Fujitsu Limited (FJTSF) on Q4 2020 Results - Earnings Call Transcript
Fujitsu Limited (OTCPK:FJTSF) Q4 2020 Earnings Conference Call April 28, 2021 2:00 AM ET
Takeshi Isobe - CFO
Conference Call Participants
Thank you for joining us today. I would like to start by introducing the main points of our Financial Results for Fiscal 2020.
Revenue decline because of the impact of COVID-19 and the decline in PC revenue from an unusually high demand of the previous year. Despite this, operating profit and profit for the year, were both the highest in Fujitsu's history, because of steady progress in improving profitability, and one-time gain on the sale of some assets.
Free cash flow was ¥236.3 billion. Continuing from the previous year, we were able to maintain free cash flow at a high level. ROE was 15.1%. EPS was ¥1013.8 and capital efficiency improved over last year. Ordinary dividends were increased for the fifth consecutive year. Together with the purchase of treasury stock, we have returned a total of about ¥60 billion to shareholders.
I will now go through and explain our consolidated Profit and Loss figures. This is Page 5. Revenue was ¥3589.7 billion. As I commented a moment ago, revenue declined 6.9% from the previous year, mainly owing to the impact of COVID-19 and the decline in PC revenue from the unusually high demand of the previous year.
Operating profit was ¥266.3 billion, and the operating profit margin was 7.4%, representing an increase in operating profit of ¥54.8 billion and an improvement in the margin of 1.09% from the previous year. Excluding the impact of restructuring and special items, we made great progress in improving profitability and generating cost efficiencies.
The impact of restructuring and special items also serves to increase profits through gains on the sale of a business and reduction in the burden of business model transformation expenses. Financial income was ¥25.5 billion, an increase of ¥8.4 billion from last year.
In addition to the gain on the stock market listing of QD Laser, an internal venture spin-off, the increase was mainly from gains recorded from foreign currency conversion adjustments resulting from the depreciation of the yen toward the end of the period.
Profit for the year was ¥202.7 billion. On Page 7, we divide our consolidated results into three categories. Our financial results excluding business restructurings, and special items, the impact of restructuring and special items. On top, we have our financial results excluding business restructurings and special items.
Revenue declined by ¥174.4 billion from the previous year. The impact of COVID-19 was a significant reduction in revenue of ¥146.9 billion mainly in technology solutions. Excluding this impact areas such as services and network products performed well, but revenue in PC significantly declined by around ¥120 billion from the previous year, when demand was unusually high, resulting in an overall decline of ¥27.4 billion.
Despite the decline in revenue, operating profit increased by ¥18.9 billion, as the impact of lower revenue was more than offset by an improvement in profitability in services and strong performance in both 5G base stations and electronic components. Next is business restructuring. As a result of progress in our business model transformation, revenue declined by ¥93.6 billion. But in part because we exited low margin business areas, the loss in terms of operating profit was minimal, resulting in an increase compared to the previous year.
The third area is special items. For this fiscal year, we are recording again from special items of ¥18.9 billion. It represents the net amount from the gain of ¥25.4 billion on the sale of a business and other expenses mainly related to restructuring of factories in Japan. This is an improvement of ¥32.7 billion from last year. If we total everything up, operating profit increased by ¥54.8 billion from last year.
Page 8. This is a waterfall chart showing factors that cause increases or decreases in operating profit compared to the prior year. On the far left, operating profit in fiscal 2019 was ¥211.4 billion. We use this as a starting point for explaining increases or decreases from the prior year. The first upward arrow shows the impact of special items and restructuring expenses, which I just talked about in comparison with the last year resulting in a net positive impact of ¥35.8 billion.
The next three arrows show the increases in operating profit excluding the impact of COVID-19. The first downward arrow shows the decline in operating profit from lower sales volumes. While there are high unit sales in network products and device solutions, unit sales of PCs declined from the prior year when there was exceptionally high demand.
