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

Good morning, everyone, and welcome to the live audio webcast of FIT Hon Teng's Full Year 2025 Results Announcement 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 financial highlights for the year ended 31st December 2025 and the outlook for 2026. You can download the PowerPoint from the resources box below the webcast window. Kindly note that the language 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 containing 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 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. And now I'll pass it over to Chris. Thank you.

Thank you, Ray. Good morning, everyone. Thank you for joining us today. Let's start on Slide 5. In 2025, we maintained focus on enhancing our product mix and seizing new opportunities arising from AI infrastructure build-out and the mobility transition. Despite persistent systemic risk from geopolitical tensions, supply chain realignment and macroeconomic headwinds, we maintained our growth momentum. Our performance was bolstered by robust AI demand and the consolidation of our mobility business. As a result, we achieved a 12.4% year-on-year increase in 2025 annual revenue. reaching USD 5 billion, setting a new record that exceeds our previous guidance. With increased contributions from AI-related products, our gross margin continued to expand, but was offset by fluctuations in commodity prices. As a result, gross margin increased by 70 basis points for the year, lower than prior guidance. Our gross profit grew 7.6% year-on-year, reaching a record of USD 946 million for the year. To meet growing AI demand from customers, we brought forward investments, ramped up development and allocated more expenses to roll out overseas manufacturing facilities to meet a strong pickup in orders for AI-related components. Despite this, our expense ratio came in at 14.5%, better than prior guidance of 17% to 18%. And our operating margin also improved from 3.9% to 4.3%, thanks to increased production efficiency in our overseas facilities. Our net income increased 1.7% (sic) [ 1.9% ] to USD 157 million for 2025, which also -- which was affected by higher tax expenses compared to the previous year. Our strategic investments are strengthening our growth trajectory. I will soon share further developments in our expanding next-generation AI portfolio in later slides, which underpin FIT's competitive position. Turning to Slide 6, which provides breakdown of our various segments for the full year. The Smartphones segment declined by 13%, driven by module replacements. However, the decrease was smaller than we had expected. Strong momentum in AI connectivity solutions and the ongoing delivery of new AI servers continue to be the main catalyst for the Cloud/Data Center segment as we expand from data solutions to power solutions. It recorded a strong double-digit growth, up 38% year-on-year for the full year. This was attributable to increased business from AI server upgrades and the introduction of new cable connectors for current mass production platforms, which also supported the higher demand for our established general-purpose server connectivity solutions. Due to higher-than-expected demand in PC sector for the next-generation upgrades, revenue from the Consumer Interconnects segment increased by 7% year-on-year despite growing uncertainties in the supply chain. The Auto Mobility segment also saw continuing growth, rising by 94% year-on-year for the full year, driven by the steady integration and consolidation of Auto-Kabel business. Following these acquisitions, FIT One Mobility exposure in the automotive industry has strengthened considerably. Our System Products segment was impacted by slower demand for electronic accessories, resulting in a smaller revenue decline of 4%, which was better than prior guidance. This success is due to better-than-expected demand for wired phones from our major customers. Turning to Slide 8. Looking ahead to fiscal year '26, the rapid adoption of AI technologies and applications, combined with certain shift in geopolitical and macro landscape are presenting us with both opportunities and challenges. We expect a low teens increase in top line revenue for 2026. While increasing contribution of AI-related shipments within our overall product mix will boost our overall margin, cost pressures from elevated precious metal prices will be a factor. Thus, we expect gross profit margin will remain around low 20s level, which is expected to drive low 30s increase in gross profit for the year. Ongoing investments in R&D, certification and global scaling currently weigh on our sales expense ratio. However, these strategic commitments are vital for capturing emerging market opportunities and securing long-term market leadership. Nonetheless, we still expect corresponding 17% to 19% growth in operating profit for fiscal year 2026 driven by operational efficiency initiatives, particularly measures for further improved expense and costs associated with production facilities overseas. Turning to Slide 9, where we update the guidance by key segments. We anticipate AI development trends will drive recovery in consumer electronics despite ongoing uncertainty in the overall business environment. Our earlier strategic transformation by investing in AI and Auto Mobility will continue to drive results for our