Tsuzuki Denki 8157
都築電気
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2021-10-29
2021-08-18
2021-07-30
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Tokyo Art Club Building, 6-19-15 Shinbashi, Minato-ku, Tokyo 105-8665, Japan
Summary
Tsuzuki Denki is a midsize network and system integrator that suppliesinformation and communication systems and electronic devices mainly to corporatecustomers. In its core Information Network Solutions segment, the company operates the network integration (NI)business the system integration (SI) business and the service business. In its Electronic Devices segment, it sells products such as semiconductors and LCDpanels for automobile onboard information equipment to manufacturers.The company was founded as a distributor of Fuji Electric Mfg. Co.,Ltd. (currently Fuji Electric Co., Ltd. [TSE1: 6504] and Fujitsu Ltd. [TSE1:6702]) in 1932. It started out as a supplier of telephone switchboards forswitching stations to the former Ministry of Communications (predecessor of NipponTelegraph and Telephone Corporation [NTT; TSE1: 9432]). Fujitsu is thecompany’s second largest shareholder.
Electronic Equipment, Instruments & Components
Key dates
2020-04-14
Coverage initiation
Executive summary
Business overview
Tsuzuki Denki is a midsize network and system integrator that supplies information and communication systems and electronic devices mainly to corporate customers. In its core Information Network Solutions segment (81.5% of sales, 92.4% of operating profit in FY03/21), the company operates equipment (36.8% of sales), development and construction (12.1%), and service (32.6%) businesses. In its Electronic Devices segment (18.5% of sales, 7.6% of operating profit), it sells products such as semiconductors and LCD panels for automobile onboard information equipment to manufacturers.
The company was founded as a distributor of Fuji Electric Mfg. Co., Ltd. (currently Fuji Electric Co., Ltd. [TSE1: 6504] and Fujitsu Ltd. [TSE1: 6702; founded as an offshoot of the communications division of Fuji Electric in 1935]) in 1932. It started out as a supplier of telephone switchboards for switching stations to the former Ministry of Communications (predecessor of Nippon Telegraph and Telephone Corporation [NTT; TSE1: 9432]). Fujitsu is the company’s second largest shareholder with a stake of 12.9% as of end-FY03/21.
Tsuzuki Denki provides products and services to 20,000 companies. It has a diverse customer base, with the services industry accounting for 20% of sales in its Information Network Solutions segment, manufacturing for 20%, wholesale and retail for 10%, transportation and telecommunication for 10%, finance and insurance for just under 10%, and public administration for 6%. In terms of equipment, the company sells PCs, servers, memory storage, IP-PBX systems, transmission equipment, routers, and other equipment. In terms of development and construction, it designs, constructs, and deploys communication networks and information systems. In terms of service, it provides operation, maintenance, and support services (including network monitoring/operation, support desk, and security functions) after equipment has been deployed or after development and construction.
The company has accumulated voice switching/transmission technologies and expertise, and excels in areas including construction, operation, and maintenance of PBXs (private telephone networks used within companies), contact centers (customer service centers that use telephone, online solutions, and email to communicate with customers), and supporting network equipment (it procures from companies such as Cisco Systems [US]).
Equipment order value consists primarily of hardware and software sales, with an average order value per project of roughly JPY1.4mn. The company receives more than 27,000 orders per year. About 50% of its hardware and software products are procured from Fujitsu (including Cisco Systems and other third-party products sourced through Fujitsu). Tsuzuki Denki also independently procures products from companies such as network equipment manufacturer Avaya (US).
Development and construction order value consists of system development fees (monthly developer manpower x monthly developer rate). The average order value per project is about JPY2.4mn (with more than 6,500 projects per year). In FY03/21, it undertook 25 large-scale system development projects worth JPY10mn or more in two categories: (1) systems designed and developed from scratch (70% of total), and (2) systems that leverage the company’s proprietary, semi-custom KitFit solutions tailored to different industries and businesses (30%). After installing a system, the company offers operation, maintenance, and support services for a span of five to six years (annual average order value of roughly JPY1mn per project x 35,000-plus projects).
