FIT Hon Teng Limited (6088) Earnings Call Transcript & Summary

Good morning, everyone. Welcome to the live audio webcast of FIT Hon Teng's Fiscal Year 2025 Interim Results Presentation. Today, we're honored to have Mr. Chris Lu, Chief Operating Officer and Chief Financial Officer of FIT Hon Teng joining us today. During the presentation, Chris will provide a summary of the group's performance for the interim period ended 30th June 2025 and outlook for the second half of 2025. You can download our PowerPoint from the resources box below the webcast window. Kindly note that the language used for this audio webcast is English. [Operator Instructions] Before I turn the call over to Chris, I'd like to first remind you that while FIT has taken every reasonable care in preparing today's presentation, the information and materials contained in it and discussed in the following Q&A session are all provided on an as is basis and does not constitute investment advice. Management on today's call may also make forward-looking statements based on the current expectations and assumptions, and those statements are subject to certain risks and uncertainties that could cause the actual results to differ materially. FIT will not be held liable for any damages arising from the reliance placed on the information and forward-looking statements contained in the presentation and discussed during our Q&A session. For the full details of our disclaimer for this call, please refer to Slide 2 of our PowerPoint. Slide 3 contains a brief agenda of today's call. Now I will hand it over to Chris. Thank you.

Thank you, Ray. Good morning, and welcome to everybody joining us today. We shall start on Slide 5. Despite headwinds, our solid next-gen product portfolio allowed us to maintain overall resilience. We have focused our efforts on managing external uncertainty and rapidly changing industry dynamics. The interim result reflected encouraging growth momentum supported by advancements in AI and the smooth integration of our new automobility business. Given the low visibility, we still delivered second quarter revenues of USD 1.2 billion, a 9% year-on-year increase. With the seasonal factors and a less favorable foreign exchange and change in product mix during the quarter, gross profit declined slightly by 5% year-on-year to USD 214 million for the period. Gross profit margin correspondingly narrowed to 17.8% during Q2. During the quarter, enhanced operational efficiencies and ongoing cost-saving initiatives contributed to a 4% rebound in our net income, reaching USD 24 million despite the challenging conditions impacting the entire electronics industry. For the interim period, revenue reached USD 2.3 billion and net profit of USD 30 million on a 6-month basis, slightly lower than our prior guidance. The easing of tariffs during the quarter was a positive development, though uncertainty remains. With this in mind, we stay focused on our growth trajectory for the second half of 2025 and are readily to work closely with our clients to navigate and adapt to evolving market dynamics. Turning to Slide 6. During the quarter, the growth of AI and the smooth integrations of Auto-Kabel into our One Mobility strategy have supported the overall revenue growth. To better align with evolving end market trends, we are renaming two categories, networking and computing to cloud and consumer interconnects. Moving forward, we believe these updated names more accurately reflect the market terminology commonly used to describe the industrial applications of the product solutions we offer. Let's look at the breakdown. The Smartphone segment continues to face challenging dynamics due to unfavorable ASPs from model replacement. As a result, it continues with a double-digit decline as prior guidance driven by continue AI momentum, contributions from Cloud segments increased by double digit during the second quarter. Upgrade for AI has fueled demand across various interconnect solutions, ranging from high-speed connectivity solutions, PQD solutions for CDU, Edgecon connectors and other external cables and power modules, supported by a better-than-expected recovery of the PC end market amid an upgrade cycle for next-gen components for CPUs and power connectors. The Consumer interconnect segment outperformed during the quarter with sales contributing up by high teens year-on-year in Q2. The consolidation of Auto-Kabel into our One Mobility strategy have generated a 116% year-on-year increase in Q2, in line with earlier guidance. During the quarter, the System Products segment was affected by supply chain disruptions and an anticipated slowdown in consumer demand due to the indirect impact of higher tariff levies, which led to a high teens decline in revenue. Finally, other segments also benefited from inventory adjustment. Turning to Slide 8. Given the transition to the new production facilities and ongoing macro uncertainties, we have lowered our full year guidance slightly by a high single-digit increase in revenue from low double digit. While the CapEx trend into AI-led infrastructure and platform upgrades in the server market will continue, this will again be offset by headwinds we foresee in other segments. While the majority of OpEx is provisioned for global expansion and potential negative impact from system risk, we will also prioritize streamlining production costs