Fujitsu (6702) FY2026 Q3 Earnings Report

Quick View

Executive Summary

While revenue growth remained modest, operating income and net income increased substantially, resulting in higher revenue and earnings. Both improved profitability and special factors contributed to the performance. Revenue was ¥24511.8B (+1.8% YoY), operating income was ¥2110.0B (+99.4%), profit before tax, corresponding to the ordinary income stage, was ¥2651.3B (+132.2%), and net income was ¥3481.0B (+261.4%). The operating margin improved from 4.4% in the previous year to 8.6%, supported by a higher gross margin and reductions in SG&A expenses. However, net income includes ¥1463.4B in profit from discontinued operations, including gains on the sale of shares in Shinko Electric Industries and General, and therefore must be evaluated separately from the underlying earnings power of continuing operations.

Factors Affecting Performance

【Revenue】Revenue increased 1.8% YoY to ¥24511.8B. The core Service Solutions Business increased revenue by 7.5% excluding the impact of the reorganization, driven by growing domestic demand for DX and modernization. This was partly offset by a 1.0% decline in revenue from Overseas Regions due to the year-ago reversal of large-scale public-sector projects.

【Profitability】Operating income increased 99.4% YoY to ¥2110.0B, profit before tax increased 132.2% to ¥2651.3B, and net income increased 261.4% to ¥3481.0B. The gross margin improved to 34.8% from 32.2% in the previous year, while the SG&A ratio improved to 26.3% from 27.2%, resulting in operating leverage through the correction of the cost structure. The substantially higher growth rate of net income than operating income was attributable to the temporary factor of ¥1463.4B in profit from discontinued operations, including gains on the sale of shares in Shinko Electric Industries and General. The divergence between operating income and net income should therefore be evaluated separately from recurring earnings power. In conclusion, the company posted higher revenue and earnings.

Segment Analysis

Service Solutions generated revenue of ¥16577B and adjusted operating income of ¥2161B, representing a margin of 13.0% and a year-on-year improvement of +2.7pt. It is the core business with the largest shares of both revenue and profit. Domestic Services revenue growth of +10.4% and a gross margin improvement of +1.9pt drove company-wide earnings growth. Hardware Solutions, with a margin of 5.5%, and Global Solutions, with profit of ¥131B, had relatively low margins. Regions (Japan) maintained the highest margin among all segments at 18.9%, clearly demonstrating that the profitability of the domestic business supports company-wide earnings.

Key Financial Metrics

Profitability: ROE 22.7% (substantial improvement YoY), operating margin 8.6% (4.4% in the previous year)
Cash quality: Operating CF/Net Income 0.56x (below 1.0x, warranting attention to cash backing), conventional FCF ¥1054.9B
Investment efficiency: Capital expenditures of ¥855.5B; investment CF was positive at ¥1993.1B, including proceeds of ¥295.4B from the sale of property, plant and equipment
Financial soundness: Equity Ratio 62.2% (49.8% in the previous year), current ratio approximately 191%

Cash Flow Analysis

Operating CF was ¥1910.5B, equivalent to 0.56x net income, requiring caution regarding the conversion of earnings into cash. The primary factors were an increase of ¥2197.1B in contract assets and an increase of ¥454.0B in inventories, against the backdrop of accumulated order backlog of ¥11457B (+106% YoY) associated with the expanded application of the percentage-of-completion method to large-scale DX projects. Investment CF was positive at ¥1993.1B, as proceeds from the sale of shares in Shinko Electric Industries and General exceeded capital expenditures of ¥855.5B. Financing CF was an outflow of ¥2810.9B, primarily due to dividends of ¥514.7B, share repurchases of ¥847.0B, and a net decrease in short-term borrowings of ¥1111.4B. Conventional FCF, calculated as operating CF less capital expenditures, was ¥1054.9B, while disclosed-basis FCF was ¥3903.6B. Cash generation requires monitoring, with the collection progress of contract assets expected to be a key focus going forward.

Quality of Earnings

Net income of ¥3481.0B exceeded profit before tax of ¥2651.3B, creating an inverted structure attributable to the temporary factor of ¥1463.4B in profit from discontinued operations, including gains on the sale of shares in Shinko Electric Industries and General. Profit from continuing operations alone was ¥2017.6B, below profit before tax. Accordingly, it is appropriate to exclude profit from discontinued operations when evaluating earnings power on a continuing-operations basis. Operating CF remained at 0.56x net income, while increases in contract assets and inventories caused earnings to remain tied up in working capital. The quality of earnings for the current period therefore requires monitoring from the perspective of cash conversion.

