Fujitsu Ltd

This is Isobe. I would now like to start explanation about the fiscal year 2023 third quarter consolidated financial results. I will use the presentation material to explain. Page 3. First, the financial highlights for the first nine months of fiscal 2023. The most important segment is service solutions. Revenue in this segment was 1,522,000,000 yen, an increase of 12.9%, excluding impact of PFU restructuring. Primarily for business in Japan, there was a strong increase in orders and revenue. Results were driven by demand related to digital transformation and modernization projects. Adjusted operating profit was 116.3 billion yen, an increase of 61.8 billion yen year-on-year. In addition to the impact of higher revenue, progress was made as expected in improving profitability, such as by transforming the delivery of services. This resulted in operating a profit more than twice as high as that of the prior year. On the other hand, there was a pullback from the previous year's strong demand for hardware solutions and network products. In addition, demand for device solutions has been decreasing since the second half of last year. Total consolidated revenue was consequently 2 trillion 642 billion 700 million yen, an increase of 1.7%, excluding the impact of restructurings. Adjusted operating profit was 118.8 billion yen, a decline of 32.9 billion yen year-on-year. Page 4 shows an overview of the financial results for each business segment. This page shows an overview of the segments, and I will discuss the results for each segment starting with the next slide. At the very top is service solutions, our most important segment, which continue to increase in size while also improving profitability. Excluding PFU, which had been included in the consolidated results through the first half of the previous year, total cumulative revenue from continuing operations for the first nine months increased by $174.1 billion. Operating profit also increased by 13.6% year-on-year. On the other hand, revenue and profit in hardware solutions, which includes network products and device solutions, which both performed well in the prior year, decreased. In intra-segment, eliminations and corporate, we are pursuing a plan of increasing growth investments to achieve growth over the medium and long term. The following pages show results for each business segment. Page 6. Service Solutions Cumulative revenue for the first nine months was 1,522,000,000 yen, which on a continuing operations basis represented an increase of 12.9% year-on-year. For customers both inside and outside Japan, there was an acceleration DX initiatives as well as sustainable transformation initiatives. As a result, there was greater demand for consulting services, modernization projects, and cloud migration support. 52 U-Vans benefited from this robust demand with a 67% increase in revenue. Adjusted operating profit was 116.3 billion, up 61.8 billion from the prior year. Although we increased growth investments related to Fujitsu Yuvan's operating profit rose significantly because of the impact of strongly higher revenue and measures to improve profitability. I will shortly explain the contributing factors of this increase in profits with the waterfall chart. First, I will touch upon the breakdown of results by quarter. At the top, shown in bright blue, growth in revenue was 10% in the first quarter, 17% in Q2, and 12% in Q3, resulting in 13% growth for the first nine months and a continuation of solid results as expected. The blue bars show adjusted operating profit. Adjusted operating profit was 4.5% in Q1, 8.2% in Q2, and 9.8% in Q3, showing a steady increase. Adjusted operating profit for the first nine months was 7.6%, reaching a level twice as high as the prior year. In addition to the impact of higher revenue, we are pursuing progress in profitability improvements. Page 8. This chart shows the factors that caused increases or decreases in adjusted operating profit in the first-time months in service solutions compared to the prior year. On the far left, adjusted operating profit for the first-time months of fiscal 2022 was $54.4 billion. The first factor is an increase of $58.1 billion in adjusted operating profit from the impact of higher revenue. In part because of solid increase in revenue in 52 months, overall revenue rose by 12.9%. The second factor is an increase of $27.9 billion from improved profitability. We continue to make progress in initiatives to improve productivity, such as the expanded use of global delivery centres and standardisation in development work. Although there is an impact from the increase in labor costs, the improvement in profitability fully covers these costs. The third factor is a decline of $24.1 billion from higher expenses, primarily investments in growth areas. As we projected, we actively made growth investments, including investments in the development of Fujitsu runs offerings, employee training and development and enhanced security. Adding these up, cumulative adjusted operating profit for Service Solutions in the first 9 months of fiscal 2023 was 116.3 billion yen. Page 9, I will now provide supplemental information on each of factors in the previous waterfall chart. First, status of orders which led to the increase in revenue. This page shows orders in Japan. Continuing from the first half, orders in Japan remained solid, increasing by 16% in the first 9 months compared to the prior year. I will now comment on each industry segment. First is the private enterprise business segment, in which orders were up 7% from the prior year. Growth was driven by orders in manufacturing, mobility, and retailing and distribution