FIT Hon Teng Limited ($6088)

Good morning, everyone. Welcome to the live audio webcast of FIT Hon Teng's First Quarter FY 2026 Results Announcement Presentation. Today, we're honored to have Mr. Chris Lu, Chief Operating Officer and Chief Financial Officer of FIT Hong Teng joining us today. During the presentation, Chris will provide the financial highlights for the first quarter ended 31st March 2026 and 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. If you have nay questions for the management kindly send me your questions in English anytime through the Q&A panel. 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 of today's call. Now I will pass it over to Chris. Thank you.

Thank you, Ray, and good morning to all joining us today. We will begin with Slide 5. The positive momentum in AI continues to drive our business expansion by capturing a larger share of the AI server market through the launch of new generation connectivity solutions, our revenue for the first quarter grew by 8.6% year-on-year, reaching USD 1.2 billion. Growing contributions from higher-margin AI-related portfolios also boost our financial performance. Gross profit increased 13.2% year-on-year during the period to USD 243 million. The improved performance is reflected in an 83 basis point increase in our overall margin to 20% during this quarter despite the impact of increasing raw material costs during the period. Operating expenses rose 4.7% due to strategic R&D investments in AI solutions. However, ongoing efficiency improvements helped us reduce the OpEx ratio by 70 basis points compared to the previous year. As a result, operating income reached USD 38 million in the first quarter, representing a nearly 90% year-on-year increase. While our operational efficiency led to a robust increase in operating income, the net income growth of 67% was dampened by foreign exchange headwinds. Turning to Slide 6. Here is an overview of the performance for each segment. During the first quarter, robust AI demand driven by cloud service providers, together with healthy growth in system products helped offset the challenging conditions in the consumer interconnect segment. In line with prior guidance, we remained flat revenue from the smartphone segment in Q1 with stable shipment levels in mature market environment, driven by growing demand for AI server and infrastructure upgrades, cloud data centers continue to outperform, delivering a 58% increase during Q1 CSPs demand for next-generation AI platforms continues to increase. The new product ramp-ups will help to strengthen our role as a key supplier in the AI industry supply chain. As a result of industry disruption due to memory constraints, consumer interconnect declined 12% in Q1 compared to last year, in line with our previous guidance. Industrial headwinds and the broader systemic risk have affected the global automotive market. The automobility segment recorded a 5% decline in Q1 compared with our prior expectation of a high single-digit increase, primarily due to weaker-than-expected market demand. The system products segment performed in line with our guidance during the quarter with a 7% year-on-year growth, showing stable growth in the shipment of audio products. For other segments, we saw a better-than-expected revenue due to higher precious metals and material pricing. Turning to Slide 8. Similar to last year, we continue to operate under very dynamic market conditions. Although there were many macroeconomic uncertainty and the systematic risk in Q1, we can still maintain our full year guidance based on robust AI demand. Turning to Slide 9. We update our full year and Q2 outlook based on recent industry developments. In the smartphone segment, we maintained stable shipments and market share across established cable and component products. Accordingly, we keep our flat outlook for both Q2 and the full year. FIT is well positioned to capture additional AI server business opportunities throughout the year as we ramp up new platform launches. We expect that favorable AI momentum will carry into Q2, leading to a mid-40 and mid-70 year-on-year increase in cloud data center revenue for the second quarter and the full year, respectively. As mentioned, we expect the elevated memory prices to continue impacting demand. As such, we lower revenue from consumer interconnect from a flat to a high teens decline for the second quarter, while maintaining a low single-digit decline for the full year with growing contribution from AI PC upgrade cycles. Similar, the outlook for the automobility segment remains challenging. We anticipate a soft market demand amid ongoing macro uncertainty and have therefore lowered our forecast from a mid-teens increase to a flat outlook for both Q2 and the year, reflecting industrial headwinds across the automotive industry. Despite these external challenges, we continue to focus on improving efficiency and tightening internal execution. Specifically, we have driven organization and footprint optimization to deliver cost reductions and organic gross margin improvements. Furthermore, our core technology in high-voltage power distribution provides a solid foundation as we pivot towards the software-defined vehicle era, ensuring resilience and profitability in the shifting landscape. We maintain our outlook for the System Products segment to deliver a low teens increase in Q2 on a full year basis, supported by continuous audio ramp-up and production agility improvements. Turning to Slide 10. Based on what we have mentioned so far, we remain positive on the growth momentum of cloud data center sectors over the next 3 years. Following our previous revisions to our long-term revenue mix guidance, cloud data center has already reached approximately 22% of revenue in the first quarter. This performance directly supports our expectation of achieving a mid-20% mix target for 2026. Turning to Slide 12. We are delighted to share recaps of live demos of FIT's innovative interconnect solutions at NVIDIA GTC and OFC this March. We received strong feedback and engagement from analysts and investors during both events. Our unique expertise in copper and optical connectivity solutions enables us to offer holistic systems for multiple ecosystems. We work closely with the world's AI ecosystem to ensure our R&D and technical standards for connectivity aligned with market demand. Some key highlights include XPO module that integrates high-bandwidth, high-density connectivity, enhanced liquid cooling and a new ELSFP laser module to support Broadcom's high-speed Tomahawk CPO architecture and an ultra-thin CPX500-pin socket solution codesigned with NTT for large-scale AI deployment. Next, on Slide 13. We continue to broaden our next-gen portfolio that encompasses high-power solutions, high-speed connectors and liquid cooling solutions that catered to evolving AI server architectures. In this industrial event, we conducted a high-level discussions directly with CSP providers and deepened collaboration with AI ecosystem partners to capture business opportunities. It also reinforces our pivotal position in the AI supply chain and expands the higher-margin product mix to achieve our long-term financial metrics. In conclusion, we are making tangible progress to enhance our core capabilities and diversify our product aligned with our goal of achieving future profitability. This concludes our presentation today. Thank you.

