We attended FPT's online analyst meeting, which covered a wide range of topics regarding the company's core businesses. Our key takeaways from the meeting are broadly in line with our expectations and reinforce our optimism on FPT’s business prospects. 

1. IT business 

Management expects software outsourcing (SO) revenue growth in the EU and Japan will return to double-digit rates. In H1 2021, revenue from the EU and Japan grew only 6% YoY and 3% YoY, respectively, which management partly attributes to COVID-19's lingering disruptions. For example, Japanese clients prefer human-to-human contact in signing contracts, which undermined FPT's sales activities in this market, according to management. However, FPT expects revenue growth in Japan will strengthen in late 2021 as Japanese clients gradually adapt to online business deals. 

Similarly, management expects digital transformation (DX) revenue growth to improve markedly in H2 2021. Per FPT, its DX revenue should soar ~40% YoY in 2021, which implies a significant step-up from H1 2021’s 19% YoY growth. After 2021, management expects DX revenue will grow 35%-40% per annum so that DX will account for 50% of total Software Outsourcing revenue in the next three to five years compared to 32% in H1 2021. 

SO labor productivity rose 7% YoY in H1 2021 partly thanks to better contract prices and application of productivity tools. Management targets a 10% YoY improvement for full-year 2021. 

FPT eyes another strategic acquisition in late 2021. This potential acquisition follows FPT’s recent minority investment in Intertec International (Intertec) in late July 2021. Intertec is a US IT service provider that has nearshore delivery centers in Costa Rica and Colombia. FPT expects its number of nearshore employees to expand from 200 to 300 in 2021 and reach 1,000 in the next three years. FPT Software currently has ~18,000 employees.  

Meanwhile, FPT targets its domestic IT revenue to grow ~30% per annum in the next few years, which is partly thanks to an increasing DX adoption among Vietnamese companies that was reflected in this segment’s robust newly signed contract value in H1 2021 (+71% YoY, per our estimate). Moreover, FPT expects its domestic IT PBT margin to improve on the back of a broader contribution from software revenue — especially from FPT's in-house products — relative to hardware revenue and a bigger contribution from FPT’s in-house products. According to management, Domestic IT's PBT margin expanded from a 2018-2020 average of ~6% to 10% in H1 2021 and could reach up to 12% for full-year 2021. The mix between software and hardware revenue was 45%/55% in H1 2021 vs 40%/60% in the past and could reach 50%/50% in 2022. Meanwhile, FPT targets the revenue contribution from in-house products will expand to 20% in the next few years vs 10% in H1 2021. Per FPT, its in-house products currently generate PBT margins of 40%-50%.  

2. Telecom Services 

Telecom Services’ PBT margin to soften in H2 2021 due to investments in international bandwidth. In H1 2021, PBT margin of broadband services (71% of H1 2021 Telecom Services’ PBT) reached a record level of 21.9% (+2.6 ppts YoY), which was partly due to delayed investments in international bandwidth. FPT states that its land-based international cable project has been hindered by COVID-19-related travel international restrictions. Once these investments ramp up, FPT expects broadband service PBT margin to ease vs H1 2021’s level. 

FPT eyes high double-digit PBT margins for the pay TV segment in the long term. Per FPT, pay TV recorded revenue of VND1tn (USD43mn; +17% YoY) and PBT of nearly VND100bn (USD4mn) in H1 2021 vs a net loss in H1 2020. Despite stiff competition, management believes the pay TV segment’s PBT margin can reach 15%-20% in the long term once FPT shores up its monetization of its subscriber base in the form of advertising revenue. 

3. Education  

FPT expects enrollment to surge at least 45% per annum in the next three years. In 2021, FPT will start receiving university applications in Binh Dinh Province (central Vietnam) and high school students in Hai Phong and Bac Ninh (northern Vietnam). In addition, FPT will roll out new programs such as the 9+4 program that combines high school and vocational training as well as a collaboration with the UK’s University of Greenwich to attract more students. 

4. Others

Losses in the ‘Investment and Others’ segment was primarily due to provisions for start-up investments such as Utop (customer loyalty services) and Base.vn (software-as-a-service/SaaS). In H1 2021, FPT made a total provision of VND336bn (USD15mn) for its long-term investments vs none in H1 2020. That said, management remains optimistic about the long-term outlook of these investments. Per management, Base.vn posted VND84bn (USD4mn; more than 80% YoY) in annual recurring revenue along with positive operating cash flow in H1 2021. FPT expects the profit margin of the SaaS business will turn positive and reach high levels after about three years of acquiring customers.