sectors, primarily for modernization projects. Finance business segment orders were up 21%. In addition to deals to upgrade mission-critical systems for medical and insurance institutions, we also won modernization project deals, resulting in a significant increase in orders from the prior year. Public and healthcare segments, Orders were up 26%. In Q3, we received multiple orders for system upgrades from government agencies and ministries, resulting in solid growth. Among customers in the healthcare industry, we are also seeing strong investments in electronic medical record systems and healthcare information systems. In the mission critical and other segment, orders were up 15%. Continuing on, the first half orders benefited from multiple large projects in the national security field. Due to sustained robust demand from the first half of fiscal year, the order backlog of our business in Japan is increasing, which will lead to higher revenue in Q4 and next fiscal year. Page 10 shows the orders in regions international. The Fujifilm's business is suddenly expanding globally. Orders for the Europe region for the first nine months of the year declined by 1%, reflecting large-scale project wins concentrated in third quarter. Orders in the Americas region increased by 35%, a big rise over the prior year as we won multiple private sector business application deals. Orders for the Asia-Pacific region were down 17%. There was a pullback from the large-scale public sector deals in the prior year, resulting in a decline. Page 11 shows the progress of 52 U-Vans, which we are positioning as the most vital area for the growth of our business and the transformation of our business portfolio. 52 U-Vans consists of a total of seven key focus areas, including four vertical areas, which are cross-industry areas that focus on the solution of societal issues, and three horizontal areas, which are technical platforms that support the vertical areas. In the first nine months of fiscal 2023, we released roughly 40 new offerings, resulting in a total of 110 offerings at present. We are accelerating the release of offerings in vertical areas in particular. Overall revenue for the first nine months was 247.3 billion, up 67% from the prior year. Business is progressing at a pace that should exceed our 52-month revenue target for the full year of 300 billion yen. 52 U-Funds now accounts for 16% of total revenue in the service solution segment, up from 11% in the prior year. In our medium-term management plan, we are seeking to achieve revenue of 700 billion yen, representing 30% of total revenue in fiscal 2025. Orders leading to revenue are now 295.6 billion yen, up 79% from the prior year. High demand is continuing from what we call the 3S business applications consisting primarily of SAP, ServiceNow and Salesforce and we expect to build on our business in these areas in the fourth quarter and fiscal 2024. On page 12, I would like to comment on profitability improvements and the status of the growth investments. Profitability increased by 27.9 billion and the gross margin improved by 1.5 percentage points. We are making steady progress in the standardization of development work, automation, the expansion of insourcing, and use of offshoring through our Japan Global Gateway and our global delivery centers. Growth investments and expenses increased by $24.1 billion. We continue to proactively invest in areas directly related to business growth, such as the development of Fujito Advanced Offerings investments needed to develop specialist human resources and investments to strengthen our security. This concludes my supplemental explanation of the increases and decreases in profit outlined in the chart on page 8. Page 13, I will briefly touch upon the status of each sub-segment in Service Solutions. First is Global Solutions. Revenue was 331.5 billion yen, up 18.4% year-on-year. On an adjusted basis, the sub-segment posted an operating loss of 3.3 billion yen, but it is an improvement of 10.1 billion compared to the loss in the prior year. Growth of 32 months was faster than anticipated, and large-scale sales of software supporting modernization drove revenue growth. We are currently in a phase of making aggressive growth investments, but in addition to the impact of higher revenue, profitability is also steadily improving, which resulted in a large decline in losses. In regions Japan, revenue from continuing operations was 886.3 billion yen, up 12.2% year-on-year. The adjusted operating profit was 122.8 billion yen, an increase of 49.6 billion yen. The ex-business deals and upgrades of mission-critical systems are increasing in a wide range of sectors, primarily in the public and healthcare sectors. In addition to the impact of high revenue, we made steady progress in improving profitability. In regions, international operating profit was 144.5 billion yen, up 7.5%. Revenue was up $445.6 billion, up 7.5% next to the backdrop of expansion of the 32 funds and the impact of foreign exchange movements. On an adjusted basis, there is a subsequent post in the operating analysis of $3.2 billion, an eruption in loss by $2.1 billion from the previous year. In terms of profitability, conditions continue to be difficult primarily in Europe. We will steadily transform our business portfolio to accelerate the improvement in our profitability. Page 14, I will now explain about the performance of segments besides service solutions versus hardware solutions. Revenue for the first nine months of fiscal 2023 was 748 billion, decreases of 6.0% year-on-year. The adjusted operating part was 37.1 billion, down 19.7 billion year-on-year. In system products, revenue increased largely