Thank you, Chris. We're now ready to take some questions from the audience. We have some webcast questions on the line. Our first few questions come from Irene from Morgan Stanley. The first question from her is, we observed a strong 58% year-on-year growth in cloud and data center this quarter. And given the high demand for high-performance computing, could you clarify the growth contribution from AI servers versus traditional general purpose servers and how this trajectory looks for the rest of the year?

Thank you, Irene. Our cloud data center performance this quarter reflects a dual growth engine. Specifically, AI server-related revenue surged by 109% year-on-year, more than doubling as we ramp up high-speed interconnect and power solution for major CSP projects. Equally important, our general purpose server business remained robust with a 30% year-on-year growth, significantly outperforming the broader market demand. For the second half of the year, we expect AI-related products to account for an even larger share of our revenue mix, supported by the ramp-up of next-generation platform. Moreover, we believe AI-related products within our 5G AIoT business will gradually surpass traditional server products and become the largest product category during the second half this year.

Thank you, Chris. The next question is following your OSP announcement regarding the 102.4T ELSFP external laser source module, when do you expect this to contribute to revenue? And how can we expect the TEM?

Regarding the 102.4T ELSFP solution, we're currently in deep co-design and validation phases with key ecosystem partners. We're on track to reach significant technical milestone by mid-2026. In terms of financial impact, we expect initial revenue contribution to begin in 2027 with a significant ramp-up in 2028 as CPU architectures become the industry standard for 1.6T and 3.2T applications. Market projections suggest TAM for this segment will exceed USD 1 billion during 2027, 2028.

Thank you, Chris. The next question is, there has been market discussion regarding the progress of your backplane solutions, including [ PB2 ] and other high-speed connectors. What is the expected time line for the revenue ramp-up?

We do not comment on specific products of individual customers. We remain closely aligned with the industry technology road map and key validation milestones. Our focus is to capture broader business opportunities in high-speed interconnects. Based on the current pace of development within the AI ecosystem, we expect the volume ramp-up for these next-generation solutions to materialize during the second half of 2026.

We have a couple of questions from Karen Huang from Citi. The first question is with power consumption for rack next gen AI platforms, power delivery has become a bottleneck. What is FIT's unique value proposition in high current busbars or power connectors?

Well, thank you, Karen. Well FIT's key strength lies in our ability to work closely with customers through fast and flexible support alongside strong development capabilities that enable us to quickly deliver customized solutions that meet evolving customer requirements.