to maintain the sales expense ratio at approximately 17% to 18%. To navigate this environment, we are working closely with clients and the product supply chain to remain responsive to their needs while utilizing Foxconn's expansive global footprint to maintain operational resilience. At the same time, we are reallocating resources to support new product launches and certification for next-generation connectivity components. As a result, our gross margin guidance remained unchanged at 20%, consistent with previous guidance. Next, we turn to Slide 9. We expect some of the enduring shift in market dynamics will play a bigger role in the years ahead. In the Smartphone segment, while our overall volume was in line with industry, the prevailing unfavorable conditions such as fallout from tariff issues and a decrease in overall ASP for module replacements are expected to persist. Given the high base during Q3 last year, we expect a high teens year-on-year decline in orders for the coming quarter, which translates to high teens decline for the full year. In the Cloud segment, we continue to capture new pipeline opportunities from the AI server, thanks to our high-speed connectivity solution for next-gen cloud computing. Some of them were showcased in the CTC and Compute Tech Conference, which I will share more details later. As a result, we feel confident in maintaining both our full year growth and Q3 at mid-double-digit level. For the Consumer interconnects, we continue to see growth catalysts coming from new AI-related component upgrades across notebooks and computing devices. However, the tariff situation has resulted in shipment rescheduling and limited order visibility across the supply chain. We revised and considerably lowered our guidance from high single-digit growth to single-digit decline in Q3, which translates into a flat growth for the full year. For Auto Mobility, despite facing industry-wide headwinds, we are seizing the opportunity presented by ongoing transformation and integration efforts. With the continued AK consolidation, we anticipated triple-digit growth in Q3 and will remain focused on identifying additional synergies through integration. For the full year, we are still targeting high double-digit revenue growth in the Automobility segment. Overall, the indirect effects of system risk have dampened consumer sentiment, resulting in sustained softness in demand for system products. Additionally, in response to potential upstream constraints, we have reallocated the manufacturing of new products and adjusted capacity to better align with prevailing uncertainties. We revised our guidance for other segments from a double-digit to a high single-digit decline driven by inventory adjustments. We also lowered the forecast Q3 revenue to a mid-single-digit decline. The outlook for the full year will remain at a similar level. Turning to Slide 11. Despite lower guidance for some segments due to macro headwinds and disruption in the electronic supply chain from tariffs, we maintain our flexibility to sustain growth momentum so far, thereby on path to achieve our overall 3+3 revenue mix by the end of 2025. We continue with reorganization and integration following the recent adjust acquisitions. While some automakers continue to face challenges amid shift in trade policy, we remain positive on their long-term prospects as we further consolidate and integrate resources within the One Mobility strategy. In next-gen 5G 5GAIoT, we have made progress in customer evaluation certifications and pilot deliveries for new rack architectures, collaborating on advanced components like liquid cooling and optics. For audio, our new production facilities are ramping up as planned, supporting shift responses to market dynamics. With global expansion and diversification manufacturing, we aim to achieve over 40% of revenue from our product mix by year-end. Turning to Slide 13. Our team continued to integrate and strengthen our R&D to push the boundaries of technological advancements. During recent Computex, FIT further extended its connectivity portfolios for cloud infrastructure and showcased dedicated solutions catered to full stack of AI servers. Many of these solutions generated interest and solid feedback from participants, which enhances FIT's role as the main developers of leading cloud connectivity solutions. Turning to Slide 14. Our recent acquisition has strengthened its position across EV, hybrid and ICE platform while supporting its strategic expansion into the Middle East. We're happy to announce that the Royal series of AC chargers have obtained SASO certification, marking a key milestone in developing localized products for the MENA region. This achievement highlights FIT's R&D expertise in delivering secure standards compliance solutions tailored to regional needs and preferences. Turning to Slide 15. We're excited to announce our very first FIT Tech Day 2025, taking place next month on September 17. This milestone event will bring together industry leaders, technical experts and academic professionals to exchange ideas on future trends in technology and mobility. During the event, we will officially launch One Mobility and showcase our latest achievements in automotive product achievements. Stay tuned as we celebrate innovation and progress in this remarkable event. This concludes our presentation today. Thank you.

