Fujitsu Ltd

Hello, and thank you for taking the time to join us today. I am Takeshi Isobe, Chief Financial Officer of Fujitsu Limited. In the bold outline, we have a summary of the consolidated results for the second quarter of fiscal 2020. Here we show increases and decreases from the prior year in the three categories, excluding restructuring and special items, impact of restructuring, and special items. The top is excluding restructuring and special items. Revenue was 820.7 billion yen, down 136.1 billion yen from the prior year. The impact of COVID-19 shown in the margin of the table was to reduce revenue by 49.3 billion yen, mainly in technology solutions. Excluding the impact of COVID-19, revenue declined by 86.8 billion yen. Revenue from PCs declined significantly in comparison with the previous year when support ended for Windows 7 and there was extraordinarily strong demand prior to the increase in the consumption tax in Japan. Operating profit was 45.8 billion yen. The impact of COVID-19 was to reduce profit by 16 billion yen. excluding the impact of COVID-19, operating profit declined by 5.3 billion yen. This was largely due to revenue decline in ubiquitous solutions. The next point, impact of restructuring, reflects the impact of the reorganization of the device business conducted last year, as well as the withdrawal from the product business in North America and countries in Europe with low profitability. Revenue declined by 24.8 billion yen. On the other hand, operating profit improved by 1.5 billion. The third point is special items, business model transformation expenses. In the second quarter, these reduced operating profit by 4.8 billion yen. In system products, we are reorganizing our production facilities, primarily those in Japan. Because we had a gain of ¥3 billion in last year's second quarter on the reversal of reserves for our restructuring in Europe, the impact of special items in comparison with last year was to reduce operating profit by ¥7.8 billion. In page 5, we show the overall profit and loss statement, including profit for the period attributable to owners of the parent. This is a summary of the consolidated results for the first half of fiscal 2020. At the top are our results excluding the impact of restructuring and special items. Revenue in the first half was 1,612.7 billion yen. Outside the table, we show the impact of COVID-19, which was to reduce revenue by 85.1 billion yen. Excluding that impact, revenue declined by 60.7 billion yen. The impact of the unusually high demand for PC upgrades last year was a reduction this year of about 100 billion yen. Operating profit in the first half was 69.2 billion yen. The impact of COVID-19 was to reduce revenue by 28.1 billion yen. Excluding that, we were able to cover the impact of the decline in PC revenue and increase operating profit by 18.7 billion yen. We will supplement this explanation with further details in a waterfall chart. Next is the impact of restructuring. We are making progress in addressing unprofitable businesses, and there is an improvement of 2.4 billion yen compared to last year. Below that are special items, which reduce operating profit in the first half by 4.8 billion yen. In the first half of last year, special items had a negative impact of 3 billion yen, primarily from the restructuring of the printed circuit board business in Device Solutions. Compared to last year, special items reduced operating profit by an additional 1.8 billion yen. Here, I would like to comment on the factors beyond operating profit. Financial income was 5.7 billion yen, a reduction of 3.9 billion yen from last year. In relation to ubiquitous solutions, income from equity and earnings of affiliates declined because of the impact of lower PC demand compared to last year when demand was unusually high. At the bottom is profit for the period, which was 47.1 billion yen. Here, I'd like to comment on the factors that caused increases or decreases in operating profit in the first half compared to the prior year. On the far left, operating profit in the first half of fiscal 2019 was 71 billion yen. I will use this as the starting point for explaining increases or decreases from the prior year. The first upward arrow shows the decline in the negative impact of special items and restructuring expenses in comparison with last year, resulting in a net positive impact of 0.6 billion yen. Now I would like to explain the increases and decreases excluding the impact of restructuring, special items, and COVID-19 with the next three arrows. The first downward arrow is a ¥17.4 billion decline in operating profit from the reduction in unit sales. Compared to last year, the impact of the decline in revenue was ¥60.7 billion, primarily from the negative impact of around ¥100 billion stemming from the decline in PC revenue. The next upward arrow shows the impact of profitability improvements of ¥12.3 billion. The next upward arrow is 23.7 billion yen from greater efficiencies in operating expenses. The total of the three arrows in the box shows changes in excluding the impact of restructuring, special items and COVID-19. We recovered from the impact of lower sales of PCs and achieved an increase of 18.7 billion yen. The next downward arrow is the impact of COVID-19. The negative impact on revenue was 85.1 billion yen, or a decline in revenue of 5%. The negative impact on operating profit was 28.1 billion yen. Adding everything together, operating profit in the first half was 62.2 billion yen. Here I'd like to offer some supplemental information on the three arrows from the waterfall chart regarding changes in revenue from the prior year. First is the increase or decrease in revenue excluding the impact of restructuring and special items. In the center of the table we have actual results in the first half and the comparison with the prior year. To the right of the table we present reasons for the changes from the prior year. On the whole, revenue