Hitachi (OTC:HTHIY) reported second-quarter financial results on Wednesday. The transcript from the company’s second-quarter earnings call has been provided below.
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View the webcast at https://www.youtube.com/channel/UCg_4TNJazFMAiJjycU0p5Ow
Summary
Hitachi Ltd reported a 15% year-on-year increase in Q2 revenue, with all four business sectors—Energy, DSS, Connective Industries, and Mobility—posting higher revenues and profits.
The company raised its fiscal 2026 revenue forecast by 300 billion yen, primarily in DSS and CI, and adjusted EBITDA by 40 billion yen, driven by strong orders and productivity improvements.
Hitachi plans to continue significant capital expenditures to accelerate AI utilization and develop HMAX solutions, while monitoring geopolitical risks and rising interest rates.
In the Energy sector, Power Grids showed strong demand with a 32% rise in revenues. Mobility saw a 40% rise in rail-based system orders, and CI experienced a significant 66% increase in Measurement and Analysis Systems orders.
For the full year, Hitachi expects a 13% revenue growth year-on-year, with an adjusted EBITDA margin forecast of 13% to 13.6%, excluding special factors.
Hitachi Digital, a merger of GlobalLogic and Hitachi Digital Services, aims to leverage AI, data, and cloud capabilities to drive growth in mission-critical industries.
The company continues to transform its portfolio with strategic divestments and joint ventures, while increasing its interim dividend by 36% and executing a share buyback totaling 290 billion yen.
Hitachi’s Lumada business accounted for 44% of consolidated revenue in the first half, with plans to increase revenue by 25% and profit margin by 17% in FY26.
Full Transcript
OPERATOR
Ladies and gentlemen, thank you very much for taking time out of your busy schedules to join us today. At this moment we will begin Hitachi web conference on Q2 FY2026 earnings. This time on Zoom’s Japanese channel, please choose 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, the new company we announced today. He is the CEO of the Digital Engineering and AI Solutions Business Unit. Please wait while the slides are being switched. Kato-san, the floor is yours.
Tomomi Kato (Representative Executive Senior Vice President, CFO and CRMO)
I will explain our consolidated results for the second quarter 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 second quarter of fiscal year 2026, Q2 revenue rose substantially, up 15% year on year, driven by business growth as well as factors including foreign exchange effects. As in Q1, all four sectors—Energy, led by its Power Grids business, DSS, Connective Industries, and Mobility—posted higher revenues and higher profits.
Both revenues and adjusted EBITDA reached record highs for a second quarter. 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 2026 outlook. Following the upward revision in Q1, we have again revised our key financial figures upward, including net income, implementing Q2 results that exceeded our original plan, order trends, and progress in productivity improvement. We raised our revenue forecast by 300 billion yen mainly in DSS and CI, and adjusted EBITDA by 40 billion yen mainly in Energy and CI. We have also revised free cash flow upward in the second half and beyond.
We plan to continue making CapEx, including capital investment as well as corporate group strategy investment, to accelerate AI utilization and to develop the HMAX 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. So I will go through the first half highlights by segment, starting with DSS, the IT business. Both orders and revenues grew 10% in Q2. We incurred a one-time loss cost of 9 billion yen, but profit increased for the first half 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 70 billion yen to reflect the Q2 results and order trends in the domestic IT business. For adjusted EBITDA, we have maintained our forecast year on year, having absorbed the loss costs. In Energy, Power Grids orders were strong again in Q2 following Q1, rising substantially in the first half. 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 substantial improvement in profit margin. For the full year, the revenue forecast is unchanged, but we revised adjusted EBITDA upward by 33 billion yen owing to productivity gains from process management, loss containment, and other measures, and profit margin is expected to improve by over 15%.
In Mobility, rail-based system orders were strong again in Q2 following Q1 thanks to large signaling and control orders and foreign exchange effects, rising 40% in the first half. Revenues rose 18%, supported by a solid Lumada business such as railway signaling systems as well as foreign exchange effects, and the profit margin improved year on year. For the full year we expect higher revenues and profit, with growth in the Lumada business such as railway signaling systems 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% in the first half. Within this, Measurement and Analysis Systems orders grew 66% with increases in semiconductor manufacturing equipment and metrology and inspection equipment, against the backdrop of growing investment demand in the 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 by 50 billion yen and adjusted EBITDA by 5 billion yen, reflecting the metrology and inspection equipment expansion and changing 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 factors, Hitachi consolidated revenues grew 10% in the first half and we expect this momentum to continue, with growth at a similar level for the full year. The adjusted EBITDA margin also improved year on year in the first half and is expected to improve by 120 points for the full year, so we have revised upward from the previous forecast.
