Welcome to Advantech's first quarter 2022 earnings call. My name is Derrick Yang, Tech Analyst at Morgan Stanley. It's our honor to host the call with the senior management from Advantech. Joining us today, we have the CFO and President of General Management, Eric Chen; President of Industrial IoT, Linda Tsai; and IR Manager, Grace Liao. Without further ado, let me pass the call to the management team for the briefing.
Thank you, Derrick Yang. Good morning and good afternoon, ladies and gentlemen. Thank you for your time today. This is Grace Liao, the IR Manager of Advantech. Let me share the screen right now. Please see the agenda today. In the beginning, I will give 10 minutes briefing regarding our first quarter financial results and second quarter guidance, and leave around 40 minutes for Q&A section. Meanwhile, Mr. Eric Chen would like to express his sincere apology that he's not feeling well today and also lost his voice. He will join us on air during the conference. However, Linda and I will answer the questions from investors. Thank you for your understanding. As usual, please see the safe harbor notice. For Q1 financial results, both top line and bottom line performance set company's new records.
Q1 revenue reached TWD 16.1 billion, increased 22% year-over-year. Gross margin rate was 38.2%, slightly improved quarter-over-quarter basis, also shows strong defense force in GP side. Operating profit was TWD 3 billion, increased 32% year-over-year. For non-op items, Advantech books TWD 129 million for FX gain in Q1. Effective tax rate was 18.99%. Net income reached TWD 2.57 billion, increased 34% year-over-year and 13% quarter-over-quarter. Earnings per share in Q1 was TWD 3.32 . For regional performance in terms of a US dollar, Q1 2022 revenue reached $578 million, increased 25% year-over-year. Almost all regions enjoyed double-digit growth compared to the same period last year.
Both North America and the Europe market enjoy over 30% year-on-year growth in Q1. Other Asia and Intercontinental market overall increased 50% year-on-year. Both EMEA and the India market were the best performers with 89% and a 74% year-on-year growth respectively due to major projects contribution. For SBG performance, the Industrial IoT is the biggest BU, accounts for over 31% of our total revenue. However, Q1 revenue growth lower than average due to high base last year. Embedded IoT increased 27% year-on-year, driven by strong demand in medical projects and the gaming sector back to growth. Applied Computing Group, ACG, increased 86% year-on-year, mainly due to contribution of our medical projects and a low base last year.
Service-IoT increased 66% year-over-year, driven by major breakthrough in iHealthcare, ICT, and iMobile solutions. For balance sheet, debt ratio reached 42% due to dividend payable, increase in current liability in Q1. Inventory levels set new company records due to component shortage. However, high-risk inventory, HRI, remain low. We will keep monitoring the inventory structure in the following quarters. For the booking to shipping ratio, historically is in the level of 1.1. In Q1 2022, BB ratio reached 1.36, which is lower than the level of last year. The overall delivery lead time was gradually reduced. For Q2 financial guidance, based on the FX assumption of $1 to TWD 28.9 , Q2 revenue guidance is in the range of TWD 530 million-TWD 550 million.
Gross margin is in the range of 36.5%-38.5%. Operating margin is in the range of 16%-18%. This is all my presentation, and now hand over to Derrick. Thank you.
Yeah, thanks. Thanks, Grace. Now, we will start the Q&A session. If you wish to ask questions, please type in the question at the text box in the bottom of the screen, and I will read out the questions for management to comment on.
Derrick, thank you.
Yeah, so while we're waiting for questions to come again, I think we have already gathered a few questions from investors previously. Maybe Grace will comment on those questions first.
Yeah, sure. Thank you. I will start answering the questions from 1.1, okay? The impact of a COVID control in China. I think the impact of a COVID control in China mainly has two aspects. The first is the limited production activities. Due to China authority didn't allow people to cross district movement, the production activity can perform by the labor who lives in our plant door only. Thus the industrial production value in Kunshan decreased around 70%, compared to the regular month's operations. Second is a logistics lockdown impact, which is more serious than the production activities. Until today, the transport either by air, by sea, or by truck is still not able to back to normal.
