Good morning and welcome to the HMS Networks' Q2 2022 earnings call. All participants will be in listen-only mode. Should you need assistance, please signal for an operator by pressing star then zero on your telephone keypad. After today's presentation, there will be an opportunity to ask questions.
To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star and then two. Please note this event is being recorded. I would now like to turn the conference over to Staffan Dahlström. Please go ahead.
Thank you and good morning, everybody. Thanks for joining this call and welcome to at least here in sunny Halmstad at the southwest beach of Sweden. We have a beautiful morning. I hope you have it as well. I will start with a couple of slides updating us on the business, and then Joakim will take the second part with more details into the financial numbers. We're following the standard procedures as we normally do.
Let's move directly into the quarter two numbers. We are happy to present another good and solid quarter, actually on net sales a little bit better than we expected ourselves, because we saw good deliveries out in the end of the quarter in June, because we got some little bit better components than we thought from beginning.
I think we landed a Q2 that was good and better than we expected due to component availability, +27% growth. Of course, we also have support from a favorable currency mix with a depreciation of the Swedish krona. We continue to see a very good order intake. As you know, for the last, I think six quarters, we talked also about a boost effect, where we see that our customers are concerned about long lead times, component availability.
They also tend to place their orders ahead of time from their normal behavior. This is giving us a continued boost, somewhat lower than the previous quarter, but still significant for us. Joakim will dive more into these details, but 35% growth is of course very good for us. We continue to deliver good results.
SEK 143 on EBIT, a combination of slightly improved quarter by quarter on margins, stable OpEx, we are increasing OpEx quite much. Of course, with net sales growth of 27% and fairly stable gross margins, we're also leaving room for some good profitability. I think what is maybe the weak point of the report is our cash flow that is lower than normal.
Joakim, will go into the details, but in general, one big effect is that we are building up more inventory. We have a fantastic order book, so we want to make sure we can deliver this. We are seeing some easing on the component market, so we are trying to get quite much inventory in here.
As you know, many of our products maybe consists of 100 different components. If we have 99 of them in inventory, it doesn't really help. We need 100 in inventory. This is also giving some buildup of inventory and planning challenges. I think you've already seen quarter one, so I skipped the year-to-date numbers. It's very solid and it follows, the quarter one and quarter two follow the same lines.
Let's take a moment just look on this boilerplate for our business. HMS is Hardware Meets Software. We make communication products where we allow our customers to interconnect machines on the factory floor to communicate with each other, also communicate between machines and devices up to IT systems wirelessly or wired.
You see on the products, it's a combination of hardware products, but of course, a lot of software content inside these products. The four main brands, Anybus, Ewon, Intesis, Ixxat, solve different problems for our customers. The three were recently acquired businesses in the last couple of years. WebFactory is more complementing our offers in some verticals. We work with two different customer groups. We have the makers of industrial equipment, and we have the users.
The makers are companies like Atlas Copco or Bosch, and these companies that use our technology building into their machines or their devices, and then deliver that as part of their package. The users are normally larger end users, could be Volkswagen, BASF, and these kind of companies that use automation technologies to integrate different systems in their facilities.
If you look on the go-to-market, on the left side with the makers, we have two major businesses. We work with device manufacturers, but we sell our embedded technology into their applications, so we are part of their designs. This is today 43% of our revenues. Here we make a design win, and we have a very strong portfolio of design wins, which makes us successful when customers sell a lot of products.
Right now we have a lot of customers with a good tailwind, and this is also seen in our orders. But here we work with direct sales. We have sales people, well, direct sales people that are subsidiaries now in 17 countries focusing on these device manufacturers. We also have makers of machines. We call them machine builders. This is 35% revenue.
Our ambition here is that our technologies, our products should be part of their bill of material when they build all their machines. In most cases, we are more an option. If a machine is sold and this buyer of this machine wants, for example, remote access or want to interconnect this machine to the previous machine or the other machine in line here, we are then specified to be an option to solve this problem.
Here we work with a combination of direct sales to large customers and distribution sales. Again, here, this is also driven out of machine builders selling more machines. This is also related to investments and CapEx investments at machine builders customers. The smallest part of our business is end users, system integrators.