declined by 145.9 billion yen from the previous year. Outside the table, the impact of COVID-19 was to reduce revenue by 85.1 billion yen. Revenue in technology solutions was reduced by about 100 billion yen. On the other hand, because of an increase in business deals relating to telecommuting preparedness, there was a positive impact on revenue in ubiquitous solutions of 20 billion yen. On the far right is the change in revenue excluding the impact of COVID-19. Revenue in technology solutions increased by 6.2 billion yen. Revenue from system platforms increased by 26.1 billion yen from the prior year because of the shipment of supercomputer Fugaku, and higher revenue from 5G base stations. Revenue from solutions and services declined by 15.7 billion yen in comparison with last year, when there was strong demand for PC setups, expansion support services, and hardware integration services. In ubiquitous solutions, revenue declined by about 100 billion yen, a sharp decline from last year, when demand was boosted by extraordinary market factors. Revenue increased in device solutions on strong results in electronic components. I will provide further explanation on the impact of COVID-19 in the first half. As I just mentioned, the overall impact was to reduce revenue by 85.1 billion yen in the first half. Negative impacts, such as delays in projects and a stagnation in business deals, reduce revenue by 138.1 billion yen. On the other hand, positive impacts increase revenue by 52.9 billion yen. I will break this out by market segment. In the private enterprise market, project implementation times were pushed back by customers in the manufacturing and automotive sectors, resulting in a major negative impact on revenue. Next is finance and retail. Our business with retail customers was affected, but the impact of COVID-19 on this sector has been relatively modest. The Japan Business Group includes industries such as local government, healthcare, education, and mid-sized companies. These customers have been overwhelmed with having to deal with COVID-19, making it difficult to have discussions about new projects. We have suspended new business discussions with small and medium-sized business customers. The impact of COVID-19 on public sector and social infrastructure customers has been modest, and business has been relatively solid in the first half. In the international regions excluding Japan, and particularly in Europe, business activity has been sluggish due to the implementation of strict lockdown measures. While this situation has yielded some positive effects, including new demand generated by telecommuting for PCs and other IT infrastructure for remote work, as well as demand for solutions, the impact of this on the top line will remain limited to the first half. Aside from this, new deals emerging in relation to issues like digitalization, contact-free transactions, and obviating the need for human intervention represent areas of possible future demand, and it will be important for us to convert these into more orders in the future. While the business environment remains difficult in some industries, we feel that some industries are beginning to recognize the importance and necessity of accelerating digital transformation. We will respond to this demand and are trying to work to accelerate efforts in this domain. Next, I will provide further explanation on our improvements in profitability and reduction in operating expenses. Excluding special items and restructured businesses, our overall gross margin was 29.5%, which was improved by 0.8 percentage points. Profitability is moving in the right direction from efficiencies in operations and maintenance services and assurance activities from upstream processes and solutions and services. Next is operating expenses. Total operating expenses were reduced by 23.7 billion yen, a 5.5% reduction from the prior year. I would like to expand on two points. First, the effect of generating efficiencies and operating expenses was 11 billion yen. Remote work, which was already being promoted, is accelerating due to COVID-19. Since our announcement of the work-life shift initiative in July, new normal ways of working have also become increasingly well established in the company. based on the three pillars of smart working, borderless office, and culture change. Our objective is to improve our employees' well-being by providing them with diverse ways of working. These activities have contributed to enhanced efficiency. The second point is efficiencies and development expenses for system platforms. Investments in the development of Fugaku and 5G base stations have already peaked, and in addition, we made progress in achieving development efficiencies for x86 servers by moving to a global development structure. Next, I would like to talk about progress on the business model transformation of international regions excluding Japan. The expenses for business model transformations were recorded before last fiscal year, and we have been implementing the actual business model transformations after that, so I would like to update you on our latest progress. First, regarding the business model transformation for the product business in Europe. We closed our production facility in Germany, and we have transferred its operation to EMS. In addition, we have reformed our development organization, which had been divided between Europe and Japan, and made progress on efficiencies. Second, regarding our exit from low profitability countries in Europe, we have completed the exit from 20 out of 23 countries in our original plan. As for the remaining three countries, we are in the final stages of contract agreements to sell to businesses, third regarding north america we have reviewed our business portfolio we will exit the product business within this fiscal year and are also negotiating the transfer of part of the business including the restructuring of business in the retail