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

Good morning, everyone. Welcome to the live audio webcast of FIT Hon Teng's 2025 Third Quarter Results Presentation. Today, we're honored to have Mr. Chris Lu, Chief Operating Officer and Chief Financial Officer of FIT Hon Teng joining us. During the presentation, Chris will provide a financial overview of the third quarter ended 30th September 2025 and outlook for the last quarter of the year. You can download our PowerPoint presentation from the resources box below the webcast window. Kindly note that the language used in 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 containing it and discussed in the following Q&A session are all provided on an as is basis and do not constitute investment advice. Management on today's call may also make forward-looking statements based on 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 reliance placed on the information and forward-looking statements contained in the presentation and discussed during the 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 for today's call. Now I'll pass it over to Chris. Thank you.

Thank you, Ray. Good morning, and welcome to those joining us today. We should start on Slide 5. In the third quarter, our revenue grew by double digits, exceeding our high single-digit guidance. Revenue increased by 13% year-on-year, reaching USD 1.3 billion. This growth was primarily driven by robust demand for our AI products. Additionally, we saw a steady contribution from Auto Mobility as scheduled, while our performance in Consumer Interconnects and Systems slightly exceeded expectations. With growing contribution from our AI-related portfolio, our Cloud Data Center segment rose to a mid-teens percentage of overall revenue compared to low teens level a year ago. As a result, our third quarter gross profit margin reached a record high of 23.5%, further boosting annual gross margins. To support our global operations, our expense to sales ratio increased to 16.4% during this quarter. Turning to Slide 6, for the breakdown of each segment. The overall quarterly performance was slightly ahead of guidance, supported again by ongoing AI demand and better than anticipated performance in the consumer electronics end markets. Smartphones segments were in line, impacted by ongoing challenging market dynamics due to modules and specification replacement. As a result, we ended the Q3 with a 20% decline, consistent with guidance. Sales of high end, high speed and high voltage AI connectivity solutions grew strongly compared to last year, driving 33% increase in cloud data center segments revenue for the third quarter. While the Consumer Interconnect segment was flat in Q3, it outperformed prior guidance as our team worked closely and flexibly to cater to customer needs despite persistent tariff and supply chain uncertainty. In the Auto Mobility segment, we made steady progress in integrating our One Mobility strategy just as we shared at FIT Tech Day, achieving 116% year-on-year growth even with challenges across automobile sector. For system products, the robust -- the rebound in consumer demand supported a 3% increase in revenue during the quarter ahead of guidance. Growth in other segments was driven by inventory adjustments. Turning to Slide 8. For 2025 full year guidance, we maintained our revenue outlook, projecting a high single-digit increase, while gross margin remained unchanged at around 20%, reflecting the successful strategy execution of an enhanced product mix. To capture further growth, we have reallocated resources to support new certification, product launches and regional expansion. At the same time, we remain committed to cost optimization initiatives and achieving synergies. We have maintained our prior operating expense to sales ratio guidance at 17% to 18%, with operating margin guidance remained unchanged. Over the [indiscernible] period, as we continue to advance our 3+ 3 transition strategy, we are confident in achieving consistent low double-digit growth in operating profit for the full year. While these factors may temporarily affect our near-term operating margin, we would like to share our longer-term financial targets in the following slides. Next, turning to Slide 9. While system risks persist, we expect the enduring market dynamics will play a longer role -- a bigger role in the year ahead. Beginning with the Smartphones segment, the prevailing unfavorable conditions are expected to persist. We anticipate a high teens year-on-year decline for the final quarter, consistent with the high teens decline projected for the full year 2025. With ongoing investments in AI infrastructure and ramp-up of new AI server racks, we expected a high 20 increase in cloud data center segment for Q4. Over the full year, as FIT captures more opportunities arising from AI on the general purpose server with launches of next-gen platforms, the growth momentum will translate to over 30% for the full year. While we benefited from higher-than-anticipated demand for consumer interconnect last quarter, we foresee a slowdown in overall macro conditions that will linger. Hence, we maintained our flat outlook in this segment for Q4 and over the full year. On Auto Mobility, despite facing industry-wide headwinds, we continue to seize opportunities from transportation and realize more synergies from One Mobility strategy. We anticipated a 40% increase in segment revenue for Q4 2025. For System Products, the indirect effects of system risk have continued to impact consumer sentiment for the festival season. As we readjusted capacity to align with prevailing uncertainty, we expect volume to be similar to last year in the fourth quarter. Finally, the expected decline in the [indiscernible] category is mainly due to cancellation of [indiscernible] heat pump division. Turning to Slide 10. In response to the improvement in our supply chain status for the AI connectivity solutions, we have revised our revenue growth expectations. We now projected top line growth rising from the low 20s to the mid-20s range for fiscal year '27 and for fiscal year '28. The increased momentum in AI infrastructure development and platform upgrades continue to drive strong demand for our interconnectivity solutions. Having achieved the 5-year target set under our [ 3+ 3 strategy ] ahead of schedule, we are now shifting our focus toward expanding the AI-related portion of our business portfolio. Accordingly, we would like to provide our long-term guidance for the cloud data center segment. We expect it to reach a low 20s revenue mix in 2026 and further improve to the mid-20s and high 20s in 2027 and 2028, respectively. Turning to Slide 12. Our schedule was packed during the last quarter, and we're delighted to share a quick recap of the many proactive business development initiatives our team undertook to promote our new offerings. During our inaugural FIT Tech Day 2025 in mid-September, we brought together leading experts and partners from our growing ecosystem. At the event, we proudly unveiled the One Mobility brand. We emphasized our core product and technical strategy with a key message, data is the new oil, highlighting the increasing demand for data connectivity and high-power solutions in the mobility industry. By showcasing our Auto Mobility solution, we further demonstrated FIT's integrated connectivity capabilities and dynamic partnership that enable customers to build AI-powered mobility solution for the near future. For those interested in staying updated on the latest developments and trends in software-defined and connected vehicles, we encourage you to use the QR code on this slide to access the event replay link. Turning vision into reality. We also participated in trade shows in Saudi Arabia to further strengthen our collaboration with a new partner. We signed a strategic MOU with Al Bassami Transport Group, a leading Saudi logistics company with an extensive commercial trucking operation. These partnerships aim to collaborate on the rollout of EV charger installations across logistics hubs, paving the way for a more sustainable and connected future in transportation. Turning to Slide 13. In September, in collaboration with Broadcom, we unveiled the industry's first 102.4 Tbps CPO connector at the China International Optoelectronic Exposition in Shenzhen. This solution supports Broadcom Tomahawk-6, the latest Ethernet switch designed to power AI, machine learning and high-performance computing networks. Last month, we showcased our complete AI solutions, including the next-generation 224G high-speed CPC interconnects and 51.2T switch immersive cooling technology at the Open Compute Project Global Summit in San Jose from data to power. We also introduced our high-voltage high current solutions. At the event, FIT's liquid cooling Busbar and power Busbar solutions were featured on NVIDIA's NR200NGX [ wall ], demonstrating our strong ecosystem collaboration and engineering excellence. Over the 3-day event, our booth attracted a strong engagement from leading customers, including all 4 major CSPs and key R&D leaders from strategic partners. The above business development and commercialization efforts are driving recurring orders for the next-gen higher-margin products, which will reinforce FIT's competitiveness to stay ahead of technological strengths. On that note, we conclude 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 Irene Yen from Morgan Stanley. And the first question from her is, there's been talk about some progress in your backplane connector developments. Could you share more details?