This is 22% of our revenue. That's also growing and quite interesting within this with acquisition of Procentec, where we do more and more business here. It's either project sales where our system integrators are working with a larger project where you work with an end user who build a new factory or refurbish an existing factory, make some integration or improvements.
There we work with participations in this project and help the system integrators. We also work with, we call it product sales, where we advertise our product, we talk about its greatness and the specifications, and simply we get customers who just wanna buy it because it fits their specification.
This is done either through traditional distributors, but to a larger and growing extent, also new e-commerce distributors that focus on e-commerce for factory automation and building automation. We are in the almost middle of our five-year plan here, and we have the humble vision of becoming the world's greatest industrial ICT company, where ICT is information and communication technology.
We're taking steps in that direction. We're following our mission by enabling valuable data and insights, allowing our customers to increase their productivity and their sustainability. This is really important for our customers, and we have a lot of strategic discussions with our large customers about productivity and sustainability. For 2025, our goals are, three of them are environmental to become net positive in our CO2 emissions, where we do good steps in that direction.
We believe that happy and high-performing employees generate loyal customers, so we focus a lot on having good Net Promoter Score for employees and also customers. We see good results there. Financially, we believe that we would like to continue growing and combine this with good profitability.
Our ambition for 2025 is to have a revenue greater than SEK 5 billion and maintain an EBIT margin over 20%. No changes there. If we jump into some business updates before the numbers, I wanna show two slides here. First, from a market point of view, all markets are growing. We see actually quite stable and strong business despite difficult macro situation, COVID in China, lockdowns, war in Ukraine, logistics problems and component situations.
Underneath there, we also see good support from mega trends, increased automation, partly also, the trend that more and more customers are, reconsidering manufacturing in Asia, moving production closer to their European markets or American markets. We see a lot of new investments in Eastern Europe and Mexico for building new production capacity. This is a market where labor costs may be higher than on, some Asian markets.
This means that people also invest, our customers invest more in automation, more in digitalization. We also see, good support from trends such as energy monitoring. Remote access of machine is a very hot topic here post-COVID, when, more and more customers want to have remote access to their machines because its availability of machines has been a challenge.
Sustainability and green energy is becoming a factor for many of our customers. We talked about the component shortage. It continues. I already mentioned that the customers are continuing to place orders earlier than normal. We estimate a boost effect of SEK 100 million-SEK 150 million in the second quarter, slightly smaller than quarter one, but still substantial.
We feel we have improvement on the sourcing during the quarter, but it's not going from good to bad. Sorry, it's not going from bad to good. It's going from bad to less bad, I would say. We still have a lot of challenges, and this will continue for some quarters, we believe. There are some lights in the tunnel, we think that.
From acquisitions point of view, as we reported in quarter one report, we acquired the remaining shares of Procentec in April, and we now are busy with the integration, especially in Asia and North America, where we see good opportunities. We also announced that we acquired our long-term main distributor in Australia, Global M2M.
It's a small business. It's a four-man operation, SEK 20 million in revenue, and they were spending 90% of their revenue was really reselling our products. So it's a good fit. The reason we do this is that we believe that this part of the world is interesting for us. We are under-penetrated there, and we see Australia, New Zealand and Oceania as a growth market for long term.
This is interesting, with this acquisition, we quickly get a bridgehead to expand in this part of the world. We'll also be busy with R&D. We're now presenting and releasing our next generation product for remote access, the Ewon Cosy+, where we have a lot of new functionality for cybersecurity, which is a hot topic with many customers that they wanna secure their assets.
Here we have a world-leading solution, not only for remote access, but also remote access, where we use the latest technology for encryption and other security features. At Procentec, we also released our new AI-based software, Snap Analytics, where we use this tool to help our customers to improve their network uptime in a new way. Very exciting product. We talked about our slightly bad cash flow.
This is based on component inventory build up. We see that this impact our cash flow, but we believe it's the right strategy to build more inventory. We have a fantastic order book of SEK 1.4 billion, so we wanna just be prepared to keep on delivering this for the coming quarters. We feel that this strategy is the right one. All right. Joakim, financial results.
Yes. Thank you, Staffan. Let's start as we normally do with talking about the order intake. I think Staffan has already done a good job explaining the boost effect and that we reached this SEK 850 million. We believe that we're quite satisfied with that result, and the market is still strong all over across the brands and across the regions. That's just good to see.