The main cost items in the Information Network Solutions business are hardware/software procurement costs (roughly 45% of cost of sales) and personnel expenses for development, sales, and operations staff (1,933 employees in FY03/21). The operating profit margin for the NI/SI business was 3.0% in FY03/21 (versus average of 8.5% at 17 major system integrators excluding OBIC Co., Ltd. [TSE1: 4684]). The operating profit margin is lower than competitors, due mainly to a high procurement costs ratio (equipment and materials costs accounted for about 55% of the cost of parent sales in FY03/20) and labor share (personnel expenses/value added). In a comparison with rivals Fujisoft, Net One Systems, Information Services International-Dentsu, and DTS (which have the same level of sales as the company), Tsuzuki Denki’s gross profit margin is lower by around 5pp, but its average annual salary of JPY8.5mn is on par with one company and 42–44% above the other three. Under the new medium-term business plan covering FY03/21 to FY03/23, “Innovation 2023,” the company plans to shift focus toward the service business (targeting service sales accounting for 40% of overall sales in FY03/23 versus 32.6% in FY03/21), create new data-driven business, and strengthen its management base.
In the Electronic Devices segment, the company procures semiconductors, LCD panels, HDDs, memory storage, and embedded servers from Fujitsu and other domestic and overseas suppliers, and sells them to manufacturers. It also combines its expertise in wireless network technologies with sensors to sell IoT modules manufactured under contract by Japanese electronics manufacturing services (EMS) companies. Main costs are procurement costs for hardware and expenses for sales personnel (167 people in FY03/21). Segment OPM was 1.1% in FY03/21.
Earnings trends
In FY03/21, the company reported consolidated sales of JPY120.0bn (-4.3% YoY), operating profit of JPY3.2bn (-28.2% YoY), recurring profit of JPY3.4bn (-26.6% YoY), and net income attributable to owners of the parent of JPY2.3bn (-25.6% YoY). The company booked orders worth JPY121.7bn (+0.4% YoY); its order backlog at the end of FY03/21 was JPY22.5bn (+7.9% YoY).
The Information Network Solutions segment recorded a 4.2% YoY sales decline. Service sales were up 3.9% YoY, but sales were down 26.2% YoY for development and construction and down 1.3% YoY for equipment. The company saw brisk remote working-related demand and solid GIGA School Concept-related orders. On the other hand, the COVID-19 pandemic restricted sales activities and some customers reduced or deferred their ICT investments. There were also factors such as reactionary slump to a rise in server and PC replacement demand a year earlier due to the discontinuation of technical support for some Microsoft products. The result was flat orders and a fall in sales YoY.
The Electronic Devices segment posted a 4.8% YoY sales decline due to production adjustments in factory automation equipment amid a shortage of components despite a 13.9% YoY increase in orders of LCD panels for in-car devices and GIGA School Concept-related orders.
The gross profit margin dropped 0.5pp YoY to 17.9% for reasons including the cost ratio of a large Information Network Solutions segment project being higher than usual. The SG&A expense ratio went up 0.3pp YoY to 15.2% on lower sales despite cost saving measures in the Electronic Devices segment and lower domestic and overseas travel expenses due to measures to prevent the spread of COVID-19 and minimize the risk of infection. As a result, the OPM was down 0.9pp YoY to 2.7%. Annual dividend: The company increased its year-end dividend per share forecast from JPY21 to JPY31. With an interim dividend of JPY10.0 and a commemorative dividend of JPY5.0, the total dividend for FY03/21 was JPY46.0 per share (JPY55.0 per share in FY03/20).
For FY03/22, the company forecasts full-year consolidated sales of JPY122.0bn (+1.7% YoY), operating profit of JPY4.0bn (+24.9% YoY), recurring profit of JPY4.1bn (+20.5% YoY), net income of JPY2.7bn (+15.1% YoY), and an annual dividend per share of JPY47.0 (JPY46.0 in FY03/21). Note: As it is impossible to forecast when the COVID-19 pandemic will come under control, marketing activities may be constrained due to stay-at-home orders and other restrictions, which may affect the earnings in FY03/22. The company said it would promptly disclose information if any material matters arose.
The company’s new medium-term business plan (Innovation 2023) will cover the three-year period from FY03/21 to FY03/23, the final year of the plan corresponding to the company’s 90-year anniversary. Under the new plan the company is targeting final-year sales of JPY126.0bn, operating profit of JPY4.6bn, and an ROE of 9.0% or higher; this compares with sales of JPY125.4bn, operating profit of JPY4.5bn, and an ROE of 10.8% in FY03/20. Under the new medium-term plan, the company is looking to step up its efforts to support the digital transformation (DX) initiatives of client companies and become more competitive by making itself into an “innovation service provider” while at the same time working for the betterment of society with SDG and ESG initiatives. The company aims to promote the transformation of its business structure, facilitate the modernization of its customers’ existing ICT assets, and provide new value to customers through innovation.