customers and investors. In Smartphones, while we recognize rising prospect from newer high-end models, we expect the end market will still face similar industry-wide dynamics and market fluctuation. So our outlook remains conservative with a flat outlook for the full year. However, to address the impact of memory chip, some of the demand will slow down to the first half. So we should see a small pickup during Q1 of 2026. FIT aligned with next-gen integrated AI module, we are excited about the pace of demand from AI platform transition to high-speed connectivity, energy efficiency and liquid cooling. New products that fulfill these segment requirements, stringent requirements are projected to support a strong double-digit growth, reaching approximately low 17% in Cloud and Networking segment revenue for 2026. While we expect another mid-double-digit increase during the first quarter, the highlight will be mass production ramp-up during the second half following validation of further industry certification. For Consumer Interconnect, we foresee continuous upgrades in AI-related components for notebooks and computers, which is favorable for growth, but will be offset by supply shortages and price hikes in memory. As such, we will focus on profitability rather than volume growth. Thus, the outlook is a flat to low single-digit decline for the whole year, while supply chain constraints on memory will impact the projection for the first quarter with mid-teens decline for the Consumer Interconnect. In Auto Mobility, upon launching the FIT One Mobility strategy last year, we will focus on consolidated resources from the German team together with the strategic alliance within Foxconn Group for cross-selling to meet growing demand from new energy vehicles and autonomous driving. We will further enhance our product mix and progress on strategic cooperation in the Middle East. These initiatives are expected to boost total product revenue where we expect high single-digit growth for the first quarter and full year of 2026. Following our global expansion in the audio segment over the last year, we are currently strengthening our audio mass production agility and flexibility to support a pipeline of new production line. We expect a flat to low digit increase outlook for System Products during the first quarter of 2026, but a positive high single-digit to low double-digit recovery for the full year due to additional contributions from expanded overseas production. This will further maintain our revenue and resiliency for System Products and Consumer Interconnect. Turning to Slide 10. Despite ongoing macro uncertainty, our multiyear outlook remains positive. As mentioned in previous slides, we continue to see strong momentum in AI server upgrades by hyperscalers over the next 3 years. With new certification in place, our Cloud/Data Center revenue is gaining momentum. And our forecast surges to approximately low 17% year-on-year growth this year. So we are raising our Cloud/Data Center revenue mix of fiscal year 2026 contribution guidance from the low 20s to the mid-20s. It is becoming an increasingly important contributor to overall performance. Therefore, we have revised our revenue mix expectations upward from low teens to high teens growth over the next 2 years. News updates. Turning to Slide 12. Following a full schedule of demos and business development initiatives last year, we catch up with the latest AI development and evolving hardware technologies at a rapid pace. Let me share several major innovations and products unveiled by our team recently. Last month, during DesignCon 2026, we unveiled the next-generation 1.6T high-speed solutions and new architecture for 448G. We are well positioned to capture opportunities as the industry transitions to 448 Gbps per lane. These innovative designs specifically developed for AI and high-performance compute demand for hyperscalers AI cloud infrastructure have attracted a favorable feedback from key end users. Next, on Slide 13, FIT continues to expand its comprehensive next-generation 5G AIoT interconnect solutions. Next week, at OFC 2026 in Los Angeles, our team will showcase the innovative 102.4T CPO external laser pluggable platform. This has been validated by NTT and aligns with the all photonic network road map. We invite you to visit us at Booth 1558 for a live demo. We are also actively exploring further laser collaborations within the CPO ecosystem to ensure FIT remains at the forefront of this technology shift. These commercialization efforts are driving recurring orders and will enhance FIT's innovation and competitiveness, ensuring we remain at the forefront of the technological trends. Following our success at DesignCon 2026, we will showcase our latest solution at GTC. As a member of the Foxconn Group, we will leverage the group's vertical integration and bring our expertise in CMM [ buy ] to bear. By collaborating with industry-leading suppliers, FIT delivers high-performance, high-power precision components that meet customer demand for higher speed transmission and low loss power delivery. To learn more, please visit us at Foxconn Booth #1921. In summary, the robust AI upgrade provides strong momentum to sustain growth. We will continue to monitor market and systemic conditions while maintaining the flexibility to meet customer demand. This concludes our presentation today. Thank you.