We're now meeting. For every quarter, we're meeting tougher and tougher comps, and also the comps are inflated with this boosted order effect. Just to elaborate a bit more on that, the SEK 150 million on the boost side that we see in Q2 is SEK 100 million less than we had in Q1, and we see that this is declining throughout the quarter.
We expect that to continue and that this boost effect will probably wear off during the second half of the year, meaning that the comps will become more challenging to face then. In terms of also not to comment on the FX side, since we have a major impact, much larger than we normally see.
The growth of this 35% in the quarter, we have 14% out of that from the FX side. In total, SEK 85 million that is building up on the FX side. SEK 50 million of those come from revaluation of the already existing order book. As you know, we will look at the closing FX rate and the closing order book, which is determining the order intake in a sense.
The fact that the Swedish krona with everything going on in the macro environment, nobody seems to be wanting to hold Swedish krona, and that is of course very good for us in this case here. As you, I think I've said it before, we have about 60% of our sales in euros, 25% of our sales in US dollars.
Obviously this is giving us a good help when the macro situation is as it is today. Still a good book-to-bill 1.36 in Q2, something that we believe will come down closer to one throughout the rest of the year with hopefully continued slow improvements on the sales side and then this boost effect wearing off. Just try to give you a view on basically the underlying demand.
We have this graph that we've been working on for a couple of quarters. What I did this time was also adding in this FX revaluation on top of the boost effect to show you that this effect is of course there in all quarters. It's normally quite small, but since it was so big this quarter, I wanted to show it clearly.
Basically what we're saying is that the underlying market and underlying demand is slightly better than Q1. It's as we said in Q1, we felt that we definitely saw a sort of a tick up from these levels around SEK 500 million that we had throughout 2021, and now we're more around the SEK 600 million.
Small improvements since Q1 still falling market, but maybe not as fantastic as it looks when you have a look at these SEK 850 million. Okay. Let's go over to the sales side. Staffan already commented, we were better than we expected.
I think I said in the Q1 call that we found it difficult to be more than 10% better than Q1. We had a fantastic June where we got in some component that we didn't expect and managed to get out a nice chunk of the backlog and so close in the quarter on the SEK 601 million, meaning 27% growth or 17% organic growth.
Also year- to- date, I think we have a strong start with 20% growth, out of which 11% is organic. I think it's quite unusual. We posted a record quarter for all our brands, which I think also shows that the market is strong on a wide level since we have some different types of customers and also some different types of channels for different brands.
That's quite good to see. I think Staffan has already been talking about the component availability. Maybe just to comment on that briefly, we think that we'll have this gradual improvement, but there will be bumps on the road. We see already now that the visibility is not great.
Just going on what we can see, we can't say that we're gonna have a super Q3, but we hope that we'll solve some things on the way as we did in Q2. Okay. Let's continue looking at the backlog. Here we have a buildup of about SEK 200 million more, s o SEK 1.4 billion in backlog, obviously quite good. We're not sure that we're gonna continue to build this given that we see this boost effect wearing off.
Also on the right-hand side, you see this graph with orders for delivery longer out in time than a quarter. I guess what we can say is that this is stabilizing. You see that it was trending up a lot throughout 2021, and now it seems to be stabilizing.
I think that tells us two things. One is that our delivery performance is getting a bit better in the customer's eyes. I think also that the customers are becoming done with building up their safety stock. They are on the levels that they want to be at, for the most part. I think this works together to keep this rather stable.
Sales per region, we normally have about 60% in Europe and 20% in the U.S. and 20% in APAC, and it's about the same situation. No big changes. It fluctuates a little bit throughout the quarters, but as I said before, all in all the regions are performing well. We see all-time high numbers in all regions.
Maybe not in the Americas since we had a very good quarter a few quarters ago there, but it's solid across. Maybe let's talk about the profitability, which is maybe the most tricky part this time to explain. Again, record result SEK 143 million, 23.7% margin.
Of course, always nice to see. The gross margin is a tricky number to understand. We're quite happy with the results reaching 62.2% and seeing the continued improvement since I guess Q3 last year when we started to see the main impact from cost increase on components. We still have a huge cost inflation on component side.
I think Q2 is the worst hit quarter of all the quarters we've seen. Now we're starting to see results in the price increases. We've been discussing this before, that we made some price increases first at year-end, and then also end of Q1.
