Good morning, everyone. Welcome to the live audio webcast of FIT Hon Teng's FY 2026 interim results presentation. Today, we are honored to have Mr. Chris Lu, Chief Operating Officer and Chief Financial Officer for FIT Hon Teng, joining us today. During the presentation, Chris will provide a summary of the group's performance for the interim period ended June 30, 2026, and outlook for the second half of 2026. 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. If you have any questions for management, you can kindly submit your questions in English anytime through the Q&A panel.
Before I turn the call over to Chris, I would 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 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 a disclaimer for this call, please refer to slide two of our PowerPoint. Slide three contains a brief agenda for today's call. Now I will hand it over to Chris.
Thank you.
Thank you, Ray. Good morning, good afternoon, good evening to those joining us today. Following the AI momentum in Q1, the AI demand remains strong, supported by stable customer orders and continual investments in AI infrastructure. During the second quarter, revenue increased by 8% year-over-year to nearly $1.3 billion, driven by the continual expansions of our next-generation AI product portfolio. Gross profit increased 9.6% year-over-year, with gross margin improving 26 basis points to 18%. Gross margin came in below our original expectation, mainly due to temporary cost headwinds. These were primarily driven by higher raw material prices and the learning curve associated with the ramp-up of our next-generation AI product on new manufacturing lines. The manufacturing processes for our next-generation AI products proved more challenging than initially expected. We have already overcome several critical bottlenecks with encouraging improvements in product efficiency.
We expect the learning cost to continue to progressing and ramping up cost to gradually optimize, normalized over the second half of the year. On operating expenses, we maintain disciplined cost management. Although R&D investment increased to support new AI product during their initial production stage, our operating expenses ratio remain at 15.05%, within our guidance range and slightly lower than last year. As a result, operating profit increased 40.7% year-over-year, while net income increased 15.7%. For the first six months of the year, revenue reached $2.5 billion and net profit total $38 million. Looking ahead, our full year outlook remains unchanged. Based on current visibility, customer demand and AI project pipelines remain intact, and our long-term growth drivers are unchanged. Turning to slide six. Let's look at the comparative breakdown for Q2.
Sustained AI infrastructure remained the key catalyst behind the cloud data center segment and for overall revenue growth during the quarter. The auto mobility system came in below prior guidance. Shipment for the smartphone segment have stabilized and remain a positive cash-generating business with reasonable near-term prospects. Q2 revenue was flat as per prior guidance. As mentioned, driven by continual AI momentum, contribution from cloud segments grew by a strong 54% during the second quarter. AI infrastructure investment continuing to drive demand for higher speed connectivity solutions. UQD solutions for cooling distribution unit, backbone connectors, and other external cables and power modules. Ongoing disruptions and upstream supply constraints in memory chips led to a 28% decline in the consumer interconnect market during the quarter. We believe this reflects shipment timing rather than a change in underlying demand.
The auto mobility segment was impacted by soft end- market demand in the automotive industry. This has led to a lower than anticipated decrease in segment sales. We continue to optimize the portfolio toward higher value modules and integrated software-defined vehicle solutions during our One Mobility brand. As production volumes continue to ramp up, combined with the low base in corresponding period last year, the system product segment increased its contribution and delivered double-digit revenue growth during the quarter. Turning to slide eight. We maintained our positive full-year outlook with high single-digit revenue growth supported by a healthy order backlog, continued AI demand, and gradual capacity ramp-up in the second half. Customer project pipeline remained intact. We also maintained our full-year gross margin guidance of 20%.
As our next generation AI products and new manufacturing lines continue to progress through the learning curve and move from qualification to volume productions, we expect higher value products to contribute to a larger shares of revenue, supporting further improvement in growth margin. As our next generation AI products continue to transition into mass production, we expect production efficiency to improve, supporting our cost objectives. Accordingly, we continue to expect operating profit to increase by approximately 70% for the full year. Meanwhile, we will continue to closely monitor raw material price fluctuations and optimize our pricing strategy to support our full-year objectives. Next, we turn to slide nine. We expect enduring industry dynamics to determine how we allocate capacity. Our product portfolio will continue leaning towards AI to capture emerging demand opportunities. For the smartphone segment, recurring business has stabilized and continues to provide healthy cash flow, as discussed earlier.
