Okay, thank you everyone for joining today's Advantech first quarter 2024 results call. My name is Shane. I'm the Coverage Analyst for Advantech at Daiwa Capital Markets. Today, it's our honor to have Eric Chen, President of General Management; Linda Tsai, President of the Intelligent Systems Sector; and Grace Liao, the Senior IR Manager to discuss the first quarter results and also the business outlook with us. Grace will walk us through the first quarter financial results first, and then after that, Eric will provide some business updates for us, and then we will open the Q&A session from the floor. So without further ado, I will hand it over to Grace. Grace, please go ahead. Thank you.
Thank you, Shane. Good morning and good afternoon, ladies and gentlemen. Thank you for your time today. This is Grace Liao, the Senior IR Manager of Advantech. For Q1 financial results, please see the table here. Q1 revenue reached TWD 13.9 billion, declined 20% year-over-year, and dropped 8% quarter-over-quarter. Gross margin rate reached 40.0%, maintained historical high level. Operating profit was TWD 1.9 billion, with operating profit rate reported 13.8%, decreased from 20.1% in Q1 first quarter last year, mainly impacted by low utilization rate and high expenses rate resulting from revenue scale down. For non-operating items, FX gain in Q1 around TWD 172 million, Q1 effective tax rate was 17.9%. Net income reached TWD 1.99 billion, declined 33% year-over-year.
Earnings per share in Q1 2024 was NT$2.32 NT dollar, both Q1 revenue and gross profit rate in line with the company guidance. However, Q1 operating profit rate was slightly lower than expectation. Okay. For regional performance, in terms of the U.S. dollar, first quarter 2024 revenue reached $443 million , declined 22% year-on-year. For regional performance, most regions suffered from double-digit decline. Only Taiwan markets outperformed with 9% year-on-year growth, benefiting from sports lottery projects in Taiwan. For the major three markets, both North America and the European markets were double-digit declined year-on-year due to weak demand. China market dropped 6% year-on-year, indicating the downtrend is decelerating since the demands in transportation and also semi-equipment have slowly picked up. For the SBG performance, all segments experienced double-digit decline due to weak demand.
For the major two BU, including Industrial IoT and also Embedded IoT, year-on-year declined 19% and also 30% respectively. Service IoT dropped 13% year-on-year due to weak demand in smart city services and also iMobile projects. For the balance sheets, this is also my last page. For the balance sheets, as you can see, cash and the cash equivalents account for 33% of the total assets. We are quite sufficient in the working capital, and also we continuously control over inventory. As you can see in the dollar amount, our inventory accounts for, like, 14% of the total assets, down from 19% in Q1 2023. However, inventory turnover days maintained 106 days due to revenue scale down. Now I'm handing over the time to President Eric Chen to share the overall business and also outlook of the second quarter this year. Thank you.
Hello, good morning, and good afternoon, everyone. Welcome to the conference today. I am Eric, and I would like to comment on the first quarter results, then the second quarter guidance. In the first quarter, we experienced low BB ratios that started in 2023, which resulted in a predictable drop in our top line. Our operating profit declined 45% year-on-year and 29% substantially. This was mainly due to the low utilization rate and the surplus material selling in February, which impacted the monthly GP performance by 2.5%. As for regional performers, the U.S. and the European market, best industrial markets slowed down, resulting in significant decline in demand. China market gradually rebounded, with a BB ratio of 1.0 and a single-digit decline in the first quarter.
From the product perspective, we encountered weak demand in different sectors, including factory automation in China, gaming in Europe, retail, and the low season of the DMS project. IIoT, ACG, and SIoT declined 19%, 15%, and 16% respectively. IIoT and ICG declined by 30% and 27% due to high base periods. Gross margins were on track. The lower utilization rate in quarter one due to the Chinese New Year has passed, and we expect the gross margin to maintain stable in the upcoming season. As revenue dropped by 20% and expense increased slightly, quarter one earnings per share was TWD 2.32, with a 33% decline year-on-year and a 13% decline substantially. Let's move on to the BB ratios. Let's look at the BB ratio trend across different regions. As you can see on the page, the BB ratios are below 0.9 throughout 2023.
