Operator: Thank you for taking time out of your busy schedules to join us today. At this moment, we will begin Hitachi Ltd. web conference on Q2 FY2026 earnings. This time on Zoom. Japanese channel by choosing from the language options, English audio can also be selected. Depending on your device, the language option may appear in different sections, but in the case of PCs, the button is at the bottom of the screen. Please choose the audio of your choice. First, Kato will provide an overview of the earnings, to be followed by Anand's presentation, who will explain Hitachi Digital as a new company, as we announced today. Anand is CEO of Digital Engineering and AI Solutions Business Unit. Please wait while the slides are being switched. Kato-san, the floor is yours.
Tomomi Kato: I will explain our consolidated results for the Q2 of fiscal year 2026 and the outlook for the current fiscal year. First of all, I would like to talk about the performance highlights. Turning to our results for the Q2 of fiscal year 2026, Q2 revenues rose substantially, up 15% year-on-year, driven by business growth as well as factors including foreign exchange effects. As in Q1, all core sectors, Energy, led by its power grid business, DSS, Connective Industries, CI, and Mobility posted higher revenues and higher profits. Both revenues and adjusted EBITDA reached record highs for our Q2. Quarterly net income and core free cash flow would each have exceeded the previous year's level, excluding the impact of last year's business restructuring, including the air conditioning business. Next, fiscal year 2026 outlook.
Tomomi Kato: Following the upward revision in Q1, we have again revised our key financial figures upward, including net income. Expecting the Q2 results that exceeded our original plan, order trends, and progress in productivity improvement, we raised our revenue forecast by JPY 300 billion, mainly in DSS and CI, and adjusted EBITDA by JPY 40 billion, mainly in Energy and CI. We have also revised full free cash flow and ROIC upward. In the H2 and beyond, we plan to continue making CapEx, including capital investments as well as corporate group strategy investment to accelerate AI utilization and develop edge Mac solutions. We will also continue to monitor geopolitical risks, as well as the impact of rising interest rates on customer demand. As in Q1, we achieved double-digit revenue growth in Q2 with broadly similar trends.
Tomomi Kato: I will go through the H1 highlights by segment, starting with DSS. The IT business orders and revenues grew 10% in Q2. We incurred a one-time loss, a cost of JPY 9 billion. But profit increased for the H1, thanks to revenue growth and ongoing productivity improvement through AI utilization and other measures. Adjusted EBITDA margin also improved year-on-year. For the full year, we revised revenues upward JPY 70 billion to reflect the Q2 results and order trends in domestic IT business. Adjusted EBITDA, we have maintained our forecast year-on-year, having absorbed loss costs. In Energy, power grid orders were strong again in Q2, following Q1, rising substantially in the H1. We continued solid growth in demand for power transmission equipment. Revenues rose 32%, including foreign exchange effects. Higher revenues combined with productivity gains and other factors also drove a substantial improvement in profit margin.
Tomomi Kato: For the full year, the revenue forecast is unchanged. We revised adjusted EBITDA upward by JPY 33 billion, owing to productivity gains and from process management loss containment and other measures. Profit margin is expected to improve by 15%. In Mobility, railway system orders were strong again in Q2, following Q1, thanks to large signaling and control orders and foreign exchange effects, rising 40% in H1. Revenues rose 18%, supported by a solid Lumada business such as railway signaling system, as well as foreign exchange effects and profit margin improved year-on-year. For the full year, we expect higher revenues and profit and will grow with growth in Lumada business such as railway signaling system and higher adjusted EBITDA. In CI, orders rose again in Q2 following Q1, led by measurement and analysis systems, building systems, and others, up 26% year-on-year in H1.
Tomomi Kato: Within this, measurement and analysis system orders grew 66%, with increases in semiconductor manufacturing equipment and metrology and inspection equipment, against the backdrop of growing investment demand in semiconductor business. Revenues rose 11% year-on-year, and profit also increased, driven mainly by the growth in measurement and analysis systems, together with expansion of the service business in building systems and foreign exchange effects. For the full year, we raised revenues upward by JPY 50 billion and adjusted EBITDA by JPY 5 billion, reflecting the metrology and inspection equipment expansion and change in timing of home appliances. Here I will explain the half-year results and full year outlook, excluding special factors. Excluding special factors such as foreign exchange, business restructuring and one-time effects, strategic consolidated revenue is growing 10% in H1, and we expect this momentum to continue with growth at a similar level for the full year.
Tomomi Kato: The adjusted EBITDA margin also improved year-on-year in H1 and is expected to improve by 120 points for the full year. We have revised upward from the previous forecast, underpinning this is continued growth in orders backlog. As shown in the bottom right, the order backlog in each sector is growing steadily. I will now outline the features of each segment. Fourth, fiscal year 2026 in DSS H2, revenue growth is expected to exceed H1 of a full year growth of 8% in fiscal year 2026. This is 2 points higher than the previous forecast, reflecting growth in the domestic IT demand. The main drivers are similar to H1, AI transformation and modernization are likely to continue. The profit margin is also expected to improve year-on-year.