We expect to maintain consistent orders for the coming quarter and project a similar annual sales contribution as last year. Ongoing AI infrastructure investment generates more pipeline opportunities from the AI server and shipment for the cloud data center segment. We continue to see strong customer engagement for our next generation AI connectivity solutions, including high-speed connectivity, upfront interconnect, power delivery, and liquid cooling. We are maintaining a high double-digit outlook in Q3, a full-year projection of up 70%. For consumer interconnects, the persistent uncertain supplies of constraint for memory chips will continue to affect near-term order volume. As such, we lower our guidance from flat growth to a double-digit decline for Q3, which translates into a low teens decrease for the full year. For auto mobility, the sector continued to face near-term pressure from subdued end market demand.
Nevertheless, we remain focused on strengthening the business by optimizing its portfolio toward higher value automotive solutions, positioning the segment for improved long-term growth and profitability. Firefly outlook remain unchanged. We expect system products to post strong year-over-year growth, reflecting the low base in the prior year period and continual production ramp-up this year. We expect relatively flat shipment volume in Q3, reflecting a more normalized quarterly pattern after a strong first half. The underlying business remains healthy. Turning to slide 10, we maintain our goal to sustain growth momentum by seizing opportunity arising from multi-year AI investments. The efforts our team put into customer evaluations, certifications, and pilot deliveries for next rack architectures are helping to increase our cloud data center revenue mix from mid 20% this year to around 30% by 2028. At the same time, capacity at our new facility is being rolled out in phases.
As production yields and scale in economies improve, we expect returns becoming increasingly visible by the first half of next year. In addition, the continued expansion of our overseas manufacturing footprint further strengthens our ability to support and secure business from global cloud and server customers. Slide 11, news updates. Moving to slide 12 for recent updates. FIT market presence and co-development expertise are growing as we broaden our suite of end-to-end AI infrastructure solutions. During Computex 2026, our team showcased innovative solutions encompassing compute, connectivity, power, and networking. In particular, our XPO technology for pluggable optics for AI networking and integrated liquid cooling attracted a strong industry response, reinforcing FIT's role as the main developers of the leading and emerging cloud connectivity solutions. Turning to slide 13. We are pleased to announce FIT Tech Day 2026, which will be held on September 16th in Taipei.
Last year, we successfully unveiled One Mobility and highlighted the latest development across our automotive portfolio. This year, the spotlight shifts to AI optic networking. Together with leading partners across the optical communication ecosystem, we will showcase FIT strategic positioning and our close alignment with customers' multi-year product roadmaps. As AI infrastructure enters its next phase of growth, driven by scaled-up connectivities and co-packaging optics, industry leaders project an addressable market could expand to $90 billion- $95 billion by 2030. The upgrade cycles in optical connectivity is gaining momentum, and revenue contributions from our 800G solutions are expected to ramp up progressively during the second half of the year. We look forward to sharing more details at FIT Tech Day and welcome investors, customers, and industry partners to join us as we showcase the next phase of FIT's growth strategies and innovation roadmap.
This concludes our presentation today. Thank you.
Thank you, Chris. We are now ready to take some questions from the audience. As a reminder, you may submit a question by text by clicking the Q&A box in the webcast panel. Please submit all questions in English. For those joining via audio line, please press star one on your keypad to join the Q&A queue. There are some webcast questions on the line. Our first few questions are coming from Mr. Anthony from JP Morgan. The first question is: Q2 operating profit missed the full year trajectory by about a third, and you are still maintaining the mid 70% OP growth target. Why not revise guidance?
Thank you, Anthony. The miss is mainly driven by cost. Our AI order book, customer pipelines, and market share momentums are all unchanged. The process design and ramp up our next generation AI products presented a greater technical complexity than previously anticipated, resulting in additional learning costs. During the second quarter, we made good progress in improving production readiness and manufacturing efficiency. As production volumes continue to scale in the second half, we expect the related cost pressure to gradually come under better control.