Strengths and weaknesses
The company’s key strengths are 1) voice switching/transmission technologies and expertise derived from an extensive track record in handling telephone switching systems, 2) a customer base of roughly 20,000 (mostly large) companies and longstanding relationships with such customers, and 3) a dedicated approach toward projects and a focus on niche markets that differ from the markets that major rivals target. Its main weaknesses are 1) its reliance on Fujitsu, 2) a high labor share (high personnel expenses as a percentage of value added are one factor depressing profitability), and 3) poor synergies between the NI and SI businesses due to historical differences in their technologies and sales channels (customer accounts).
Key financial data
Note: Figures may differ from company materials due to differences in rounding methods.
Notes: Figures may differ from company materials due to differences in rounding methods. Figures through FY03/16 for the Other segment include sales and installation of air conditioners, and sales of car audio and wireless devices.
Trends and outlook
Quarterly trends and results
Note: Figures may differ from company materials due to differences in rounding methods.
Note: Figures may differ from company materials due to differences in rounding methods.
Note: Effective from 1H FY03/21, in order to more accurately grasp the business status of the Information Network Solutions segment, the company has changed its business management classifications from “network integration,” “system integration,” and “service business,” to “equipment,” “development and construction,” and “service.”
Note: Figures may differ from company materials due to differences in rounding methods.
Note: Effective from 1H FY03/21, in order to more accurately grasp the business status of the Information Network Solutions segment, the company has changed its business management classifications from “network integration,” “system integration,” and “service business,” to “equipment,” “development and construction,” and “service.”
Key characteristics of the group’s quarterly results
The company group’s sales and profit both tend to be concentrated in September and March, which are critical points in the financial year.
Many of the customers have financial years running from April of one year to March of the next, and the company books sales primarily on an “inspection basis.”
1H FY03/22 results (out October 29, 2021)
Summary
In 1H FY03/22, the company reported consolidated sales of JPY53.1bn (+0.2% YoY), operating profit of JPY798mn (+262.1% YoY), recurring profit of JPY855mn (+271.7% YoY), and net income attributable to owners of the parent of JPY492mn (+JPY230.2%). The company booked orders worth JPY68.6bn (+13.0% YoY); its order backlog was JPY37.9bn (+33.2% YoY).
Progress versus forecast: Q2 consolidated sales reached 43.5% of the company’s full-year forecast for FY03/22 (the achievement rate a year earlier was 44.2% versus actual full-year sales in FY03/21), operating profit reached 20.2% (+6.9% YoY), recurring profit 21.1% (+6.8% YoY), and net income attributable to owners of the parent 18.2% (+6.4% YoY). The full-year forecast remains unchanged.
Consolidated sales up 0.2% YoY: The Information Network Solutions segment recorded a 7.3% YoY sales decline. Sales were up 11.7% YoY for services, but were down 0.8% YoY for development and construction and 27.1% YoY for equipment. As in Q1, projects addressing network expansion, security enhancement, and contact center construction remained robust, as did medical projects, many of which had been postponed due to the impact of COVID-19 in Q2 FY03/21. Still, segment sales dropped YoY in the absence of large projects that contributed to the company's performance in Q2 FY03/21, and also due to PC deployment tapering off as many customers finished addressing their teleworking needs. Meanwhile, the Electronic Devices segment continued its growth from Q1, with demand from the factory automation (FA) equipment and automotive industries. In-car information devices, especially semiconductors, servers for factory equipment, and one-off demand generated by the Tokyo 2020 Olympic Games contributed to segment sales that increased 32.9% YoY.
Operating profit increased 261.1% YoY: Information Network Solutions grew 187.6% YoY. Contributing factors were improved cost ratio in development and construction and equipment deployment projects, as well as the growth of service sales. Electronic Devices grew 638.9% YoY, with profit soaring due to higher sales and lower expenses. The gross profit margin was up 1.3pp YoY to 18.4% and the SG&A expense ratio rose 0.2pp YoY to 16.9%. The operating profit margin rose 1.1pp to 1.5%.
Results by segment
The company revised its business classifications (including subsidiaries) to gain a more accurate understanding of the status of its businesses. From 1H FY03/21, the breakdown of the Information Network Solutions segment has been changed as follows from the previous breakdown of network integration (NI), system integration (SI), and service business.
Equipment: Sales of information and communications equipment
Development and construction: Providing technical services in consulting, design, development, and system construction
Service: Operation and maintenance of information and communications equipment, software, etc., and monthly subscription services such as cloud services
Note: The following text uses the new segment breakdown, although the previous breakdown is used in the tables. We plan to revise the tables using the new breakdowns at a later time.