Tomomi Kato: In Energy, we expect the H2 growth at roughly the same rate as H1 for the full year, a growth of 21%, mainly through higher production capacity from planned capital investment and headcount growth in power grids, together with productivity improvement, we expect a higher full-year profit and a substantial improvement in profit margin. In Mobility, we expect to maintain a solid growth for the full year in H1. As in H1, the profit margin is also expected to improve, thanks to better business mix across railway signaling system and vehicles, and to cost reductions. In CI H2, the revenue growth is expected to exceed H1, with growth for the full year as well. The main growth drivers include semiconductor manufacturing equipment and measurement analysis system and the service business in building system.
Tomomi Kato: For promote the business, service business is expected to improve. Here, I will explain the year-on-year comparison to the H1. Revenues grew 70% year-on-year. Even excluding special factors such as foreign exchange rates, one-time effects and impact Middle East situation, we achieved a 10% year-on-year growth from business expansion. All sectors posted higher revenues. Excluding special factors, adjusted EBITDA margin improved 110 basis points year-on-year to 12.8%. Now year-on-year comparison for the full year. Revenues are expected to grow 13% year-on-year. Even excluding special factors, we expect to achieve 11% year-on-year growth. We plan higher revenues in all four sectors. The adjusted EBITDA margin is focused at 13% or 13.6% excluding special factors. Next, the interim net income and cash flow H1 results. Excluding the negative impact of approximately JPY 150 billion from last year's business restructuring, interim net income increased year-on-year.
Tomomi Kato: Core free cash flow also increased year-on-year, excluding the approximately JPY 60 billion impact of last year's business restructuring. Including the effect of large advance payments raised by JPY 200 billion year-on-year. Now, full year outlook. Despite the impact of last year's business restructuring, net income is expected to rise by approximately JPY 120 billion year-on-year, driven by higher operating income. Excluding the effect of last year's large advance payments, core free cash flow is expected to increase by approximately JPY 90 billion, driven by higher adjusted EBITDA and improved net working capital despite increased CapEx and impact of business restructuring. In terms of cash conversion ratio, 100% will be maintained.
Tomomi Kato: Topics.
Tomomi Kato: Hereafter, I will introduce the topics. We continue to make steady progress transforming our portfolio, including the transfer of Hitachi Construction Machinery shares, proposed sale of the share of Astemo, an auto parts manufacturer, as well as setting up a joint venture for the ATM business where we are the minority shareholder. Further, we are planning to sell the share of our electric appliances business by the end of next fiscal year. With respect to capital allocation for shareholder return, in view of the upward revisions we made to our core FCF and rising interest rates, the interim dividend payment will be increased above our initial forecast. It will be raised by 36% year-on-year. Share buyback for the H1 totaled JPY 290 billion, which is half of what we have planned for this fiscal year.
Tomomi Kato: Regarding our growth investments, as is shown in the chart on the right, as part of organic growth investments, we increased year-on-year. CapEx, including those for the power grid business, as well as investments for corporate growth strategy, including those for promotion of AI use and development of HVAC solutions. On top of that, we executed an inorganic investment of JPY 90 billion. Our company continues to proceed with the growth strategy. Under our capital allocation policy that we set at the beginning, we will make the necessary growth investments going forward as well. Here on this slide, I will explain the progress of our growth strategy in DSS. First on Japan's IT service business. In the H1, AX modernization in financial and social infrastructure fields drove the growth. Revenue increased by 7% year-on-year. By sector, financial infrastructure centering around insurance grew 19%.
Tomomi Kato: Profit margin also went up when adjusted for one-off factors. On a full year basis as well, mainly in financial and social infrastructure fields, revenue is expected to rise 6% year-on-year, and profit margin also is projected to increase after adjusting for one-off factors.
Tomomi Kato: In the overseas IT business, total business of Hitachi Digital in H1, when combined with revenues from synergies with other sectors, rose by 28% year-on-year. Revenues from synergies grew substantially year-on-year, primarily in Energy and Mobility. Furthermore, because the market environment surrounding the digital engineering business was severe, an order-taking strategy with a focus on profitability was implemented, resulting in a revenue at the same level as the year before on a standalone basis. The highlights of Q2 performance in FY2026 are, as I described at the beginning, we steadily executed our inorganic strategy as well. Next, on page 17, allow me to discuss our financial conditions. Total assets at the end of Q2 in FY2026 came to approximately JPY 15 trillion, which was roughly the same level as the year before. Cash and deposits increased, but also did advances received at the same time.
Tomomi Kato: CCC cash conversion cycle declined slightly, mainly due to a reduction in account receivables and an increase in advances received, resulting in improved funding efficiency. This shows the status of revenue in Q2 by region, including the impact of foreign exchange. Revenue grew in all regions, particularly in North America and Europe. In DSS, Japan's IT business and Europe storage business were robust. Energy expanded in almost all the regions, in particular in North America. I would like to explain the orders received in Q2 by segment. Orders for DSS with increases in Japan's AI transformation and modernization businesses were up 14% in Q2. For Energy, the power grid business grew 47% overall due to the contributions from multiple large-scale HVDC projects in Europe and data center projects in the US, on top of robust demand for transmission facilities.