We can't deliver our finished goods to our customers on the promised schedule. Also, the supply of raw material also suspended. If the raw material does not enter our factories, there will be a risk of material shortage and also cause the production line to stop. As to the question of when Kunshan and Shanghai operations were back to normal. According to our local management team's feedback, the lockdown control will gradually ease in May. We expect in middle of May, our production capacity in Kunshan will back to around 50%-60%, and by end of May, it will be back to 100%. That would be the impact of China control.
Second question, the impact of Russia-Ukraine impact to Advantech business and also the demand of pan-Europe. Actually, the direct sales revenue from Russia and Ukraine only accounts for less than 1% of our total revenue last year, and also Q1 this year. Therefore, I think, in terms of sales and accounts receivable, the impact is relatively small. If we look at the European booking status in Q1, the BB ratio was aligned with our corporate average. We don't see any significant changes so far in pan-Europe demand. For long term, if the war continues, it will harm, like, several industries such as automobile and semiconductor, and also cause inflation in the future as well. That was the second question.
The third question is that the impact of weak NT dollar against US dollar and our impact to the revenue and the cost expenses. Well, Advantech is an international company with over 28 branch office around the world, so most of the subsidiaries are doing the business with local customer in terms of a local currency. For example, in China, all the receivable is in renminbi, and in Japan, mostly it's for Japanese Yen. As in Europe, most of the transaction are based on Euro dollar. Okay? In terms of revenue, US dollar accounts for around 55% of total sales income.
On the procurement side, since most of the high-value key components such as CPU, memory, and the flash is all bought and paid in US dollar, the US dollar accounts for 80% of the material cost. Okay? Though I am not able to give out specific numbers, but I can add more color on the impact of weak NT dollar. Internally, we do have the assumption that if NT dollar depreciation to 29 to $1 , it will bring a positive impact to our top line. However, operating expenses will also increase. Therefore, the overall operating margin will be negatively impact around 0.2%, roughly. Yeah. That would be the FX issue to the company.
For the fourth questions, maybe I can leave the component shortage issue to Linda to answer the question. Thank you.
This is Linda. Regarding the question of when do we expect the component shortage to ease?
From the market is that commercial product, consumer product, and we see the demand for the consumer product is slowing down. Even though at this moment on quarter two, we still quite facing some of the serious shortage for some of the component. We do expect, and we hope, the component shortage should get improved by the end of the year, but may not really resolve all the shortage we have. On quarter four, I think with the end of the year, maybe there'll be some improvement, and definitely for next year. At this moment, since the beginning of the year till now and at the end of quarter two, we suffer the severe shortage still mainly on the power related of the component because those component, the manufacturing process are still to the old one.
The wafer allocation for our primary supplier is last. I think the power component-wise will be the one we face a shortage the most. Secondly, some of the Ethernet controller, especially Advantech is almost by more than 90% Intel-based product. We also have the severe shortage on some of the Intel product line, especially on the Ethernet controller. That is the feedback to the question we have on the 1.4 on the component shortage.
Thank you, Linda. We continue to the 2.1.
Okay
The key developments and outlook for SBU. I will also leave the question to Linda. Thank you.
Right. Advantech is the Industrial IoT product, our key development for the product team is still very similar like we would do is that for the coming years, we look at the growth market in semicon, in infrastructure, and some of the medical, that way we focus, also for logistics. Our key development is still develop those vertical-focused product. That's for one. Second is wireless technology is crucial. In the coming quarter, we will invest more our development in product design on the wireless related module and device for the connectivity for the IoT. The third is the key development for Advantech, again, is our solution business on software.