That is really starting to give results now and then, as we expected to see. You also want to see the results from those measures. We also get some help from the fact that the Swedish krona is weak, and that we have some volume that is helping the utilization on the manufacturing overhead costs. All in all, I think that improvement is helping.
As we said before, we think this is gonna continue to trend upwards, and we're gonna reach the 63%+ that we're pretty convinced with the measures that we've taken. On the OpEx side, we've been continuing to invest, and maybe the numbers looks high with the 21% organic growth of OpEx, b ut you should also remember that during 2021, we were very thin on marketing sales activities. It was still tough with the COVID situation.
I think we've been working to strengthen the sales function to build up a better team, stronger team that can focus also on some verticals. That's been working out quite well. We're now doing fairs and trade shows and various customer events again, and it's good to see the activity is picking up. I think we need it for the lead generation to be competitive going forward as well.
Of course, we, as everyone else, also see a bit of salary inflation, especially in the U.S. and in some parts in Europe. We're just getting to the very high single-digit numbers. This is of course also impacting the cost side. Earnings per share, I'm not gonna spend too much time on this. SEK 2.33 krona. Good. We had the adjustment in Q1, otherwise this would also be a record EPS. Not too much standing out there.
Let's just continue to maybe the more interesting part with the cash flow. You see this graph is of course not how we want to see it develop. We knew, and I think we also commented on this in the Q1 call, that we were gonna continue to build inventory.
Now when we see some releases on the component side, we definitely do not want to miss out since we do not have the simple components as is available, or that something would happen there. We're taking the hit and building this up with SEK 50 million in the quarter. Then given the very strong end of the quarter with the super strong June, this builds receivables quite a bit.
I think this is something that we're aware of when sales normalizes out. Right now it's building up a bit and that also impacts with SEK 60 million. All in all, we believe that we're okay on the working capital side, even if it's a bit higher than what we've seen before. We don't expect this high build-up to continue.
There might be a little bit build-up on the inventory side. Difficult to know exactly the timing. I think all in all, it's under control. Year- to- date, you have roughly the same numbers with the receivables. On the inventory side, we have built SEK 80 million from year-end. That's quite a bit.
As we said, we think it's for a good cause, and we want to make sure that we can deliver during the second half. Finally, looking at the debt situation, starting to look maybe a bit more normal given that we had this acquisition of the extra 30% of Procentec. We removed some of this option related debt, and now it's normal interest bearing debt instead.
I think 0.69 in net debt to EBITDA is of course we're very happy with that level, not a big problem. We still think we have plenty of room to continue with the M&A agenda, looking for interesting companies, and we have some firepower to do what we need there. I think that was basically it from us. Let's see if there are any questions. I hand over to operator.
Thank you very much. We will now begin the question- and- answer session. To ask a question, you may press star then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys.
If at any time your question has been addressed and you would like to withdraw your question, you can do so by pressing star and then two. At this time, we will just pause momentarily to assemble the roster of questioners. Thank you. Your first question comes from Joachim Gunell from DNB Markets. Please go ahead.
Thank you very much and good morning Staffan and Joakim. As I said, the delivery capability clearly came in ahead of your expectations during the latter part of the quarter. Can you just share your thoughts here with regards to how you, I mean, do you see that that's more of okay, one-off and then continue to expect this more gradual improvement throughout Q2, Q3, Q4 as opposed to exceptional as what we saw here in June?
Joakim, do you have a good answer for that?
Yeah, I think I have-
Joakim, you want to-
Yeah, I can answer that. I think that what we said, Joachim, is that we believe that on the big level overall, we see that there is a slow improvement on the component availability side. We see that the confirmations that we get tend to stick. Before we saw a lot of reconfirmation of orders, which made planning very difficult, and it was very difficult to see what's gonna happen in the coming quarter or so.
Now we see that we have better performance there from the suppliers. Still, there are various things that makes it difficult. Now you had the COVID shutdowns in China, which is still somewhat impacting here and there.
Basically what we can say is that we believe that it's gonna become better over the coming quarters, but there will be some setbacks. We know that. There will also be some things that we solve. It's difficult to say. I gave a range in the Q1 call that we could be ±10% in Q2. That's how difficult it is. That's a pretty big range. I say maybe we're a bit more optimistic towards Q3, but we don't wanna make a guess where that will end up at the moment. It's still too uncertain.