Thank you, Irene. While we anticipate the market's interest in our ongoing development, as a general principle, we do not comment on individual products or specific clients. What we can say is our existing solutions continue to gain recognition from customers, supported by our leading technical capabilities and strong execution. We believe we are well positioned to achieve the target set in our 3-year guidance for the cloud and data center segment. We'll continue to uphold transparency through official announcements and investor briefing. Thank you.

The second question from her is, there are rumors about NV 72 and NV 144 that some competitors have bypassed the patent restrictions and are developing in rack high-speed connectors. Ever moving toward cable cartridge designs. Is that true? And what impact would it have on FIT?

Again, we prefer not to comment on individual product-specific clients or competitor development. Having said that, in high-speed interconnect areas such as backplane connectors and cable cartridge solutions, success depends not only on product design, but also on long-term reliability, integration capability and ecosystem compatibility. FIT continues to focus on strengthening our core engineering capabilities and working closely with customers to align with next-generation system architectures. In those areas, we have made substantial progress and gained solid recognition from our customers.

The third question from Irene is regarding your AI-related high-power product portfolio, how far ahead are current customer orders secured? And how does the visibility support your upcoming ramp-up plans?

We continue to expand our market share as shipments of our existing power products for AI racks, particularly those in the computing trade continue to increase steadily. At the same time, we have introduced a new range of high-voltage and high-power solutions showcased at the OCP Global Summit, including our 800V and 400V power Busbar systems, 400A and 100A AC Whip connectors and liquid cooling Busbar related to 140 kilowatts and UQDB Floating Module supporting 51.2 switch immersive cooling technology. Now these new additions further strengthen our position in the next-generation power infrastructure and enhance customer confidence in FIT's engineering and execution capabilities.

Our next few questions are from Karen Huang from Citi. The first question from her is, you mentioned at OCP that your power solutions are gaining more traction. So could you update us on customer adoption for these new power products and how they complement your existing offerings?

Thank you, Karen. Our power-related products used in compute trays have already been certified by several major global cloud and AI server customers, and some are now shipping steadily. Furthermore, as a design partner, we have made strong progress becoming the first source suppliers for key power solutions such as the liquid cooling Busbar showcase at OCP Global Summit this year, which has been gaining an increasing share in the supply chain. Our next-generation products are also already in development.

