Fujitsu Ltd

This is a summary of the consolidated results for the third quarter of fiscal 2020. Excluding the impact of restructuring and special items, we were able to maintain revenue at essentially the same level as last year's third quarter despite the impact of COVID-19. Operating profits significantly increased as we made further progress in improving profitability as we had in the first half. In the table, we are dividing revenue into three categories, revenue excluding the impact of restructuring and special items, the impact of restructuring, and special items. At the top is third quarter revenue excluding the impact of restructuring and special items, which was 884.3 billion yen, slightly lower than last year. The main impact of COVID-19 was on technology solutions. Excluding that impact, revenue in technology solutions increased by ¥10.3 billion. We were able to more than offset the decline in PC revenue from the unusually high demand of the previous year, primarily through an increase in revenue from 5G base stations in network products and a higher volume of sales of electronic components. excluding the impact of restructuring and special items. Operating profit was 68.6 billion yen, up 17.8 billion yen from last year. COVID-19 had a negative impact, but profit increased because of further profitability improvements. Because of higher efficiencies, the operating profit margin reached 7.8%, a 2.1 percentage point improvement from the previous year. In addition to profitability improvements in services in Japan and in the international regions, a higher volume of sales of 5G base stations led to a significant increase in operating profit, mainly in technology solutions. I will explain in greater detail in a waterfall chart a little later. Next is the impact of business restructuring. In addition to the restructuring of the device business last year, the impact of exiting unprofitable countries in Europe and the impact of exiting the hardware product business in North America, this includes the impact of the sale of the mobile phone retail store business, which occurred during the third quarter. The combined impact was to reduce revenue by 19.1 billion yen from the prior year. The third category is special items. Because of the sale of the mobile phone retail store business, we recorded a one-time gain of 25.4 billion yen. Adding these together, operating profit was 93.4 billion yen, an increase of 43 billion yen from the previous year. On page 5, we show the overall consolidated profit and loss figures, including profit for the period. At the bottom of the upper table, profit for the period was 67.2 billion yen. This represents an increase of 31 billion yen over last year, resulting from the improvement in results excluding the impact of restructuring and special items, in addition to the one-time gain. Page 7. This shows consolidated financial results for the first nine months. At the top are results excluding the impact of restructuring and special items. Revenue was 2,482.6 billion yen. Outside the table, we show the impact of COVID-19, which was to reduce revenue by 105.2 billion yen. Excluding that impact, revenue declined by 43.6 billion yen. The impact of the unusually high demand for PC upgrades last year was a large reduction in revenue this year of about 120 billion yen. Aside from that, revenue increased about 80 billion yen, mainly from a higher volume of sales of 5G base stations and electronic components. Excluding the impact of restructuring and special items, operating profit was 137.2 billion yen. This represents an increase of 8.3 billion yen over the prior year. in addition to profitability improvements in solutions and services. The impact of higher revenue in 5G base stations and electronic components more than offset the negative impact of COVID-19. Next is the impact of business restructuring. Revenue was reduced by 76.8 billion yen, but the cuts to low margin businesses resulted in a profit improvement of 2.5 billion yen compared to the previous year. Below that is special items. During the first nine months, in addition to the ¥5 billion in expenses in the first half of the year from reorganizing our production facilities in Japan, there was the one-time gain of ¥25.4 billion, resulting in a profit for the nine months of ¥20.5 billion. The impact of not having last year's business model transformation expenses and the gain on the sale of businesses recorded last year was to increase profit by 2.8 billion yen. Adding these together, operating profit rose by 23.4 billion yen from special items in comparison to last year. Adding all three categories together, operating profit was 155.7 billion yen, up 34.2 billion yen from last year. Page 8. Here I would like to comment on the items below the operating profit. Financial income was 8.3 billion yen, a reduction of 4.7 billion yen from the last year. Income from equity and earnings of affiliates in relation to the ubiquitous solutions 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 114.3 billion yen. Page 10. Here I would like to comment on the factors that cause increases or decreases in operating profit in the third quarter compared to the prior year. On the far left, operating profit in the third quarter of fiscal 2019 was 50.4 billion yen. 