Thank you, Chris. We're now ready to take some questions from the audience. [Operator Instructions] There are some webcast questions on the line. Our first few questions came from Ms. Zha from CICC. The first question is, do we have a plan to invest in the U.S.A.

Thank you, Ms.Zha. We are working closely with clients and the broader supply chain to stay responsive to their needs while leveraging Foxconn's very extensive global footprint to ensure operational resilience.

Thank you, Chris. The next question is, what factors impacted your gross margin and overall profitability this quarter?

This quarter, our gross margin was mainly affected by foreign exchange fluctuations and also change in product mix. While the industry still face persistent systemic risk. We continue to benefit from strong AI-driven demand. We are also actively optimizing internal efficiency to preserve both profitability and growth amid a challenging environment.

And the last question from Ms. Zha is FIT's revenue came in below expectations. How does management view this? And what are your plans to manage this going forward?

The lower-than-expected overall revenue was largely driven by tariff-related pressures, which have softened the demand in the consumer electronics sector. In addition, our gross margin was adversely affected by unfavorable foreign exchange, impacting our ability to meet previous guidance of a 20% gross margin. Looking forward, we remain committed to strengthening our fundamentals and identifying high-margin growth-oriented segments to drive recovery in new markets such as AI.

Thank you, Chris. Our next few questions came from Mr. Hong from [indiscernible]. So the first question from him is, what is the major CapEx and which area this CapEx being allocated to?

Thank you, Mr. Hong. We will continue to have ongoing discussion with customers before we commit any major CapEx.

Our next question from Mr. Hong is, how is demand trending for water cooling components like CDUs?

The demand for our large-scale CDU liquid cooling solutions remain robust. The content dollar for each AI rack equipped with our CDU is in the 4-digit range. We're facing only one U.S.-based competitor in this particular space, and we began shipments in Q4 last year. We anticipate continued market share gains with our current revenue mix still in the low single digits.

Thank you, Chris. Our next couple of questions came from [indiscernible]. The first question is, what is the current outlook and strategy for the Automotive segment?

We're also using the auto down cycle to really streamline our European operation by strategically consolidating and repositioning our German subsidiaries. This transformation is designed to prepare us for the next upturn and enhance our long-term competitiveness in auto-related solutions.

The next question from [indiscernible], what's the current demand trend in consumer electronics?

The Consumer Electronics segment have benefited from pulling orders ahead of schedule, which provides a temporary lift during the first half. However, the overall outlook remains cautious due to broader macro headwinds.

Our next couple of questions came from Karen Huang at Citi. The first question from her is, what's the progress on new audio production line?

Thank you, Karen. We are working closely with our clients to ensure progress aligned with their needs and expectations.

Thank you, Chris. So the next question from Karen is, what's the current demand trend in the Smartphone category?

Our Smartphone business continued to face high teens percentage year-on-year declines, primarily due to the ASP pressures from replacements of product specifications. However, we have always maintained a stable share, and we are well to capture shipment volumes along with the market conditions normalizing.

Our next couple of questions came from Jeff Pu at Guangfa. The first question from him is, when can we expect updates on your GPU socket product?

Thank you, Jeff. The use of SKT chip sockets remain unchanged, providing enhanced flexibility for system maintenance and replacements. FIT has firmly established itself as a key supplier for critical products such as memory. Any decisions on the further adoption of new chip sockets in other modules will ultimately be determined by our customers.

Thank you, Chris. The next question from Jeff is, what is our status on ASIC? Any updates?

Currently, we're still actively strengthening our presence in the industry and collaborating with licensed IC design companies. With growing income requirements for chip connectivity, we remain confident in our business opportunities in ASICs. At the same time, we maintain a strong position in motherboard I/O interfaces, which continue to serve as a strategic entry point for future advancements.

Our next few questions come from [indiscernible]. The first question from her is, could you elaborate on how the recent easing of tariffs in second quarter has influenced your revenue performance and full year outlook, particularly in the Cloud and Consumer Interconnect segments?

Thank you, Ms. Wang. The easing of tariffs in Q2 provided a short-term relief, supporting cloud growth and moderating consumer interconnect softness. But uncertainty remains. So we are working closely with customers to adjust sourcing and capacity.

The next question from Ms. Wang is, could you provide an update on your next-generation connectivity product launches and certification efforts and how these initiatives will support your target of maintaining a 20% gross margin for fiscal year 2025?