Annex Bulletin 2005-13                            April 27, 2005

Confidential Client Edition

JAPANESE COMPANIES

Analysis of Fujitsu’s 2004 Fiscal Year Business Results

Flat Revenues, Lower Net

Solid Growth in Computer Hardware, But Services Drag Down Profits

NEW YORK, Apr 27 – A week after slightly lowering the forecast for the fiscal year 2005 ended on March 31, Fujitsu met its new numbers.  The company’s operating income was up 12.5% (up 6.6% in Yen) to $1.5 billion on a 5.5% increase in revenues to $44.5 billion (basically flat in Yen).  But net income dropped by 48% to $229 million (down 36% in Yen), mostly due to non-operational actions to clean Fujitsu’s financial slate.

Investors weren’t impressed.  Having already discounted Fujitsu’s shares during the past week in advance of the earnings announcements, the Tokyo stock market tacked on another 2% loss in this morning’s trading, pushing the stock to a new 52-week low (see the chart).  

Investors also shrugged off the company’s optimistic comments, such as this:

“I am encouraged by the strong performance in our Platforms segment, as well as by significant improvement in our overseas businesses, where we were profitable in every region,” Fujitsu’s president Hiroaki Kurokawa (right) said in a statement.

Nevertheless, after today, Dell will be officially the world’s No. 3 IT company, having surpassed Fujitsu (see the chart).

Platforms.  A closer look under the hood of Fujitsu’s engine shows solid growth in its “Platforms” (computer hardware) business (up 12% in U.S. dollars; up 6% in Yen).  With $15.9 billion revenues, this business segment’s share went up a couple of points during the latest fiscal year (from 34% to 36% of total).  More importantly for Fujitsu shareholders, the unit’s operating income surged from just above break-even in the last two years to $514 million in FY05 (a 3.2% margin).

Revenue grew in all key sub-segments.  Especially strong was the growth in sales of Unix servers in Europe and North America, double-digit gains in transmission systems, and a nearly 20% increase in sales of hard disk drives.

Software & Services.  Fujitsu’s largest unit - the $19.4 billion-“Software & Services” business that accounts for about 44% of the total – showed modest growth in U.S. dollars (up about 4%), while declining about 1% in Yen.  The Japanese market was the problem area that contributed to a 14% drop in operating income (to $1.06 billion).

Indeed, Japan’s revenues declined by about 3% in Yen, while the overseas business grew by about 10%.

“Sales in Japan decreased, primarily due to the slow recovery in IT investment, sluggish sales in solutions/systems integration services, and a reduction in earnings from public infrastructure systems deals,” Fujitsu said in a statement.

In the domestic (Japanese) solutions/systems integration business, development costs significantly increased for projects with deteriorating profitability.  The decline in Japan was partially offset by improved profitability in Europe and in the U.S. consulting business. 

In an effort to maintain delivery schedules and quality on large-scale projects in Japan, Fujitsu poured extra development staff and resources into these deteriorating deals throughout the fiscal period.  s a result, overall efficiency in its solutions/system integration business declined, and profits fell short of projections.

If the preceding Fujitsu explanation sounds familiar, maybe you’ve also listened to some EDS’s quarterly earnings calls.  The big difference, of course, is that in Fujitsu’s case, we are talking about diminished profits, but profits nonetheless.  Some EDS’s mismanaged projects, however, have bled hundreds of millions of dollars of red ink to the bottom line.

Electronic Devices.  The Electronic Devices segment’s revenues were basically flat at 733.8 billion yen (up 5.5% in U.S. dollars to $6,859 million), although they were up 4.6% on a continuing operations basis.  Worsening demand and price erosion in markets for plasma display panels and liquid crystal displays were some downside factors.  But they were partially offset by a stronger demand for advanced technology devices and higher sales by components subsidiaries.

The operating income in this segment jumped sharply (up 25%) to $305 million), thanks to further improvements in production efficiency and higher income from components subsidiaries.

Outlook

Looking ahead to fiscal 2005 (that ends Mar 31, 2006), Fujitsu anticipates higher sales and significant improvement in operating income in networks and solutions/systems integration.

The company foresees higher sales of PCs and hard disk drives, yet a decline in operating income due to intensifying price competition in this market.

Fujitsu also expects lower revenues and operating income in its Electronic Devices business.

Undaunted by his own forecast that envisaged only a 1.8% rise in FY05 revenues, the company predicted its net earnings would jump by 57% to 50 billion Yen ($467 million) in the next fiscal year.

“I am confident that this year will be one in which we can clearly demonstrate that Fujitsu is moving boldly from a path of reform and realignment to one of sustained growth and profitability,” Kurokawa, the president, said in a statement.

Happy bargain hunting!

Bob Djurdjevic