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 in comparison with last year, resulting in a net positive impact of ¥25.1 billion. As I mentioned earlier, we had a one-time gain of ¥25.4 billion in the third quarter. The next three arrows show increases in operating profit excluding the impact of COVID-19. The first upward arrow shows the increase to operating profit from higher sales volumes. Revenue increased by ¥10.3 billion from the previous year. The increase is mainly from higher unit sales in network products and device solutions. The next upward arrow is a 10.6 billion yen increase in operating income from improvements in profitability. The next upward arrow is a 13 billion yen increase in operating income from greater efficiencies in operating expenses. Together, the total of the three arrows inside the box increase operating income by 26.7 billion yen. Broken down by segment, the increase in operating profit in technology solutions was ¥22.6 billion, mainly from profitability improvements. The next downward arrow is the negative impact from COVID-19. The negative impact on revenue was ¥20.1 billion, or a decline in revenue of 2%. The negative impact on operating profit was ¥8.8 billion. Adding everything together, operating profit in the third quarter was 93.4 billion yen. Page 11. Here we give 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 third quarter and the comparison with the prior year. To the right of the table, we present the changes from the prior year. On the whole, revenue declined by 9.7 billion yen from the previous year. Excluding the impact of COVID-19, revenue rose by 10.3. The impact of COVID-19 was to reduce revenue by 20.1 billion yen. excluding the impact of COVID-19, revenue in technology solutions rose by 13.2 billion yen. In system platforms, revenue in network products rose mainly from 5G base stations. For solutions and services, there was a significant decline from the previous year when there was strong demand for hardware integration services, such as PC setups and deployment support services. In ubiquitous solutions, revenue declined by 23.2 billion yen, a sharp decline from last year when there was unusually strong demand. Revenue increased in device solutions on strong results in electronic components. Page 12. I'll provide further explanation on the impact of COVID-19 in the third quarter. As I just mentioned, the overall impact was to reduce revenue by ¥20.1 billion. Negative impacts such as delays in projects and a stagnation in business deals reduced revenue by ¥37.4 billion. Positive impacts increased revenue by ¥17.3 billion. In the first and second quarters, the negative impact on overall revenue was about 5%, but the impact has been declining, reaching a level of 2% in the third quarter. The scale of the negative impact has been declining mainly because projects that had been delayed were restarted. I'll break this down by market segment. In the manufacturing sector and distribution sector, there's been a continuation from the first half of a decline in IT spending budgets as well as continued project delays. There's considerable variation from customer to customer, however, as some projects have restarted and the negative impact is diminishing. Healthcare and local government customers continue today to have to directly deal with COVID-19, and business has been weak. We expect this impact to persist in the fourth quarter. In finance and retailing, there has been no major impact. Similarly, we have seen very little impact on our business with the public sector or telecom carriers, and business has been solid. Outside of Japan, some regions have reinstituted lockdown measures and business conditions remain difficult. On the other hand, there have also been circumstances in which measures designed to deal with the new normal have had a positive impact on demand. The positive impact on revenue is mainly from PCs and other IT infrastructure or telecommuting and other remote work, as well as from the provision of related solutions. New deals are increasing around the keywords of unmanned and contactless, with public sector institutions and financial institutions employing solutions using AI for unstaffed reception areas to avoid interactions at customer service counters. In addition, there are also many business discussions on rebuilding mission-critical systems for the purpose of actively leveraging data, and our feeling is that there is a growing customer awareness of the issue of digital transformation. We are assuming that demand will further strengthen going forward, and we are working to be able to thoroughly respond to these customer needs. Page 13. Next, I'll discuss our gross margin. Excluding the impact of restructuring and special items, our overall gross margin improved by 1.1 percentage points over the previous year to 30.5%. just as in the first half, there was progress in profitability improvements and solutions and services. We're working to thoroughly implement efficiencies in operations and maintenance services and assurance activities from upstream processes. With regards to the productivity of remote development work and remote maintenance, no major problems have arisen, and we're putting in place the environment to enable further expansion. In addition to these factors, there have been improvements in the product mix from higher sales of 5G base stations, as well as progress in recovering overhead costs because of the higher demand for electronic components, leading to a higher level of profitability improvements from the first half. Next, total operating expenses were reduced by 13 billion yen. Three factors led to this result. First, greater efficiencies in general expenses reduced operating expenses by ¥6 billion. Our Work-Life Shift initiative, which promotes new