Gathering the resource we have in engineering team on the software and our regional sales force, so this will be the third our key development for product division team. From the past quarter, one to two, because of component shortage, some of our engineering has been spent time doing the redesign, in order like to resolve the component shortage issue. I think this we're getting less in the coming quarter. We will back into the key focus that I just shared previously on the IoT product on our vertical focus market. Regarding the RBU, which mean our regional sales force, for Advantech, that we are designing for the business for the coming one or two, even three years.
The end demand still remain very strong that we're with share on semicon market and on infrastructure, on energy-wise because of the demand for the ESG, and also the online for the logistics, the warehouse. The demand from those is still very strong, so our regional sales force team are working on those design opportunity for the focus market. The order momentum is quite strong on the BB ratio, even quarter one BB ratio 1.3 is slightly lower than last year. Compared to the historical BB ratio we have, it still remain at very high order momentum. Yeah. Continue to the next question regarding the policy and the momentum in China. Is Advantech rethinking the production and base strategy in the next two year?
I think for the production strategy, Advantech had a production facility in Taiwan, China, and also in Japan, and this is still remain no change. Due to Advantech product is a diversified product line on the volume scale-wise is not that as much as those like contract manufacturing. We have no plan to do the expand the production outside of China, Taiwan and Japan. On the other hand, that we do invest on the system integration, the last mile integration production capacity in all our regional office.
Which means that in Taiwan, China, and Japan, we build the board and the enclosure, the key component modules, and we will ship to our regional sales office, and they will have an integration center to do the last mile integration so that we can provide a diversified product to the needs of different customers. For the business strategy-wise, in China, in the past two years already, we already developed a lot of the China silicon product line to fulfill the need from the local market. So I think that is the one additional investment in addition to the current portfolio we have. We designed the products effectively specifically for China market. Yeah. Regarding the production, again, I want to share that in Taiwan and China, actually our production volume and dollar are quite equal.
Three years ago, due to China and U.S. trade war, because there are 25% of import tax if the product made from China. At that time, we already have the flexibility to move some of the product line from China to Taiwan. At this moment, as the previous question mentioned about the lockdown in Kunshan, of course, the logistics-wise is very difficult. Some of the product we already have a dual production location in Taiwan and China. In the past month, some of the product we are able to upsize the production output because we are able to produce in Taiwan in addition to China. Here's the feedback for the question on the 2.1, 2.2, and 2.3.
Yes, indeed. Thank you, Linda. Actually, I think the flexibility and also customization of our production line is one of our strengths, and we are able to do the allocation, leveraging the capacity between Taiwan and China during this difficult time. Yeah. Thank you. I guess we'll continue to answering the operating and outlook questions. So 3.1, that inventory level is quite high right now. Your inventory management strategy. Well, indeed, I think inventory level is reached record high for sure, and for two reasons. One reason is that the key component shortage caused the production and also shipping is not smooth recently. Second reason is that the material cost last year was in uptrend.
As a result, we built about 20% excess quantity than demand for common parts. I think starting this year, 2022, due to the downtrend in the PC, notebook, and the mobile industry, we stopped building the existing material quantity and also decreased the safety stock in our ERP system. By doing so, we expect the inventory level at the end of this year gonna be the same as the level of last year. For next year, 2023, according to our COO, we had a goal to reduce our inventory DOH, days of inventory on hand, to ninety-five days within two digits. This is our internal targets for the inventory level.
I think right now it's quite high, but as I mentioned before, high risk inventory indicator is still low. I think the overall structure is quite healthy and this is for the short term impact from the component shortage. In the long term, for example, next year, our inventory level gonna gradually back to normal. Yeah, that's for the inventory management strategy. Well, maybe we can start answering the questions online and hand over the time to Derrick. Thank you.
