A second-quarter beat: was revenue or margin the main driver?

  • In the second quarter of its fiscal year ending in March 2027, FANUC reported revenue of 242.673 billion yen, up 14.9% year on year and just 0.8% above market consensus. Operating profit, however, rose 45.1% year on year to 63.17 billion yen, 14.2% above consensus. The standout result came mainly from profitability, rather than a large revenue beat.
  • Gross margin rose to 42.3% in the quarter, and operating margin reached 26.0%, up approximately 5.4 percentage points from a year earlier. High factory utilization and a greater contribution from the high-margin factory automation (FA) business enabled revenue growth to translate more fully into profit.

Why are orders growing so much faster than revenue?

  • Year-on-year order growth accelerated from 36.9% in the previous quarter to 49.1% in the second quarter, well above the 14.9% revenue growth recorded over the same period. Orders for the FA and Robomachine businesses rose 130.1% and 72.3% year on year, respectively, making them the clearest areas of accelerating demand.
  • The report attributes strong orders to particularly robust demand for AI data centers and semiconductors in Asia, investment related to humanoid robots in China, and a recovery in automotive investment in Japan and the United States. The upturn has several sources of end demand, and both its strength and duration have exceeded Bernstein’s original expectations.
  • But delivery capacity is limiting the conversion of orders into revenue: persistent shortages of memory, printed circuit boards, cables, connectors and mechanical parts have lengthened lead times, taking the gap between order and revenue growth to an unprecedented level. Supply constraints have also hurt market share in China; both management and Bernstein consider the trend temporary.

After the full-year guidance increase, can margins keep rising?

  • The company raised its guidance for the fiscal year ending in March 2027, forecasting revenue of 1.0137 trillion yen and operating profit of 240.7 billion yen, up 18.2% and 31.0% year on year, respectively. The two forecasts are 4.3% and 5.2% above the market consensus cited in the report, respectively. Strong orders have prompted the company to raise its full-year operating outlook.
  • However, the company’s guidance implies a slightly lower margin in the second half than in the first, reflecting higher component costs caused by tight supply. The second quarter’s 26% operating margin should therefore not be extrapolated directly to the full year.
  • Management expects supply and lead times to improve from the next quarter. Bernstein sees effects in both directions: faster deliveries could help increase revenue growth, but the level of new orders may decline as a result, potentially causing revenue realization and order trends to diverge.

Earnings forecasts are up. Why did the price target fall?

  • Bernstein raised its earnings-per-share forecast for the fiscal year ending in March 2027 from 221.78 yen to 251.30 yen and maintained its “Outperform” rating, but cut its price target from 7200 yen to 7000 yen.
  • The key is the position in the cycle: the firm estimates that the peak in global FA year-on-year growth is 2–3 quarters away, so it has lowered the valuation multiple it is willing to assign. The discussion concerns a peak in the growth rate, not a peak already reached in the absolute amount of revenue or profit.
  • In the valuation, the one-year forward EBITDA forecast rose from 255 billion yen to 298 billion yen, but the enterprise value/EBITDA multiple fell from 23 times to 18.8 times, and the price target date was rolled forward to December 2027. The earnings upgrade did not offset the effect of the lower valuation multiple.