Information Network Solutions
Segment results: Orders came to JPY50.2bn (-0.9% YoY), sales JPY40.0bn (-7.3% YoY), and order backlog JPY24.7bn (+8.6% YoY). Operating profit reached JPY532mn (+187.6% YoY). While orders and sales finished lower YoY, operating profit increased significantly from improved cost ratio in development and construction and equipment deployment projects, as well as from the growth of service sales. By subsegment, the trends were as follows:
Equipment orders were down 16.3% YoY and sales were down 27.1% YoY, while the order backlog was up 5.6% YoY. Begun in FY03/21, the deployment of smartphones for sales staff in the insurance industry continued to progress in Q2. Equipment deployment projects for medical and educational institutions increased as well. Meanwhile, results were negatively affected by the absence of multiple large projects the company won in Q2 FY03/21. PC deployment projects that had peaked in the previous fiscal year also tapered off as many customers finished addressing their teleworking needs, and along with the impact of delivery delays due to a shortage of certain semiconductors, orders and sales declined YoY.
Development and construction orders rose 15.1% YoY and the order backlog grew 19.0% YoY, but sales fell 0.8% YoY. As in Q1, there was an increase in projects related to strengthening networks and improving security. However, a decrease in orders in Q1 resulted in lower sales in Q2. The migration to an LCM service model was also partially responsible. On the other hand, orders increased by double digits YoY thanks to steady Q2 progress with the many system development projects that had been postponed due to the impact of COVID-19.
Service orders were up 12.1% YoY, sales were up 11.7% YoY, and order backlog was up 6.4% YoY. Contributing factors included LCM service results from Q1 and growth in cloud-based contact center services.
Profitability was significantly higher than in Q2 FY03/21 due to the improved cost ratio in development and construction projects and equipment deployment projects, as well as the expansion of service sales, including cloud-based contact center services.
Electronic Devices
Segment results: Orders came to JPY18.4bn (+83.4% YoY), sales JPY13.1bn (+32.9% YoY), and operating profit JPY266mn (+638.9% YoY). The order backlog was JPY13.2bn (+131.4% YoY). Orders, sales, and operating profit significantly overshot the year-earlier results. Orders soared on the back of a global semiconductor shortage that continued to build customer momentum to secure the products they need. By subsegment, the trends were as follows:
Devices business: Orders and sales have been strong with high demand in the factory automation (FA) equipment and automotive industries and a burst of strategic sourcing of parts among the company's clients in conjunction with the shortage of semiconductors and other electronic components.
Systems business: Orders and sales enjoyed significant growth with an increase in demand for servers for factory equipment in the factory automation market. Also, in addition to the rise in demand for SSDs and LCD panels used in in-car devices, demand expanded for HDDs used in Blu-ray disc recorders and other consumer devices whose demand rose rapidly as the Olympic Games neared.
Segment operating profit rose significantly in response to the company sourcing large volume of products in response to the shortage of parts. It also cut back domestic and overseas business travel due to the pandemic and made efforts to promote teleworking, both of which curtailed expenditure.
Company forecast for FY03/22
Note: Figures may differ from company materials due to differences in rounding methods.
Overview
For FY03/22, the company forecasts full-year consolidated sales of JPY122.0bn (+1.7% YoY), operating profit of JPY4.0bn (+24.9% YoY), recurring profit of JPY4.1bn (+20.5% YoY), net income of JPY2.7bn (+15.1% YoY), and an annual dividend per share of JPY47.0 (JPY46.0 in FY03/21).
The company forecasts a sales increase of 1.7% YoY and operating profit growth of 24.9% YoY, assuming an upturn in market conditions and a recovery from the COVID-19 pandemic. However, the company notes that uncertainty about when the COVID-19 pandemic will subside, which affects restrictions on sales activities (e.g., self-imposed restraints on going out) could impact performance in FY03/22. The company says it will promptly announce any matters that require public disclosure.
The consolidation of ComDesign contributed to FY03/21 performance for six months (from October 2020). In FY03/22, the subsidiary will contribute to performance for a full 12 months. The company aims to strengthen synergies between on-premise business and Avaya. On September 30, 2020, the company made ComDesign a subsidiary in line with one of the key initiatives in the medium-term management plan, “Transformation of the business structure through the creation of services.”
Decline in projects related to the GIGA School Concept
In FY03/21, orders for GIGA School Concept projects totaled JPY2.1bn. Despite concerns that this demand will decline in FY03/22, the company aims to steadily take advantage of replacement demand, given that PCs are typically used for around three years. The company also aims to win operational services related to the GIGA School Concept project. The company believes the gross profit margin on GIGA School Concept projects will average around 15%, below the 17.9% recorded in FY03/21. However, the company expects to win orders for replacement demand, and thinks orders on projects that are already operational will have higher margins. The company has not included uncertain projects in its FY03/22 forecasts. Even if demand for GIGA School Concept project decreases, the company believes it can make up lost ground once economic activity recovers and companies resume investment.