Tomomi Kato: Mobility was up by 69% in total, with large orders for projects involving railway vehicle and signaling and control systems in Europe. In CI, against the background of expanding investment demand in the semiconductor industry, metrology and inspection equipment centering around semiconductor manufacturing equipment were up 77%, leading the growth in CI overall. Lastly, I will explain the Lumada business on page 28. Lumada, the pillar of our growth business. In H1, Lumada accounted for 44% of Hitachi's consolidated revenue, as is shown on the right. In FY2026, our plan is to raise its revenue by 25% and profit margin by 17%. Primary areas of growth for Lumada have been Japan's IT business in DSS, semiconductor manufacturing equipment in CI's metrology and inspection equipment, and service business in building systems, amongst others.
Tomomi Kato: HMAX, which is a solution for Lumada's digital service business, exhibited a progress rate of 47% against the FY2026 four-year forecast of JPY 510 billion. HMAX, mainly in CI railway and DSS, led the overall progress. This time, we made upward revisions to our four-year forecast for both Lumada and HMAX respectively. I have just explained our Q2 earnings in FY2026. Looking back on the H1, we realized that we were able to make steady progress in growth, profitability, and funding efficiency. On the other hand, in order to achieve the goals of Inspire 2027, management challenges still remain. In addition, the external business environment is uncertain. We, therefore, will continue to strengthen risk management as we take our growth strategy forward. Now, I would like to turn it over to Anand Birje, who has been supervising our overseas IT business since August.
Tomomi Kato: He will be discussing our policy going forward and Hitachi Digital's new organization.
Anand Birje: Thank you, Kato-san, and good afternoon, everyone, and thanks for taking time to join us today. My name is Anand Birje. I am the CEO of Hitachi's digital business globally, and I am based in Santa Clara, California. It is my pleasure to be here today and share both our market perspectives and also our vision, strategy, and plans to execute to the strategy for Hitachi Digital globally. First off, just wanted to share how we see the market going forward. Everyone has been talking about the convergence of AI and the amount of opportunity and risks AI has created over the last two years. As we look forward to the market, if you go to the next slide, we really believe that there is a convergence of three big factors that is driving change across the market.
Anand Birje: Cloud as a foundational transformation element to enable data and data foundations that are critical for enterprises to leverage the full value of AI. Then, of course, rethinking every business value chain across industry verticals that AI is making possible. So all these three hype cycles, and I am calling them hype cycles because we all know that every industry leverages these capabilities and these new technologies at different pace and at different maturities. So we are seeing these hype cycles converging over the next five years. So at Hitachi, we actually see enormous opportunities in this convergence zone, to basically both bring our capabilities, to bring our customer base and opportunities we have accessing the customer base, and deep domain expertise to help customers leverage all these three elements of transformation. If we go to the next slide.
Anand Birje: One of the things that I've talked about is how Hitachi, as a both digital services company and as one Hitachi conglomerate, is uniquely positioned to take advantage of these transformations happening across the market-driven by AI enablement and AI-led transformations. First off, if you look at us, we are uniquely positioned in our domain expertise in the industries we currently operate in, which is Energy, Mobility, and Connective Industries. Also industries we serve across the world in the mission-critical areas of telecom, automotive, banking, financial services, and healthcare life sciences.
Anand Birje: In these industries, we have unique advantage of strengths in domain and understanding of domains to create FDE teams that work with our top clients to leverage capabilities that we've built with HMAX as our framework for data fabric and creating ontologies for these customers and these industries. Most importantly, leveraging our ecosystems of partners and capabilities to deliver transformation services across every layer, from the infra layer to the data layer, to the agentic applications layer, and then of course, the business process transformations layer. If you go to the next slide. We believe we are uniquely positioned at Hitachi Digital, both in terms of what we've been building as capabilities globally with GlobalLogic as a digital engineering, product engineering services company, and Hitachi Digital Services, which has strong cloud operations, IoT, and platforms capabilities across the world.
Anand Birje: Bringing these two capabilities together has allowed us to create transformation both within our own front business units, and you see we've grown 46% year on year delivering these synergies and transformations across our views. Also creating opportunities to serve the seven verticals that we focus on, that I've talked about. Mission-critical industries that are critical to societies and the world across the world. Second is really creating four growth service lines. We believe cloud and CloudOps, data and insights, enterprise platforms and agentic platforms, and last but not the least, IoT, that is an enabler for phygital AI, are capabilities that are uniquely positioned for us. We're bringing the convergence of these capabilities along with the vertical focus areas to transform our top 200 customers, which have grown in single digits the last few years.
Anand Birje: We've seen the opportunity to really take part in vendor consolidation across these customers because they trust our brand, they trust our capabilities, and they see unique sort of end-to-end capabilities that we drive along with domain expertise in these customers. Last but not the least, we've been investing steadily over the years in our IPs, which are both domain-focused in the seven industries that we focus on, and also enabling ontologies for these industries to really enable and leverage AI for their business process transformation. One of the things that we are doing, and going to the next slide, we are excited today to also announce a new name that brings our services businesses, namely GlobalLogic and Hitachi Digital Services, together. The new name is Hitachi Digital.