Thank you, Chris. The second question from Anthony is: In accordance with the second quarter 2026 performance that implies a very steep ramp in second half, what specifically needs to go right for you to hit 70% OP growth for the full year?
Well, there are three key factors. First, we expect AI product shipments to continue ramping in the second half, supported by a healthy order pipeline. Second, we expect yields and production efficiency at our new next generation manufacturing lines to continue improving as planned. Third, we will monitor raw material costs. While execution remains important, we are seeing steady progress across these areas, which supports our confidence in achieving our full-year operating profit target.
Thank you, Chris. Next, a couple questions coming from Karen Huang from Citi. The first question is: Recent market reports suggest that Kyber's rollout could be delayed, raising concerns about the deployment timeline for the next generation AI platforms. Could investors expect any impact on FIT's AI business or product roadmap if such delays materialize?
Thank you, Karen. While we don't comment on any specific customer, product, or platform roadmap, from a FIT's perspective, regardless of which AI architecture customers ultimately adopt, the long-term demand for higher bandwidth, power density, and thermal efficiency continues to increase. This supports sustained demand for our AI connectivity portfolio and reinforces our long-term growth outlook.
Thank you. The next question from Karen is: Could you provide an update on your cable cartridge products? When do you expect them to begin contributing to the revenue, and how should investors think about the pace of the ramp?
Well, Karen, we are not able to comment on a single product. More broadly, though, we continue to see encouraging progress across our next generation AI product portfolio. We expect new AI products to begin contributing toward the end of this year, with broader contributions as customer deployments continue to ramp up. The timing will depend on customer qualification and deployment schedule, but we believe these products will support our long-term growth.
Thank you, Chris. Our next couple questions are coming from Wang Jie from Zhongxin Jiantou . The first question is: How important will optical products become within FIT's portfolio? Could you update us on your progress in XPO and CPO technologies, and when should investors expect optical revenue to become meaningful?
Well, thank you, Wang Jie. Optical technology represents one of the key pillars of FIT's long-term AI strategy. Our 800G optical products are progressing into volume production, while 1.6T transceivers continue customer qualification. As a contributing member of the XPO MSA ecosystem, we have successfully demonstrated 224G bps per lane transmission integrated with liquid cooling, bridging near-term, near-package copper connectivity with high-density external optical interfaces. We expect optical revenue to increase progressively beginning in the second half as 800G and 1.6T product ramp into production. As XPO and CPO architectures achieve broader commercial adoption over the coming years, optical product will become one of the strongest growth drivers within our cloud data center business.
Thank you, Chris. Our next question is, when does 800G optical revenue start contributing, and how material will it be in the second half?
Well, we expect initial revenue contribution from 800G products in the second half, and we will share more updates in our optical roadmap at FIT Tech Day in September. While the near-term contribution will be gradual, we see 800G as an important long-term growth driver for our AI business.
Thank you, Chris. Our next couple questions are coming from Kate from UOB. The first question is: What should investors expect from FIT Tech Day on September 16?
Thank you, Kate. At our upcoming FIT Tech Day on September 16, we will bring together the world's leading experts across the AI optical ecosystem. It will convene globally recognized technology leaders, distinguished researchers, and key innovators from across the AI optical ecosystem to explore how next generation AI infrastructure is being built, from light generations of photonic integration to AI networking and rack scale connectivity. Together, they will share perspectives on the technology shaping the future of AI data centers. The event will provide investors with a clear view of FIT's technology roadmap, ecosystem strategy, and long-term growth opportunities. We welcome everyone to join us online.
Thank you, Chris. The next question is: The optical market is getting crowded. How does FIT's approach differ from pure play optical companies?