The next upward arrow is a ¥34.3 billion increase in operating profit from improvements in profitability. The next upward arrow is a ¥37.7 billion increase in operating profit from greater efficiencies in operating expenses and so on. Together, the total of the three arrows inside the box increased operating profit by ¥67.1 billion.
Broken out by segment, the increase in operating profit in technology solutions was ¥52.8 billion, mainly from profitability improvements. The next downward arrow is the negative impact from COVID-19. The negative impact on revenue was ¥146.9 billion or a decline in revenue of 4%. The negative impact on operating profit was ¥48.2 billion. Adding everything together, operating profit for the year was ¥266.3 billion.
Page 9. Here we give some supplemental information on the three arrows from the waterfall chart regarding changes in revenue from the prior year. This page shows the increase or decrease in revenue excluding the impact of restructuring and special items. In the center of the table, we have actual results for the fiscal year and the comparison with the prior year.
To the right of the table, we present a breakdown of the changes from the prior year. On the whole, revenue declined by ¥174.4 billion from the previous year. Excluding the impact of COVID-19 revenue declined by ¥27.4 billion. The impact of COVID-19 was to reduce revenue by ¥146.9 billion.
Excluding the impact of COVID-19 revenue in technology solutions rose by ¥24.2 billion. For solutions and services there was a decline in revenue from the previous year, when there was strong demand for hardware integration services such as PC setups and deployment support services. And system platforms, revenue and network products rose mainly from 5G base stations.
In international regions revenue increased, partly as a result of winning a large scale public sector project in Europe. In ubiquitous solutions, revenue declined by ¥122.1 billion, a sharp decline from last year when there was an unusually strong demand for PCs. Revenue increased in device solutions on strong results in electronic components.
Page 10 shows the status of our gross margin. Excluding the impact of restructuring and special items, our gross margin was 30.5% a one percentage point improvement from the previous year. In solutions and services, the profitability improvement was even greater than one percentage point. In addition to activities to reduce costs in operational and maintenance services for system integration services projects, we performed comprehensive profit management and quality assurance starting from upstream processes.
Delivering system deployment and maintenance service remotely has also contributed to increase productivity. In the second half of the fiscal year, there was an improvement in the product mix in the form of higher unit sales of 5G base stations and higher demand for electronic components lead to greater progress in recovering fixed costs, leading to an overall improvement in the gross margin.
Next, the impact of the reduction in operating expenses was ¥37.7 billion. We made three main contributing factors. First, through greater efficiencies, general expenses and development expenses declined by ¥35 billion. The greater efficiencies in general expenses amounted to ¥23 billion. Our work life shift initiative was aimed at improving employee wellbeing, but it also contributed to greater cost efficiencies.
Deployment expenses significantly declined because of reforms to streamline our global development organization for x86 servers, and because development expenses for Fugaku and 5G base stations had already peaked. The second area is growth investments in which expenses increased by ¥15 billion from the prior year.
In addition to investments to strengthen our services business and internal DX investments to promote data driven management, we work to build a secure network environment and change our office environments to accelerate our work life shift initiative. The third area consists of one of items that impacted expenses, the net result of which was to reduce operating expenses by ¥12.5 billion.
It mainly consists of the impact of streamlining real estate, including company apartments and a reduction in the expense burden compared to last year when we recorded expenses to deal with product defects. Page 11. Next, I will comment on the status of orders in Japan. For each industry segment, I will comment on orders in the fourth quarter and for the full year.
First is private enterprise, in part because some projects that were delayed in the first half of the fiscal year we've restarted. Orders in the fourth quarter recovered to about the same level as the previous year. For the full year, excluding PCs, orders declined by 7%. Orders declined from the prior year mainly in the first half because of the significant impact of COVID-19.
