Fujitsu Limited: Short-Term Pain for Long-Term Gains (OTCMKTS:FJTSF)

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Fujitsu Limited (OTCPK:FJTSF) (OTCPK:FJTSY) (6702:JP) is rated a Buy.

I previously covered a potential catalyst for Fujitsu Limited in an introductory article on November 5, 2020. My current update focuses on the company’s near-term outlook. and long-term prospects.

In the near term, FJTSF’s quarterly results may be lower than expected as the company invests in expanding its consulting business. In the long term, Fujitsu Limited’s plan to increase the number of consultants to 10,000 by March 31, 2026, may pay off in the form of faster revenue growth. I maintain a Buy rating on the stock because I believe Fujitsu Limited is making the right decision to take on short-term pain for long-term gains.

The company’s shares are traded on the over-the-counter (OTC) market and in Japan. The 10-day average daily transaction values ​​are: Fujitsu Limited’s Japanese listed and OTC shares were valued at $100 million and $2 million, respectively. S&P Capital IQ data. Readers can use the services of American stockbrokers such as Interactive Brokers to buy and sell the relatively liquid shares of Fujitsu Limited listed on the Tokyo Stock Exchange.

The company plans to expand its consultant team to support future revenue growth.

The Service Solutions segment is Fujitsu Limited’s largest business segment, accounting for 53% of the company’s revenue for the nine-month fiscal year 2023 (YE March 31, 2024).

Within the Service Solutions segment, the company’s consulting business, known as Fujitsu Uvance, is a key growth driver. Specifically, the revenue generated by Fujitsu Uvance increased by 67% in the first nine months of its most recent fiscal year. As a result, Fujitsu Uvance’s service solutions segment’s total revenue percentage increased from 11% in September 2022 to 16% in September 2023. These numbers are taken from FJTSF’s Q3 2023 results presentation slides.

Fujitsu Consulting Solutions Overview

Going forward, the company has plans to grow its consulting business.

Fujitsu Limited said in an investor briefing on its consulting business on February 22, 2024 that the company plans to increase the number of consultants from the current 2,000 to 10,000 by the end of fiscal year 2025 (YE March 31, 2026).

The company plans to expand the size of its consulting team in various ways. Approximately 60% of the target of 10,000 consultants will be achieved by retraining some of Fujitsu Limited’s existing staff. Another 30% of the goal of 10,000 consultants will be achieved through hiring new staff. Additionally, FJTSF plans to increase its number of consultants by an additional 1,000 by acquiring another consulting company.

FJTSF aims to increase Fujitsu Uvance’s sales from approximately 0.2 trillion yen in FY 2022 to more than 0.5 trillion yen and 1 trillion yen in FY 2025 and FY 2030, respectively. This translates to an impressive eight-year high CAGR target of +22% for Fujitsu Uvance.

In summary, Fujitsu Limited’s consulting business revenue increased rapidly in September 2023, and the company plans to increase the size of its consulting team to support the medium- to long-term growth of its consulting business.

Achieve higher profit margins in the medium to long term with AI and portfolio restructuring

Fujitsu Limited aims to improve operating margins in its Service Solutions segment from 8% in fiscal 2022 to over 17% by fiscal 2030, as indicated in a presentation dated February 22, 2024.

The company’s Service Solutions segment profit margins are expected to benefit from increased utilization of Fujitsu Uvance’s AI solutions. In a Q&A session at the AI ​​Strategy Investor Conference on February 14 this year, FJTSF emphasized that the “integration of AI” is expected to result in “unit price increases” for Fujitsu Uvance solutions “due to advanced analytics and automation.”

Separately, Fujitsu Limited shared that it is reorganizing its business portfolio in the Service Solutions segment in the company’s Q3 2023 results presentation slides. For example, the company decided late last year to sell its private cloud division, a relatively unprofitable service solutions unit that operates in Germany. FJTSF’s business portfolio restructuring activities for the Service Solutions segment aim to reduce the revenue contribution of less profitable businesses and divert more resources to support the growth of its fast-growing consulting businesses.

Simply put, Fujitsu has good potential to expand its profit margins over the long term by leveraging AI and portfolio rationalization levers.

Take a look at past potential quarterly results.

Fujitsu Limited is expected to announce its financial results for the fourth quarter of 2023 (January 1, 2024 – March 31, 2024) on April 25. Sell-side analysts forecast the company’s revenue and EBIT (in JPY) to grow by +5.7. % YoY and +1.9% YoY respectively in the last quarter of the most recent fiscal year.

The company’s actual operating profit in the fourth quarter of 2023 may fall short of market expectations. Fujitsu Limited acknowledged in a Q&A session at its Consulting Business presentation on February 22, 2024 that it would need a “significant sum” to increase the number of consultants (as previously mentioned) to 10,000 by the end of fiscal 2025. There is a risk that the Company’s short-term operating profitability may be reduced due to the expansion of its consulting team.

I believe investors should look at Fujitsu Limited’s potential operating profit loss in the fourth quarter of fiscal 2023 and focus on the company’s potential for revenue growth and earnings improvement over the long term.

Disadvantages Risks to Consider

There are a number of risk factors you should pay attention to with respect to Fujitsu Limited.

First, Fujitsu Limited’s consulting business may not be able to achieve revenue growth that exceeds the rate of growth in labor costs, assuming actual demand for consulting services is lower than expected.

Second, the company’s actual improvement in profitability in the medium to long term may disappoint investors. This can happen if business portfolio restructuring is slow and customers are unwilling to accept price increases associated with AI-related solutions.

Third, there is a possibility that investors may lose interest in FJTSF if the company’s financial performance falls below expectations for consecutive quarters in the future. This may be due to increased costs resulting from an increase in the number of consultants.

Closing Thoughts

The market currently values ​​Fujitsu Limited at 8.6x the consensus 2024 EV/EBITDA, and the company’s consensus EBITDA CAGR for 2023-2026 is +15.0%. These metrics are obtained from: S&P Capital IQ.

A simple valuation rule of thumb is that if the earnings multiple is equal to the future earnings growth rate, the stock is significantly more valuable. In that respect, FJTSF’s valuation is attractive. As the company achieves top-line expansion and margin improvement over the medium to long term, it will be able to maintain a higher EV/EBITDA valuation ratio in line with its long-term EBITDA growth prospects.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.