Yeah, sure. Thanks, Grace and Linda. We have quite a few questions online. The first one is regarding your second quarter guidance. This is from multiple investors. The question is that your 2Q, the midpoint of your 2Q revenue guidance, is implying a 7% QoQ decline on the revenue side. Is that too conservative? Also a relevant question is that during the press release, you mentioned that there will be a 8%-10% of the revenue being pushed out from 2Q because of the component supply issue and also the COVID control measures in China. Could you give us a rough breakdown between these two factors regarding that 8%-10% of the impact on the top line?
Well, I will answer the question first, and maybe Linda can add up later. Okay. According to our original version, actually, I think our bookings on hand is very aggressive since last year. In booking points of view, I think is definitely a very positive year for Advantech this year. Our original plan gonna be grow quarter by quarter this year. Starting from Q3, with the component shortage gonna be revealed, I think there will be more aggressive, quote-unquote, order growth in the second half. However, in Q2, we do suffer from the impact of COVID control in China.
We are able to mitigate the impact through multiple ways and also flexibility to leveraging our capacity in the Taiwan and other region. I think there is a limited impact in Q2. However, the top line do suffer a little bit and the unfulfilled orders gonna be postponed in the following quarters this year. I think there gonna be some downward force in the bottom line both in gross margin and operating margin. I think the GP level and also OP level gonna within our guidance range. Yeah. Maybe Linda can add more information. Yeah. Thank you.
Yeah. I think on the quarter two, as mentioned, that component shortage is still remain the very challenging for us. I think the other one, COVID lockdown in China, even though we are able to ship some of the production to Taiwan, is still limited. On the quarter two, we were significantly impact by China because in our regional China market, we are not able to ship out. If you look at the lockdown impact for outside of China, because Advantech our logistics is that we ship out to our regional sales office. Actually in April, the impact for COVID lockdown in China is not really significantly impact to our other sales office like the USA, Japan, Korea, or Europe, other sales office because all those product already were shipped to there before lockdown.
We will see on quarter two, maybe in the coming 1-2 months, the USA, I mean, other country may slightly impact. Immediately in April, the China sales is impact immediately because in China is our production, also warehouse is there. Here, I think the portion of that, the aspect of the component shortage and the lockdown, I think on quarter two, the lockdown, I think is still like quite a significant impact to us and of course, component shortage as well. On the quarter three, because the lockdown, as Grace just mentioned, we expect our production will be back to maybe 30%-60% by the end of May. Our production will then upsize the production output, as soon as we could from end of May or to June, right?
To ensure that at least on the quarter three, the lockdown, the production, the lag behind will not that, move after to quarter three. Yeah.
Okay, thank you. A relevant question to this is that, could you give us a rough guidance regarding your 2022 full year revenue?
Well, first of all, actually, Advantech gives our official guidance on quarterly basis. Therefore, we don't have a full year official guidance to disclose. That's the first thing. However, according to the bookings on hand, actually it's very aggressive. The booking level is historically high right now. The visibility is like over three quarters to around one year because more and more clients are willing to confirm long-term orders. Therefore, I think again, 2022 is actually a very positive year for Advantech. I think the revenue will be in the low double digit of growth for this year. Maybe Linda can give us more color regarding the strong demand by sector or even by major markets.
Thank you.
Yeah. Since last year, because of component shortage, and actually a lot of customer already placed the order for the long lead time. If you would look at the BB ratio this year and the backlog we have till end of the year, I believe that this year, as Grace mentioned, that we are also expecting a low double-digit growth this year. Again, that the strong demand, as shared previously, that the industry from SEMICON, from medical, and also from the end of last year, the gaming industry is coming back. We talk about the energy, ESG wise, of course, on the EV car and in China, in Korea and Japan, the USA, and the EV car related, especially battery related, or the factory wise also are the strong demand to support all of that.
Our customer are waiting to place the order for the lead time that they expect. The booking this year, that so far the 1.3, 1.36 BB ratio, our customer expect that the growth on those market will still remain strong this year or early next year. The lead time right now because it's long, so our customer is placing the order, much earlier than before. Yeah.