Operating environment
Information Network Solutions
The company expects the COVID-19 pandemic to accelerate the digitalization of companies and expand ICT investment.
Tsuzuki Denki expects the COVID-19 pandemic to accelerate the shift to the cloud. As part of this process, the company anticipates a transition from long-term development projects to the use of call center and other SaaS offerings that need not wait on development.
Electronic devices
The company believes that demand for semiconductors and other electronic devices, which has grown rapidly since 2H FY03/21, will continue to expand in FY03/22, and that the market environment will remain favorable.
Aiming to reach targets by steadily implementing the medium-term plan
In its medium-term plan (covering three years from FY03/21), the company aims to significantly enhance the value it provides customers with several key measures, outlined below. (For details, see the section titled “Medium-term outlook.”)
Conduct initiatives to support customers’ work-style transformation: building remote working environments, building zero trust security infrastructure, and rolling out electronic contract services
Upgrade cloud services for contact centers, which have become increasingly vital during the pandemic
Accelerate efforts to enhance the profitability of the Electronic Devices business
Medium-term outlook
New medium-term business plan: Innovation 2023 (FY03/21–FY03/23)
Overview
The new medium-term plan covers the three-year period from FY03/21 through FY03/23, the final year corresponding to the company’s 90-year anniversary.
Under its previous medium-term plan (Make New Value 2020), the company’s main push was directed at changing its earnings structure. Thanks to these efforts, it easily exceeded the performance targets set for the final year of the plan (FY03/20) with consolidated operating profit setting a new all-time high.
Under the new medium-term plan (Innovation 2023), the company is looking to step up its efforts to support the digital transformation (DX) initiatives of client companies and become more competitive by making itself into an “innovation service provider” while at the same time working for the betterment of society with SDG and ESG initiatives (see FY03/20 results section for details.)
The company will provide more details its new plan when it releases its FY03/20 results presentation materials on May 28, 2020.
Numerical targets
Under the new plan the company is targeting final-year sales of JPY126.0bn, operating profit of JPY4.6bn, and an ROE of 9.0% or higher; this compares with sales of JPY125.4bn, operating profit of JPY4.5bn, and an ROE of 10.8% in FY03/20.
The company noted that the performance targets under its new medium-term business plan were set giving due consideration to the coronavirus pandemic and the ongoing disruptions of economic activity in Japan and around the world.
Negative factors affecting the sales target include the drop in one-time demand such as replacement demand for servers and PCs due to the end of support (EOS) for Microsoft products and economic recession due to COVID-19. Positive factors include the expansion of digital transformation (DX)*1 business and expansion of demand accompanying COVID-19 (demand for enhanced networks, introduction of lightweight PCs, establishment and expansion of call centers, and electronization).
Management philosophy
Vision (core value): Connect people, intelligence, and technology to the future and contribute to an affluent world.
Mission (ultimate goal): Cooperate with others, take on challenges in order to create new value with an eye toward the future.
Major initiatives
Transform business structure by shifting toward services
Grow the business by modernizing*2 IT systems and moving to digital
Transform business structure through the expansion of software business
Grow Electronic Devices business by moving into new areas with good growth prospects
Promote data-driven businesses*3
Promote innovation business with the creation of digital transformation services to serve the needs of different industries
Use alliances and co-creation to expand contact center business
Foster data scientists
Strengthen business foundation
Accelerate work-style reforms and revamp personnel system to create a more attractive workplace
Increase efficiency through reforms in business processes
Improve group governance
Background to the “Innovation 2023” medium-term business plan
Society is about to undergo a paradigm shift due to behavioral changes as a result of the COVID-19 pandemic, digital innovation (AI, IoT, and 5G), and a decrease in the working population. The company’s customers are beginning to transform their business models using digital technology (digital transformation [DX]) to respond to changes in the environment.
The company formulated its “Innovation 2023” medium-term business plan to ensure it will continue to be the company of choice for customers in this environment. Under the plan it will help customers further achieve digital transformation through modernization and innovation.
Modernization: Update software and hardware of clients’ information systems with the latest products, while making use of the assets currently in operation. This means modernizing old IT assets (legacy systems) to be compatible with the latest technology.
Innovation: Provide new value to achieve innovation in customer businesses.