In manufacturing and distribution, there is strong demand to upgrade mission critical systems for the purpose of greater efficiencies in factories and logistics, and to better utilize data. So, this is an area in which we are hopeful that orders will increase going forward. Next is finance and retail. Orders declined by 9% in the fourth quarter, or 6% if PCs are excluded.
The impact of COVID-19 was not a big factor here. The decline from the previous year is a result of the cyclical nature of orders for large scale projects. In addition to orders in new areas, such as online communication services to avoid face to face sales activities in the finance segment orders are advancing for projects to modernize existing systems.
Next is the Japan business group. In the fourth quarter, orders spiked by 25%. This is an area which was greatly impacted by COVID-19 in the first half, but progress was made in the fourth quarter in catching up for projects that have been put on hold and orders significantly increased. For the full year excluding PCs, orders declined by 4%, as there still was a negative impact from COVID-19.
For customers in both the local government and healthcare segments, there was a strong need for digitization, and we would like to meet those needs. Next is public sector and social infrastructure. Orders in the fourth quarter were down 3% but rose 7% for the full year. The trend in orders was strong throughout the year from Telecom carriers and national government agencies.
Orders from Telecom carriers rose in the fourth quarter, but large-scale orders from national government agencies are cyclical and they declined, leading to a slight decline compared to the prior year. At the very bottom is the total for all major industries. Orders in the fourth quarter raised 1% but declined 4% for the full year, or by just 1% if PCs are excluded. There was a large negative impact from COVID-19, mainly in the first half, but orders rallied back in the second half.
The patterns vary by industry segment, but for the full year, we reached nearly the level of orders of the previous year. I will now discuss progress on our business model transformation. Business Model transformation expenses in fiscal 2020 was ¥6.4 billion, mainly for restructuring factories in Japan. We recorded large business model transformation expenses in Europe in fiscal 2018 and in North America in 2019. And afterwards, we made actual progress in structural reforms.
As we had planned from the start, we completed these reforms in fiscal 2020. In Europe, the closing of the Augsburg plant was completed in September. Production we shifted to electronics manufacturing services and R&D capabilities that was spread inside and outside of Japan have been consolidated.
In addition, with regard to the exit from low profitability countries in Europe, we have completed our exit from the 23 countries in our original plan. The exit from the product business in North America has also been completed this fiscal year. In Japan, we advanced another big step in restructuring our manufacturing plants.
We are simultaneously trying to optimize our manufacturing organization and the major reforms were completed this fiscal year. Business model transformation initiatives had a positive impact in fiscal 2020 of about ¥7 billion. These benefits will also accrue throughout fiscal 2021. And we anticipate another ¥5 billion in benefits in addition to the ¥7 billion.
Next, I would like to provide additional information on changes in our profits since our last forecast. Operating profit exceeded our forecast by ¥29.3 billion. Excluding restructuring and special items, it exceeded our forecast by ¥20 billion. Operating profit in technology solutions exceeded our forecast by ¥2 billion. We were able to thoroughly suppress losses from unprofitable project.
Operating profit in ubiquity solutions exceeded our forecast by ¥9 billion. Selling prices were firm and unit volumes were also good, such as from the GIGA School Project. Operating profit in device solutions exceeded our forecast by ¥9 billion. Against the backdrop of strong worldwide demand for semiconductors, there was a high level of demand for electronic components, and the yen was weaker than we had anticipated, boosting operating profit.
Overall, though, we were apprehensive about the potential for a widening of adverse effects when the Japanese government declared an emergency at the beginning of the fiscal year, we made progress in improving profitability, and we were able to successfully convert that into higher profits. Special items exceeded our forecast by ¥9 billion.
These results were also impacted by the reversal of a revenue on which we had previously recorded a loss because the risks stemming from a dispute were reduced. Page 15. I will now discuss our segment results primarily in relation to last year's results. First is technology solutions. Revenue was ¥3,043.6 billion down 5.3% from last year.