Well, I think longer visibility definitely is a very positive to our, like, procurement management and also due to bargaining power with our suppliers. I think right now the BB ratio is slightly back to normal. I think for the long term, when component shortage is gonna be ease and more long-term and sustainable level for BB ratio is around 1.2-1.3 level. Yeah. I think that's for more long-term view for the BB ratio in the near future. Yeah. Thank you.
Okay, thank you. The next question is regarding your BB ratio. It says that in the first quarter, the BB ratio is about 1.3-1.4, while in last quarter it was about 1.7. What's your view on the BB ratio into 2Q and 3Q? Do you think it's an indication of a slower demand outlook, or it's because of a better order fulfillment rate?
Well, thank you. Regarding the BB ratio question, actually, I think, as I mentioned, historically, BB ratio is in the range of 1.1. Starting from last year, starting from Q1, I think the BB ratio is quite high due to the component shortage and also the component cost up. I think the high BB is not sustainable and comfortable level for the company because it means that the lead time to the customer is very, very long and is due to the severe impact from the supply side. Okay.
Given the very positive and the strong demand for the booking side from the major markets, actually, we think with the component side gonna be revealed starting from Q3, gradually starting from Q3 this year, I think the BB ratio gonna be maintained around this level, 1.3, around this level. We foresee next year, BB ratio gonna be more toward to the healthy level. Like I say, for long term, 1.2 or 1.3 level is a more healthy and sustainable level for the company, which means the delivery time is not so long, which is the win-win situation for both the customer and the company. Yeah.
Maybe Linda can add up, more like a backlog, observation from end markets. Yeah.
Right. Because right now lead time is long, so our customers are already aware of the lead time. I think this year the BB ratio will not be like too much, like too high or too low, will become stable. Again, we hope that we can deliver and shorten the lead time. I think that's the goal for Advantech. We are now like asking customers to place the order much earlier because the lead time is long. Now it's because material shortage. When the material shortage will be eased at the end of year or early next year, and our lead time will become normal, I think BB ratio will become, as Grace mentioned, like 1.2, 1.3. Even previously, we only have 1.1. Somehow it impacts the booking, but somehow impact is our lead time is long.
Our goal is to have the lead time back to normal, so we can fulfill customers sooner than needed.
Okay. Thank you. The next question is regarding your margin. It says that it seems that there are some changes of your gross profit margin range among different product segments in the first quarter. For example, both ACG and Cloud-IoT Group gross margin are higher than 2021 level, while the Service-IoT gross margin were lower versus 2021. Could you give us some color regarding this margin change?
Well, I can answer this question from my end, and also Linda can also help to add up more information. For gross margin up, I think, for ACG and the Cloud- IoT is the reason quite different. For ACG, I think, some of the revenues come from NRE and also prepaid revenue for the component price. I think this is one of the reason that the gross margin is higher than before.
For Cloud- IoT, I think the product mix within the Cloud- IoT within the BG is quite different because right now is under the component shortage and high margin products are shipping in the first, and low margin products are delayed. The product mix is quite changing within the Cloud- IoT compared to the previous time. Therefore, I think when the component shortage gonna ease in the second half, the Cloud- IoT gross margin gonna be slightly back to normal level. Yeah.
For the gross margin, which is a downtrend, for example, Service-IoT, I think because it enjoy very, very good revenue growth in the first quarter and some of the projects is in a slightly lower gross margin rate. Therefore, again, the product mix also impact the overall GP for Service-IoT. For the Advantech Service Plus, AS+, I think the gross margin declined because the raw material cost increased, therefore is a erosion for the GP for AS+. I think this is my answer to the gross margin changing by SBG. Maybe Linda can have a add on more information on your view. Thank you.