[Operator Instructions] There are some webcast questions on the line. Our first few questions came from [ Hao Yan Hui ] from [ Taitong ]. So the first question is, we noted that the fourth quarter '25 gross margin was impacted by rising precious metal costs. Looking ahead to 2026, could you share the company's strategy for managing material price volatility? Specifically, are there structural adjustments to mitigate the systematic risks?

Well, thank you very much, Ms. Hui. As a manufacturing-focused company, we prioritize operational excellence over financial hedging. We addressed cost fluctuation by optimizing our product mix and also enhancing supply chain agility to maintain a healthy profit profile. However, given the uncertainty in the international landscape, we'll continue to monitor the situation very closely.

So the next question is, given the optimistic growth guidance for 2026, the current dividend policy appears to maintain conservative approach. Could management elaborate on the strategic considerations behind retaining cash at this stage?

Yes. To capitalize on the transformative business opportunities in AI, as I stated earlier, we are prioritizing the reinvestment of our cash flow. Now we are reserving cash to support continued investment in AI-related products.

The next question is, the 2026 guidance suggests a strong expansion in operating profit. From the strategic perspective, how does the company plan to bridge the gap between revenue growth and margin enhancement?

Our growth path is anchored by the Cloud/Data Center segment. By leveraging our leadership in AI-related high-value components, we expect the ramp-up of mass production in the second half of the year to be the primary engine for margin expansion.

We have a couple of questions from Karen Huang from Citi. The first question is regarding FIT One Mobility OEM strategy, what are the key operational milestones for 2026? Are the current investments focused on capacity expansion or efficiency optimization?

Thank you very much, Ms. Huang. Our priority for OEM in 2026 is operational refinement. We're focused on enhancing yield rates and process efficiency to ensure that our automotive business contributes high-quality earnings to the group.

The next question is, beyond AI, what levers can the company pull to expand profit margins, especially given the cost pressures on legacy products?

We're shifting our portfolio toward high-margin products and reallocating capacity to high-voltage cables and high-speed components in new sectors such as robotics and mobility.

Our next few questions come from Irene from Morgan Stanley. The first question is the high double-digit growth target for the Cloud segment implies a significant inflection point in the second half of the year. Could you provide more color on the qualification status across various customer platforms? What gives the team confidence in the H2 acceleration?

Thank you, Irene. We do not comment on individual customers or specific products. Now we are working closely with major global clients and current qualifications are proceeding as planned. Our confidence in the H2 ramp-up stem from a clear production visibility we have once the -- we have seen these high-value AI component transition from certification to mass production.

The next question is, with the AI architectures shifting towards cableless designs, how is the company positioning its portfolio to capture new value? And do you foresee this next-generation solutions replacing existing products like MCIO?

Though we are not able to comment on individual customer or specific products, we can comment on industry trend. As AI clusters continue to scale and compute density increases, the industry will see significantly higher demand, not only for thermal management and high-speed interconnect solutions, but also for data transition capabilities to support increasing power density and data density. Now we view technological iterations as an opportunity. While architecture changes, the demand for signal integrity only increases. Solutions like our back plant connectors offer higher content value, ensuring FIT remains a key contributor across all mainstream AI platforms.

The next question is, there has been market discussion regarding the progress of your backplane solutions, including [ PHD2 ] and other high-speed connectors. Could you discuss the competitive moat for these products?

Sorry, we do not comment on individual customers or specific products. As a leading company in the connector sector, our true competitive moat lies in our speed to market and also our scale to readiness.

Our next 2 questions are from [ Huang Jie ] from [indiscernible]. The first question is market rumors suggest the [ Kabel ] connector uses FIT's exclusive solutions. What is the current status of your backplane solutions?

Well, thank you, Ms. [ Huang ]. As a matter of policy, we do not comment on individual customer or specific products. Now as a leader in the connector sector, our core strengths lie in our comprehensive high-speed signaling know-how and our ability to rapidly transition from R&D to mass production. We continue to develop advanced backplane solutions and progress is moving forward in alignment with various customer time lines. The true barrier to entry in this space really is the combination of ultra-high precision and speed to market. We leverage our top-tier tooling capabilities to meet the rigorous requirements of next-generation AI architecture while ensuring immediate scale-up readiness for our clients.

The next question is, following the successful qualification of the Power Whip series, what is the expected time line for its revenue ramp-up? How does it align with the broader AI power delivery infrastructure cycle?

Now having cleared the qualification phase, the Power Whip series is moving into mass production. We expect to see a meaningful revenue contribution in the second half of the year, directly addressing the surging power demands of AI compute clusters.

Our next couple of questions are from [ Leo ] from [ Chanjiang ]. The first question is, can you share the status of your liquid cooling solutions? Does the company intend to keep this technology focused on AI infrastructure? Or is there a plan to diversify into broader industrial cooling?