact of foreign exchange movements, but there was also a decline in revenue in APAC, which is making progress on finishing up structural reforms. On the other hand, in terms of profit, the effects of the business portfolio transformation continue to improving -- contributed to improving profitability. Page 16. I will now talk about the other segments besides Service Solutions. First is Hardware Solutions. Revenue was JPY 202.1 billion, down 11.6% from the prior year. Adjusted operating profit was JPY 1.3 billion, up JPY 5 billion from the prior year.

The main reason for the decline in revenue was the European system products business. In addition to the impact of foreign exchange movements, there was also the impact of changing the reporting standard for the sales of licenses for competitors' products from gross revenue to net revenue. The change in the standard for reporting revenue did not have an impact on profit -- through progress made on cost efficiency efforts. Revenue in network products was still sluggish, but remained at the same level as the prior year. Profit increased due to an increase in sales of profitable products and cost-cutting efforts. In addition, as planned, we established a new company, 1FINITY on July 1. Through this company, we will consolidate our network-related business, improve business efficiency and globally expand our high-quality and competitive network solutions.

Page 17, Ubiquitous Solutions. Revenue was JPY 47.9 billion, down 1.8% from the previous year. Adjusted operating profit was JPY 8.2 billion, up JPY 3.7 billion from the prior year. We exited from the European business in the first quarter of last year. So there was a pullback from the final revenue of that business last year. Revenue in Japan grew by 6%. Adjusted operating profit was up by 17.2%, an improvement of 8 percentage points from the prior year due to focusing on comparatively profitable business in Japan and a decline in the cost of components due to exchange rate fluctuations.

Towards the bottom is intersegment eliminations and corporate. There was an operating loss of JPY 22.3 billion with a JPY 3.1 billion increase in costs from the prior year. We are continuing to strategically invest in medium- to long-term business growth including in advanced research for such fields as AI and quantum computing. Page 18. I will now talk about the status of the cash flows and the balance sheet. Page 19, cash flows. Excluding onetime cash inflows or outflows, core free cash flow was JPY 230.3 billion, an increase in inflows of JPY 62.5 billion from the prior year. There was a high level of sales in the fourth quarter of the prior year, and we made progress in the collections of accounts receivable.

Towards the bottom of the table, free cash flow was JPY 401.7 billion, an increase in inflows of JPY 271.3 billion from the prior year. There was a significant one-off increase in inflows due to the sale of shares in Shinko Electric Industries. Cash flow from financing activities was negative JPY 89 billion, and there was an increase in cash outflows of JPY 82.4 billion compared to the prior year. Last year, in anticipation of the cash to be received from the sale of noncore assets, we executed share buybacks in advance, and we repaid the resulting short-term borrowings in the first quarter of this fiscal year. Page 20 shows the status of assets, liabilities and equity. I will omit an explanation for this page.

This concludes my explanation of the financial results for the first quarter of fiscal 2025. The results from this first quarter progressed largely in line with our internal forecast. Although there were rapid changes to the business environment in and outside of Japan, the trends in each market did not change significantly during this first quarter and were in line with our expectations. There are, of course, some positive and negative effects with each individual customer. But as there has been little change in how certain -- uncertain the future seems, we cannot take an overly optimistic outlook.

We will closely watch the business environment and make progress towards achieving our forecast. The progress made in each of our business segment is also largely in line with our plans. Page 21. I will now talk about our projected financial results for fiscal '25. Page 22, this is the financial results forecast for fiscal '25. Revenue is projected to be JPY 450 billion. Adjusted operating profit is projected to be JPY 360 billion. Adjusted profit for the period is projected to be JPY 250 billion. All of these figures remain unchanged. Page 23 shows the results from the first quarter compared to our forecast for the full year. For the consolidated total, the target adjusted operating profit for the full year is JPY 360 billion. The results for the first quarter represented progress of about 10% towards this target.

Of this, taking a look at the Service Solutions, the segment had progress of about 13%. As always, profit is skewed towards the second half of the fiscal year, but progress on profitability improved from the previous year. We will diligently continue into the final year of our current medium-term management plan to ensure that we achieve our goal. Page 24 shows the adjusted consolidated results forecast and adjusted items as well as forecast before adjustments. As you can see, there are no changes from our previous forecast. We will steadily proceed towards the goal of achieving record high profits in the final year of the medium-term management plan, both before and after adjustment and for both operating profit and net income.

Starting from the next page, there is information regarding each business segment and the projected cash flows. There have not been any changes to our initial forecast for either. Lastly, I would like to inform all of you about Fujitsu [ IR Day 2025. ] On September 9, we will explain the status of our current progress towards our current medium-term management plan and our business strategy for sustainable growth following it. During the event, we will be able to speak directly with several senior executives of Fujitsu. We believe it will be a valuable opportunity to understand the strategy of our company. We will share further details of the event and the specifics of how it will be held in a separate announcement. We look forward to seeing you at the event. This concludes my presentation.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]