1. As for the new orders received in the first half of the fiscal year ending March 2018, you said that the decrease due to the reactionary decline in large-scale projects received in the first half of the fiscal year ended March 2017 had been just as expected and, that in light of the decrease, the result has continued to be steady. Regarding the large-scale projects in the Financial segment and the Australian large-scale project in the North America segment, could you tell us the affected amount of reactionary decline for each?
Regarding the effect of reactionary decline in large-scale projects in the Financial segment, approximately speaking, the decline was more than 160 billion yen.
The effect of reactionary decline in the Australian large-scale project in the North America segment was around 80 billion yen. The North America segment as a whole recorded an increase of around 60 billion yen year on year despite the effect of reactionary decline.
2. You mentioned that the result is positive despite the effects of reactionary decline in large-scale projects. Could you explain the factors?
To begin with, it is necessary to divide overseas markets from domestic markets in understanding the factors more accurately.
I will explain the domestic market first. There were some major projects we needed to secure in a steady manner, such as in the Public & Social Infrastructure segment as well as the Financial segment. In fact, we were unable secure one or two of them, but we mostly succeeded in securing contracts for other projects.
Additionally, irrespective of industrial category, there are many moves to invest in new areas such as digitization, and we received quite a lot of requests for assistance of varying nature; in fact, too many for us to accept them all. This means we are in a very good situation for receiving orders.
As for the overseas markets, the situation is not necessarily similar between markets. Concerning the business of the North America segment, we are currently pursuing the procedures for PMI (post-merger integration), but we were able to maintain most of the large clients. Also, since the acquisition of the former Dell Services, we have been able to secure most of the renewal projects of large scale. Also, corporate investment in digital transformation is continuing to increase more rapidly there than in Japan.
On the other hand, it is noteworthy that moves toward vendor consolidation are seen with many clients of the North America segment. Vendor consolidation means reduction in number of contracting vendors. The client requires us to give them greater cost advantage, in return for choosing us. Because of the moves toward vendor consolidation, the North America segment faces difficulties in securing orders in some cases.
As mentioned earlier, despite the negative effects of reactionary decline in large-scale projects, the overall results were positive as you have seen, thanks to the impact of the unification of accounting periods, the impact of consolidation of the former Dell Services, and reasonable success in winning new orders.
As for Europe, each of the three companies (EMEA, everis, and Business Solutions) has a somewhat different situation from one another.
Regarding Business Solutions, their SAP business continues to perform very well.
Their SAP business portfolio includes, comparatively speaking, more projects for small to medium-sized companies; therefore Business Solutions has a relatively steady performance.
As for EMEA and everis, they are currently working on some large digitization projects for new clients. Geographically, subsidiaries in such countries as Spain and Germany are quite vivacious, so I think we can expect higher performance in these subsidiaries in the second half of the current fiscal year.
1. Regarding PMI-related costs for the former Dell Services, the actual cost for the fiscal year ended March 2017 was around 10 billion yen, and the budgeted cost for the fiscal year ending March 2018 is 15 billion yen. Is it correct that year-to-date outlay is just in line with the budget or below that?
Also, other than the initially expected items, have you faced any other items requiring cost coverage? Could you confirm this point?
Firstly, the planned total of PMI costs is 250 million dollars. So, if 110 yen to the dollar is assumed, it is around 27 to 28 billion yen.
We actually spent a little less than 10 billion yen in the fiscal year ended March 2017, and the planned cost for the fiscal year ending March 2018 is around 15 billion yen. In addition, it is projected that we will spend about 3 billion yen for the fiscal year ending March 2019. All in all, total expenditure for PMI would be just as budgeted.
2. If any part of the PMI processes is completed earlier than projected, I suppose the total amount of PMI costs would be reduced. Do I suppose correctly?
One of the cost elements of PMI that could vary is the cost for TSA (transition service agreement).
TSA represents an agreement with Dell whereby we keep using Dell’s system to a limited extent during the transition period. If the period is shortened, the budgeted cost for the remaining period will become unnecessary.
However, even if that is the case, its impact on profitability would be minimal or slightly positive, as the cost size is not that large.
The PMI period would be up to the end of the first quarter of the fiscal year ending March 2019 for system integration and, as for the others, it would be up to the end of the second quarter of the fiscal year ending March 2019, just as scheduled in the initial plan.
1. Concerning the Mid-term Management Plan (with the fiscal year ending March 2019 being its final period), could you explain the underlying thoughts in setting the objectives?
The targeted operating income is 150 billion yen, a 50% increase from the actual income of the fiscal year ended March 2016. Since budget for investments in new fields will be increased by 10 billion yen compared with the fiscal year ended March 2016, I understand operating income net of the investment would be around 140 billion yen.
Starting with the operating income of 120 billion yen expected for the fiscal year ending March 2018, there would a positive effect of around 24 billion yen from non-amortization of goodwill as a result of adopting IFRS (International Financial Reporting Standards). So, if the outlay of 10 billion yen as investments in new fields is counted as a negative factor, are you actually expecting negative growth in operating income for the fiscal year ending March 2019?
You have spent around 500 billion yen for cross-border M&A deals so far, but it seems you have not realized any sizable business growth from the investments. I think the stock market is not so generous as to accept such sluggish performance without any criticism.
I believe you would have to show really profitable results through organic growth, after having absorbed necessary investments, and not counting the non-recurring effect of the changes in accounting standards.
First of all, I will explain our underlying thoughts in setting the objectives in the Mid-term Management Plan.
The targeted net sales is over 2 trillion yen and the targeted increase in operating income after adjustment is 50% (over the actual figure of 100.8 billion yen in the fiscal year ended March 2016) in the Mid-term Management Plan. At the time the Plan was compiled, we thought such targets were quite challenging, based on the fact that acquisition of the former Dell Services was yet to be determined.
Our insight was that, in light of the harsh competition in technical innovation in the industry, we would like to invest around 10 billion yen in new fields, out of the expected 150 billion yen in operating income. This comprised our underlying thoughts when we compiled the Mid-term Management Plan.
Admittedly, in terms of operating income, the simple sum of 120 billion yen expected for the fiscal year ending March 2018 and the positives from non-amortization of goodwill, etc. is around 142 billion yen. Please note, however, that our targeted level is not around that, but higher.
In our projection, operating income would be at least over 150 billion yen as net sales grow surpassing the line of 2 trillion yen.
At that time, we shared a desire to invest an amount in excess of 140 billion yen in new fields, if and when operating income surpasses the level of 150 billion yen. This is the message which was incorporated into the current Mid-term Management Plan.
In other words, if the planned increase in investments in new fields is excluded, operating income should increase. We would appreciate your understanding that it never is a negative planning.
2. Generally, shareholders do not exclude investments in new fields when looking at the performance in operating income. You have spent around 500 billion yen for cross-over M&A deals so far, but you have only shown negative growth. This is not the type of story shareholders would like to see. It seems there is a big discrepancy in the way of thinking.
We fully understand your viewpoint.
We would like to once again review the forecast for the fiscal year ending March 2019, taking into account such viewpoint.