Understood. Perhaps to throw some free stuff on, I mean, with somehow industrial automation end markets tend to have this like two-year long upcycles. We are approximately 20 months into this. Given the fact that your products connect assets out in the field, are you seeing any sort of indication from, say, specific end markets that business momentum is slowing or are showing any signs of the cyclical correction signs?
With Snap, perhaps you could help us just understand how you think about the trends you allude to, I guess, I mean, reshoring, energy monitoring, et cetera. How those sort of trends will basically dampen the cyclical amplitude of HMS business model, like you said?
No, I think first, if we compare this to other setbacks we had in 2009, et cetera, I think today our business is much broader. We used to work only with device manufacturers. Now we have machine builders. We have also end users, I think. We are more broad, and this makes us more sustainable to different things.
We also seem to be different in our building automation section versus industrial automation, b ut I would say in general, business-wise, customers are still quite optimistic for different projects, but there's an uncertainty that is higher now. People are talking about will it be a soft landing next year? How will it be?
They seem to keep on investing, and especially this with increased automation, increased digitalization is a hot topic because I see quick wins and quick profits out of taking these steps in Industry 4.0 and these other trends.
I think so far people are quite positive going forward, and I think our position is fairly strong, and it's more broad-based than it used to be. I wouldn't say we are really worried, but of course, we are a bit careful on the new expansion investments, of course. On the other hand, we have good profit levels, and we wanna make sure we capture the opportunities we can as well. We are in a mixed mode at the moment.
Understood. Just a final one from me in regard to the new product releases here. The Snap Analytics product from Procentec, for instance, it seems like you're really starting to elaborate with more of like a subscription service based on the network diagnostics, et cetera. Can you comment a bit on the gross margin profile on that? I mean, what's the base that you could tap into for such a product?
I think with this Procentec offer, it's all about helping customers to the ultimate goal is to have high network uptime. They started that business, and we acquired it a couple of years ago, with it more being a troubleshooting tool. When you have a network failure, we could then help them fix the problem, find where it is, and then fix the problem.
That's still a portion where you need some hardware tools and some software tools. That market is also evolving to more and more customers would like to invest in, "Okay, how can I make sure that I don't get these problems?" We have some. We talk about being reactive, proactive .
We see with this Snap tool, it's much more of understanding more about your network structure and the traffic you have and doing more of a predictive thing. We see that market is very interesting for the future, but it will also take time because a lot of customers are still in this reactive mode, how to solve things.
They're slowly moving to be more proactive, but the predictive part is still in the early days. From a margin point of view, it's a software sales only, so that's good gross margins. We believe that it will take some time before this is a large part of our revenue. That's a big value for our customers to really make sure that the network uptime is there. It costs a fortune for them when it's not.
Perfect. I'll get back to the queue. Have a great summer.
Thank you.
Thank you. Your next question comes from Simon Granath from ABG. Please go ahead.
Thank you, operator. Good morning, Staffan and Joakim, and congrats on a strong quarter. Initially, I'd like to just discuss a little bit on Ewon's performance here in the quarter. It was a very, very solid result. Would you say that you saw any extraordinary impact on Q2 sales here from new product launches? How should we think about this brand going forward?
Should I start, Joakim? Well, I think what we've seen with the Ewon in the results, we've been the—we had a difficult component situation, especially related to Ewon. I think part of the good June result was also a surprisingly good, output from our deliveries related to this product. The majority, almost everything there is our existing product offer. The new Cosy+ will help us, b ut I think this will continue this fantastic double-digit growth we have seen year over year over year. I think this will continue to perform very well.
We see that we are expanding this business and we went from a situation a couple of years ago where this was a fairly new and a little bit odd way of doing things. Now, after COVID, it seems to be a lot more acceptance with customers because they couldn't get access to their factories to the installations.
Remote access, what we do with Cosy and other Ewon products is today moving from being a nice option to almost a mandatory component for when you deliver a machine, especially under the warranty time over this machine.
What we're trying to do here is also to make other services around this to make it more sticky with the end users, to make sure that they don't only use it when the manufacturer have the warranty time of the machine. We also want to make it sticky over time.