Anand Birje: Starting tomorrow, you will see brand campaigns that define Hitachi Digital, if you go to the next slide, and our brand theme around Hitachi Digital, which we proudly are sharing here with you all today, which is "Engineer What The World Depends On." As you all know, we cater to mission-critical industries that societies depend on, and we have been delivering both the physical layer and digital layer transformations in these industries, and we will continue to do that, enabling these industries to take full value and full potential of AI in the coming years. If you go to the next slide. You are going to see a lot of the brand purpose and brand transformation across our services businesses globally.
Anand Birje: Really the focus is on being a services company that helps complex industries leverage data, AI, and physical technologies and IoT technologies converge and sustainably build business transformation in these industries as we cater to these customers across the world. If you go to the next slide. One of the things that we really are trying to hence simplify for our employees, for our customers, and for our partners is what is our growth strategy. We actually break it down into three areas. One is our core, which is our strength in the chosen verticals and the industries we serve, as well as the industries we operate in.
Anand Birje: Second is the AI era, and the service line transformation that we are doing with focus on service lines that are enabling AI adoption, namely data and insights, IoT and phygital AI, enterprise platforms and agentic platforms, and lastly, cloud and CloudOps, including FinOps and TokenOps. The multipliers for us include our IP-led differentiation, so that we non-linearize how we serve our customers and help them build ontologies that help them build the foundations for AI transformation. Secondly, we will continue to look at inorganic transformation and inorganic acquisitions. We have been successfully looking at inorganics and acquired capabilities across the world over the last few years.
Anand Birje: I think we are now even more poised well because of the integrated organization, because of the leadership structure we have created, and because of the customer access and market access we have to participate in consolidation and acquiring capabilities in verticals, in geographies, and in horizontals that we have identified as our focus areas. Last but not the least, the amplifiers, which is one Hitachi Ltd as a company that has access and understanding of deep domains and operating companies across Energy, Mobility, and Connective Industries. Also uniquely poised with our ecosystem partners, which include hyperscalers, data scalers, model scalers, and SaaS and platform scalers. I want to talk a little bit about these partners, so if you go to the next slide. We are not just uniquely positioned here as partners that we leverage to create unique solutions for our customers.
Anand Birje: With a lot of these partners, as Hitachi conglomerate, we are large consumers of their technology. We are customers, and we create 360 relationships with each of these partners, and that is what makes us uniquely poised. Also the domain expertise we bring to these partners along with our FDE teams, to take their technologies and really enable them to create true value and ROI with AI into the customer base that they want to serve and we jointly serve together. Lastly, if you go to the next slide. We just want to share some of the work we have been doing over the last few years and what differentiates us. We talked about industries we serve. Walgreens is one of America's largest pharmacies and continues to grow as a really consumer-focused, customer-focused, unique pharmacy across the country.
Anand Birje: For the last many years, we have been a digital transformation partner and now a data and AI transformation partner that is leveraging technologies to transform Walgreens' pharmacy platforms, their supply chain, their last mile filling platforms, as well as how they engage with their customers and price for their customers across their stores across the country, as well as their digital stores that they serve for North America. Hitachi High-Tech has been working with semiconductor companies in leveraging data and cloud to help them optimize their MES systems, their PLM systems, as well as creating the last mile advantage in quality and transformation to optimize semiconductor equipment manufacturing and really creating higher productivity across the industries that they serve. Hitachi Rail is the last customer, and it represents all the mobility and automotive customers we work with.
Anand Birje: Again, for those customers, we are transforming how they manufacture, how they repair, how they do predictive maintenance, how they actually do last mile servicing of their customers and pricing of the customers. Last but not the least, Hitachi Energy, which represents the energy sector that we serve across the world, where there is massive transformation happening, everything from transmission to distribution, to pricing, to load management using data cloud and AI, along with our ecosystems partners. This is just representative of some of the customers we serve, and we continue to serve in the industries that we chose as the seven focus industries.
Anand Birje: We really, again, want to reiterate, we are uniquely positioned in the global marketplace as we bring GlobalLogic and HDS together into Hitachi Digital to serve seven mission-critical verticals, 200 of our top clients, and continue to serve other clients across the world using four service lines that are really driving growth to enable AI adoption, true adoption with ROI in our customer base, and leveraging our ecosystem partners to deliver their technology with value creation in these industries. I will take questions, and we will pause at this point and hand it over back to you. Thank you.
Operator: Kato-san, Anand-san, thank you very much. At this moment, we would like to move to questions and answers. We will take questions for earnings as well as overseas IT business. Those of you with questions, please press the hand raise button on Zoom's screen. We will call your name. Once your name is called, please unmute, state your name and affiliation before asking questions. Time is limited, therefore, we would like to limit the number of questions per person to a maximum of two.
Operator: We will take questions from those of you on the Japanese channel. Members of the press, institutional investors, and analysts, we will be taking questions from all of you. Anyone with questions, please press the raise hand button. Harada-san, please unmute. Please ask your questions in Japanese.
Ryo Harada: Harada from Goldman Sachs Securities. Thank you very much. The number of questions is limited to two.