The next question from Karen is, congrats on the significant improvement in the AI segment. We noticed a strong quarter-on-quarter growth in your AI shipments during Q3. How sustainable is this growth trend? And what are your expectations for the upcoming quarters?

The new project ramp-up and the rising consumer demand primarily drove the strong quarter-on-quarter growth. In addition, we were able to capture more incremental opportunities across new platforms and key hyperscale customers. The pace is likely to stabilize in short term, but the growth trend remains clear. AI-related application will continue to be the main catalyst next year.

The third question from Karen is, could you break down your AI-related product mix a bit more? Which areas, connectors, cables or power solutions are currently driving the most momentum?

Yes. In the new AI architecture, we started with what we do best, connectors and cables within the compute tray. We are gradually achieving design wins for tray-to-tray solutions and expanding our portfolio toward rack-to-rack connectivity. Building on this foundation, we are capturing new AI server opportunities for next-generation solutions, offering a comprehensive suite that spans chip-to-chip connectors, next-generation high-speed connectors for compute boards, backplane connectors and copper cable as well as high-voltage and high-capacity power solutions. This full spectrum capability allows FIT to serve as an integrated connectivity partner for the world's leading cloud and AI customers. Together, these solutions help FIT's complete layout in AI applications, supporting the growth of AI infrastructure across various regions and industries.

Our next few questions are from [indiscernible] from [indiscernible]. The first question from him is, will NVIDIA's new cableless platform affect our MCIO business?

Thank you, Mr. [ Liu ]. While we're not able to comment on individual product or specific clients regardless of how the architecture evolves, the growing demand for high-performance computing will continue to drive the need for reliable interconnect solutions. Connectors will remain a critical component within the compute trade and beyond.

The next question from Mr. [ Liu ] is, there's a talk that FIT has made significant progress in the backplane connector business. How long does certification for AI products usually take? And will that make significant shipments for next year?

Based on our experience, the certification process generally takes several months, followed by a ramp-up phase that may vary by customer and platform. The overall time line largely depending on customer qualification progress and platform readiness. At this point, we are working closely with customers to align our next year's shipment plans and ensure a smooth ramp-up process.

The third question from Mr. [ Liu ] is your expense ratio has remained relatively stable despite higher R&D spending. Could you elaborate on the key initiatives helping you manage operating efficiency?

We continue to enhance efficiency through automation, process optimization and better resource allocation. While our expense ratio has increased due to higher R&D and global expansion, these investments are necessary to support future growth and technology development. We remain disciplined in cost management and continue to identify areas for long-term operational improvement.

Our next few questions are from [ Wang Ji ] from [indiscernible]. The first question is the backplane connector market is becoming more competitive, especially with the new entrants. How does FIT differentiate itself and maintain leadership in this area?

Well, thank you, [ Wang Ji ]. Backplane connectors are highly technical and reliability-driven products. Our key advantage lies in vertical integration. from design and tooling to mass production, all controlled in-house. This structure allow us to respond quickly to design changes and ensure supply stability, which has earned FIT a strong reputation among top-tier cloud customers.

The next question from [ Wang Ji ] is, turning to automotive segment, you highlighted progress under the One Mobility strategy. Could you elaborate on what specific improvements or milestones you've achieved so far?

We're in the process of consolidating and optimizing internal structure and operations, also improving service efficiency and qualities in automotive segment. We'll elaborate more details next time.

The last question from [ Wang Ji ] is beyond AI and automotive, is FIT also investing in new applications such as robotics?

Well, this is still an emerging area. We will stay open to exploring new technologies and partnerships as the market continues to grow. In this new field, we already have the capability to provide flex-resistant cable assembly specifically designed for robotic applications, which represent a new growth revenue for FIT. We are also seeing a clear trend where our advanced cable connectors are increasingly being adopted in robotic-related solutions.

Our next few questions from [ Alicia ] from [indiscernible]. The first question from her is, for the Automotive One ability plan, beyond Europe, which regions will you focus on? Is there a global multisite expansion plan?

Thank you, [ Alicia ]. Well, we don't have immediate plans for the new site expansion at this point. For now, our priority is to strengthen engagement with existing customers and make the best use of our current global footprint. We'll continue to evaluate market conditions and customer needs before taking further steps.

And second question from [ Alicia ] is that can FIT's revenue performance be benchmarked against the AI rack shipments volumes of your parent or sister companies within the group?

It is really not a straightforward component or cabinet-by-cabinet comparison because delivery schedules and stocking levels of components won't be the same. Therefore, the pace of finalized sampling won't happen in sync. Nonetheless, we'll continue to move in a similar upward trend.

The third question from [ Alicia ] is that do we have plan to invest in the U.S.A.?

FIT already has an operational presence in the United States. Now we're working closely with clients and broader supply chain to stay responsive to their needs. We remain open to further investments, which will be made in alignment with customer requirements and supply chain localization needs. We'll continue to strengthen our local presence to support key customer programs, while we're also leveraging Foxconn's extensive global footprint to ensure operational resilience.