Okay. On the margin wise, on quality, some of the business group may be lower than last quarter. Mainly is on the product mix, because some of the quarter one for some of the team, they have ship out for maybe specific few customer with larger volume, where the profit could be higher or lower than average. Mainly it's because product mix. Again, for the Advantech, starting from I think last year till now, we have, like, increased our price twice due to the component increase. There's a time shift there because customer place order much earlier. Generally, when we do the price increase, we apply to the new PO. On the existing backlog may not be able to increase the price due to the contract.
On the margin, where Grace shared at the beginning is that in quarter one our margin is slightly higher than previous quarter. That is a sign that our price increase has been slowly applied to the new order taken or some of the new shipment already. Yeah.
Okay. Okay, thank you. The next question is more of a long-term one. It goes like, in the past decade, Advantech has been growing at around 10% CAGR, and what would be the driving force for the company to further accelerate the CAGR to, for example, 15%? What would be the key driver for that?
Well, yes, in the very long-term points of view, actually, Advantech's top line, historically, CAGR is around 10%. Going forward, sharing by Chairperson KC Liu himself and also Linda Tsai just mentioned that we will keep investing, the product integration and also like a wireless IoT technology as well. Therefore, we will keep enhance our R&D and also software capability in the future to grab on the AIoT big trend in the future. We do see lots of research institute like Gartner and also MarketsandMarkets says that there is a huge opportunity in the next five years regarding the AIoT big trend in the future, and also lots of IoT application gonna be coming up.
The opportunity gonna be heavily lying in, like, software platform and also solution domain knowledge, kind of SRP business. Therefore, we will start investing heavily in our R&D and the software and enhance our software capability. We foresee more software business solution-wise in the overall business mix. Therefore, both top line and bottom line gonna be increased, and the growth rate would be slightly higher than the historical average. Maybe Linda can add more on our investment in the wireless and also in the software-wise and our strategy in the next three or five years in the future. Yeah. Thank you.
Yeah, regarding the original question about the growth rate, the compound growth rate, how Advantech will target or achieve that 15%, we are currently, we're looking at 10% roughly every year. If go for 15%, we believe that we need M&A to have annual compound growth rate at 15%, but Advantech has always be cautious for the M&A because we're looking for the synergy, not just for the revenue financial investment. That's the key. I think if we want to maintain 15% year-to-year growth rate, like, in the coming years, I think M&A is needed.
Back to what we're sharing is that what is our investment internally or what could be our external candidate to look at M&A indeed on the solution where KC Liu, our CEO, has been sharing our AIoT strategy in the past year. This still remains the key investment area for us. We expect those investments on software will add value to help our hardware selling to most system integrators. The other one is wireless connectivity, because wireless connectivity on Cellular, on LoRa, on Wi-Fi will be widely adopted on the IoT area. We already have some of the team on the wireless product development on module and Cellular router on all the sensing device wise.
We are also looking at whether we can have an external partner to speed up our product development for the revenue growth or even any suitable target, the company that we can do the M&A. We will be looking at that very cautiously. Yeah. Thank you.
Okay. The next question is regarding, since Grace touched on the software business, the next question is regarding your software business. It goes like, could you give us an update on this software business regarding the revenue contribution, and where do you expect that to go in the next few years? What would be the key success factors for this business? What are your major competitors?
Strategy wise, yes, we are focusing on the development of a software business and a solution business internally. So far we are not disclose the contribution and the progress for software and the solution wise in regular basis. However, we do have several indicator to monitor the progress right now. Actually, the progress is on schedule, and it's quite promising.
The key indicators including like the revenue contribution from software and the solution and the contribution per membership and the number of membership base and also like a regional or sector breakthrough is quite meaningful to us because we would like to extend our software as a solution, not only regional wise, but also sector wise to open the product offering as an industrial apps to the end users, enterprise end users.
Okay, we do have several key indicators to monitor the progress right now, and right now is quite promising. Hopefully in the near future, when the contribution from software and also solution big enough, for example, maybe high single digit revenue contribution to the total sales, maybe we can disclose on a regular basis for investor to track, easier to track in the future. For the competition, the next question is for the competition right now.