In 2024, quarter one, it was 0.97. The U.S. and the European regions rebounded to 0.91 and 0.97 respectively, and the China region up to 1.0s. The booking amount has slightly increased for three consecutive quarters, from $386 million in quarter three last year to $426 million this year, quarter one. The BB ratio in Taiwan and Korea also risen to above one. Next page, please, now. Looking ahead, to the second quarter, even though the bookings in quarter one have slightly increased, the demands for the U.S. and European markets still do not show a strong rebound. Therefore, we anticipate the revenue for the second quarter to be between $435 million and $455 million, based on the exchange rate assumption of $1 U.S. dollar to TWD 32.
Regarding margins, the second quarter gross margin is expected to be between 39% and 41%, while the operating margin is forecast to be between 14% and 16%. This concludes all my comments, and thank you for your attention.
This is the presentation for the first quarter and also second quarter guidance. Now I'm handing over the time to Shane. Thank you.
Kate, sure. Thank you very much, Eric and Grace. It's now Q&A session. Management has prepared several questions for investors beforehand. Firstly, we will go through those questions first and then open the floor for the online participants to raise questions later. So for the first questions, related to the financials and outlook. The very beginning of the first question is, most investors would like to know about the outlook for the second quarter of this year and also the entire year in 2024. Could Eric provide some color about which end customers or the industry or even application could show the strongest end demand recovery? Thank you.
Okay. Thank you for the second quarter guidance, which I mentioned earlier. Consolidated revenue will be between $435 million and $455 million. And the gross margin is between 39%-41%, and the operating margin is between 14%-16%. As for the full-year guidance, we do not have specific figures to release at this moment. Our internal goal is still to maintain positive growth this year. And regarding the end demands, each region is experiencing different situations. In the U.S., the gaming sectors and the video streaming sectors remain strong. And in China, the transportation sector rose prominently. Meanwhile, semiconductor demands have rebounded in Korea and Taiwan after hitting a low point. So this is my guidance regarding the quarter two. And for full-year guidance, sorry, we don't have a specific number to release at this moment.
Thank you, Eric. Very clear. So, for the second questions about the financial and outlook, investors were also keen to know, when will the BB ratio return 1.1 and, any more meaningful change in BB ratio in terms of the region over the past three months?
Okay. It's a challenge to pinpoint when the BB ratios return to 1.1. We eagerly anticipate this happening in quarter three, again, in quarter three, but it still has many uncertainties. The BB ratio in the past three quarters shows an uptrend. Also, the booking amount increased quarter by quarter from $386 million in quarter three to $426 million in quarter one this year. Furthermore, the BB ratio in China, Taiwan, and Korea has surplus of 1.0, indicating a promising outlook. We foresee these three regions as the key drivers of positive growth for us this year. And for the U.S. and for the Europeans, we are not foresee the BB ratio will return to 1.1 in quarter three, in quarter two of quarter three. Yeah. This is my answer.
Thank you, Eric. So for the third questions, investors also would like to note about, is there any plan for Advantech to adjust the selling price in 2024? Besides, how should investors think of the gross margins and also operating margin trend in the following quarters? Any, like, positive or the negative factors to impact the profitabilities ahead? Thank you.
Okay. Thank you. Thank you, Dr. Chen. The gross profit performance is influenced by various factors, including the selling price, operational efficiency, and raw material costs and the product mix. In terms of selling price, we encountered a strong price competition in China Chinese local market, which led to a 2.0 percentage point decline in selling price. In other regions, there have no significant change. As for the operational efficiency, we just consolidated the Taiwan Donghu plant into the income. And now the production lines in Taiwan are centralized in one location, which will positively impact our production cost. And for the raw material, internal data shows we gained 1.9 percentage point in cost saving in quarter one. Also, for the product mix, it's a key factor in terms of gross margins.
In the first half, IoT performance is expected to be better than EIoT, which will bring us a positive result as well. Considering the overall positive and negative factor, our gross margin performance has a great chance to maintain at 40% this year. Yeah.
Thank you, Eric. Could you also add a bit on the operating margin trend if we have stable gross margin trend in this year?
I think for the OP margin trend, it's still sticking to the 14%-16% for this year. Yeah.
