Fujitsu faces challenging market for revenue growth

Krista Macomber, senior analyst at TBR, said that revenue of Fujitsu continued to decline in Q2 2016, despite advances in its services-led offerings.

Fujitsu is adjusting its business model to meet data center customers’ changing modernization requirements, and to overcome the impact of overall weakness in the global PC marketplace. But those efforts were not sufficient to improve Fujitsu’s revenue performance in Q2 2016. The Tokyo-headquartered vendor reported a 7.4 percent revenue decline to 9.8 billion yen in Q2 2016, following a 4.2 percent decline last quarter. Fujitsu’s revenue performance was more favorable when stated in US dollars, increasing 4.2 percent year to year to $9.1 billion in Q2 2016, after a decline of 1 percent last quarter.

Revenue growth in Fujitsu’s services segment and double-digit growth in its Mobilewear segment did not offset declines in the vendor’s Network Products and PC and Mobile Phone segment in Q2 2016. Fujitsu’s revenue performance, stated in yen, was especially impacted by declines in its infrastructure services in the U.S. and Europe, as well as its network products in North America. This is the third consecutive quarter of revenue decline for Fujitsu as it faces foreign currency exchange challenges due to the rise in the value of the yen earlier this year.

The vendor’s business model transformation drove operating margin improvement to -1.1 percent in Q2 2016 from -2 percent in 2Q15. TBR believes Fujitsu will continue to evolve its attached services capabilities to achieve a positive operating margin, reaching 1 percent in 3Q16.

Fujitsu’s financial performance displays the increasing importance of its services-led offerings to its business performance. Services have historically contributed about 57 percent to the vendor’s top line, but they contributed more than 58.6 percent to its overall revenue in Q2 2016. Fujitsu achieved particular success in driving systems integration and outsourcing services sales in Japan. In the coming quarters, global expansion and reducing reliance on its legacy products will be increasingly important to Fujitsu.

Fujitsu adjusts its portfolio strategy to cope with the impact of increased cloud adoption on its traditional storage models

Fujitsu continues refining its storage strategy to emphasize software-driven functionality and value-added services capabilities in areas such as IoT, cloud computing and analytics. This is helping Fujitsu ensure high-visibility, high-value relationships with customers, and also offset the impact of hardware commoditization on its financial results.

Fujitsu is complementing its core strengths in hardware and professional services with strategic R&D and alliance investments that better align Fujitsu’s solutions capabilities with next-generation technology areas, including hybrid cloud and analytics. For example, Fujitsu recently announced that it is collaborating with Oracle to bring cloud services to customers in Japan. By bringing together Oracle’s database and analytics capabilities with Fujitsu’s cloud hosting and integration capabilities, Fujitsu is positioning to address customer demand for more agile information storage and real-time business insights.

Fujitsu faces rising pressure in both its domestic market and globally from vendors such as Dell, HPE and IBM as it pursues IT modernization-related opportunities. TBR believes Fujitsu will message its ability to deliver a broad portfolio of hardware and services capabilities in house. As IBM continues moving forward with a more limited hardware portfolio following its divestiture of its System x server business, and as Dell and HPE continue their move towards a more hardware-led portfolio by shedding services (and in the case of Dell, software) assets, Fujitsu will maintain consistent messaging about its holistic capabilities to differentiate and drive sales with customers that are seeking to simplify their engagements with their IT vendors.

To further expand its cloud service based offerings, Fujitsu launched Fujitsu Hybrid Cloud Connect in Q2 2016. This enables Fujitsu to offer services that allow customers to be connected to public cloud services provided by Fujitsu’s partners. To stand out from its competition in the market, Fujitsu will message the interconnectivity of heterogeneous, hybrid cloud environments and the ease for customers to seamlessly integrate their own networks with Fujitsu’s Global Cloud Platform, Fujitsu Cloud Service K5, and the Fujitsu Digital Business Platform MetaArc offerings to support customers executing digital transformations. TBR believes that focusing on areas such as the public sector will be a key vertical opportunity for Fujitsu in building its market share in cloud components, as these customers require private and hybrid offerings to enhance productivity and meet data security requirements.

Fujitsu expands its security portfolio and partner ecosystem in its pursuit of security revenue growth

To achieve its revenue goal of $130 billion yen (about US$1.25 billion) in security-related products and services in fiscal 2016, Fujitsu is expanding its security portfolio and adding security alliance partners. In Q2 2016, Fujitsu announced its Security Solution Security Resilience Enhancement Support Service—a managed security service that helps customers set medium-term countermeasures to ensure business continuity following a cyber-attack. Fujitsu also partnered with Menlo Security in the quarter, announcing that the Menlo Security Isolation Platform (MISP) will be used within Fujitsu’s managed security services to reduce customers’ risk of malware infection.

These announcements demonstrate the evolution of Fujitsu’s Global Managed Security Services offerings as the vendor realigns its go-to-market strategy to address increasing customer demand for security incident prevention and recovery.

However, TBR believes Fujitsu must take more significant steps to meet its FY16 security revenue goal. To achieve its goal, Fujitsu must increase its security revenue by more than 30 percent compared to its FY15 performance, according to TBR’s estimates. This is a very challenging growth rate in the current security market landscape where vendors of similar size are achieving single-digit security revenue growth. TBR expects Fujitsu will increase promotions to bundle its security services with its digital transformation, application modernization and end user services to expand use cases for its security solutions.