Thank you, Chris. The next question is market discussions significant increase in interconnect content for upcoming AI architectures that -- improving, how does FIT view the dollar content opportunity per rack compared to previous generations?

While we do not disclose specific product detail for individual customers, we can provide perspective on the evolving AI architectural trends. This expansion is significantly driven by new business opportunities captured through our latest product developments, such as liquid busbars and powers. In the upcoming AI architecture, we expect these new wins to elevate content per rack, highlighting our successful transition from a component supplier to a leading provider of system-level power and thermal solutions. With our early engagement and expanding portfolio, we're seeing increased participation across multiple AI platforms as they ramp up for mass production.

Thank you, Chris. The next question is, given your early engagement in AI connector programs, is it reasonable to expect FIT to secure a meaningful share, for example, 30% as these platforms ramp up?

No, while we do not provide specific information for individual components, by leveraging our co-development with the ecosystem and our proven mass production scale, our target to secure a meaningful market share remains consistent with our historical leadership in high-speed and high-power industries.

Thank you, Chris. We have questions from [indiscernible]. The first question is we've seen significant buzz in recent industry reports regarding the [ Verono ] connector stack for future AI platforms. Do you clarify FIT's strategic positioning here, specifically as architectures shift towards this proprietary designs, how does this impact your road map and growth trajectory heading into 2027?

Thank you very much, [indiscernible]. So we do not comment on specific design details. The industry shift toward high-density proprietary architectures align perfectly with FIT's technological road map. we're deeply engaged in the early-stage development of these next-generation solutions well ahead of broader market adoption. This high-level involvement not only reflects our R&D strength, but also effectively raises the entry barriers for new generation AI rack.

Thank you, Chris. Next question is, how does FIT view the evolving trend between copper and optical solutions in the AI cluster interconnect space? And how is the company's road map positioned to support this transition?

As AI cluster bandwidth and data transmission requirements continue to increase, copper solution will gradually approach their physical limitation in certain high-speed and long-distance applications. As a result, optical solutions are expected to become an increasingly important interconnect technology going forward. FIT's road map remains closely aligned with customer needs, and we will continue to support customers with both copper and optical solutions based on different application requirements and technology transition.

Thank you, Chris. Next question is, looking at your CPO and silicon photonics progress, when should we expect these technologies to start contributing meaningfully to the FIT's revenue? Is it 2026 and 2027 story?

We're currently in a critical validation phase for ELSFP, upon the successful completion of the system level validation with our key customers, we will transition into the pilot production stage. From an industry cycle perspective, we expect 2026 to focus on technology adoption and initial deployments. Significant revenue growth is projected to materialize in 2027, aligning with the global ramp-up of the 102.4T switch architectures. Our focus remains on ensuring technical maturity to perfectly match the deployment cadence of next-generation AI cluster.

Thank you, Chris. The next question is from Kate from UOB. The question is FIT is recognized as one of the few players capable of delivering FFD quick disconnect solutions. Can you share the status of your liquid cooling solutions? Does the company plan to leverage this advantage to expand into broader components like code plates?

We expect our liquid cooling solution to see significant growth in 2026. Our strategy is centered on connectivity components and module, where we deliver high-precision critical components with the highest technical barriers. Regarding portfolio expansion, our priority is to dominate mission-critical segments such as FFQD and liquid cooled power busbars. By providing a specialized integration of power and thermal management, we solve the industry's most complex density challenges, ensuring a superior margin profile and long-term competitive advantage.

Thank you, Chris. The next question is, could you provide some color on the current progress of the keyboard carriage qualification and how we should think about the timing and visibility of future production ramps?

I'm sorry. We do not comment on specific products, but it is clear that we see a strong growth trajectory in our AI-related business over the coming years.

Thank you, Chris. Our next question is, could FIT provide more color on the outlook for the rack interconnect business in 2026 and 2027, particularly in terms of the key customer trends and technology transitions that may drive future growth?

As AI computing demand continues to increase, we believe the need for rack level and rack-to-rack interconnect solutions will also continue to grow alongside larger and more complex AI clusters. We remain positive on the long-term outlook for the rack interconnect market, driven by higher bandwidth requirements, increasing power density and ongoing AI infrastructure expansion. Given FIT's strong positioning in high-speed connectivity, we believe we are well positioned to capture these opportunities and will not be absent from any major industry transitions going forward.