due to foreign exchange movements. On the other hand, in network products, there was a large pullback from the strong demand of the previous year in Japan and the Americas, resulting in a significant drop in revenue. Various sales are decreasing due to the large-scale demand cycle. We are expanding our development investments for the next growth cycle for network products this fiscal year. This includes investments to achieve high speed, high capacity, low latency, and low energy consumption networks. On the bottom of the slide, you can see ubiquitous solutions. Revenue was $197.5 billion, down 3.2% year-on-year. Adjusted operating profit, both 16.7 billion up sharply by 10.9 billion yen year-on-year. Regarding the higher component costs, including the impact of foreign exchange and movement, so we are advancing efforts to cut costs and pass on higher costs to customers and we are steadily increasing our resilience to changes in the external environment. Page 15, device solutions. Revenue was 212.4 billion down a massive 30.2% year-on-year. Adjusted operating profit was 12.7 billion, down 58.2 billion yen year-on-year. Demand for semiconductor packaging, which had been very strong through the first half of the prior year, significantly decreased in the second half of the year. In this year's Q3, the decline seems to have ended, but demand continues to be weak. In addition to lower air capacity utilization from lower product unit volumes, there was a significant decrease in operating profit. We anticipate air recovery towards fiscal 2024, but current conditions in the segment remain severe. At the bottom, there is intersegment elimination and corporate. This segment poses an operating loss of 64.1 billion yen with a 27.7 billion yen increase in expenses year on year. We continue to expand our investments in medium to long-term business growth, including enhancing advanced research in cutting-edge areas such as AI, quantum computing, and energy-saving processes, and promoting the 152 program for strengthening our management foundation, as well as enhanced global security.

Page 16. Here, I would like to describe our initiatives to transform our business structure. Page 17. First, I will describe our initiatives in the regions or international. We are accelerating the shift in our business portfolio to improve profitability. Our first focus is the growth in Fujitsu events. The ratio of revenues in region to international increased from 20% in fiscal 22 to 25% in the first nine months of fiscal 23. Our goal is to increase the revenue from Fujitsu U-BANs to 45% of the total revenue by the end of fiscal 25. Our second focus is to consolidate our business mainly on Fujitsu U-BANs. To this end, we have strategically reformed our service business. In Germany, we carved out low-margin existing businesses such as private cloud business and on-premises managed services. As a result, we recorded a one-time loss of approximately 30 billion yen as part of our adjusted items for the third quarter. The loss expected from this business in fiscal 23 is nearly 10 billion yen, but losses are expected to be eliminated starting from next fiscal year as a result of the carve-outs. Next is page 18. I will explain about our ongoing initiatives in hardware solutions. In April 2024, we will launch EFSAS Technologies Inc., a dedicated company for servers and storage solutions. EFSA's technologies will integrate product development, manufacturing, sales, and maintenance functions to build an integrated entity, accelerating management decision-making and pursuing thorough improvement of business efficiency to provide comprehensive, added-value solutions with advanced technologies. The establishment of FSAS Technologies did not have direct impact on consolidated financial results. Moving forward, we will achieve improved outcomes by streamlining the business. Page 19. This is Ubiquitous Solutions. The client computing devices or CCD unit in Europe, which has been facing severe competition and difficulties in maintaining profitability, will be shut down with a target of April 24. As a result of exiting that business, we recorded one-time loss of approximately 20 billion yen, recorded as adjusted items to operating profit in the third quarter. The expected loss from this business in fiscal 23 is expected to be roughly 5 billion yen. Regarding CCD business, we are planning to redirect our focus on business in Japan. Page 20. Device Solutions We concluded the transfer agreement of shares in Shinko Electric. This sale is scheduled to take place in fiscal 24 after a various examination and a tender offer. Although this will not impact the consolidated financial results for fiscal 23, in fiscal 24, we expect to record a one-time gain of approximately 150 billion yen from discontinued operations. In addition, Shinko Electric's annual financial results for fiscal 23 are projected to be sales of 230 billion yen and operating profit of 35 billion yen. Of this, we anticipate that 12 billion yen of Shinko Electric's net income will apply to Fujitsu, the parent company. Page 21. Of the transformations described so far, a one-time loss of approximately 30 billion yen from the sale of private cloud business in Germany and a one-time loss of approximately 20 billion yen from exiting the CCD business in Europe were major items that were recorded as adjusted items from GAAP operating profit in the third quarter. We will continue to steadily work on reviewing our business portfolio and transforming our business structure to achieve sustainable growth in our corporate value. Page 22 This page shows the status of cash flows and status of assets, liabilities, and equity. Page 23 