Earnings Forecast and Guidance

Progress against the full-year forecast was 69.4% for revenue, 58.6% for operating income (16.4pt below the standard progress rate of 75%), and 80.9% for net income, which exceeded the standard level because it includes profit from discontinued operations. The company raised its full-year forecast for adjusted operating income from ¥3600B to ¥3800B and increased its annual dividend to ¥50 (¥35 year-end dividend, +¥20 from the previous forecast). The order backlog was ¥11457B, equivalent to approximately 32.5% of the full-year revenue forecast of ¥35300B, indicating a certain degree of revenue visibility toward Q4. For Q4, the company plans to raise the Service Solutions margin to 21.5%, while anticipating a decline in Ubiquitous due to the reversal of Windows 10 special demand and restructuring expenses in Europe in Hardware. The deviation in progress rates reflects an earnings plan weighted toward the second half.

Shareholder Returns

The Q2 dividend was ¥15.00 per share, while the full-year forecast dividend is ¥50.00, increased to ¥35.00 for the year-end dividend (+¥20 from the previous forecast). Based on forecast EPS of ¥241.83, the Payout Ratio is approximately 20.7%, within a sustainable range. Including share repurchases of ¥847.0B, the Total Return Ratio is approximately 39.6%, which should be evaluated separately from the dividend-only payout ratio. Conventional FCF of ¥1054.9B exceeded dividend payments of ¥514.7B, indicating that shareholder returns are covered by internally generated funds.

Catalysts

【Short Term】Progress toward the planned increase in the Service Solutions margin to 21.5% in Q4, the actual extent of the reversal of Windows 10 special demand in Ubiquitous, and the actual amount of restructuring expenses in European Hardware.

【Long Term】Progress in converting modernization and Uvance projects into revenue against the backdrop of an order backlog of ¥11457B (+106% YoY), and improvement in operating CF through the collection of increased contract assets.

Industry Benchmark (Reference; Compiled by the Company)

Industry Benchmark (manufacturing)

Profitability and Returns

The operating margin was at the industry median, while the net margin substantially exceeded the industry median, largely due to the impact of temporary gains on the sale of shares.

Growth and Capital Efficiency

The revenue growth rate was slightly below the industry median, placing the company’s revenue growth pace in the middle to lower range of the industry.

※Source: Compiled by the Company

Risk Factors

1. Risk of delays in collecting contract assets: Contract assets increased 110% YoY to ¥4126.1B, reflecting the accumulation of an order backlog of ¥11457B (+106% YoY). If project acceptance, billing, or collection is delayed, the low cash conversion rate of Operating CF/Net Income at 0.56x could deteriorate further.

2. Delayed progress toward full-year operating income: Q3 year-to-date progress against the full-year forecast of adjusted operating income of ¥3800B was 58.6% on an unadjusted operating income basis, below the standard level of 75%. Significant earnings accumulation is required in Q4, creating a high degree of dependence on the second-half-weighted plan, including achievement of a 21.5% margin in Service Solutions.

3. Reversal risk in overseas segments: Overseas Regions revenue declined 1.0% due to the reversal of large-scale public-sector projects in the previous year. Orders in the Americas and Asia Pacific also fell below the previous year’s levels (74% and 91%, respectively), and the extent of recovery in Q4 will affect company-wide performance.

Key Takeaways from the Earnings

1. The operating margin improved by 421bp to 8.6%, confirming a structural correction in profitability through a higher gross margin (+2.6pt) and a lower SG&A ratio (-0.9pt). The improvement in the core Service Solutions margin to 13.0% (+2.7pt) was the primary driver of company-wide performance.

2. The sharp increase in net income (+261.4%) was attributable to ¥1463.4B in profit from discontinued operations, including gains on the sale of shares in Shinko Electric Industries and General. Earnings power on a continuing-operations basis should therefore be evaluated using operating income and profit before tax as the primary benchmarks.

3. Operating CF/Net Income was low at 0.56x, with increases in contract assets and inventories causing cash to remain tied up in working capital. The sustainability of shareholder returns, including the increased annual dividend of ¥50 and continued share repurchases, will depend on improvement in operating CF through the future collection of contract assets.

Theoretical Share Price (Reference Value)

Sensitivity: ¥1,626–¥1,728 for a ±1% change in the cost of equity, and ¥1,661–¥1,699 for a ±0.1 change in ω.

Notes:

• The EPS impact of approximately ¥0.7 per share from a ±¥5 change in the assumed exchange rate has been reflected in the bear/bull scenarios.
• Net assets as of the quarter-end have been used (there is a timing difference relative to the full-year forecast).

(Calculation model: Residual Income Model (Ohlson-type, explicit 5-year fade) / Interest rate reference month: 2026-07 / This is a mechanically calculated value based solely on publicly disclosed data. It is not a forecast of the market share price or a recommendation of any specific investment action, and does not predict or guarantee the future share price.)

---

This report is an earnings analysis document automatically generated by AI through an integrated analysis of XBRL earnings release data and PDF earnings presentation materials. It does not recommend investment in any specific security. The industry benchmark is reference information compiled by the Company based on publicly disclosed earnings data. Investment decisions should be made at your own responsibility, after consulting with professionals as necessary.

---End of Report---