The business model today is mainly, I would say, we sell the hardware and quite many of our customers keep on using the free version of the software, and we are seeing a better conversion to our pro version that you pay for, but we can still do more things there. A lot of the success right now is based on a hardware-accelerated hardware unit sales rather than a better penetration with software. This will continue and we see a very good market going forward for this.
Maybe if I can just add, Staffan, one thing that could be good to know, just looking at the numbers quarter- by- quarter, we had a really tough start of the year on the component side with Ewon.
This is a business where we don't normally hold a very big backlog. So we had some backlog, and now we managed to get in some components in Q2, so we could push out some of the things that we didn't manage to deliver in Q1. To look at it fairly, maybe 10% of the revenue in Q2 should have normally been in Q1 if everything was normal. That could be good to know.
Thank you. That's very clear, and thanks for a great answer. Furthermore, your order intake has been very strong after COVID, which I interpret has mainly stemmed from increased investments in automation to cope with increased cost, driving efficiency, et cetera. Another thing that has been a topic more recently is nearshoring. My question is whether you are currently bearing any fruit from this effect, or would you say that is further down the road?
I think a lot of customers talk about this, but it's also, it doesn't happen overnight. I think that maybe the strongest signal is that we see that European and American companies are not investing in new capacity in China.
They mainly invest this in Mexico, Eastern Europe instead. This is really a clear nearshoring. I think most of this is not done. Most of this is ahead of us. I think the discussions are there, but it's of course starting building new factories, it's a multi-year process. I think this will help us for the coming years. The trend is there, it's clear.
Great. Thanks. I also found it interesting that you, Staffan, mentioned earlier that compared with 2009, your offering now is so much broader and you're standing on firmer legs in light of that.
If we look at HMS, let's say a five-year horizon down the road, would you say that you want to continue broadening your offering? How many brands should we see on an approximation going for that horizon o r how should we think about the breadth of your offering going forward?
Yeah. I think we have a couple of sweet spots, as we say here. I think we'll continue to acquire companies that either bolt on to our existing sweet spots or can create new sweet spots that we've seen, for example, with Procentec. We still wanna stay in this industrial ICT field.
I think we are a communication company, and this is where we want to stay. I think today our different brands could almost be a bit confusing. We haven't maybe managed this so well when it comes to at least from an investor relations point of view. We kept some brands after the acquisitions that have strong brand in the market.
When you look on this bouquet of brands now with seven brands, it's a bit spreading in different directions. Let's see how this will be developed the next couple of years. I think we need to consolidate some of these brands to make it more clear as well. This is not urgent for us, but I think we can't continue to grow this to + 10 brands. We need to consolidate going forward.
Great. As final question from me, I know that this has been a topic in recent quarterly earnings, and that is on prices. How has pricing impacted growth in this quarter a nd do you see further room for price increases going into H2?
Joakim, would you like to
I guess that's maybe for me, y eah, I can take that. In the quarter, we don't disclose that fully, but there are a few percentage points added by price pricing increases in the range of 5%, I'd say.
Further price increases, I think we try to follow what's happening in the market on the underlying cost side. Right now we're not planning to do it, but it's we know that there's also pretty high cost inflation pressure. We're gonna continue to follow what's happening. If we need to, we'll do the best to push for the price increases.
Thank you so much. That's all from me. Have a great summer.
Thank you. Thank you.
Thank you. Your next question comes from Viktor Högberg from Danske Bank. Please go ahead.
Good morning. Most of the questions already asked, just trying to dig into some of it. In terms of the gross margin, and it's a follow on the previous question, how much of the work you've done on pricing did come through here in Q2? You said you expected to reach above 63% over time. What kind of magnitude in Q3 and Q4, if you could help us? Anywhere on that would be perfect.
Yeah. Just summarizing what we already said then. We've been going from when we started out, we were around 61%, I think, in bottoming out around 61%, and now we're at 62.2. We say that when everything is normalized, we're gonna be above 63. In that sense, I guess we're about halfway there in terms of price increases.
If we were to see more cost increases on the component side, of course, we need to do further price increases as well, b ut I think I'm gonna stop there since we do have various discussions going on, we don't wanna be too open here. About halfway there and about 63% is sort of the target towards the end of the year.