Thank you. So for the last questions, which related to the financial and long-term outlook, investors also would like to know about the potential capacity expansion plan in 2024 and 2025 and the current capacity in each region, including Taiwan, China, and also Japan.
Okay. Advantech currently has 23 SMT production lines, 11 in China, 11 in Taiwan, and 4 in Japan. Due to the decline in demand, the utilization rate in China is around 70%. In Taiwan, it's about 90%. And in Japan, it's a little bit higher, around 93%. For the CapEx in 2024 to 2025, we are currently working on two main projects. The first is the North America head office in Southern California, which is expected to be complete in quarter three of 2026. The total construction fee is around $75 million. The second project is the second manufacturing center in Taiwan Linkou campus, which is expected to be launched in quarter two of 2028. The total construction fee is around $100 million.
Therefore, the total CapEx will be around $80 million annually from 2024 to 2025, including the construction fees for two buildings and some production lines and R&D equipment upgrades. This is our CapEx plan for the year 2024 and 2025.
Okay. Thank you, Eric. Very clear. That will conclude for the first part of the financial and the outlook questions. We will jump into the regional business unit or the subsegment business units questions. So for the first question is that investors also would like to know about the current market in China. Could management provide us some colors about the current competition landscape in China? As Eric just mentioned that we are actually seeing some more fierce competition in China. What will be the impact from the consumption downgrade trend in China? And can we have some more colors on the industrial IoT segment? Thank you.
Thank you, Shane. This is Linda. I'm the president of Industrial IoT. Regarding this question for China, this year, 2024, we have not observed a significant market rebound in China. But however, there are signs of stable demand showing no further decline. Despite this, our channel partner and OEM, they are hesitant to increase the stock level and actually prefer the shorter lead time instead. So for Advantech, we will be preparing some buffer stock for China-focused products to support the rush order. And the competition, the competition for China continues to be very intensive, especially within the energy sector and industrial equipment for electronic devices, EV batteries, and solar, where the Chinese local vendors, especially Chinese local vendors, are trying to get more market share from Advantech. Nevertheless, I believe Advantech brand recognition and quality are highly appreciated in some industries, especially mission-critical applications, like healthcare and semiconductor equipment.
Some of the OEMs from China, they are eager to develop the overseas market. I believe that provides Advantech a very distinct advantage over local competitors. Indeed, the price pressure may be very high, both for the supply validation from Advantech and also we have the global network. I believe that we can gain some more favor on the margin-wise. In addition, because the Chinese market is quite different than the rest of the world, they have really unique characteristics compared to other regions in terms of the product requirements, not just for China-made silicon, also for any other, like, what we know for the Intel or the ARM or AMD products. So Advantech still continues to implement the China-for-China product strategy for both general-purpose industrial applications and for specific vertical market applications.
For industrial IoT, in addition to what I mentioned about the price competition, market competition for energy and industrial, and for the transportation sector, as Eric mentioned previously, after COVID, after the pandemic, for transportation investment, especially on the road for those that they leverage a lot of edge AI technology and try to do the advancement for intelligent vehicle collaborative systems, we see the demand is increasing. I believe this is because it's that the need and also the technology is getting mature from local silicon vendors, like Huawei, or from NVIDIA. Advantech is, collaborating closely with a tier-one AI accelerator provider to provide the tailor-made product solution for those increasing needs, especially for transportation.
Here's a sharing of what we observe of the market demand for China and the competition and how we do to work with our partners no matter on the AI, on the industrial IoT, transportation-wise. Yeah. Here's my feedback.
Thank you, Linda. Very clear. And then we will jump to the next questions. So for the second questions about the region, do you mainly to the high inflations and the potential longer than expected for the interest, interest rate cut from the U.S. Fed? What will be the current demand from Europe and U.S.? As Eric just mentioned, for the first quarter, actually, we are seeing the revenue from Europe and the U.S. actually are still in the double-digit decline. Do we can we see a slightly better demand from for the following quarters? Thank you.
In both North America and Europe, the quarter one is not doing well. BB ratio below 1. The primary revenue contribution in these two major regions are large key accounts who are really, in the past, providing a longer visibility of the purchase order. This year, of course, we benefit slightly from medical equipment and gaming and gambling, which grew a lot from last year, like, till the end of the year. But in the quarter one and also the end of the year, we expect to be flat. Especially on the gaming, some of the regulation changed in some of the European countries. So some of our gaming and gambling customers put their shipment plans on hold and wait until the better clear policy to be released. So for U.S. and Europe, some of the customers, especially big OEMs, still have some inventory to consume.