ways of working, is firmly taking root as we change our policies. The initiative is designed to improve the well-being of employees, but also continues to generate cost efficiencies. The second factor is efficiencies in development expenses for system platforms, which reduced operating expenses by 3.5 billion yen. Investments in supercomputer development have already peaked. Additionally, we have made progress on development efficiencies for x86 servers by moving to a global development structure. Lastly, the impact of other one-time items reduced operating expenses by 3.5 billion yen. These include one-time measures that have reduced expenses or increased revenue from last year, such as progress in reducing company housing and other real estate holdings. On page 14, we provide some additional information on our work-life shift initiative for your reference. I'd like to talk to you about the state of progress on Fujitsu's three new ways of working, promoted under work-life shift. In our Smart Working initiative, we extended a flexible working system that previously had been partially applied to all employees, doing away with core working hours and enabling a flexible way of working as we make progress on putting the proper environment in place. Next, in our Borderless Office initiative, we have worked to expand the workplace with hubs, satellite offices, and shared offices. The proportion of employees who commute to the office remains about 20%. Lastly, with our Culture Change Initiative, we've introduced a system in which we collect the opinions of employees in order to reflect them in our next action steps, leveraging the voice platform. In an internal survey conducted in November, 75% of employees responded that under remote working, their productivity had either not changed or had improved. These work-life shift initiatives are firmly taking root and actively contribute to greater well-being as well as improvements in productivity. We're continuing to make investments to achieve new ways of working, and the changes we have made to previous ways of working have also led to reductions in overhead costs. Page 15. I would now like to comment on the status of our orders in Japan. I'll briefly comment on each industry segment for the third quarter. Please look at the percentage change for the third quarter excluding PCs. Excluding PCs, the enterprise segment was down by 5%. The decline can be contributed to COVID-19. As I briefly mentioned earlier, we are continuing to be impacted by reductions in IT spending budgets and by project delays primarily in the manufacturing and automotive sectors. From the third quarter, however, some projects that had been delayed have restarted and the impact is diminishing compared to the first half. On the other hand, in terms of new demand, we have started to win new orders for solutions to enable new ways of working, private 5G networks for streamlined manufacturing, and AI for work optimization. In the financial services and retailing sectors, orders rose by 2%. The cyclical nature of large-scale deals had a negative impact in the first half, but as we anticipated, the impact turned positive in the third quarter. In these areas, to avoid face-to-face sales activities, we are promoting sales via online communication services. Orders in the Japan business group were down by 2%. Because there was some progress made in catching up in projects that had been put on hold, orders in the third quarter approached the level achieved in the prior year. Still, because of the higher burden placed on local governments and healthcare providers to directly deal with COVID-19, business discussions remain largely on hold, and it is difficult to predict the outlook for the fourth quarter. In the third column from the right of the table, overall orders, including PCs, were up by 1%. There was an increase in PC orders for the Giga school project, resulting in a level of orders that exceeded the previous year. Orders from public sector and social infrastructure customers were up 31%. In addition to a strong trend in orders from national government agencies and institutions, there was a major increase in demand for spending on 5G base stations by telecom carriers. The impact of COVID-19 is modest and trends appear strong for the full year. Taking all of the above into account, overall orders to date are up 6% or up 9% excluding PCs. Orders in the second quarter were at a fairly low level, but orders in the third quarter greatly exceeded the prior year's level. This trend is as we had anticipated. For the fourth quarter, there are some concerning developments, including an upturn in the spread of COVID-19 and another declaration of a state of emergency in Japan, and we are aware that we need to closely monitor changes in demand for each sector of the economy. Page 17. I'll now discuss our segment results, primarily in relation to last year's results. First is technology solutions. Revenue was 753.5 billion yen, down 2.1% from last year. Operating profit was 52.3 billion yen, up 11.4 billion yen from last year. Results were negatively impacted by COVID-19, but improvements in profitability more than offset that impact, resulting in an increase in profit over last year. I'll explain the reasons in each sub-segment. Page 18, Solutions Services. Revenue was 427.2 billion yen, down 3.9% from the prior year. As I mentioned earlier, in addition to the impact of COVID-19, revenue is down because last year revenue was significantly boosted by the hardware integration services business. Operating profit was ¥40.9 billion, up ¥2.5 billion from the previous year. There was a negative impact from COVID-19, but 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. Page 19. System Platforms. revenue was 169.7 billion yen, a 20% increase over the prior year. The increase in revenue in system products includes a positive effect from a change in distribution. Excluding this and the impact of COVID-19, revenue was essentially at the same level as last year. 