sector in the first half the impact of these business model transformations was about 2 billion yen primarily from narrowing losses from unprofitable countries and greater development efficiencies We will work to reap solid benefits in the second half, as well as next year and beyond. I would now like to comment on the status of our order in Japan and the outlook for the future. I will briefly comment on each industry segment. Please look at the percentage change for the first half excluding PCs. Excluding PCs, the private enterprise segment is down by 9%. Because of COVID-19, we are experiencing the impact of customer delays in IT investments in the manufacturing and automotive sectors. However, we feel that now is almost at the bottom, and these customers are generally very conscious of DX. We are already beginning to see new demand in areas such as obviating the need for human intervention, private 5G, and optimization with AI. Revenue is expected to remain in a difficult situation in the third quarter due to negative factors, including the trade friction between the United States and China and recovery gradually from the fourth quarter. In the financial services and retail sectors, orders are down 10%. This is mainly because there were some large-scale deals in the first half of last year. It's really an issue of the order cycle and we're not concerned that there will be a collapse in orders. Orders in the Japan business group are down by 12%. In addition to the fact that there was a concentration of electronic medical record system upgrades for some large-scale hospitals in last year's first half, this year local governments and healthcare providers are being significantly affected by COVID-19. We are beginning to see new demand for e-government, remote diagnostic systems and DX, but we expect these will not translate into orders before fiscal 2021. Orders from public sector and social infrastructure customers are up 2%. The impact of COVID-19 is modest and business has been good. Second quarter orders are lower than the previous year, but it comes from the business cycle. We see strong demand in areas including the digitalization of government offices and the accelerated development of 5G by carriers, and we will work hard to meet this. Overall orders to date are down 9%, or down 6% if PCs are excluded. As expected, COVID-19 had a big impact in the first half, but the situation is in line with the annual earnings forecast which we showed in July. I will now discuss our segment results, primarily in relation to last year's results. First is Technology Solutions. Revenue was 1,377.4 billion yen, down 7.2% from last year. Operating profit was 42.3 billion yen, down 21.5 billion yen from last year. Both revenue and operating profit were significantly impacted by COVID-19. I will explain the reasons in each subsegment. Solutions and services. Revenue was 795.5 billion yen, down 8.8% from the prior year. As I mentioned earlier, in addition to the impact of COVID-19, revenue is down because last year there were some large-scale healthcare provider deals and integrated hardware services business. Operating profit was 54.2 billion yen, down 7.3 billion yen from the previous year. The impact of COVID-19 was to reduce operating profit by 19.7 billion yen. excluding the impact of COVID-19. Operating profit increased by 12.4 billion yen. There were improvements in the profitability of operations and maintenance services, and progress in generating efficiencies in operating expenses. System platforms. Revenue was 291.7 billion yen, a 1% increase over the prior year. In system products, although there were shipments relating to Fugaku, COVID-19 had a significant adverse effect on revenue. Revenue in network products increased because of higher revenue from 5G base stations. Operating profit was 7.3 billion yen, down 2.5 billion yen from the prior year. The impact of COVID-19 was to reduce operating profit by 5.8 billion yen. excluding that and the impact of restructuring and special items. Operating profit increased by 7.9 billion yen. In addition to the impact of higher revenue in network products, there was a reduction in development expenses. International regions excluding Japan. Revenue was 334.9 billion yen, down 9.2% from the previous year. In addition to being impacted by COVID-19, revenue was adversely affected by the impact of business restructurings. Aside from that, the product business in Europe was weak. There was an operating loss of 3.7 billion yen. Excluding the impact of restructuring and special items, the impact of COVID-19 was to reduce operating profit by 3.7 billion yen. excluding the impact of COVID-19, operating profit was essentially unchanged. Adding together the negative impact of business model transformation expenses and the reduction in losses from business restructuring, the net effect is breakeven. This shows common expenses held in technology solutions. Operating profit was 18.3 billion yen. Increases in expenses held in common in technology solutions led operating profit to decrease by 7.8 billion yen from the prior year. The impact of COVID-19 was 1.6 billion yen. This was from a group company that provides training in other educational services. Other than that, measures were taken to enhance network capacity and security to accelerate the work-life shift initiative. Additionally, expenses were recorded for the Fujitra transformation project started for Fujitsu's internal digital transformation, as well as the one ERP project for global data-driven management. In our management direction briefing in July, we touched upon two key business areas of technology solutions, for growth and for stability. I would now like to discuss the status of revenue in these areas. 