Ryo Harada: My first question has to do with DSS. As was presented, JPY 9 billion one-off factor, had it not been there, the margin is increased more than Q1. JPY 9 billion one-off factors, specifically, what were they? Could something similar happen in the future? That is what I would like to ask for. On page 12, on a full year basis, the forecast, the margin without one-off factors is 18% or so. It seems that full year forecast seems a little weak given the momentum right now. Are you being conservative? You are leveraging AI to increase efficiency of development. Is that the case? If you could also answer that. That is my first question.
Tomomi Kato: Yes. Allow me to answer. One-off factors, as I explained, in one project, loss cost overrun happened, unfortunately. It is in the area of SI, that is social infrastructure business.
Tomomi Kato: Having said so, we know what the outlook is going to be. In Q2, because of the lost cost, I think the project will wind down, and I do not think there will be any further effect from that going forward. Regarding the margin, in the H1, excluding this, 17.2% on a full year basis, you suggested that perhaps our forecast is rather conservative. This is because it depends on the mix of projects. Rather than being conservative, we are looking at the projects. As we do so, the H1 number is as presented, as well as the full year forecast. We are being neutral in that. This is testament to our capabilities, so we will continue to work toward improvement. Thank you very much.
Ryo Harada: Just to follow up, regarding AI utilization, you will use AI to improve margin as well as productivity.
Ryo Harada: In Japan, I think there is a quite robust demand for that. Perhaps process that you have not been able to capture, you may be able to capture going forward. That is a possibility. Next fiscal year, two years from now, when will we start to see the impact? If you could please follow up on your answer.
Tomomi Kato: As I have already explained, as of end of last fiscal year, SI business has realized 10% productivity enhancement, and FY27 goal is set at 30%. This fiscal year, at the end of fiscal year, 20% productivity enhancement is what we are looking for. I think we will start to see the impact of that on our margin gradually. Thank you very much.
Ryo Harada: My second question, this is a question to Anand.
Ryo Harada: GlobalLogic and Hitachi Digital Services were merged. Additionally, what is it that you will be able to do as a result of the merger? On page 11, you talked about the track record so far. Additionally, what is being enabled as a result of the merger? In terms of digital services, AI-enabled cyberattacks are happening. So customers are discouraged to connect to the network. That is negative. AI could also, however, be used positively to enhance security. So what is Hitachi's position on that, and what kind of commercial opportunities, business opportunities do you see?
Anand Birje: All three great questions, by the way. There are three questions within your one question. First off, I think in terms of what this merger brings together, let's start with capabilities. If you look at GlobalLogic, the strength and capabilities of GlobalLogic over the years has been strong product platforms and application engineering, which is very critical, which is where the process and business process of every industry lies, is at the application layer and the data layer. So product engineering, platform engineering, and data engineering were strengths and are strengths of GlobalLogic. Hitachi Digital Services, on the other hand, has always built capabilities around enterprise platforms and agentic platforms, such as ServiceNow and Salesforce and SAP and Oracle, as well as IoT platforms around MES, PLM, SCM, and CloudOps, FinOps, and now TokenOps.
Anand Birje: As we combine these two organizations, we are now able to offer to our customers everything from engineering and build to transform and operate, which is really what customers are looking for as they consolidate their vendors and are able to work across the layers, from the infrastructure layer to the data layer, to the API layer, to the applications layer with fewer vendors who have end-to-end capabilities. So the capability as we bring together the two organizations is a big advantage to customers. Secondly, both organizations have customers who really like those capabilities, have long been loyal customers, and have worked with both organizations for a period of time, but they have not worked with each other's organizations. So cross-pollination and really cross-selling into these customers' capabilities of each of these companies is a huge opportunity for us ahead.
Anand Birje: Vendor consolidation is happening in the market, and given our size and the trust customers have in the Hitachi brand, is something that we are leveraging a lot in driving the vendor consolidation. Third is between the two organizations, we have strong, deep domain expertise in different industry verticals, and as we focused on seven industry verticals that I talked about earlier, we are able to bring the best of domain capabilities in addition to the horizontal capabilities of both organizations together.
Anand Birje: Last but not the least, I think the fact that these organizations are now operating as one single company with a single CEO, which is myself, a single CTO, with a single CMO, and the entire executive leadership that is one operating model, it makes it easier for customers, partners, our ecosystem analysts and advisors, and industry at large, including our own employees, to see us as a single large global technology services and digital services provider and work with us in a much more seamless manner. So that's the third big advantage. I think your question on AI and the risk is absolutely right. I think last 3 years, what we really, really believe has been a lot of hype around AI, right? A lot of POCs created, a lot of interesting opportunities explored.
Anand Birje: But as we look at the next 5 years, enterprises are looking for more realistic adoption, and it starts with understanding the risk of security, risk of governance, risk of overrun of costs, and most enterprises are not ready for it. That's something that we bring as a large enterprise ourselves, working across 3 mission-critical industry sectors, Energy, Mobility, and Connective Industries. We are doing AI adoption in our own companies, and doing that at scale in extremely regulated industries has allowed us to build IP frameworks that help us build harnesses, AI agent registries, security protocols, both at the OT layer and the IT layer, because again, we work both at the physical and digital AI layers.
Anand Birje: Then last but not the least, bringing governance around how our engineers build for each of the domains and solve for each of the domains using AI data and cloud foundations. So I think, again, just having that own expertise is what has helped us become valuable to our clients. So great questions.