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 11.9 billion yen, up 7.1 billion yen from the prior year. Operating profit increased sharply, mainly from the impact of higher revenue from network products. Page 20, international regions excluding Japan. Revenue was 192.4 billion yen, down 5.3% from the previous year. excluding the impact of lower revenue from COVID-19 and business restructurings. Revenue was up 3%. Revenue was higher than last year in part because we won a large-scale systems development deal from a public sector customer in northern and western Europe. Operating profit was 8.6 billion yen, an improvement of 9.8 billion yen from the previous year. The impact of not having the burden of last year's business model restructuring expenses was 5.5 billion yen. Excluding the impact of restructuring and special items, although results continued to be negatively impacted by COVID-19, profits increased because of profitability improvements and greater cost efficiencies. Page 21. This shows the shared expenses of technology solutions. Please look at the top row, which shows the shared expenses excluding special items. It is minus 9.2 billion yen, close to last year's level. From special items, the profit decreased by 7.3 billion yen for the prior year because last year there were one-time gains. Adding these together, shared expenses reduced operating profit by 8 billion yen compared to the previous year. Page 22. This shows revenue results in the two areas of value creation in technology solutions, for growth and for stability. Third quarter revenue in technology solutions was 753.5 billion yen, comprised of 31% from for growth and 69% from for stability. Revenue from For Growth was 236.7 billion yen, and it was also impacted by COVID-19, but it increased 4% over the prior year. On the other hand, revenue from For Stability was 516.8 billion yen, down 5% from the prior year. In the appendix, we have attached supplementary materials that show the businesses included in each of these areas and the performance of each subsegment. In both areas, revenue was reduced by COVID-19, but revenue from for growth managed to still rise because of the strong demand for 5G base stations in the third quarter. While building reference models from Fujitsu's own progress in digital transformation, we will work to contribute to the growth of our customers' businesses and the resolution of issues facing society. Page 23, ubiquitous solutions. revenue was ¥84.1 billion, down 24.5% 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 extraordinarily strong demand last year relating to the end of support for Windows 7. Operating profit was ¥30.9 billion. Operating profit increased by ¥22 billion from the prior year, The impact of the gain from the sale of a business was 25.4 billion yen. Excluding that, the impact of lower revenue reduced operating profit by 3.3 billion yen from the prior year. Page 24, Device Solutions. Revenue was 75.5 billion yen, up 5.6% from the prior year. The impact of the business restructuring was to reduce revenue by 3 billion yen. Excluding that impact, revenue increased by 10.2%, primarily from electronic components. Operating profit was 10.2 billion yen, an increase of 9.5 billion yen from the prior year. There was a positive impact of 1.6 billion yen from the reduction in the burden of business model transformation expenses compared to the previous year. The impact of higher revenue and improvements in profitability for electronic components led to an increase in operating profit of 8 billion yen, excluding the impact of restructuring and special items. Page 25. This is cash flow for the first nine months. Cash flows from operating activities were 199.4 billion yen. This represented an increase in outflows of ¥17.3 billion from the previous year, despite progress in greater asset efficiencies, including lower inventory assets, because of an increase in corporate tax expenses. Cash flows from investing activities were a net outflow of ¥41.2 billion, essentially unchanged from the prior year. Free cash flow was 158.1 billion yen. Cash flows from financing activities were a net outflow of 146.8 billion yen. This was primarily the result of purchasing the outstanding shares of Fujitsu Frontech in conjunction with that company's delisting and fluctuations in corporate bond redemptions. There's not a slide for this, but I would like to comment on our results in comparison with our internal targets at the time of our previous announcement. The consolidated total operating profit exceeded our internal target by about 5 billion yen. I'll break that amount out by segment. The performance in technology solutions was essentially as anticipated. Ubiquitous solutions and device solutions each exceeded our target by 2.5 billion yen. Page 28. 