Fujitsu Limited Q2 FY2026 earnings call

• Service Solutions Growth: Strong performance driven by U-vans (revenue up 27% YoY in first half) and modernization projects (orders up 56% YoY). Enterprise orders rose 7%, while public sector orders rose 10%, particularly in defense (+43%) and healthcare.

• Profitability Improvement Challenges: Adjusted operating profit margin improved by 0.6 percentage points. However, one-time negative factors in Q2 reduced gross margin improvement by 1 percentage point. These included lower system engineer utilization due to fewer working days and unprofitable projects requiring provisions. Management expects these issues to resolve in H2.

• AI-Driven Delivery: Fujitsu is advancing AI utilization from Level 1 (task optimization) to Level 2 (process automation via agents) and Level 3 (multi-agent consolidation). Productivity gains from AI are becoming a key driver for future margin improvement.

• Strategic Technology Investments:

  • Fujitsu Monaka: A sovereign, energy-efficient CPU with confidential computing capabilities. Field trials with 45 companies began in August, with official release scheduled for November across Japan, US, Europe, and APAC.
  • Physical AI: Collaboration with FANUC, Yasukawa Electric, and Kawasaki Heavy Industries. Prototype implementation at Kasashima plant using 'Fujitsu Kozuchi' physical OS. Version 1.0 planned for partner model projects in FY26.
  • Quantum Computing: Developing hybrid platforms. Deployment of a 1,024-qubit superconducting quantum computer planned for this year, alongside prototypes for diamond spin and neutral atom methods.

• Cybersecurity: Announced a new cybersecurity strategy focusing on a 'cyber defense lifecycle.' High demand for solutions that detect/respond to incidents and strengthen resilience.

Service Solutions: Revenue of 1.1294 trillion yen (up 5.9% YoY), representing the majority of consolidated revenue. Adjusted operating profit was 133.7 billion yen (up 11.8% YoY) with a margin of 11.8%. This segment contributed significantly to overall growth, driven by U-vans and enterprise/public sub-segments.

Hardware Solutions: Revenue of 449.1 billion yen (up 5.7% YoY). Adjusted operating profit was 4.5 billion yen (down 8 billion yen YoY). Profitability declined due to increased component costs (e.g., memory chips) that could not be fully passed on in prior-year contracts.

Ubiquitous Solutions: Revenue saw a decline (specific figure not explicitly isolated in total but described as down 20.6% for this specific line item contextually or part of the broader drop; transcript notes 'decline in revenue' due to Windows 10 pullback). Adjusted operating profit was 13.4 billion yen (down 8.3 billion yen YoY).

Intersegment Eliminations/Corporate: Recorded an operating loss of 37.7 billion yen, an increase in expenses of 5.1 billion yen, largely due to investments in advanced technologies.

• Financial Forecast: Management confirmed that the full-year financial forecast for fiscal 2026 remains unchanged from previous announcements.

• Adjusted Operating Profit: Guidance maintains the expectation of record-high profits for the fiscal year, noting that profit is typically skewed toward the second half.

• Segment Targets:

  • U-vans: Annual revenue target of 840 billion yen (up 18% YoY). Management expects growth beyond this level.
  • Modernization: Annual revenue target of 470 billion yen (up 20% YoY). On track to achieve this.

• Cash Flow: Core free cash flow decreased due to strategic inventory buildup (memory chips/CPU) and increased investment in cutting-edge technology development.

• Component Cost Inflation: Hardware solutions profitability was negatively impacted by rising costs of components like memory chips, which were not fully offset in pricing for prior-year contracts.

• Project Execution Risks: Emergence of unprofitable projects in Japan and overseas led to delivery delays, higher costs, and recorded provisions. Management has taken corrective action but acknowledges these as operational failures.

• Demand Volatility: Ubiquitous Solutions revenue declined due to a pullback in Windows 10 update-related demand following strong activity in the previous year.

• Investment Costs: Increased development investment in advanced technologies (next-gen CPU, quantum, physical AI) contributes to corporate operating losses and impacts short-term cash flows.

Q: Regarding the unprofitable projects impacting margins, can management provide more detail on the nature of these issues and the timeline for resolution?

A: Management acknowledged difficulties with certain projects both domestically and internationally, leading to delivery delays and cost overruns. They have taken corrective actions on all affected projects and do not anticipate further deterioration. The negative impact is expected to conclude in the second half of the fiscal year, allowing for a rebound in profitability metrics.

Q: How does the company view the competitive landscape for its sovereign computing initiatives, specifically regarding Fujitsu Monaka?

A: Management emphasized that Monaka supports digital sovereignty through confidential computing capabilities at the hardware level. With field trials already underway with 45 companies and an official release in November, they aim to leverage proprietary technology to offer superior cost-performance ratios. The roadmap includes future versions (Monaka X/XX) tailored for evolving AI models, targeting global markets including the US, Europe, and APAC.

Q: What is the outlook for U-van growth given the aggressive annual target of 840 billion yen?

A: Management highlighted that U-van revenue grew 27% in the first half, driven by strong uptake in finance and retail sectors. While the annual target represents an 18% increase, management expressed confidence in exceeding this guidance. They expect a step-up in growth momentum in the second half, supported by the continued expansion of their AI-driven delivery platform and modernization capabilities.

Q: Can you elaborate on the 'Physical AI' collaboration and its commercial potential?

A: Fujitsu is collaborating with major industrial players like FANUC and Kawasaki Heavy Industries to implement Physical AI in real-world settings. A prototype 'Kozuchi' physical OS is being tested at the Kasashima plant to manage multi-robot collaboration. Version 1.0 will be deployed in partner model projects this fiscal year, with feedback informing Version 2 in FY2027. This initiative aims to create a sovereign AI platform extending AI effectiveness from digital to physical processes.