Business policy in the current medium-term business plan
Promote the modernization of existing ICT assets, provide new value through innovation, and move forward with structural reform of the company’s business.
Policy in regards to post-COVID-19 society
Changes in social values: Japan and the world at large have been severely affected by the COVID-19 pandemic. The impact has made it necessary for companies to adapt to an environment in which people are encouraged to stay at home. Remote work has become the standard as companies try to continue business activities and resume business safely. Setting up and maintaining their online environment is thus an urgent issue.
As an ICT company, Tsuzuki Denki will step up efforts to create a stress-free remote work environment so that it can provide services that meet the needs of customers seeking help in work-style changes and diversification of working environments.
The company thinks the keywords of this new period are “digitization” and “no physical contact.” It is considering providing an integrated service that comprehensively supports remote work, mainly through electronic contract and payment systems.
Tsuzuki Denki thinks that “cyber security” will be another important keyword. The company says it aims to promptly provide optimized services for companies in need of cybersecurity measures to eliminate the risks associated with moving operations online.
Priority measures
Transform business structure by shifting toward services
Raise the services sales ratio to 40% in FY03/23 (30.0% in FY03/20, 32.6% in FY03/21).
Concrete measures include business expansion through digital-based modernization, strengthening of the software business, and expansion of the Electronic Devices segment by focusing on growth fields.
Details of each measure are as follows.
Expand business through digital-based modernization: Modernize existing ICT assets (legacy assets) such as software and hardware in use in customers’ current information systems with digital technologies such as AI, IoT, and data analysis to achieve sophistication, automation, and efficiency.
Strengthen the software business: 1) Convert the in-house software business to a cloud-based or subscription model. In addition, increase value-added and profitability by adding a forecast function using AI; 2) promote software sales growth through collaborating with partners who have a competitive edge. Also consider M&A and collaborations through capital and business alliances.
Expand the scope of the Electronic Devices segment by focusing on growth fields: 1) Shift to fields where growth is expected, such as human machine interface (HMI)*4, memory storage, and embedded products; 2) expand business areas by leveraging the company’s technological and procurement capabilities and strengthening up-selling and cross-selling; and 3) promote business through co-creation with customers and suppliers.
Promote data-driven businesses
The data-driven businesses Tsuzuki Denki outlines in its medium-term business plan are businesses based on data that utilize technologies such as AI and IoT. This is a new area for the company, which it expects to add to earnings growth.
Specifically, the company will promote the following three initiatives.
Promote innovation businesses with the creation of digital transformation services tailored to specific industries: Promote innovation through the creation of data-driven digital transformation businesses in the restaurant, convenience store, contact center, medical care, nursing care, factory, and wholesale industries. The company started its own services including D-VUE Service (DATA-Visualization Utilization Explainable), which provides forecast, image analysis, and text mining functions in one-stop. Tsuzuki Denki aims to further IoT-based smart monitoring in the manufacturing industry; forecasting of store visits, sales volume, and logistics at convenience stores; and provision of facial recognition and ticketless services in the entertainment industry (e.g., movie theaters). The company has a track record of delivering a system that detects defective PET bottle products using AI and IoT technology, which roughly doubled the defective product detection rate.
Use alliances and co-creation to expand contact center business: Procure ICT equipment in bulk and expand monthly services involving installation and operation of the equipment.
Foster data scientists: Increase the number of data scientists from 15 at end-FY03/20 to 30 over the next three years. In FY03/21, the company also made steady progress in training data scientists and other personnel involved with digital transformation (DX).
The company launched D-VUE Service (DATA-Visualization Utilization Explainable) in March 2020, a specific example of its effort to promote data-driven businesses. The service visualizes a large amount of data and helps utilize the explainable analysis results in business operations. It resolves issues facing customers by automatizing labor-intensive tasks. The business has already recorded some sales and the company is pushing forward with new proposals.
D-VUE Service (using industry-specific AI) has been adopted mainly by customers in the construction and food industries, resulting in 16 contracts as of end-March 2021.
The company engaged in discussions on 17 projects related to zero-trust security. Deployment progressed mainly in the manufacturing sector. In response to high customer demand, the company plans to reinforce its organization from FY03/22. The company aims to expand into a wide range of customers by establishing the Tsuzuki Zero Trust Lab.
As of end-March 2021, Tsuzuki Denki planned to develop DX services for e-contracts for three trial customers, and the company plans to move steadily toward an October 2021 service launch. The company plans to establish industry- and region-specific sales promotion teams, garnering a 10% share of the e-contract market by FY03/23.