Underpinning this is continued growth in orders backlog. The order backlog in each sector is growing steadily. I will now outline the features of each segment for fiscal 2026. In DSS, in the second half the revenue growth is expected to exceed the first half; full-year growth of 8% in fiscal year 2026 is 2 points higher than the previous forecast, reflecting growth in the domestic business. The main drivers are similar to the first half—AI, transformation, and modernization likely to continue. The profit margin is also expected to improve year on year.
In Energy, we expect second-half growth at roughly the same rate as the first half; for the full year, growth of 21% mainly through higher production capacity from planned capital investment and headcount growth in Power Grids. Together with productivity improvement, we expect higher profit and substantial improvement in profit margin. In Mobility, we expect to maintain solid growth for the full year as in the first half. The profit margin is also expected to improve thanks to a better business mix across railway signaling systems and rolling stock vehicles, and cost reductions.
In CI, in the second half the revenue growth is expected to exceed the first half, with growth for the full year as well. The main growth drivers include semiconductor manufacturing equipment, Measurement and Analysis Systems, and service business in Building Systems. The service business is expected to improve. Here I will explain the year-on-year comparisons. Q2 revenues grew 15% year on year. Even excluding special factors such as foreign exchange and the impact of the Middle East situation, we achieved 10% year-on-year growth from business expansion. All four 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 forecast at 13% to 13.6% excluding special factors. Next, the interim net income and cash flow. In first-half results, excluding the negative impact of approximately 150 billion yen from last year’s business restructuring, interim net income increased year on year. Core free cash flow also increased year on year. Excluding the approximately 60 billion yen impact of last year’s business restructuring, including the effect of large advance payments, it rose by 200 billion yen year on year.
Outlook: despite the impact of last year’s business restructuring, net income is expected to rise by approximately 120 billion yen year on year, driven by higher operating income. Excluding the effect of last year’s large advance payments, corporate cash flow is expected to increase by approximately 90 billion yen, driven by higher adjusted EBITDA and improved net working capital, despite increased CapEx and the impact of business restructuring. In terms of cash conversion ratio, 100% will be maintained.
Hereafter, I will introduce the topics. We continue to make steady progress transforming our portfolio, including the transfer of Hitachi Construction Machinery shares, sale of the share of Asimo and Autopilot Manufacture, as well as setting up a joint venture for the ATM business where we are the minority shareholder. Further, we are planning to sell a 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 first half totaled 290 billion yen, which is half of what we have planned for this fiscal year.
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 AIUs and development of HMAX solutions. On top of that, we executed an inorganic investment of 90 billion yen. Our company continues to pursue the growth strategy under our capital allocation policy that we said 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 first half DX 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%. 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.
In the overseas IT business, total business of Hitachi Digital in the first half, when combined with revenue from synergies with other sectors, rose by 28% year on year. Revenue 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 revenue at the same level as the year before on a standalone basis.
The highlights of Q2 performance in FY26 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 FY26 came to approximately 15 trillion yen, which was roughly the same level as the year before. Cash and deposits increased, but so did advances received at the same time. CCC, the cash conversion cycle, declined slightly mainly due to a reduction in accounts receivable and an increase in advances received, resulting in improved funding efficiency.
This is 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’s 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 a data center project in the U.S., on top of brisk demand for transmission facilities. Mobility was up by 69% in total, with large orders for projects involving railway vehicles and signaling and control systems in Europe.
In CI, against the background of expanding investment demand in the semiconductor industry, measurement and analysis systems 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 the first half accounted for 44% of Hitachi’s consolidated revenue. As is shown on the right in FY26, 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 CIS, measurement and analysis systems, and service business in Building Systems, amongst others.
HMAX, which is the solution for Lumada’s digital service business, exhibited a progress rate of 47% against the FY26 full-year forecast of 510 billion yen. HMAX, mainly in CI, Railway, and DSS, led the overall progress. This time we made upward revisions to our full-year forecast for both Lumada and HMAX, respectively. I have just explained our Q2 earnings in FY26. Looking back on the first half, 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. He will be discussing our policy going forward and Hitachi Digital’s new organization.