The situation is a little bit different than China. So we believe that, in U.S. and Europe, we might have to still wait until, like, quarter two and three for some of our major OEM customers in medical and some of the big OEMs to consume their stock. But on the other hand, as we mentioned, on the semiconductor equipment, it's getting rebound in Taiwan and Korea. But again, in U.S. and Europe, we also see that the increasing, even not the big rebound, but gradually increasing quarter-over-quarter, and with the expectation for a strong rebound in quarter four and 2024 in these two major key regions, especially in the semiconductor industry. And as for the SIOT, SIOT focuses on the retail, healthcare, and hospital, also logistics.
Most of the customers in this sector are also the large key accounts, not the small, like, general customer or channel. So for the USA, the key accounts are still slow due to the existing stock issue. So I think in the USA for SIOT, we might have to wait until a little bit late, until quarter four, like, to get the shipment to take in with a really, like, increasing rate. But for most of the project base, we actually monitor on the design win status. So in the USA, the design win still is going very well. In Europe, the healthcare and for SIOT, we expect that's slightly better than quarter one. But compared to last year, YOY may still face some of the low double-digit decline. Yeah. So here's the feedback and some colors for the SIOT and the overall update for USA and Europe.
Thank you, Linda. So for the third questions, investors would know that Advantech collaborates with Qualcomm in the embedded business, especially in the edge computing, for the semiconductors or the EV areas. Investors are keen to know, could management provide some thoughts on the company strategies or the business plan, within the edge computing, from the industrial side? Thank you.
Okay. This is Eric speaking. Let me try to answer these questions. The collaboration with Qualcomm in manufacturing aspects. Firstly, it's a technical collaboration, which includes Qualcomm edge AI, edge computing, and wireless connectivity technologies. The second is the product collaboration. Advantech will integrate Qualcomm technology solutions into our embedded AI modules, AI functional boards, and edge AI systems. Lastly, there's a collaboration in application fields, especially in medical, industrial automation, robotics, and retail. I think the partnership with both parties aims to drive continuous innovation and expansion in edge AI devices for the whole AIoT industry. So this is why we cooperate with Qualcomm in the embedded business.
Okay. Thank you, Eric. So for the fourth questions, from this subsegment, investors also would like to know, for the emerging market, the momentum seems to be a bit slowed down. Could the management comment on the current order visibilities or the vertical opportunities?
Thank you. This is Linda again. For the emerging market opportunity, I would like to share the two portions. One is about the green business. One is about the Edge AI. For the green business, we are talking about the green business from the EV card and the ESG. So while the sales of the EV card in the major countries appear to be slowing down in 2024 compared to strong growth in 2023, some of our clients remain committed to global expansion efforts for the EV battery factory, especially for our customers in China and in Korea. And so EV battery and energy storage were still the very emerging market, and we see the growing trend, growth rate from us.
Given the design-in cycle typically takes six to 12 months, so the visibility of the order depends on our customer validation, readiness, installation schedule, and sometimes related to the regulation in each country and also some of the benefits, like from their government. So we are already receiving some of the orders for the EV battery factory in North America, Europe, and Asia, South Asia, and primarily from the customers in South Korea and China. And in addition, for the energy storage, the design win we have for the global tier-one battery energy storage manufacturer, where we design win in 2023, but now we have secured some different orders that will extend through the quarter three of 2024. So that will be the emerging market update for the green business-related application. The other one is for the Edge AI.
Edge AI is where it could happen in different verticals and is the emerging market with the growth potential. And we do find the increasing inquiry from vision-guided robots, traffic management, healthcare, safety, and security, and of course, smart manufacturing. And the individual project size may not always be substantial, but project inquiries are more than 40% growth compared to last year. This is because of our close collaboration with ecosystem partners, including NVIDIA, Qualcomm, and China maker, Huawei, and also very important is the global AI software partner. And they specialize in different vertical applications. So in addition to the Edge AI, within Advantech, we also integrate GenAI into Advantech-wide software solutions. And in the past, we only provide users with visualized dashboards. But GenAI now empowers the user to pose a specific inquiry and tailor-made to their requirements. So we plan to launch GenAI in June.