Actually, maybe you probably already know that for IPC markets, the global peers like Siemens, GE, ABB, Schneider, they are already moving from edge to cloud for many years, and right now they are more focusing on the cloud side, and some of them do outsource the edge opportunity to Advantech already. Okay. However, look at Asian IPC market. Actually, Advantech is probably the only mover to follow the global value add pattern from edge to cloud. As you may know that we already the leader in edge side with very high market share globally. We also enter the software platform in year 2015 by launching WISE-PaaS to the market and entering the solution market in year 2019 by launching a WISE-Marketplace and also industrial app, all kinds of industrial apps.
Therefore, we already moving from edge to cloud for maybe five or six years. Right now, still, we still have a long way to go. However, we would not consider Siemens or GE or ABB, Schneider, they are purely competitor because I think the target audience is quite different. For example, there's a very kind of high level of a solution with very expensive membership fee. Therefore, their target audience is kind of big cap enterprise company. For Advantech, we are focusing maybe is in the mid or small cap and focusing in Pan- Asia, for example, for the beginning period.
Right now, I think there is not kind of a head-to-head competition between Advantech and the global peers. However, I think this is a good thing that everyone's investing in the solution and cloud side. This is the right trend to go. I think we do have more confidence in the next five years to grab the opportunity for IIoT because we do have heavily invest internally and also trying to do the external investment, just like Linda mentioned. We do have the confidence to grow in the near future. Yeah. Maybe Linda can add on more information. Thank you.
Yeah. For the software solution development and business-wise, I think Taiwan and China are still our main focus country area, and then Southeast Asia. Other than this region, of course, we are low touch, so, we invest on the product also on the sales-wise. Okay? The vertical-wise is that we focus on vertical, smart manufacturing, energy, environment, retail, hospital. We have selective focus on the vertical market, where we will promote our software solution together with our hardware. By doing so, that we are not massively scale up to all the vertical market or even to all the global regions. We want to be successful in the key region, like Taiwan, China, Southeast Asia, in our focus area, where those markets are already strong with Advantech hardware product line. Yeah. Thank you.
Okay. The next question is also relevant to this software development. It goes like, what would be the hurdles for the DFSI and developers to create industrial apps on your WISE-PaaS marketplace? I think the demonstrator got this question because it makes sense that you need to have more apps on the marketplace to get the wheel spinning. Yeah, that's how you get this software business running. Yeah. Could you give us some color on that?
I will pass the question to Linda.
Right. Okay.
For the DFSI strategy in the future.
Yeah. Regarding the DFSI developer, if they want develop the industrial app on our WISE-PaaS, I think the most hurdle is not the technical part, it's that the connection between Advantech and DFSI is that there are other like I would not say really competitor because no one is really dominating the market. Whether they develop the solution, the app based on Azure or based on AWS or based on other vendor have, I think that is the most hurdle that we will face, is not really on technical side. What Advantech right now is they're working with the partner is that we are not just that working with them to develop the industrial app on our WISE-PaaS or any platform, but also we are engaging business together.
It means that for Advantech, we are still quite have strong market share footprint in some of the industry. We are able to leverage Advantech global footprint and branding to bring this solution business to our DFSI or we say like domain-focused partner. Yes. Here's what I want to share, okay, regarding the question about the hurdle and difficulty how to develop the app on WISE-PaaS. Yeah.
Okay. Next, we got a few housekeeping questions. The first one is that, do you have any potential plan to increase your price in the coming quarters because of this increasing component price?
Well-
Um-
Maybe I can answer for the first and then Linda can add on more. Okay, for the ASP hike, actually, in this cycle, Advantech do have twice an ASP hike. First one is in April last year, and second one is in Q1 this year. We plan to review all the local services items, including the CTOS, the RMA, and also the after-shipment services. For regional wise, we will start reviewing the process from Japan, Korea, and also Europe region. According to the data we got so far, we don't raise any local assembly services charge for the past ten years.