Anand Birje (Chief Executive Officer)
Thank you, Kato-san, and good afternoon everyone, and thanks for taking time to join us today. My name is Anand Birje. I’m the CEO of Hitachi’s digital business globally, and I’m based in Santa Clara, California. And it’s 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’s been talking about the convergence of AI and the amount of opportunity and risks AI has created over the last three years as we look forward to the market. If you go to the next slide, we really believe that there’s a convergence of three big factors that is driving change across the market: cloud as a foundational transformation element to enable data and data foundations that are critical for enterprises to leverage the full value of AI, and then of course rethinking every business value chain across industry verticals that AI is making possible.
And so all these three hype cycles, and I’m 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. And so we’re seeing these hype cycles converging over the next five years. And 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, one of the things that I’ve talked about is how Hitachi, as both a digital services company and as Hitachi—one Hitachi conglomerate—is uniquely positioned to take advantage of these transformations happening across the market and 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 connected industries, but also industries we serve across the world in the mission-critical areas of telecom, automotive, banking, financial services, and healthcare life sciences.
In these industries we have unique advantage of strengths in domain and understanding of domains to create FD teams that work with our top clients to leverage capabilities that we built with HMAX as our framework for data fabric and creating ontologies for these customers and these industries, and 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. 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 FBUs, but 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 core service lines: we believe cloud and cloud ops, data and insights, enterprise platforms and agentic platforms. And last but not the least, IoT that is an enabler for physical AI capabilities that are uniquely positioned for us.
And 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. But 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, and starting tomorrow you’ll 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’ve been delivering both the physical layer and digital layer transformations in these industries and we’ll 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’re going to see a lot of the brand purpose and brand transformation across our services businesses globally.
But really the focus is on being a services company that helps complex industries leverage data, AI, and physical technologies and IoT technologies converge and sustainability. 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? And 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 industries we operate in. Second is the AI era and the service line transformation that we’re doing with focus on service lines that are enabling AI adoption, namely data and insights, IoT and physical AI, enterprise platforms and agentic platforms.
And lastly, cloud and cloud ops including FinOps and TokenOps, the multipliers for us, including IP-led differentiation, so that we nonlinearize how we serve our customers and help them build ontologies that help them build the foundations for AI transformation. And secondly, we’ll continue to look at inorganic transformation and inorganic acquisitions. We’ve been successfully looking at inorganics and acquired capabilities across the world over the last few years, but I think we are now even more poised well because of the integrated organization, because of the leadership structure we’ve 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’ve identified as our focus areas.
And last but not the least, the amplifiers, which is one Hitachi as a company that has access and understanding of deep domains and operating companies across energy, mobility and connected industries. And 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 if you go to the next slide. We’re not just uniquely positioned here as partners that we leverage to create unique solutions for our customers. With a lot of these partners, as Hitachi conglomerate, we are large consumers of their technology, we are customers, and we create 360-degree relationships with each of these partners. And that’s what makes us uniquely poised.
And also the domain expertise we bring to these partners along with our FD 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’ve 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.
For the last many years we’ve 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 fulfillment 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 sort of 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 a large customer and it represents all the mobility and automotive customers we work with.
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 for the customers. And last but not the least, Hitachi Energy, which represents the energy sector that we serve across the world where there’s 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 focused industries. So 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’ll pause at this point and hand it over back to you. Thank you.
OPERATOR
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. So those of you with questions, please press the raise hand 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.
We will take questions from those of you on the Japanese side channel. Members of the press, institutional investors and analysts 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 from Goldman Sachs Securities.
Harada (Analyst)
Thank you very much. So the number of questions is limited to two. My first question has to do with DSS. As was presented, 9 billion yen one-off factor. Had it not been there, the margin is increased more than Q1. So 9.1 billion yen factors. Specifically what were they? And could something similar happen in the future? That’s what I would like to ask for. And on page 12, on a full-year basis, the forecast, the margin without one-off factors is 18% or so. So it seems that full-year forecast seems a little weak given the momentum right now. So are you being conservative and you are leveraging AI to increase efficiency of development? Is that the case? If you could also answer that. That’s my first question.