In FY03/21, the company completed an IoT services framework to provide one-stop offerings ranging from sensor design to data analysis. To promote operational reforms in the logistics sector, the company conducted proof of concept (PoC) tests aimed at expanding its operation management services to food manufacturers and four convenience store operators. The company aims to become profitable quickly in the logistics business by rolling out these offerings to existing customers.
Tsuzuki Denki also plans to accelerate its IoT business through collaboration with JIG-SAW Inc., which focuses on auto sensing and auto control (A&A) technology. The company has begun considering building a strategic relationship to jointly create business by leveraging each other’s strengths. Tsuzuki Denki plans to provide IoT services that incorporate JIG-SAW's NEQTO* service and expand operational services such as cloud monitoring and operation agency services.
Strengthen management base
Tsuzuki Denki places great importance on its employees as its most valuable management asset. As the company is aware of how important a comfortable and easy work environment is for employees, it plans to review personnel systems to help increase employee motivation, and to promote work-style reforms and operational efficiency.
Strengthen the group governance system and build a stronger management base.
Continue to hire and develop personnel specializing in digital transformation. Consider M&A, capital and business alliances, and business collaborations. Work to improve enterprise value.
The company spun off the Electronic Devices segment to strengthen profitability, and established Tsuzuki embedded solutions in July 2021. By accelerating management decision-making and clarifying management responsibilities, the company aims to (1) create a new business model that maximizes relationships with customers and suppliers, and (2) rapidly pursue efficiency and productivity.
Strategy and targets: For business integrators, the company aims to (1) extricate itself from low levels of profitability and capital efficiency by improving the quality of new business negotiations and closely monitoring existing discussions, (2) focus closely on products and customers, accelerating collaboration with existing customers.
In FY03/21, the company began renovating its head office and focusing on other initiatives to facilitate “decent work” for employees.
In pursuit of management efficiency, the company is making its head office 30% more compact. The company aims to create new work styles by leveraging ICT.
The company plans to create a “live office” that serves as a place for co-creation with customers and helps them experience digital transformation.
In-house testing of cutting-edge digital transformation (DX) solutions began in FY03/21: The company introduced next-generation unmanned stores, a category where demand is growing amid the COVID-19 pandemic. The company plans to roll out these offerings to offices, hospitals, and cinemas with an eye to expanding its business domain, such as by using purchasing history data.
SDG initiatives
Since its founding, Tsuzuki Denki has aimed to contribute to society. The company is working to solve social issues with its corporate philosophy of “Connect people, intelligence, and technology to the future and contribute to an affluent world.”
Considering that the “affluent world” the company aims for and the “sustainable society” the SDGs target are one and the same, the company plans to contribute to the achievement of SDGs through its business and corporate activities.
(Reference) Make New Value 2020 (FY03/18–FY03/20)
Overview
In May 2017, Tsuzuki Denki released its “Make New Value 2020” medium-term business plan spanning from FY03/18 through FY03/20. The release coincided with a transition to a new management structure as the company celebrated its 85th anniversary. The plan views FY03/18–20 as a period to transform the company’s earnings structure, setting the stage for a phase of growth in FY03/21–23.
As of May 2017, when the “Make New Value 2020” was released, the plan called for FY03/20 sales of JPY106.0bn (100.8% of FY03/17 level), operating profit of JPY2.8bn (130.7% of FY03/17 level), and ROE of 8% or more (5.9% in FY03/17). However, the company already achieved this sales target in FY03/18 (JPY112.0bn), as well as the operating profit target in FY03/19 (JPY3.3bn). ROE stood at 7.9% in FY03/19.
The company’s most recent FY03/20 targets (announced on January 31, 2020) are sales of JPY123.0bn (+3.5% YoY) and operating profit of JPY4.1bn (+23.6% YoY).
Basic policies in medium-term plan
Priority measures
Increase profitability of core businesses
Strengthen service business
Transform into service vendor focused on cloud, security, and operation services.
Concentrate management resources on personnel training, product development, and R&D.
Shift focus from growth in scale to higher profitability.
Reform Electronic Devices segment
Further leverage technical capabilities accumulated over half a century in the Electronic Devices segment.
Expand sales of global products to customers in the FA, automobile onboard terminals, and robot markets to secure stable earnings.
Strengthen measures to prevent unprofitable projects
Implement stricter project screening when orders are placed.
Strengthen project management training.
Enhance quality of upstream processes.
Take on challenges in new growth fields and areas
Venture into growth fields such as medical care, welfare, and nursing care.
Actively form capital and business alliances.
Leverage open innovation through industry–government–academia cooperation.