Well, we are not a pure play optical company, but we leverage the Foxconn Group resources, global manufacturing footprint, and ecosystem to deliver integrated AI connectivity solutions. This positions us as a platform partner rather than a component supplier. Also, our strength is integrating copper, optics, power, and thermal solutions into a common AI connectivity platform. As cloud customers increasingly look for system-level optimization, our broad portfolio and close collaboration with ecosystem partners position us as a platform partner rather than a component supplier.
Thank you, Chris. Our next couple questions coming from Irene Yan from Morgan Stanley. The first question is: What are the top risks to your full year guidance, and how are you mitigating them?
Thank you, Irene. Well, there are really three areas we continue to monitor. First, commodity material prices. Second, the ramp-up of our new manufacturing facilities, where we remain focused on improving production efficiency and yields. Third, macroeconomic and foreign exchange volatility. While these factors are largely outside our control, we continue to work closely with our customers and manage our operations proactively. Overall, these are manageable risks, and we remain confident in our full year guidance.
Thank you, Chris. The next question is: As you continue expanding AI capacity and investing in the next generation AI products, how should investors think about your capital expenditure plans? Do you foresee any need for external financing?
Our capital expenditure remains focused on AI capacity expansion and next generation AI product deployment and development also. We also leverage the Foxconn Technology Group's global manufacturing footprint and production resources to optimize capital efficiency. As for financing, we remain disciplined in our capital allocations while maintaining flexibility.
Thank you, Chris. Our next couple questions from Alicia from Guǎng fā. The first question is: You've indicated that the cloud data center could account for around 30% of total revenue by 2028. As investors look at your long-term roadmap, what are the key milestones or indicators that they should monitor over the next few years to assess whether you are on track to achieve that target?
Thank you, Alicia. We remain confident in our long-term cloud data center growth trajectory. Key milestones include a ramp-up of backplane connectors, 800G optical solutions, and other next generation AI products, improving factory utilization, and expanding engagement with hyperscalers and AI server customers.
Thank you, Chris. The next question is: Recent geopolitical developments and ongoing supply chain realignment are reshaping the AI infrastructure industry. How do you see these changes affecting FIT's competitive position and long-term growth opportunities?
Any industry transition or supply chain realignment reinforces the values of agile, globally diversified manufacturing footprint, and multi-domain engineering capabilities. Areas where FIT and Foxconn Technology Group are exceptionally well-positioned to support our global customers.
Thank you, Chris. Once again, as a reminder, ladies and gentlemen, you may submit your questions by text by clicking the Q&A box in the webcast panel. For those joining via audio line, please press star one on your keypad to join the Q&A queue. Our next few questions are coming from Tony Chen from Huatai Securities. The first question is a tariff refund and FX. Did you see any tariff related to tax refund this quarter? How should we think about the FX impact? What is your outlook on both for the next six months?
Well, yes, we did receive the tax refund, and as for the forex policy, we are adopting a neutral hedging policy instead of speculation. [inaudible].
Thank you.
Excuse me.
Sorry, Chris.
Yeah. No, go ahead, Ray.
Thank you. This next question from Tony is, so cloud networking and CPO. The rapid growth of cloud networking this half was mainly copper-based. FIT had a lot of AI-related products shown on the Computex, which is very impressive. With CPO ramping industry wide in second half, does FIT have any optical CPO opportunity or is growth still copper driven for now? Thank you.
Yeah. Tony, the growth was still copper driven, but the optical related product is our future growth driver. We have already demonstrated some of the CPO/XPO product in our [OCS] Computex. We will focus on this topic in our FIT Tech Day in September.
Thank you, Chris. The next question from Tony is about Apple supply tightness. Apple's earning call mentioned supply tightness on iPhone, iPad, and Mac for the next quarter. This year, lineup of the new products, the cycle maybe will change its seasonality. Will this affect your performance?
We are unable to comment on a single product or a single client, but all the segment is in line with our expectation.
Thank you, Chris. Ladies and gentlemen, as a reminder, you may submit your questions by text by clicking the Q&A box in the webcast panel. For those joining via audio line, please press star one on your keypad to join the Q&A queue. Our next question is from Howard Tao from Morgan Stanley. The question is: next generation AI server appears to use more optical interconnect to scale up. How does this trend benefit FIT?