Thank you, Chris. So our next few questions are from Mr. Wang from Everbuy Securities. The first question is, with increasing pricing competition in the smartphone market, do new modules, AI smartphones and foldable phones provide a significant increase in value creation?

Well, thank you, Mr. Wang. The increase in value is not significant. However, our market share in the smartphone segment remains in a stable leading position. These innovations have the potential to increase shipment volumes and benefit businesses.

Thank you, Chris. The next question is the automobility segment faced headwinds in early 2026. What is the strategy to improve profitability? And when do you expect this segment to reach breakeven?

Our focus remains on cost discipline and operational improvement in the near term. Our long-term path to profitability involve increasing value capture per vehicle, shifting from basic components to integrated high-value system within the One Mobility framework. We expect to reach breakeven by the end of 2028.

Thank you, Chris. Our next question is beyond the servers, what is FIT's progress in the robotics sector? And how does this align with your current client ecosystem?

Robotics is a natural extension of our high-speed and power connectivity expertise. We are collaborating with key ecosystem partners to develop interconnect solution for next-generation autonomous systems, which we expect to be a long-term growth in the future.

Thank you, Chris. Our next questions are from [ MS ] from CICC. The first question is, given the recent geopolitical tensions, how is FI mitigating potential risks to its supply chain or customer base?

Well, Foxconn Group has operations and manufacturing sites worldwide, which allow us to leverage this footprint and operational flexibility to better support customer needs based on geopolitical tensions.

The next question is, could you provide more color on your OpEx strategy for 2026, specifically as FIT pivots towards increasingly complex AI technologies, how should we think about the evolution of R&D spending?

Well, we remain comfortable with our OpEx ratio guidance of approximately 16% to 17% in 2026. And we will continue striving to optimize our operation -- operating expenses and improve overall cost efficiency. While developing next-generation AI solutions require continued R&D activities, we are forecasting to our strategic growth areas that can directly drive future revenue growth for FIT.

Our next few questions from Mr. Lu from [ Camgian]. First question is, given the current volatility in global commodity prices, specifically in industrial metals, how does FIT plan to sustain this upward margin trajectory through your product mix? And what is your comfort level for gross margins for the full year?

Thank you, Mr. Lu. While we are seeing some pressure from rising raw material costs, we work closely with both customers and suppliers to mitigate the impact of commodity volatility.

Thank you, Chris. And next question is looking at your strategic road map, where you need more capacity to support new growth engines such as audio and AI. Could you share your priorities for capital allocation and how this investment cycle positions FIT for 2027 and beyond.

We are currently in a pivotal investment cycle to capture the next wave of AI opportunities. Our capital allocation is strategically prioritized with significant resources dedicated to AI infrastructure and the remainder supporting our global manufacturing resilience. As for audio, our priority is enhancing operational efficiency and launch. Looking towards 2027 and beyond, we will maintain full flexibility in our global footprint to meet evolving client needs. This strategic agility allows us to leverage our prepositioned assets to drive significant operating leverage. Such positioning ensures that our growth engines mature, we can efficiently scale operations and deliver sustained long-term value to our shareholders.

Our next few questions are from Howard Kao from Morgan Stanley. The first question is, congratulations on the quarter. With the growing TAM for Agentic AI, can you talk about your exposure in general server, which products with key contributions from general servers?

Thank you, Howard. While general server is good as expected. ID remains as one of our key segments. Our general purpose server business remained robust with a 30% year-on-year growth, significantly outperforming the broader market.

Thank you, Chris. The next question is, can you talk about your vision in data and power? Between these 2 segments, which segment will easier for FIT to take share and grow over the next 2 or 3 years?

Both power and data represents strong growth at this moment. So if we have to pick one, I will say data may have higher potential.

So following up on the engine question from earlier, do you think there could be upside to your 3-year long-term guidance?

It's really early to comment on 3-year guidance. Since we are really year 1 or not even quite year 1 yet, probably only really at the beginning of this. So it's very difficult to predict 3 years down the line. What I can say is so far, so good.

The next question is from Lucas Lu from [ Jo Capital ] And the question is, would you update the 1.6T optical receiver.