Tomomi Kato: With respect to cybersecurity, because this also concerns Japan, just to add, within DSS, there's a Cyber COE or a Cyber COE rather, and this is playing a role in defending against cyber attacks, and we're exploring the risks. We're also helping customers defend themselves. So centering around the COE, vis-a-vis customers, we're coming up with ways to help them defend themselves. From customers who are responsible for critical infrastructure, we're seeing increasing number of inquiries for security. Hitachi will work with customer FDE and cybersecurity COE. Both of them are going to work together, to provide solutions to customers' problems. Our strength is representing Anthropic, for example. So utilizing frontier technology, we're able to provide technology including that of Anthropic, and we have OT internally, so inclusive of OT customer zero as well as physical security. We're in a position to provide all of that.
Ryo Harada: Understood. Thank you very much.
Operator: Takizawa-san, please. Over to you. Please unmute and ask your question in Japanese.
Noriyuki Takizawa: Thank you very much. Question. Regarding HMAX, in terms of the target has gone up year-over-year, 70%, there is a significant growth that is expected in HMAX. Is it the recapitalization of the existing service or is it net increase or net acquisition? Can you give me a breakdown between the two? Furthermore, in terms of the net increase, 22% EBITDA, is it high EBITDA in a similar way? What should be our understanding?
Operator: Hatakeyama-san, please respond.
Masashi Hatakeyama: Thank you very much for the question. Regarding HMAX, this time, compared to the Lumada definition so far, we have a more detailed definition. HMAX definition is given in the appendix. Digitalized asset, the data utilization, and AI enabler is strengthened as domain and recurring digital service.
Masashi Hatakeyama: These are three that have been identified and there might have been some that were satisfying this, but we have reclassified according to the definition and are posting revenues for HMAX. In order to make this HMAX, the conditions must be met, and that has been reflected accordingly. So please consider that most of this will be new business.
Noriyuki Takizawa: Thank you very much. Regarding Energy, on the other hand, in this result as well as the five-year plan, in both contexts, I would like to ask the following question. In terms of the midterm Energy, the supply capabilities are increasing by 2.5 times. These are growth rates that are explainable. So price increase more than inflation seem not to be reflected. But what about the recent past profitability 2.6 point improvement has been made in terms of profitability.
Noriyuki Takizawa: So, is margin going to be pushed up because of the price of orders? Is it more than the inflation increase? Please talk about the recent past.
Tomomi Kato: In this case, for Energy, in terms of revenues, we have not made up with the revision. We have changed the profit level. At the time of July, we had a revision, but the revenue level was being forecast at the very last minute before the announcement. Therefore, taking into consideration the production capability, we believe that this is all we can achieve. Then why has the margin increased is the question. Productivity increase is the driver. Productivity increase means that different processes must be smooth and improvement has been made from one year ago. ERP utilization has gone up and inclusive of AI utilization. This is contributing to productivity increase.
Tomomi Kato: Furthermore, for major project that we are working in, there is loss cost potential that we have to be aware of. A contingency must always be factored in. So far, this is working well. Loss cost was not as high as expected originally, and that is the reason why the profitability has increased. Furthermore, it is not related to the upward revision, but in terms of a long-term trend, I would say that price is still continuing to improve. For the backlog, we are looking at the gross margin and there is no change in the trend. I believe that there is room for further improvement.
Tomomi Kato: The upward revision that we have made has been factored in Q1. Productivity increase is the driver for the profit margin increase. Thank you very much.
Operator: Next, Hirakawa-san. Hirakawa-san, please unmute and ask your questions in Japanese.
Mikio Hirakawa: Hirakawa speaking. I have two questions. Question number 1 is directed to Anand-san. Once again, why did you join Hitachi? Why did you decide to work for Hitachi? You worked for Emerson as part of your career, industrial companies, or Encora, digital companies and so forth. What kind of experience that you have had will continue to Hitachi Digital's success? Is there affinity, if I may ask? That is my first question.
Anand Birje: Again, a great question. You are right. If you look at my career, it actually spans across two very distinct industries where Hitachi is uniquely poised in the DSS or Hitachi Digital Business. I started my career in industrial control systems with Emerson Electric, both at the physical IoT layer, Emerson's Distributed Control Systems business, and then at the MES and HMI layer with the SCADA business, which was Intellution. Then for the last 20 years, actually more than 20 years, I have been involved in large global systems integration, digital engineering, data engineering, and application services businesses across HCL Technologies for almost 20 years, building two big businesses within HCL. Then more recently, Encora, which was a direct competitor to GlobalLogic, headquartered in Santa Clara, doing digital engineering, data engineering services across industry verticals.
Anand Birje: As I sort of looked at my career forward, I really found Hitachi to be uniquely positioned that brings both of these capabilities. Very few, really, if any, companies across the world can really combine these capabilities that are going to be important in what I call the phygital enterprise transformation, the physical layer and the digital layer transformation. Very few companies can do phygital, both layers of transformation, in especially complex regulated enterprise industries. So again, sitting in Silicon Valley for the last 30 years and working across enterprises across the world in transforming and building digital services, I felt this critical phase of my career, I really needed an enterprise and a company of the size and scale, which has the ability to invest in AI, in data, in digital transformation, in physical transformation, and partner with some of the best companies in the world.