Tomomi Kato (Representative Executive Senior Vice President, CFO and CRMO)
Yes, allow me to answer. So one-off factors, as I explained, in one project loss cost overrun happened. Unfortunately it’s in the area of SSI, that’s social infrastructure business. Having said so, we know what the outlook is going to be. So in Q2, because of the loss cost, I think the project will wind down and I don’t think there will be any further effect from that going forward. And regarding the margin, in the first half, excluding this, 17.2% on a full-year basis, you suggested that perhaps our forecast is rather conservative. But this is because it depends on the mix of projects. Rather than being conservative, we’re looking at the projects as we do, so the first-half number is as presented as well as the full-year forecast. So we’re being neutral in that. But this is an assessment to our capabilities. So we will continue to work toward improvement.
Harada (Analyst)
Thank you very much. Just to follow up. So regarding AI utilization, you will use AI to improve margin as well as productivity. In Japan I think there’s quite robust demand for that. So perhaps process that you have not been able to capture, you may be able to capture going forward. That’s a possibility. So 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 (Representative Executive Senior Vice President, CFO and CRMO)
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%. So this fiscal year, at the end of fiscal year, 20% productivity enhancement is what we’re looking for. So I think we will start to see the impact of that on our margin gradually.
Harada (Analyst)
And this is a question to Anand-san. GlobalLogic and Hitachi Digital Services were merged, and additionally what is it that you will be able to do as a result of the measure? On page 11 you talked about the track record so far. But additionally what is being enabled as a result of the merger? And in terms of digital services, AI-enabled cyber attacks are happening so customers are discouraged to connect to the network. That’s negative. And 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 (Chief Executive Officer)
All three great questions. By the way, there are three questions within your one question. But first off, I think in terms of what does this merger bring 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.
Product engineering, platform engineering, and data engineering are our strengths at 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 Cloud Ops, FinOps, and now Token Ops. So 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 capability. So the capability as we bring together the two organizations is a big advantage to customers.
Secondly, both organizations have customers who really like the 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. And when the consolidation is happening in the market, and given our size and the trust customers have in the Hitachi brand, it 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’re able to bring the best of domain capabilities in addition to the horizontal capabilities of both organizations together. And 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, 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 three years, what we really, really believe has been a lot of hype around AI, a lot of PoCs created, a lot of interesting opportunities explored. But as we look at the next five 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.
And that’s something that we bring as a large enterprise ourselves. Working across three 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.
And 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 (Representative Executive Senior Vice President, CFO and CRMO)
And with respect to cybersecurity, because this also concerns Japan, just to add, within DSS there’s Cyber CoE, and this is playing a role in defending against cyber attacks. We’re exploring the risks and we’re also helping customers defend themselves. So centering around the CoE vis-à-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 works with customers and the Cybersecurity CoE. Both of them are going to work together and provide solutions to customers’ problems. Our strength is representing AI, Anthropic for example, so utilizing a 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.
Harada (Analyst)
Understood, thank you very much.
OPERATOR
Please, over to you, and please unmute and ask your question in Japanese.
Tomomi Kato (Representative Executive Senior Vice President, CFO and CRMO)
Thank you very much for the question regarding HMAX. Now this time, compared to the Lumada definition so far, we have a more detailed definition. HMAX definition is given in the appendix. Just like asset, the data utilization and AI enabler strengthened as dominant and recurring digital service. 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 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. Now, in this case for energy, in terms of revenues we have not made upward revision; we have changed the profit level. At the time of July we had 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 the level we can achieve. Then why has the margin increased is the question. Productivity increase is the driver. Productivity increase means that different diversities 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. Furthermore, for major project that we are working in, there is less cost potential that we have to be aware of. A contingency must always be factored in, and 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’s not related to the upward revision, but in terms of a long-term trend I would say that the 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 there is room for further improvement. The upward revision that we have made has been factored in. The first quarter, productivity increase is the driver for the profit margin increase.
OPERATOR
Next, Hirakawa-san, please unmute and ask your questions in Japanese.
Hirakawa (Analyst)
I have two questions. Question number one 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 company, and other companies and so forth. But what kind of experience that you’ve had will contribute to Hitachi Digital’s success? Is there affinity, if I may ask? That’s my first question.