It is quite not reasonable since the labor cost in the past 10 years has risen a lot. We were reviewing by regional and try to have more healthy and a balanced way to do the internal business and local delivery. Okay, by doing so, we expect it will bring positive results to our margins performance in the future. This is from my points of view, and I will leave for Linda to add on more information. Yeah.
Right. Last April and this January, the price increase is mainly on the component price increase from our supplier. From the cost of the goods wise, in addition to the component cost, there are still freight cost, the shipment cost, and also the local, like, assembly integration, the cost. I think on the component wise, indeed, there are still few supplier, they may have the cost up to Advantech again, but compared to last year, it's much less. Unless they can see significant price increase from some of the supply we have, if there is, then we may consider to refer the cost out to the customer. Otherwise, at this moment, on the component-wise, we may not have the price increase.
On the other hand, as Grace shared previously, on the freight cost, on the regional system integration testing validation cost, those costs that we charge to customer, we haven't increased for years. We are reviewing whether those costs apply to the local market and the labor that already increased, like, in the past years. For those, each regional office may have different price increases because the country is different. Yeah. Okay. Thank you.
Okay, thank you. The next question is that the investor wants to make sure that about your previous comment on the NTD depreciation. He wants to make sure that whether you mean when NTD depreciates to TWD 29 versus USD, the impact will be -0.2 percentage points to your operating margin, or you meant that every 1% of depreciation against US dollar will impact your operating margin by 0.2 percentage points.
I think it would be more like a 29% assumption rather than every 1% of depreciation to have this impact. Yeah.
Okay. It's year 2022.
Internal assumption. Yeah, internal assumption.
Effect assumption-
Yeah.
versus 29.
Yes.
Okay, okay. Got it.
Well, due to the limits of time, maybe we will take the last question from the investors.
Okay, sure. The last question is more of a general one. It says that how big and sustainable is a trend regarding this reshoring demand in the U.S. and Europe, and how is that going to reduce your dependence on China? Has this trend changed with the lockdown in China and the supply chain disruptions there? How is this going to translate into the demand for Advantech's products?
Well, I will leave the question to Linda. Thank you.
Okay. I hope I answer this question because I think we will not reduce the portion of China business. That's not our intention. It's that we believe China market may be on the product-wise, the needs maybe will be different than rest of the world. That's why we integrate it. For the dependency on China on the business is that we are not really depending on any region. I think right now the USA is still the largest portion of our revenue contribution, and China and Europe, and we have other region like Intercontinental and Asia. I hope that answer your question on the business dependency-wise.
For our product division-wise, we are thinking, not now, even from, like, two years ago, because China silicon demand increase in China, most of our product team are already have the product design, especially for China and maybe for rest of the world, because we see the needs and want are sort of different, not just only for China silicon, also some other functionality. Yeah. In the past year, we are more like a global product. Design one product, sell to rest of the world. We see the gap is getting more. On the other hand, I don't know if investor is asking for production dependency, but I think that is why the answer previously.
The production that's in Taiwan and China that we are not really depending on that, and we have the flexibility to move the product production from China to Taiwan, or even from Taiwan to China. Yeah. Thank you.
Okay, thank you. In the interest of time, we may have to wrap up the call here. Sorry that we may not be able to answer all of the questions in the list, but hopefully we have covered most of them. Linda and Grace, do you have any closing remark to make?
No, not from me. Thank you.
No, not from Linda. Thank you.
Okay. In that case, we will wrap up the call here. Thank you everyone for joining us. Thank you Eric, Linda, and Grace, your time. Yeah. We will disconnect here. See you next time.
Thank you.
Thank you.
Thank you everyone for your time. Take care. Bye bye.
Thank you.
Thank you. Bye bye. Okay. Hi, everyone. The webcast has ended. Thank you very much.