Annex Bulletin 2006-18                               April 27, 2006

Excerpts from CONFIDENTIAL client edition

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JAPANESE COMPANIES

Updated 4/27/06, 11:50PM PDT

Analysis of Fujitsu's FY2006 Business Results

Best Profit in 15 Years

Third Year in a Row of Profitable Growth, But Strength of U.S. Dollar Diminishes Revenue Gains

SCOTTSDALE, Apr 27 - The largest Japanese computer company has just reported its third year in a row of profitable growth, according to the just-released Fujitsu business results for the fiscal year 2006, ended March 31.  More importantly, the bottom line net income jumped 115% in yen (up 105% in U.S. dollars) to $611 million, the company's best earnings record in 15 years.

The Tokyo traders and investors took notice of Fujitsu's improved profitability, boosting the price of its stock yesterday to 981 yen, following the FY06 earnings release.  The new price level suggests a reversal of a short-term downward trend, and hints at a possible start of a new upward slope (see above chart).

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Business Segment Analysis

HDD. The best performing unit in terms of revenue growth was Fujitsu's storage (hard disk drive) business, whose revenues went up 21% in yen; up 15% in U.S. dollars to $2.5 billion.  Alas, at just 6% of total revenues, the HDD's impact on the company's overall growth was rather moderate.

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Services. Among Fujitsu's biggest units, the Infrastructure Services (outsourcing) grew by 6% in yen, while rising only 0.6% in U.S. dollars.  Other Software and Services operations all declined in U.S. dollars, though the Solutions/SI (systems integration), the company's second largest unit, actually grew its business in yen by 1.8%.

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Systems. Partially offsetting such an improvement in services' profitability was a 41% drop in the operating income that the Systems Platforms generated in FY06.  The company blamed "intensified competition in the server and related markets both inside and outside Japan and accelerated investment in development of certain new products" for the profit erosion.

[snip]

Other Hardware. Fujitsu's PC and Mobile Phones business was also down - 2.5% in yen and down 7.7% in U.S. dollars to $6.7 billion.  The company's LSI and other electronic components' revenues also dropped in FY06 16% to $6.3 billion.

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Geographies.  In terms of geographies, the Americas region, long one of the companies "problem children," experienced a remarkable turnaround and became its best performer of the FY06.  Revenues were up 22% in yen, up 15% in U.S. dollars to $3.2 billion, while operating profits surged by 195% to $120 million.  Only two and three years ago respectively, the Americas region reported significant losses.

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Outlook

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So overall, looks like Fujitsu is now out of the woods and poised for consistent growth.  Which is the time when top management needs to be particularly vigilant as unwelcome surprises may thwart "the best laid plans of mice and men."

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"That's all she wrote," we're afraid, for those of you who are NOT Annex Research clients, who are now reading the complete Annex Newsflash, along with all charts which back up our story.

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Volume XXII, Annex Newsflash 2006-18
April 27, 2006

Bob Djurdjevic, Editor
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