Okay, great. Thank you. I get that it's an uncertain environment, and you don't really know the availability for the full quarter in terms of components and delivery capacity. What we take here is expect a gradual improvement in delivery capacity over Q2 and Q3. I assume tangibly better situation in Q4. Is that what you see o r would you be more uncertain about Q4 delivery capacity as well?
I guess if you were to go back and listen to the last four quarterly calls, we've always been positive if we just wait one or two quarters more. That's been sort of the story all the way. This problem has just been pushing forward, and it's not only us, it's the whole industry, right?
Given what we know right now, we believe that Q3 will probably be a little bit better, and Q4 should be better than Q3. It should be moving in that direction. As we said before, it's super difficult to know what's gonna happen. There could be things happening that changes everything. With what we know right now, yes, that's the way it seems.
Okay. Thank you. Also just last question, and this has been asked in a different way, but with your discussions with customers, it seems that underlying demand is not a problem, b ut in the near term, given comps, PMIs coming down, you have had some historical correlation with that, at least to some extent, even with a broader product suite.
But are you getting any signals from your customers for the 2023 orders? Is that just too far out to be discussing today o r what are you picking up in terms of 2023 and 2024 demand? Might be too long or too far out.
I think maybe I'll start here, Joakim, but my view is that on some markets like Japan, they are very keen on placing very long-term orders. On most other markets, actually, we are also trying to refrain from taking too many orders long-term. In Japan, I see that that's. We see a lot of activities that they want to place 2023 orders. Most other markets, we try to say, "Please wait, we are not ready for it yet," because we are not sure about the price level for 2023. We wanna, if we can hold that for a little bit, it'd be helpful.
Okay.
Joakim, do you have any thoughts to complement that?
No, I agree with that, absolutely.
Thank you.
Thank you. Your next question comes from Julia Utbult from SEB. Please go ahead.
Hi, Staffan and Joakim. Thanks for taking my question. Could you please give us some flavor on the dynamics between increasing the software concentration and the EBIT margin?
I'm not sure I get the question. Joakim Gunell, did you get the question?
Yeah, I get it. I can take it. Okay. Obviously, building the software penetration will improve the margin since we are facing close to a 100% gross margin.
It's still a small part of the overall business. We have about 5% being software on the overall. Out of that 5%, maybe half or a bit less than half would be software as a service type of revenues. Staffan Dahlström presented that we're now releasing the Snap Analytics. This is still a very small product, and we're talking a couple of million Swedish Krona.
Of course, we're positive and think that will grow, but it will take quite a bit of time for having the organic impact that will have. The organic growth that will give a big impact on the EBIT margin. I think we talk like tenths of a percentage or something like that that will build up in line with that growth.
I think the real if we're to get a bigger tailwind, that we were to make an acquisition, I think that would be more software-heavy. Otherwise, it will take some time to build that. I don't know if that was helping you or not, but that's the way we see it.
Yes. Yes. Thank you. Yes. That was very helpful. What would you think that the main drivers for customers would be to leave the software versions that are free for taking the new software solution?
I think what we do is, on the Ewon side, we're constantly working to make this pro offering, as we call it. It's the same as, like, Spotify. You can use the free version. If you want to get some features, use the pro version, you get some more features. We're trying to make it more attractive by adding features, and that we've been working on also with the acquisition or the part-ownership we did with Connectitude in December last year.
Then on the Snap Analytics side, we have a new product that's we think the value proposition is excellent, and now we're just gonna get the customers to understand how good it is so that they choose to buy this product.
I think that's a continuous improvement of course for the business and business development. I guess those two things are probably the main things that we're doing at the moment.
Great. Thank you very much.
Thank you. That concludes our question- and- answer session. I would like to turn the conference back to our hosts for some closing remarks.
Thank you. Thanks everybody for joining this quarter two call, and thanks for good questions. We are super happy that you are so interested and follow us. We will take a couple of weeks vacation now and be back in August.
Look forward to keep on working with challenges in quarter three on components. I think we also can relax a couple of weeks here because things are going in the right direction, we feel, and it's a stable business also going forward. Thanks, everybody, and thanks Joakim. Thanks for being part of this call, everybody, and we wish you a very nice summer. Goodbye.
Thank you. That concludes our conference for today. You may now disconnect your lines.