Operating profit was ¥188.4 billion up ¥0.5 billion from last year. This year's outcomes were negatively impacted by COVID-19, but improvements in profitability delivered results on par with prayer. I will explain the reasons in each sub segment. Page 16, solutions and services. Revenue was ¥1,765.9 billion down 6.2% from the prior year.
As I mentioned earlier, in addition to the impact of COVID-19, revenue was down because last year revenue was boosted by significant hardware related services business. Operating profit was ¥183.5 billion, and the operating profit margin was 10.4%. Operating profit increased by ¥4 billion from the previous year.
In addition to profitability improvements in system integration services as well as operations and maintenance services, there was progress in generating greater efficiencies in operating expenses, enabling us to cover the impact of low revenue. Page 17, system platforms. Revenue was ¥665.4 billion, a 2.8% increase over the prior year.
Revenue in system products declined 4.5% due to a significant impact from COVID-19. On the other hand, revenue and network products sharply increased on higher telecom carrier spending on 5G base stations as well as spending strengthened backbone networks. Operating profit was ¥41.2 billion up ¥13.7 billion from the prior year.
Operating profit increased sharply mainly from the impact of higher revenue from network products and global efficiencies in the development organization for x86 service. Page 18, International regions excluding Japan. Revenue was ¥723.7 billion down 5.6% from the previous year. The negative impact of COVID-19 was even stronger than in Japan because of lockdowns and other restrictions.
On the other hand, there were also some bright signs in Europe, including a major win in the form of a large-scale systems development deal from public sector customer. Operating profit was ¥11.6 billion, up ¥7.7 billion from the prior year. The impact of not having the burden of last year's business model restructuring expenses was ¥6.3 billion, excluding that operating profit was at ¥1.3 billion.
Despite the significant impact of lower revenue, profits increased because of profitability improvements and greater cost efficiencies. Page 19. This shows the common expenses of technology solutions. Please look at the top row, which shows the shared expenses excluding special items is ¥47.8 billion, an increase in expenses of ¥15.2 billion from last year.
This was mainly from growth investments to accelerate Intel and DX and our work like shift initiatives. From special items, shared expenses increased by ¥9.6 billion from the prior year. Because last year, there were one-time gains. Adding these together, shared expenses reduced operating profit by ¥24.9 billion compared to the previous year.
Page 20. This shows revenue results in the two areas of value creation in technology solutions for growth and for stability. Revenue and technology solutions was ¥3,043.6 billion comprised of 32% from for growth, and 68% from for stability. Revenue from for growth was ¥988.9 billion essentially unchanged from the prior year.
On the other hand, revenue from for stability was ¥2,054.7 billion down 8% from the prior year. In both areas, revenue was reduced by COVID-19, but revenue from for growth managed to be essentially unchanged from the prior year because of the strong demand for 5G base stations. We will achieve increases in revenue from fiscal 2021 from the restart of our projects that had been put on hold and by fully capturing the potential demand for digital transformation.
Page 21, Ubiquitous Solutions. Revenue was ¥334.6 billion down 26.5% from the prior year. Revenue sharply declined from the prior year because of the impact of lower revenue from business restructurings. And because of the extraordinarily strong demand last year relating to the end of support for Windows 7.
Operating profit was ¥48 billion. Operating profit increased by ¥21.2 billion from the prior year. The impact of the gain from the sale of a business was ¥25.4 billion, excluding that the impact of low revenue reduced operating profit by ¥4.7 billion from the prior. Page 22, Device Solutions. Revenue was ¥293.8 billion down 4.7% from the prior year.
The impact of the business restructuring was to reduce revenue by ¥39.1 billion, excluding that impact revenue increased by 9.1%, primarily from electronic components. Operating profit was ¥29.8 billion, an increase of ¥33 billion from the prior year. There was a positive impact of ¥10 billion from the reduction in the burden of business model transformation expenses compared to the previous year.