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, but our forecast for operating profit has been increased by 25 billion yen to 237 billion yen, and the forecast for profit for the period has been increased by 17 billion yen to 177 billion yen. For reference, we are forecasting our highest ever profit for the period. The impact of COVID-19 compared to the previous year shown outside the table is expected to lower revenue by 120 billion yen and lower operating profit by 41 billion yen. These amounts reflect an increase in the negative impact on revenue by 10 billion yen and on operating profit by 3 billion yen. For the details of these changes, I will comment on this segment breakdown on the next page. Page 29. This shows our forecast by business segment. Please look at the center of the table at the comparison with the forecast issued in October. At the very bottom, the consolidated total for operating profit shows a 20 billion yen increase in the forecast under special items. The forecast for operating profit in Ubiquitous Solutions has been increased by 25 billion yen from the sale of the mobile phone retail store business in the third quarter. At the same time, in technology solutions, expenses have been increased by 5 billion yen in order to bring forward some structural transformations. Next, please look at the changes in our revenue forecasts, excluding special items. While our consolidated total revenue forecast has not changed, there have been some changes at the segment level. We have reduced our revenue forecast for solutions and services under technology solutions by 10 billion yen. This takes into consideration the fact that the delay in business deals due to COVID-19, especially in the fields of healthcare and local government, will continue into the fourth quarter. In device solutions, we have increased the revenue forecast by 10 billion yen due to the current rise in overall demand for electronic components. Next is operating profit. Our consolidated total forecast has been increased by 5 billion yen. In technology solutions, we have lowered the forecast for solutions and services by 5 billion. About half of that amount is due to the greater impact of lower revenue due to COVID-19. The other half is the impact of bringing growth-focused strategic investments forward from the next fiscal year. The strategic investment primarily consists of a measure to expand offshoring called the Japan Global Gateway, aimed at improving profitability, and a measure to build shared solutions for both Japan and other regions in order to increase our growth rate around the world. In ubiquitous solutions, we have increased our forecast by 5 billion yen. This incorporates profitability improvements due to greater than expected increases in unit sale prices, including increases in the sales of high-end products. In device solutions, we have also increased our forecast by 5 billion yen. This reflects higher demand for electronic components. Page 31 includes a breakdown of sub-segments within technology solutions. Page 32. Here we show the revised full year forecast for technology solutions, broken into three sections. Results excluding special items and restructuring, the impact of restructuring, and special items. Please look at the top line, showing operating profit margins excluding special items and restructuring. On the right hand side, you can see that our operating profit margin forecast for fiscal 2020 is 6.4%. In theory, excluding the impact of COVID-19, this would give us a margin of 7.6%, an increase of 1.3% over the previous year. This shows that even in the midst of significant negative impacts from COVID-19, we're making steady progress in improving operating profit margins. Page 33, cash flow. Our forecast for free cash flow for the full year is 200 billion yen. This is an increase of 30 billion yen over the previous forecast, taking into consideration factors such as the sale of the mobile phone retail store business. We are reliably generating free cash flow. I'd like to comment on shareholder returns and on the progress of our stock buyback program. Last year, when we announced our financial results for the third quarter, we decided to conduct 50 billion yen in stock buybacks. Of that amount, ¥30 billion worth of shares were purchased in the fourth quarter of the last fiscal year. Since then, in part due to careful assessments of the financial impact of COVID-19, we had stopped any additional purchases. As I commented earlier, we have now reached our goal of securing results that exceed the level of the previous year, so we will be conducting the remaining ¥20 billion in buybacks. For details, please refer to the disclosed information on TDNet operated by the Tokyo Stock Exchange. So, our stock buybacks for fiscal 2020 will amount to 20 billion yen, while our dividend will amount to 40 billion yen. All told, our total shareholder returns will amount to 60 billion yen. As explained in our capital allocation policy, we'll work to expand shareholder returns by combining stable dividends based on the sustainable growth of our businesses and a flexible approach to stock buybacks based on capital requirements. This concludes my explanation of our third quarter financial results and our results forecast for fiscal 2020. Due to the wide range of direct and indirect changes brought about by the COVID-19 pandemic, the environment surrounding our business is becoming ever more complex. In order for Fujitsu to achieve its purpose of making the world more sustainable by building trust in society through innovation, I would like us to first continue to make flexible changes ourselves and work on both sustainable growth and value creation. I'd also like to ask for your continued understanding and support for Fujitsu's businesses and for our future direction. Thank you.