Anand Birje: That is what brought me to Hitachi. I think the experiences from my last 30 years between the two industries is what I bring in the convergence of phygital for Hitachi. Of course, additionally, just the industry networks and people who have worked with me across these industries and these companies are excited about Hitachi and our way forward, and that is what is represented in the new leadership we are building together. Thank you very much.
Mikio Hirakawa: Thank you very much. Second is about engineering service. On year-over-year, this year's target is 6% increase year-over-year. I think it is rather normal, not too high, but revenue is an increase of 3% year-over-year. Revenue increase in engineering service is rather low. That is because strategic withdrawal from the businesses focus. Is that how you are going to explain it? Within Hitachi Digital Services' revenue, non-focus business. Correction, non-focus business. What is the percentage of that as a total? Will this withdrawal from non-focus business end this year, or will it continue into the next year and onward? What is the timeline? That is my second question.
Tomomi Kato: I will answer the first part of question 2, and for the latter part, I would like to turn to Anand for an answer. In engineering service, year-over-year revenue growth of 3% is set.
Tomomi Kato: That is because Hitachi Digital, which is former GlobalLogic and HDS combined. HDS itself was growing revenue quite successfully in manufacturing sector and synergies with other Hitachi companies. Regarding GlobalLogic, as was explained today, strategically, narrowing down on verticals, that is what Anand has started to do. Because of that, revenue target is set at this level. On this fiscal year, we will pursue various structural reforms. That is Anand's policy. As to the future outlook, I would like to invite Anand to comment on that. What is the timeline as well?
Anand Birje: Thank you, Kato-san. As Kato-san rightly suggested, we really look at this year as a year of reset and accelerate. We believe that if you look at the next 5 years, being very intentional about the verticals we want to focus on, the intentional to focus on horizontals where we see growth acceleration. I talked about data and intelligence. I talked about cloud, FinOps and ops. I talked about IoT and phygital AI, and of course, enterprise platforms for agentic modernization. This is where we are seeing growth acceleration across both our customers and competitors' customers who are attracted to consolidate and looking at us as an end-to-end phygital and digital AI services company. Last is intentionality in the geographies and the customers we focus on, which is really the 200 top customers that contribute today to about 80% of our revenues.
Anand Birje: We see there lot of growth opportunity because if you look at that base of customers, we have only grown single digits last year to this year. As consolidation happens based on capabilities of vendors and are now combined end-to-end capabilities, we see higher double-digit growth opportunities in the coming years. Really, this is a reset year for accelerate with intentionality around 7 verticals, 4 horizontals, 200 top customers and 11 ecosystem partners. I am not going to project out numbers for the next year, but I am very bullish at the market opportunity ahead. I can also say that very few companies can play at both the phygital and digital layer across the world at scale, especially in mission-critical industries. That is really what is giving us the confidence of the year ahead.
Operator: Thank you very much. Next, Inajima-sama, please. Inajima-san, please. Please unmute and ask your question in Japanese.
Tsuyoshi Inajima: I hope you can hear me. Question? Thank you very much. I have also 2 questions. First question is regarding the profit. Revision is mainly Energy and data center orders received increased, is significant. I have a question about that. Regarding AI infrastructure, is there some credit concerns that is occurring regarding your data center projects? Is this meaning cancellations or reducing in scale? Are there any concerns about the data center business going forward? That's my first question.
Tomomi Kato: First of all, regarding data center, in terms of Hitachi Energy, it's about a little bit more than 10% in terms of revenues. But backlog is increasing, orders are increasing around 10% plus level, and therefore it is growing. But the ratio is as I have already mentioned.
Tomomi Kato: Now, in particular, for the orders that we are receiving, there's no delay. Tamai-san, would you like to address this?
Shinichiro Tamai: Regarding data center related business, for the projects that we are running today, there have been no delays. In terms of orders, the Q2 contribution was very significant, as we mentioned. But there is a timeline before it is reflected in a revenue increase. So the orders received this term to contribute in terms of revenue next fiscal year. So far, we are not seeing any delays or any payment issues.
Tsuyoshi Inajima: Thank you very much. I have another question. For January, Mr. Kato, CFO, talked about the rare earth regulations for China. There have been some delays, but the impact has been limited. This proceeding and this interim, I believe that the supply to Japan has been more difficult. You said that the impact is limited.
Tsuyoshi Inajima: Is it still the case? What are the elements or products that are most significantly impacted? What is the inventory level? How much production can you maintain given the current inventory level?
Tomomi Kato: Now, to your point, as I've already explained in the past, CI Mobility, rare earth, magnets, motors are being procured. There have been some variation in terms of the delivery time. In terms of procurement partner as well as strategic inventory and alternative sources are being considered. Currently, the impact is limited. However, going forward, we don't know what is going to happen regarding strategic inventory. We are going to watch this very carefully. Regarding what are being impacted, this would be a breakdown of our operation. Therefore, we will refrain from giving you details on the elements. Thank you very much.