Excluding that, operating profit increased by ¥23 billion. With a high level of demand for semiconductors, electronic components performed strongly throughout the year. Page 23. This is cash flow for the fiscal year. Cash flows from operating activities were ¥307.9 billion. The increase in profits benefited cash flows, but there were also negative factors such as an increase in corporate tax expenses.
Cash flows from investing activities were a net outflow of ¥71.5 billion. In addition to cash inflows from the sale of the mobile phone, retail store business and the restructuring of our PC business, there were also inflows from the sale of fixed assets. Free cash flow was ¥236.3 billion similar to last year's levels. Cash flows from financing activities were a net outflow of ¥219.6 billion.
This is primarily the result of purchasing the outstanding shares of Fujitsu Frontech in conjunction with that company's delisting. Page 24 assets, liabilities and equity. At the end of fiscal 2020, total equity was ¥1,546.9 billion. Because of the increase in profit, it increased by ¥198.4 billion from the end of the previous fiscal year.
ROE was 15.1%. EPS was ¥1,013.8. Capital efficiency is steadily improving. Page 25 returns to shareholders. The ordinary dividend per share, including the interim dividend is ¥200, representing plans for the fifth consecutive year of higher dividends. Total shareholder returns, including the purchase of treasury stock is on the scale of ¥60 billion.
Page 27. I will now discuss our forecast for fiscal 2021. This is the upper portion of the table with the bold outline. We are forecasting revenue of ¥3,630 billion, a 1% increase from the previous year. Operating profit of ¥275 billion, an increase of ¥8.6 billion from the previous year and profit for the year of ¥205 billion, an increase of ¥2.3 billion.
I will now explain the breakdown by segment on Pages 28 and 29. First, Technology Solutions. We forecast revenue of ¥3,200 billion, a 5% increase. Our DX business will continue to steadily expand. For operating profit, we forecast ¥240 billion, a ¥51.5 billion increase. In addition to the impact of higher revenue, this reflects ongoing improvements in profitability.
I will give a further breakdown of this figure later on. Ubiquitously Solutions. Here, we have incorporated decrease in revenue due to the fact that previous year's remote work support and GIGA School Business deal will not recur. For revenue, we are forecasting ¥230 billion, a 30% decrease. For operating profit, we are forecasting a significant decrease to ¥5 billion due in part to the impact of the loss of profits from the sale of businesses in addition to the impact of low revenue.
On Page 29, we have Device Solutions, we foresee that the strong demand from fiscal 2020 will continue and we expect that we will be able to maintain both revenue and profits at the high level of the previous year. As you can see broken down by segment, there are both positives and negatives compared to fiscal 2020. But by steadily growing technology solutions, our core area, we are continuing to increase profits overall.
On page 30, I will add some more information on the factors behind the increased profits in technology solutions. On the far left, we see operating profit for 2020, ¥188.4 billion with an operating profit margin of 6.2%. I will use this as a starting point to comment on increases and decreases from the previous year.
The first upward facing arrow shows a ¥50 billion increase in operating profit, which is due to a ¥156.3 billion increase in revenue. In addition to the resumption of projects that have been postponed by the impact of COVID-19 will steadily promote the growth of DX business. The next upward facing arrow shows profitability improvements of ¥50 billion.
We will significantly improve our profitability due to transformations in our service delivery structure, and the effects of structural transformations in regions outside Japan in addition to reducing the number of unprofitable projects. The next downward facing arrow represents ¥50 billion in higher expenses due to expanded growth investments in fiscal 2021 we will actively make gross investments in order to expand sales and improve productivity.
These investments will center on investments in the hunting service delivery, investments relating to the Japan global gateway and global offerings, internal DX investments aimed at achieving data driven management and investments to accelerate the work life shift initiative. On the far right, adding everything together, we have the forecast for fiscal 2021 with operating profit of ¥240 billion and an operating profit margin of 7.5%.