Anand Birje (Chief Executive Officer)
Again, a great question. You’re 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 industry control systems with Emerson Electric both at the physical IoT layer, the Emerson’s distributed control systems business, and then at the MES and MMI layer with the SCADA business which was Intellution. And then for the last 20 years, actually more than 20 years, I’ve 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 and then more recently Encora, which was a direct competitor to GlobalLogic headquartered in Santa Clara, doing digital engineering, data engineering services across industry verticals.
So 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 digital enterprise transformation, the physical layer and the digital layer transformation. Very, very few companies can do both layers of transformation, especially in complex regulated enterprise industries.
And 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 at 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 and digital transformation, and physical transform, and partner with some of the best companies in the world. And that’s what brought me to Hitachi.
And I think the experiences from my last 30 years between the two industries is what I bring in the convergence of phygital for Hitachi and, 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 on our way forward. And that’s what’s represented in the new leadership we’re building together. Together. Thank you very much.
Hirakawa (Analyst)
Thank you very much. Second is about engineering services. This year’s target is 6% year-on-year increase. I think it’s rather normal, not too high, but revenue is an increase of 3% year-on-year, so revenue increase in engineering services is rather low, and that is because of strategic withdrawal from the business of focus. Is that how we are going to explain it? And within Hitachi Digital’s revenue, non-focus business correction, non-focus business — what is the percentage of that as a total?
Will this withdrawal from non-focused business end this year, or will it continue into the next year and onward? What is the timeline? That’s my second question.
Tomomi Kato (Representative Executive Senior Vice President, CFO and CRMO)
So I will answer the first part of question two, and for the latter part I would like to turn to Anand for an answer. In engineering services, year-on-year revenue growth of 3% is set, and that is because Hitachi, which is former GlobalLogic and HDS combined, HDS itself was growing revenue quite successfully in the manufacturing sector and synergies with other Hitachi companies. Regarding GlobalLogic, as was explained today, strategically narrowing down on verticals — that’s what Anand has started to do.
And because of that, the revenue target is set at this level, and this fiscal year we will pursue various structural reforms. That is Anand’s policy. And as to the future outlook, I would like to invite Anand to comment on that. And what’s the timeline as well?
Anand Birje (Chief Executive Officer)
Thank you, Kato-san. And as Kato-san rightly suggested, we really look at this year as a year of reset and accelerate, and we believe that if you look at the next five 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 physical AI, and of course enterprise platforms for modernization.
This is where we’re seeing growth acceleration across both our customers and competitors — customers who are attracted to consolidate and looking at us as an end-to-end physical and digital AI services company. And 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. And we see there a lot of growth opportunity because if you look at that base of customers, we’ve only grown single digits last year to this year. But as consolidation happens based on capabilities of vendors and our now combined end-to-end capabilities, we see higher double-digit growth opportunities in the coming years.
So really this is a reset year for accelerate with intentionality around 7 verticals, 4 horizontals, 200 top customers, and 11 ecosystem partners. I’m not going to project out numbers for the next year, but I’m very, very bullish at the market opportunity ahead. And I can also say that very few companies can play at both the physical and digital layer across the world at scale, especially in mission-critical industries. And that’s really what is giving us the confidence of the year ahead.
Hirakawa (Analyst)
Thank you very much.
OPERATOR
Next, please. Inajima-san, please unmute and ask your question in Japanese.
Inajima (Analyst)
I hope you can hear me. Thank you very much. I have also two questions. First question is regarding the profit revision, mainly energy. Data center orders received increased significantly, so I have a question about that. Regarding AI infrastructure, is there some credit concerns that are occurring regarding your data center projects? Is there cancellation or reducing in scale? Are there any concerns about the data center business going forward? That’s my first question.
Tomomi Kato (Representative Executive Senior Vice President, CFO and CRMO)
First of all, regarding data center, in terms of Hitachi Energy it’s a little bit more than 10% in terms of revenues, but the backlog is increasing. Orders are increasing around 10% plus level, and therefore it is growing. But the ratio is as I have already mentioned. Now in particular for the orders that we are receiving, there is no delay. Taman-san, would you like to address this?
Taman (UNKNOWN)
Regarding data center-related business, for the projects that we are running today, there have been no delays in terms of orders. The second quarter contribution was very significant as we mentioned, but there is a time lag before it is reflected in a revenue increase. So the orders received this term will contribute in terms of revenue next fiscal year. So far we are not seeing any delays or any payment issues.