Core free cash flow, which excludes one-time expenses, was 75 million yen of 39.2 million yen from the previous year. In addition to the increase in accounts receivables, progress has been made in the contraction of inventories, which increased during the previous year and working capital has improved. Page 24. Core free cash flow and adjusted items from GAAP free cash flow. The breakdown is as shown on this page. As I mentioned previously, in Regions International, we anticipate an impact of cash flow from the sale of private cloud computing business in Germany and exiting of CCT business in Europe to come after fourth quarter. At the bottom of the page is free cash flow, which was 69.5 billion yen, an increase in 19.8 billion yen from the previous year. Page 25 shows the status of our assets, liabilities, and equity, but I will omit an explanation of these figures. This concludes my summary of the financial results from the cumulative nine months of fiscal 23. Although each segment had its strengths and weaknesses in terms of performance, we are still progressing in line with our forecast. In service solutions, the strong pipeline of orders and business deals, primarily in Japan, is in the first half of the fiscal year continued into the third quarter in line with our forecast. Against this backdrop, we believe that we can fully anticipate a strong growth past fourth quarter as well. In addition, in hardware solutions and device solutions, demand continues to be low, but it isn't within what we had expected. We will continue to make solid progress, including further business efficiency improvements. I would like to take this opportunity to offer a comment regarding the ongoing inquiry into the UK Post Office Horizon system, which has been covered widely in the news reports and media globally since the beginning of the year. First and foremost, on behalf of Fujitsu Group, I would like to convey our deepest apologies to the sub-postmasters and their families, and reiterate that we regard this matter with utmost seriousness. Our company's UK subsidiary has been cooperating fully with the ongoing UK statutory inquiry, which has been investigating complex events that have unfolded over many years and going forward we remain fully committed to offering our complete support and cooperation. I would like to emphasize that our global board of directors is maintaining strict supervision over the matter, including handling of the ongoing inquiry. It is our hope that inquiry allows for a swift resolution that ensures a just outcome for the victims. Thank you. Now, I will continue with my explanation of our financial results. I will explain our financial forecast for full year on the following pages. Page 27. This is our financial forecast for fiscal 23. We are projecting revenue of 3,110,000,000 yen, adjusted operating profit of 320,000,000 yen, and adjusted profit for the year of 308,000,000 yen. There has been no change to these forecasts. Page 28. As you can see, there have also not been any changes in our forecast by segment. Page 29 shows our forecast for the fourth quarter. The only segment I will briefly touch upon is service solutions. The 9-month cumulative adjusted operating profit is 116.3 billion yen, an increase of 61.8 billion yen from the previous year. Our forecast for the segment's fourth quarter adjusted operating profit is 138.6 billion yen, an anticipated increase of 30.1 billion yen from the previous year. Although the trend of profit being skewed toward the fourth quarter remains, the progress made during the nine cumulative months of fiscal 23 was better than the previous fiscal year. We believe that we will achieve the target through ensuring the high levels of order backlogs are converted into sales. This concludes our forecast for adjusted operating profit. Page 30. I will explain the adjusted consolidated results and adjusted items on this page. First, the 9-month cumulative results on the left. The second item on the column is operating profit. From the left is adjusted operating profit was 118.8 billion yen in adjusted items. There was a one-time loss of 70.7 billion yen from the transformation activities, and the total of these is profit for the year before adjustments. Next is the forecast for fiscal 23 on the right. The adjusted operating profit is projected to be 320 billion yen, and adjusted profit for the year is 208 billion yen. As I explained earlier, these remain unchanged from our previous forecast. Adjustments to operating profit results in a loss of 70 billion yen in the results through the third quarter, but we plan for further transformation activities in the fourth quarter to offset this one-time loss. We expect that adjusted profit for the year will remain at previous forecast level of 208 billion yen. Page 31. We forecast core free cash flow of 215 billion yen. It remains unchanged from our previous forecast. Next, I will explain bringing down the investment unit price through a stock split. Page 33. Today, Fujitsu decided to carry out a 1 to 10 stock split effective April 1, 2024. The purpose of StocksFloat is to improve share liquidity and further expand the investor base through bringing down the investment unit price. Through this, investment price per share will be lowered from current price of approximately 2 million yen to approximately 200,000 yen. For details regarding this, please see the timely disclosure announced today. We will continue to implement financial measures while keeping in mind the perspective of the capital market. This concludes my presentation on consolidated financial results for the first nine months of fiscal 23 and the full-year financial forecast for fiscal 23.