Adding everything together, the increase in operating profit for fiscal 2021 is projected to be ¥51.5 billion. In addition to higher revenue and improved profitability, we'll be actively conducting growth investments, which will lead to achieving our management targets for fiscal 2022. Page 31. As I just mentioned, this is our pathway to achieving our management targets for fiscal 2022.
As I explained in the part about our financial results, we made significant progress in our improvements to profitability, but due to the impact of lower revenue from COVID-19, the overall result was a very slight increase in profits. The fiscal 2021 we are forecasting a ¥50 billion increase in operating profit as we expand the scope of our business, continue to improve profitability and proceed with well balanced growth investments.
For fiscal 2022, we will implement a similar scale of growth investments to fiscal 2021. We are expecting an increase of ¥110 billion in profits from the effects of our growth investments up to that point. Page 32. This shows our forecast for cash flow.
For free cash flow, we are forecasting ¥210 billion, while this is a decrease compared to the previous year, because we will not have the one-off inflows recorded in fiscal 2020 from the sale of businesses and other factors. We expect to maintain free cash flow above ¥200 billion. Page 33. I would like to touch on our capital allocation policies.
First, this page reprints the capital allocation policy announced last year. Over the five years from fiscal 2020 to fiscal 2024, we will create over ¥1 trillion of free cash flow and by optimizing the allocation of this between growth investments and shareholder returns, it will lead as I have said to business expansion, enhancing earnings capacity and improved capital efficiency.
Page 34. Here, I would like to explain this allocation more specifically, first strategic growth investments. Growth investments in fiscal 2020 amounted to about ¥40 billion, but for fiscal 2021, as I explained earlier, we'll significantly increase this amount and execute about ¥100 billion worth of investments in the form of OpEx and CapEx.
For fiscal 2022 and beyond, we will continue at this high level or higher. In addition, we are also considering supplementary investments on the order of ¥100 billion for responding to ESG and risks such as the pension system. This means that we plan to conduct investments amounting to a total of between ¥500 billion and ¥600 billion over five years.
The details of the individual investments are as I explained earlier. Page 35. This is the other target for allocations, shareholder returns. In addition to our stable dividends up to now, we will be actively conducting purchases of treasury stock with an awareness of capital efficiency and expand the total amount of shareholder returns.
We plan to deliver total shareholder returns on the order of ¥400 billion to ¥500 billion in total over five years. Through active growth investments, we expect not only to expand our businesses and enhance our earnings capacity, but also expand our shareholder returns. Page 36. In accordance with the policy I have just laid out, these are our forecasts for shareholder returns for fiscal 2021.
Dividends per share will be ¥220 split between interim and an end of year dividend. This will be a ¥20 increase over the prior year. This represents the sixth year in a row in which we will have increased dividends. In addition, we have set aside ¥50 billion for purchases of treasury stock for fiscal 2021.
The total amount of shareholder returns including both dividends and purchases of treasury stock is ¥93.1 billion. This represents an increase of ¥33.1 billion over the prior year. Page 37 summarizes what I've just laid out. Despite the difficult business environment in fiscal 2020, we were able to achieve our highest ever operating profit and profit for the period.
But this is just a step on the path to achieving our medium-term targets. For fiscal 2021, we will step on the accelerator expanding our businesses and enhancing our earnings potential through active growth investments, delivering both higher revenue and profits. We will also expand our shareholder returns.
We are aware that in order to achieve our financial targets for which fiscal 2022 is the final year, we still face difficult hurdles, but by using the growth we achieve in fiscal 2021 as a springboard, we will accomplish our targets. With regard to earnings per share, which we set forth as a target KPI in last year's capital allocation policy, we have now quantified growth targets for this indicator.
We aim to achieve an average annual growth rate in earnings per share of over 12% for the period of the policy, which runs through fiscal 2024. By working simultaneously to expand our businesses, enhance our earnings potential and increase a capital efficiency, we will continually increase corporate value and achieve our purpose.
This concludes my presentation.
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