Operator: We will switch over to the English channel to take questions from those of you on the English channel. If you have a question, please press the hand raise button. Any questions, please? If not, then we will go back to the Japanese channel to take questions there. Yasue-san, please unmute and ask your questions in Japanese, please.
Kenji Yasui: Yasue from UBS Securities. Thank you. My first question has to do with power grids. Following Q1, in Q2, you made upward revision. So on a full year basis, I think your profit is increasing by JPY 200 billion. Will this trend continue into the next year? Increase in revenue. I would hope that that's the case into the next fiscal year, but the number is very large. So will the top line increase in its growth? Will growth accelerate? Is there any downside risk that you are concerned about?
Kenji Yasui: If you could please talk on that. Second, about cybersecurity. I do understand that it is very difficult to quantify, but I am led to believe that projects in this area will increase in 1 year in terms of the budget in the H2 of this fiscal year. Perhaps projects in this area may start to increase. What is the level of increase from your perspective? In which verticals or sectors? Would that be financial services? At this moment, if you can share any numbers on that, I would appreciate it. Thank you very much for the questions.
Tomomi Kato: Regarding the power grids, as you rightly pointed out, given the size of upward revision, and given the profit, yes, it is growing at this profit level. Up until last year, we said that it will continue to grow until 2030.
Operator: But in the last few months, we are saying that it will continue to grow into 2034. Since the volume itself will be larger, I think the growth will probably slow down. This year and next year, what is going to happen? Next fiscal year, what is going to be the accurate revenue forecast, we have not been able to identify yet. But given the overall trend, the growth rate itself will probably gradually start to decline. In terms of the amount, in the last 2 to 3 years, we have made a considerable CapEx, and that impact will start to show gradually. That is where we are right now. In terms of the amount, I do not think the growth will go down all that much, and that is our expectation. That is how we look at the outlook. Regarding cybersecurity, your second question.
Tomomi Kato: Since before, regarding cybersecurity, we are getting requests and requests for consultations from customers. This is a job for us to help customers defend themselves. It is increasing. But at this moment, in terms of numbers, which area is increasing? What is the size? We are not yet ready to share numbers. Tamai-san, if you could add.
Shinichiro Tamai: Customers who are responsible for critical infrastructure. We are doing business with increasing numbers of such customers. Power, traffic, manufacturing, and so forth. These mission-critical customers in mission-critical industries that support society, we are increasingly dealing with such customers. But at this moment, we do not have any numbers that we can share with you. A follow-up question. Regarding power grid, if there is any downside risk, what would that be? Regarding cybersecurity, 30 minutes ago, NEC announced earnings, and they said that they are not changing the budget in Q3.
Operator: Just 1 or 2 percentage points, or could it be 10%? Which are you close to toward next year? If you could give us a feel as to what the size of growth is going to be. Yes. Regarding power grid, downside risk? Geopolitically and AI as well as cyber, there are so many potential risks that balance. There is a possibility of fluctuation or change. But what we think our strength is, Hitachi's operation is that development site as well as production sites, they are distributed across different geographies. I think we have quite strong resilience in that regard. But we have very large projects, and so there are always risks of cost overruns and delayed timelines. We have to conduct project management and risk management over such projects.
Kenji Yasui: Regarding the impact of cyber? Would growth of over 10% happen right away?
Shinichiro Tamai: It is hard to conceive so, but in the world, so many things happen that are unexpected. We would like to continue to closely monitor. That is where we are right now. Thank you.
Operator: We have gone beyond the allocated time, but we will take one more question before we close. Hosoda-san, please. Please unmute and ask your question in Japanese.
Takuro Hosoda: I have 2 questions regarding your Energy business. Currently, production level has been increased and as a result, Hitachi Energy revenues as well as backlog, I think it is increasing by 2.5 times or 3 times. I think that has been presented. What about the delivery? Is it flat or is it becoming shorter? Please talk about the relevant timing. Furthermore, you said that there was a downside risk, which is geopolitical. For the long delivery time projects, inflation, cost increase, can you reflect that on the price? Can you increase the price compared to the time that you received the order, so can you increase the price thereafter?
Tomomi Kato: First of all, regarding delivery, we have been increasing our production level on a planned manner, and the productivity is increasing. We want to deliver as quickly as possible. On the other hand, in terms of orders received, it is very significant. It is still growing. Backlog is increasing, and it is likely to continue going forward. Therefore, delivery cannot be shortened dramatically. That would be difficult to do. But delivery time to be reduced is very important. But on the part of customers, they have individual requests for delivery, and timely delivery is what we are focused on. In fact, we are making intensified efforts, and improvements are being made. Therefore, in this way, we are trying to enhance the customer satisfaction level.
Tomomi Kato: Furthermore, in terms of variation risk, inflation will have a one-off impact, but when we have a long-term contract, that is an important risk that we consider. Therefore, we use indexing. If prices increase, to be passing through to price in an objective manner has been incorporated into the contract. Otherwise, we cannot accept the long-term contract. This is how we are dealing with this matter. Therefore, I think we are doing a good job managing the process.
Takuro Hosoda: Thank you very much.
Operator: Thank you very much. With this, we would like to bring the Q2 fiscal year 2026 earnings web conference to a close. Thank you very much for your participation today. Thank you.