Well, thank you for asking. Well, in terms of financial impact, we expect initial revenue contribution really to begin maybe towards the back end of 2027 with a significant ramp-up in 2028 as really the CPU architectures become the standard for the 1.6T and 3.2T applications.

The next question is from Alex from CMBI. The question is, recently, we see a robust demand in [ see ] driven by inferring AI and AI agents. What's your view on the impact to FIT's consumer interconnect segment and other segments?

Thank you, Alex. We also see a strong demand of CPU. However, the constraints on memory limits the upside growth for the near to long-term -- it should be healthy.

The next question is from [indiscernible] from Titan Securities. The question is, could the company please elaborate further on its layout in optical connectivity as well as its collaboration with affiliated companies of Hon Group?

Thank you for asking. The optical connectivity will definitely become one of key driven AI industry going forward. However, it will take some time for the industry to evolve. So we're talking about something for the next 1 to 2 decades. FIT will definitely work closely with all partners in the on Group. That's really one of our competitive edge. Thank you.

The next question is from Alex Wang from SDIC Securities. The question is, what is current progress of It sample delivery for [ original ] connectors to client? And when is it expected to enter the official supply white list? Also, what are the customer validation and mass production schedule for the 1.6T optical modules and 1.24TTO ELSFP products?

Well, thank you, Alex. The connectors really is on track. Regarding the 102.4T ELSFP solutions, we're currently in the deep co-design and validation phases with our key ecosystem partners. We're on track to reach significant technical milestones by mid-2026.

The next question from Alex is, how can the company maintain its technological foresight in fields such as connectors, liquid cooling and optical interconnect and avoid the risk of market share loss caused by rapid technological iteration in AI server hardware.

Well, no one can guarantee success all the time. FIT understands all the risk coming with opportunities. We have to be always paranoid to stay competitive in the business. Now one of the things that we can say is we have many long years of collaboration with ecosystem partners. So by this close collaboration over the years, we tend to be able to pick up new technology trends probably slightly earlier than the rest of the field.

Our next couple of questions are from [indiscernible]from Huatai Securities. The first question is, Chris, can you provide more details on auto business as you just mentioned weaker-than-expected market conditions?

Well, thank you for the question. Well, the automotive sector suffered with all the macro uncertainties and we will focus on our business plan and really adapt to the market conditions. With us and our specific strategy in focusing on delivering value power-related solutions and connectivity solutions in the automotive businesses, we believe we have a very strong product offerings that will be valuable to the players.

The next question is also from [indiscernible]from Huatai Securities. The question is, did memory price hike affect some business performances?

We commented on our consumer interconnect segment. The constraint of memory will limit upside growth for the near term, but it should be healthy. It should be healthy.

The next question is from from [indiscernible] HSBC. And the question is, we've noticed competitors are already participating in CPC copper cable design. Could you update us on our current progress and share your view on the long-term industry trend for CPC...

Thank you very much for this question. First of all is we do have this technology, and I'm not at the liberty to comment anything further on this at this particular moment. And we will disclose the details later when it's more mature and ready to do so because we're bound by certain military constraints that we cannot disclose at this moment. Thank you very much.

[Operator Instructions]. So next question is also from [indiscernible] from HSBC. And the question is what is your view on the technology trend of POGO pins solutions in backplane connectors?

I'm sorry. We really cannot comment on specific product design that is applicable to our customers. And just rest assured that we're very closely aligned within the ecosystem, and we're working on the latest trend and standards. And if time matures and allow, we will definitely share more details with you.

So due to time constraints, this marks the end of the time. Thank you for participating. If you have any other questions, please contact our Investor Relations department. So now I'll pass it over to Chris for closing remarks.

Well, thank you, everyone, for all these questions. They're very, very good. Thank you very much. Now despite ongoing macroeconomic uncertainties, we remain confident in our long-term growth strategy and also our ability to capture opportunities driven by AI infrastructure expansion. With our strong technology foundation, diversified product portfolio and also close collaboration with ecosystem partners, FIT is well positioned to strengthen its role in the evolving AI supply chain. Again, thank you once for joining us today and also for your continued support. We look forward to speaking with you again during our next earnings call for the second quarter, and have a great day. Thank you.

And now this concludes today's conference call. You may now disconnect.