Inajima (Analyst)
Thank you very much. I have another question. Mr. Kato, CFO, talked about the regulations for China. There have been some delays, but the impact has been limited. I believe that the supply to Japan is becoming more difficult. You said that the impact is limited. Is it still the case, and what are the elements or products that are most significantly impacted? What is the inventory level, and how much production can you maintain given the current inventory level?
Tomomi Kato (Representative Executive Senior Vice President, CFO and CRMO)
Now, to your point, as I’ve already explained in the past, in mobility, rare earth magnets and motors are being procured, and there has been some variation in terms of delivery time and in terms of procurement partner as well as strategic inventory and alternative sources 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, and regarding what are being impacted, this would be a breakdown of our operation; therefore, we will refrain from giving you details on the elements.
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? If not, then we will go back to the Japanese channel to take questions there. Yasui-san, please unmute and ask your questions in Japanese.
Yasui (Analyst)
Yes, from UBS Securities. Thank you. My first question has to do with power grids. Following Q1, in Q2 you made an upward revision. So on a full-year basis, I think your profit is increasing by 20 billion. Will this trend continue into the next year, or rather 200 billion 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, and is there any downside risk that you are concerned about?
If you could please talk on that. And second, about cybersecurity — I do understand that it’s very difficult to quantify, but I’m led to believe that projects in this area will increase in one year. In terms of the budget in the second half of this fiscal year, perhaps projects in this area may start to increase. Then what’s the level of increase from your perspective? In which verticals or sectors would that be — financial services? So at this moment, if you can share any numbers on that, I’d appreciate it.
Tomomi Kato (Representative Executive Senior Vice President, CFO and CRMO)
Thank you very much for the questions. Regarding the power grids, as you rightly pointed out, given the size of upward revision and given the profit, yes, it’s growing at this profit level, and up until last year we said that it will continue to grow until 2030, but in the last few months we’re saying that it will continue to grow into 2034. But since the volume itself will be larger, I think the growth will probably slow down. So this year and next year — what’s going to happen next fiscal year, what’s 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 two to three years we have made a considerable capex, and that impact will start to show gradually. That’s where we are right now. So. So in terms of the amount, I don’t think the growth will go down all that much, and that’s our expectation. So that’s how we look at the outlook. Regarding cybersecurity, your second question since before regarding cybersecurity, we’re getting requests and requests for consultations from customers, and this is a job for us to help customers defend themselves. It’s 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. Customers who are responsible for critical infrastructure — we’re doing business with an increasing number of such customers.
So power, traffic, manufacturing, and so forth — these mission-critical customers, customers in mission-critical industries that support society — we’re increasingly dealing with such customers. But at this moment, we don’t have any numbers that we can share with you. Yes. Regarding power grid, for downside risk — geopolitically and AI as well as cyber — there are so many potential risks that abound, so there’s a possibility of fluctuation or change. But what we think our strength is, Hitachi’s operation is that development sites as well as production sites are distributed across different geographies, so 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. So we have to conduct project management and risk management over such projects. Regarding the impact of cyber, would a growth of over 10% happen right away? It’s hard to conceive so, but in the world so many things happen that are unexpected, so we would like to continue to closely monitor. That’s 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 unmute and ask your question in Japanese.
Hosoda (Analyst)
I have two questions regarding your energy business. Currently, production level has been increased, and as a result the energy revenues as well as backlog — I think it’s 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? So 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 receive the orders? Can you increase the price thereafter?
Tomomi Kato (Representative Executive Senior Vice President, CFO and CRMO)
First of all, regarding delivery, we have been increasing our production level in a planned manner, and the productivity is increasing. We want to deliver as quickly as possible. But on the other hand, in terms of orders received, it’s very significant — it’s 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.
On the part of customers, they have individual requests for delivery, and timely delivery is what we are focused on, and 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. Furthermore, in terms of variation risk, inflation will have one-off impact. But when we have a long-term contract, that is an important risk that we consider. Therefore, we use indexing, and if prices increase — to be passing through to price in an objective manner — that has been incorporated into the contract. Otherwise, we cannot accept long-term contracts. This is how we are dealing with this matter, and therefore I think we are doing a good job managing the process.
Thank you very much.
OPERATOR
Thank you very much. With this, we would like to bring the second quarter fiscal year 2026 earnings web conference to a close. Thank you very much for your participation today. Thank you.
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