Thank you, Howard. Absolutely. We will work closely with customers in the optical market. This should benefit FIT in financial and customer relationship. It is still relatively early to comment on the detailed numbers. We are very confident that we are in a position to really seize these opportunities.
Thank you, Chris. Our next question is still from Howard. The question is: for CY 2028 cloud mixed target of low 30%, this implies more than $2 billion revenue. At that point, what does the split look like between NVIDIA and ASIC programs?
We believe AI infrastructure will continue to evolve across multiple computing architectures. Regardless of the underlying platform, higher AI computing performance will continue to drive the need for high-speed connectivity, power delivery, optical interconnect, and also liquid cooling. These trends expand our content breadth and also support our medium to long-term growth. We closely work with multiple ecosystem partners. Therefore, we are not really pinning toward one versus the other. We participate in all these platforms.
Thank you, Chris. The next question is from Bing Wei from Haitong Securities. The question is: could management break down how much of this growth came from volume, new customer wins, and new product lines versus pricing ASP improvements? What is the H2 sequential trend looking like?
Well, both in volume and ASP improvement recording a low double-digit growth.
Thank you, Chris. Our next question is from Howard Tao from Morgan Stanley. The question is: with the first half results now out, would you view your OP guidance for the year as achievable or more of a target to hit?
Now, we believe performance will be in line with our previous guidance. During the second quarter, we made good progress in improving production readiness and manufacturing efficiency. As production volume continue to scale in the second half, we expect the related cost pressure to gradually come under better control.
Thank you, Chris. Our next question is from Bing Wei from Haitong Securities. The question is: R&D expenses increased 28.7% year-on-year to $190 million in H1, notably outpacing revenue growth. What are the incremental R&D dollars primarily going forward? New product development for the AI server connectors or upgrades to the legacy product portfolio? Do we expect R&D spending to continue growing in absolute terms in H2? What is the full year R&D to revenue ratio target?
Mostly our product developments are focused on AI server connectors. We will continue allocating resources to R&D activities.
Thank you, Chris. Our next question is from Howard Tao from Morgan Stanley. The question is: are there any plans to dispose any lower margin consumer-related businesses?
No. We will continue monitoring our portfolio mix and platforms. We will balance our profitability and growth and also long-term growth strategy.
Thank you, Chris. The next question is from Bing Wei from Haitong Securities. The question is: effective tax rate dropped significantly from 62.4% in H1 2025 to 37.3% H1 2026, contributing roughly $36 million to net worth profit. Is this decline driven by one-off items, for example, a reversal of prior year tax provisions or structural changes? Can we expect a similar rate in second half, or should we model something different?
Well, yes. The high rate in the first half of 2025 is attributed from a one-off event, primarily on dividend tax paid on repatriations of profit from Mainland China. Going forward, we will continue to optimize our tax rate and make efficient use of it. Thank you.
Thank you, Chris. Our next question is from Alex Wong from Guotai Junan. The question is, can you explain why Q2 gross profit margin fell quarter-on-quarter, and whether it will pick up in the second half?
Yeah. Thank you. As I shared earlier on, as our next generation AI product and new manufacturing lines continue to progress through the learning curve and move from qualification to volume production, we expect higher value products to contribute a larger share of revenue, supporting further improvement in gross margin.
Thank you, Chris. There appears to be no more questions. This marks the end of today's presentation. I will now turn the conference over to Chris for closing remarks.
Well, thank you everyone for your participation and also for the robust questions. FIT continues to benefit from a longer term AI infrastructure buildup. We are expanding our next generation AI connectivity portfolio, improving manufacturing efficiency as new products and production lines mature, and also deepening our collaboration with global customers. We remain confident in our long-term strategy and believe these initiatives will continue to support sustainable growth and create long-term value for our shareholders. I look forward to welcoming everybody to the FIT Tech Day in September in Taipei. Thank you and goodbye.
Thank you, Chris. This concludes today's conference call. Thank you all for participating. You may now disconnect. Thank you.