So, for the emerging market in GenAI, because this is very fragmented in different verticals, and it might take longer time to ring up because it's difficult to duplicate from one application to the other application. But this is definitely a growing trend that we are working on. Yeah. So here's the update and sharing for the emerging market and some of the solutions and the go-to-market strategy we have. Thank you.
Thank you, Linda. Very clear. Then we will jump into the third sections of the questions, the longer-term strategy and development. I think some of the investors also keen to know are keen to know the current updates on the new M&A plan this year. And especially when the management just released the new acquisition of Aures Technologies last Friday, could management provide some updates on this acquisition? Thank you.
Thank you, Chen. This is Grace speaking. I think question 3.1 including two parts. First of all, our M&A plan this year? Well, actually, Advantech, in the past 20 years, we enjoyed top-line CAGR about 10%. This is mainly driven by organic growth. Going forward, not only this year but also till 2030, we try to reach our 2030 goal in the future. So we hope in the future, our growth, our future growth will come from new engines, including organic growth and also M&A. Therefore, Advantech's, our investment regime would be, like, a value creation rather than rather than pure financial investment. So, we try to maximize the synergy between Advantech and also the counterparts, so including maybe in technical-wise or product-line-wise or region or channel partners. So we try to maximize the synergy for the all parties. That is our M&A going forward.
And second part, for the Aures acquisition, we just announced, the acquisition of Aures, in last Friday after the board approval. So, I will share more details about this case. First of all, Aures is a franchising company and also a global leading brand in POS and the kiosk industry. So, Aures also established a very strong presence for the POS equipment in Europe, Australia, and also the United States. And this acquisition deal aligns with our corporate strategy, sector-driven. So, in the strategic purpose, we aim to strengthen Advantech's global coverage in smart retail and also ICT services sector. So the collaboration of Advantech and also Aures A+A multi-brand holds a very promising synergy and also results in a win-win situation. We're targeting for a top 10 iRetail branding globally and aiming in the long term, aiming to the top five in the future.
So the deal structure is like this. Part one, we will acquire Aures shares through transactions with the major shares, including founder, and also public tender offer at a pricing per share not exceeds EUR 6.7 and up to 100% shares. And for the second part, we will subscribe Aures convertible bonds, total EUR 5 billion to support its working capital as Aures will be independent, operate in the future. So the deal will be based on Advantech's own capital. We have no funding plan accordingly in the future. So that's my answer for the question 3.1. Thank you.
Thank you, Grace. Very clear. So for the last questions, 3.2, investors would like to know, have management seen rising demand from the industrial platforms, i.e., WISE- IoT and Edge AI recently? Could management share some updates on the contributions from these two sectors? Thank you.
Okay. Thank you for the questions. Over the past three months, there has been an uptrend demand for WISE- IoT, especially for IEM and iFactory solutions. Most customers and use cases are in China, Taiwan, and SM regions. Revenue in the WISE- IoT has grown by 16% year year to month. Yeah, 16% year to month. Regarding the edge AI platforms, Intel and AMD AI solutions are widely adapted in IIoT, EIoT, and SIoT products. For the NVIDIA solutions, there will be many delivered by IIoT and ICVG, SVG. For other AI solution partners such as Qualcomm, Huawei, NXP, etc., EIoT will be the primary partner in introducing those AI solutions to our embedded board, embedded modules, and embedded systems. For the sector performance for the edge AI performance, it's around 80%, accounts for our 4% of our total revenue.
And the CAGRs for the Edge AI is around 30%-36%, for the past three years. So, we do foresee the Edge AI demand at booming, in the past three years. So this is my update, regarding the WISE IoT, also the Edge AI adoption. Thank you.
Thank you, Eric. So, we have finished the first prepared questions. Then now we will go into the second part of the Q&A sessions. For the participants, investors who want to ask questions, please use the raise hand button. Please wait for your name to be announced, and then unmute yourself directly and ask questions. Alternatively, you can write the questions in the chat box and send to me. We will go through that shortly. Thank you. So while we are still waiting for our first questions from the floor, I have a question for Linda. When Linda, you mentioned that we, Advantech actually started preparing some China to China products. I wonder if you could provide us some colors on the current selling price for Advantech with the local price. So if the gap is actually shrinking, especially when we are using the Chinese semiconductors.