Implement initiatives that address social issues such as Japan’s falling birth rate and aging population.
Fusion of solutions services business and device business
Combine cloud infrastructure, network infrastructure, and sensor network technology, and strengthen IoT business centered on manufacturing and distribution industries.
Create new business models that leverage next-generation ICT such as AI and robotics
Acquire AI-powered technologies such as big data analysis tools.
Train data scientists.
Practice healthy management*
Rethink and strategically practice healthy management from a managerial perspective
Aim to enhance mental and physical health of employees and their families to continue to create new value.
Enhance work motivation and satisfaction through a diverse range of work styles.
Promote work-style reforms
Develop work environments and review various systems to enhance productivity and creativity.
Strategic investment
Invest in product development and other areas to strengthen profitability and thus support implementation of the priority measures of the medium-term plan
View on M&A and overseas expansion
The company’s present view on M&A and overseas expansion can be summarized as follows:
M&A
Tsuzuki Denki aims to explore high-quality M&A deals. M&A strategy can be leveraged to either offset existing weaknesses or venture into new fields, and the company will actively explore the latter of these two categories.
Overseas expansion
The company currently has no plans to expand its operations overseas.
Its existing overseas bases in Shanghai, Hong Kong, and Singapore mainly provide products and services that support the overseas expansion efforts of its Japanese customers. In addition, it aims to develop a global business operation that provides products and services to overseas customers.
In September 2019, the company entered a partnership agreement with Aura Alliance Limited (UK), and it can leverage the agreement to support Japanese customers branching out overseas. The partnership will also enable the company to accept orders from foreign companies seeking to build infrastructure in Japan (discussed later).
Business
Business description
Tsuzuki Denki is a midsize network and system integrator that supplies information and communication systems and electronic devices mainly to corporate customers. Its sales were about JPY120.0bn in FY03/21. The Tsuzuki Denki group comprises the parent, 12 subsidiaries (including nine consolidated subsidiaries), one affiliate, and one other affiliated company. On a consolidated basis, the group has 2,408 employees (salespeople 30%, engineers 57%, administrative staff 13%).
In the Information Network Solutions segment (81.5% of sales, 92.4% of operating profit in FY03/21), the company provides ICT infrastructure construction, software development, and post-construction operation, maintenance, and support services. In the Electronic Devices segment (18.5%, 7.6%), it sells products such as semiconductors and LCD panels for automobile onboard information equipment to manufacturers.
Established in 1932, Tsuzuki Denki started out as a distributor of Fuji Electric Mfg. Co., Ltd. (currently Fuji Electric Co., Ltd. [TSE1: 6504] and Fujitsu Ltd. [TSE1: 6702; founded as an offshoot of the communications division of Fuji Electric in 1935]). The company has grown along with the development of Japan’s IT technology, from fixed-line telephone switchboards to computers, and then to system integration. Its second largest shareholder is Fujitsu, which owned a stake of 12.9% in FY03/21.
Tsuzuki Denki stands out by virtue of its technological expertise accumulated over nearly 90 years and its longstanding relationships with customers. The company started operating as a network integrator 30 years ahead of most of its current rivals, which were founded in the 1960s. As of end-FY03/21, it provided products and services to roughly 20,000 customers, primary large manufacturers, vendors, telecom carriers, IT companies, and financial institutions.
While many of its rivals struggle to recruit ICT staff, Tsuzuki Denki has maintained a low employee turnover rate of about 2% (compared with average of 10–15% for the ICT industry as a whole). Shared Research thinks this is attributable to a corporate culture that values employees, and to a higher average salary (annual salary of 8.5mn per employee in FY03/21) than at competitors (see Competitor trends in the Market and value chain section). However, although the company’s OPM improved for eight consecutive years through FY03/20, it only reached 2.7% in FY03/21 mainly due to a high ratio of hardware sales (hardware procurement, including for the Electronic Devices segment, accounted for about 55% of cost of sales in FY03/21).
Over the medium term, the company looks to transform its business structure through a shift toward services, promote data-driven businesses, and strengthen the management base to achieve continuous profit growth and improved profitability (see Medium-term business plan section).
By segment
Tsuzuki Denki has two reportable segments: Information Network Solutions (81.5% of total sales, 92.4% of total operating profit, and OPM of 3.0% in FY03/21) and Electronic Devices (18.5% of total sales, 7.6% of total operating profit, and OPM of 1.1%). In the Information Network Solutions segment, the company operates the SI business, the NI business, and related operation and maintenance services.
The Information Network Solutions segment is the core segment.
Note: Above ratios do not include adjustments