4Growth is a business area in which we use digital technologies to contribute to the transformation and growth of our customers' businesses. We have positioned this as a growth area and we seek to expand both our scale and profitability in this area. 4Stability is a conventional IT area including system operations and maintenance in which we seek to contribute to the stable operations of our customers' IT platforms and improve their quality. In this area, we are pursuing efficiencies and seek to raise profitability. In the first half, revenue in technology solutions was 1,377.4 billion yen, of which 33% was recorded in the for growth area, while 67% was in the for stability area. First half revenue in the 4 growth area was 459.1 billion yen, 5% higher than last year, despite the impact of COVID-19. Revenue in the first half in the 4 stability area was 918.3 billion yen, down 12% from the previous year. The details of each business and the actual performance for each sub-segment are described in the supplementary explanation which follows. Sales declined in these areas due to the impact of COVID-19, but our for growth business expanded to cover these impacts. The overall economic environment is still far from optimistic, but we're beginning to see demand for DX expansion, such as work style change, smart city solutions and services, and private 5G. We'll make every effort to contribute to the growth of our customers' businesses, as well as building a reference system by promoting our own DX system. Going forward, we will continue to share with you our business activities in each of these two areas. Ubiquitous Solutions Revenue was 157.6 billion yen, down 34.7% from the prior year. Revenue declined for the prior year when support ended for Windows 7 and there was extraordinarily strong demand prior to the increase in the consumption tax in Japan. Operating profit was 8.7 billion yen. Operating profit declined by 5.2 billion yen from the prior year, primarily from the impact of lower revenue. Device solutions. Revenue was 138.6 billion yen, down 17.8% from the prior year. The impact of the business restructuring was to reduce revenue by 36.1 billion yen. Excluding that impact, revenue increased by 4.6%, primarily from electronic components. Operating profit was 11.1 billion yen, an improvement of 17.9 billion yen from the prior year. There was a positive impact of 6.8 billion yen from last year's business model transformation expenses and business restructuring. The impact of higher revenue improvements in profitability for electronic components led to an improvement in results by 11.1 billion yen, excluding the impact of restructuring in special items. This is cash flow. Cash flows from operating activities were 156.9 billion yen. This was an increase of 41.7 billion yen from the previous year, mainly from lower inventory assets and other asset efficiencies, as well as lower outflows from structural reforms. Cash flows from investing activities were a net outflow of 44.1 billion yen, essentially unchanged from the prior year. Free cash flow was 112.7 billion yen. Now for assets, liabilities, and equity. We were able to reduce both assets and liabilities by about 200 billion yen each, as a result of progress of business transformation and reducing inventory. This is about the status of shareholder returns. As we announced in July, we'll pay an interim dividend of 100 yen per share. We have been able to maintain a level of profit that is close to that of the prior year, and because we can maintain a solid financial foundation, we will increase the interim dividend by 20 yen per share compared to last year, as anticipated. There is not a slide for this, but I would like to comment on our results in comparison with the internal targets we announced in July. First, I will discuss the segments. Results in technology solutions fell slightly below our plans. This is because the business from local governments and healthcare providers was slightly lower than anticipated. On the other hand, results in device solutions were slightly higher than expected. In comparison with last year, results in the second quarter may seem weak in relation to results in the first quarter, but there are three reasons for this. The first is that the second quarter of the previous year was very strong, mainly due to special demand for PCs, reflecting the impact of the consumption tax increase in Japan. The second is that, in contrast to last year, when most revenue from large-scale system product deals was in the second quarter, this year most revenues were in the first quarter. The third is the impact of COVID-19. Because the impact of COVID-19 on orders began to appear starting in the first quarter, the impact on revenue was greater in the second quarter than in the first quarter. These effects were factored into our internal plans in July. I will now discuss our forecast for fiscal 2020. This is the upper portion of the table with a bold outline. We have made no changes to our forecast for revenue of 3,610 billion yen, operating profit of 212 billion yen, and profit for the period of 160 billion yen. The impact of COVID-19 shown outside the table is the same as last time. This shows our forecast by business segment. Technology solutions, ubiquitous solutions, and device solutions are all as we had projected last time. This is a breakdown of the forecast for technology solutions. Inside the bold outline in the middle of the table is the comparison with the previous forecast. There is one upward and one downward change. This is the impact of shifting the business model transformation expenses recorded in the second quarter in system platforms out of common. Excluding the impact of restructuring and special items, there is no change in the sub-segments. Although we have been affected quite considerably by COVID-19, it is essentially in line with what we anticipated. Both in and outside of Japan, there's still many uncertainties in our business environment. As we thoroughly examine trends and needs in society and among our customers, however, we will continue to advance our business operations without wavering to achieve sustainable growth.