Yeah. Thank you for the question. So when we say China for China, the product, of course, one is the product we design with the Chinese silicon. But I have to say for this kind of the demand of China silicon is driven by, you know, their government, maybe on the military, network secure some infra. But the demand is not increasing as much as we expected. But on the other hand, we're more based on the competition on the regular product we have, no matter designed with Intel, AMD, or ARM. So that is the one. So for those, the China for China product, that because some of the product requirement or the I/O is quite different than global product. So we are defining some China SKU with the just enough feature to fit the customer.
Of course, there's still a gap even though it's China for China because what we're competing is really, like, to China maker. It's not that what we know as the Taiwanese IPC vendor that, like, ADLINK AAEON because China's price is getting very competitive. The price gap, indeed is high, maybe like 10%-15% compared to Advantech. So what we are doing is that we are not just going, not just, like, compete the customer, compete with them with the price. We also, like, do some other action of some of the, like, transfer some of the production line from Taiwan to China or provide some of the most cost, cost-effective solutions. So on some of the key customer, the big customer, the ASP in China could be reduced. But we only, go for the selective strategic key account for less competition.
For our flow business of the channel, the general account, because the service we provide, and I believe our margin is a little bit degraded but still not too much. So in general, in China, the margin is lower than what we had in the past but not too much because it's only to the selective key account. Yeah.
Thank you, Linda. So I think we haven't received other questions from the floor. I have a follow-up, another question for Eric. Eric, I heard from you saying about there's other like leading indicators for instead of the BB ratio, which is a design win and the design-in, the ratio between the design-in and the design win. Could you provide us some of these statistics for us to get a view about the current demand globally? Thank you.
Yeah. Yes. We actually have an indicator called design win and design in, especially for we have another indicator called net new design win, which means the new customers, and the new project. It's called net new design win. According to our president, our country head in the USA feedback, we have almost $170 million design win this year. And plus last year, we have almost $300 million design in and design win projects. So this is quite optimistic about next year's performance for the US. This is for the U.S. situations. And for the Europeans, the current design in and design win indicator is not so strong. It's a little bit slack compared with last year. So this is what I can tell for these indicators. So this is quite important because normally in Advantech, each project will last for around three years.
The design win and design in indicators can, for sure, our further growth, at least for the two or three years. Yeah.
Thank you, Eric. I have a follow-up on the BB ratio. So actually, we could see from the past two to three quarters, actually, we are seeing the sequential growth on the BB ratio from 0.8 to current 0.97. I wondered if the BB rate, the rising trend is actually driven mainly by the lower shipments or how should we interpret the sequential growth for the BB ratio? Could we interpret it as, going in the next few quarters, actually, we could see the better revenue momentum in the following quarters? Thank you.
Yeah. Not really because if you look at the booking amount from the third quarter last year is around $386 million. But for this year, quarter one is up to $428 million. So from the booking amount point of view, it's still in the uptrend. Yeah.
Thank you, Eric. And again, so if you want to ask questions for the participant investors, please use the raise hand button. Please wait for your name to be announced, and then unmute yourself and ask questions. Alternatively, you can write down your questions and send it through the chat box for me. I will help to go through the questions for you. I wonder if there's any questions from the floor. If no, then before we conclude the call, I wonder, Eric, do you have any closing remark for the investors?
Yes. This is Eric speaking. We did not perform quite well yet in the first quarter. Also, for the outlook of the second quarter, the guidance still in the low; it's still in a low rate. So but for the long run, I think Advantech has ongoing the sector-driven project. We are trying to trend actually make the transformation from the product-driven company to a sector-driven company. And right now, we have started try around in the automation sector and the design in sectors worldwide. So maybe for another two or three quarters, we can foresee the key result after this key transformation from Advantech. So please be patient. Yeah.
Thank you, Eric. I think we will finish all the questions for today. Thanks for everyone's participation. I will conclude the call here. Thank you, everyone, for.