U Blox Holding AG
SIX:UBXN
Earnings Call Analysis
Q2-2023 Analysis
U Blox Holding AG
u-blox, a key player in the semiconductor space, exhibited strong performance in the first half of 2023 despite broader market challenges. The company saw a double-digit revenue growth of 15% at constant currencies, with an adjusted EBIT of CHF 62 million and an EBIT margin of 18.6%. Adjusted net profit reached CHF 48 million. This robust growth trajectory follows an impressive 2022 and comes at a time when both macroeconomic conditions and the semiconductor market are showing signs of weakness.
The company has importantly increased its design win volume in key markets like automotive and industrial sectors, which promises future revenue growth. They also signed a significant partnership with Orbcomm, which aligns with a strategy to strengthen their position through collaborations. These new projects and partnerships underpin u-blox's commitment to long-term growth and its ability to effectively navigate market challenges.
u-blox has responded to the market demand for better connectivity solutions by launching new products and expanding service offerings. For instance, their new module for automotive applications integrates advanced Wi-Fi and Bluetooth technology. They strategically enhanced their correction services and entered into a partnership with GMV for automated driving, highlighting their commitment to innovating and expanding market reach.
Due to the significant portion of its business being conducted in U.S. dollars, u-blox's revenues are sensitive to currency fluctuations. The Swiss franc to U.S. dollar exchange rate has deteriorated, prompting u-blox to revise its 2023 revenue guidance downwards by 9%. Nevertheless, the company has secured about 90% of the lower end of its revised guidance in orders, ensuring some stability in uncertain times.
While the third quarter is expected to be challenging, u-blox anticipates recovery in the fourth quarter. The company refrains from providing a detailed forecast for 2024 and beyond due to low visibility. However, they plan to share more during their upcoming Capital Market Day in November. The executive team expressed confidence in the company's future, highlighting their positioning in global megatrends such as climate change adaptation, demographic shifts, urbanization, and digital transformation, all of which rely heavily on the solutions u-blox provides.
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Ladies and gentlemen, good morning or good afternoon, depending from where you are following this webcast. Welcome to the u-blox First Half 2023 Results Presentation. I'm Rafael Duarte, newly joined Head of Investor Relations at u-blox. CEO, Stephan Zizala; and CFO, Roland Jud will first present the results and later will be available for a Q&A session. For the Q&A session, we ask you kindly to test your audio equipment beforehand and follow the instructions in the webcast platform.
Before we start, I would like to go through the disclaimers for this event. This presentation contains certain forward-looking statements. Such forward-looking statements reflect the current views of management and are subject to known and unknown risks, uncertainties, assumptions and other factors that may cause actual results, performance or achievements of the group to differ materially from those expressed or implied herein.
Should such risks or uncertainties materialize or should underlying assumptions prove incorrect, actual results may vary materially from those described in this presentation. u-blox is providing the information in this presentation as of this date and does not undertake any obligation to update any forward-looking statements contained in it as a result of new information, future events or otherwise.
Without further ado, I hand it over to Stephan. Please go ahead, Stephan.
Thank you, Rafael. Ladies and gentlemen, good afternoon, good morning. Before we start, I would like to welcome our new Head of Investor Relations, Rafael Duarte. Rafael comes with certain years' experience in Investor Relations and two years in Corporate Treasury. At the same time, I would like to thank Gitte Jensen, who was instrumental for u-blox Investor Relations for a very long time. She will put her future focus on ESG topics. Our external members of the IR team, Doris Rudischhauser and Lena Cati you know already. All the contact details are at the end of the presentation.
Let's start on Slide 5. u-blox achieved strong results in the first half of 2023. Our revenue grew double-digit by 15% at constant currencies. Adjusted EBIT reached CHF62 million with a respective EBIT margin of 18.6%. Adjusted net profit amounted to CHF48 million. These results achieved in the first half are important as they come after a very strong 2022 in an overall weak macroeconomic and semiconductor market environment. Compared to the first half of 2022, we also increased the value of new projects we won, our design wins in the automotive and industrial businesses, which should contribute to our results in the next years. We also signed an important partnership with the company, Orbcomm, which I will talk about -- more about in a minute.
If we now move to Slide 6, let me shed some light into our revenue performance. As mentioned, we achieved strong results despite a high comparison base last year. If we consider the last three years, our revenue almost doubled. Volumes played a big role in this growth year, mainly in our focus markets of automotive and industrial applications. It is also important to mention that a part of the revenue originate from the 2022 order backlog. When effects of the global semiconductor supply chain shortage were still paramount. We will explore this topic later in the presentation.
On Slide 7, we break down our revenue in certain aspects. By region, we saw the strongest development in Europe and Asia Pacific, while the Americas was weak due to lower demand in health care and consumer applications. We had a strong growth in our core markets, automotive and industrial, a lot from the 2022 order backlog. We saw continued weak performance in consumer following the trends in the industry. Lastly, in terms of product types, both modules and chip grew, while chips grew faster.
Before I hand over to Roland for the financials, let us look at our gross margin development. Adjusted gross profit reached CHF156 million in the first half of 2023. The respective gross profit margin was 46.8% from 48.9% in the first half of 2022. In the first half of 2023, we saw the positive impact of our long-term agreements with customers, not only in the volume growth, but also in quite stable prices. The decline (ph) in the gross margin was mostly due to changes in the product mix result compared to one year ago. We assume that this trend will continue in the second half of 2023.
Now I'll stop here and hand over to Roland for the financials.
Thank you, Stephan. A warm welcome also from my side. As Stephan only went through revenue and gross profit, I will cover now the operating expense, which makes up then our EBIT of CHF62 million. On the left-hand side, you see a graph of our R&D expenses, which in the first half year 2023 reached CHF60 million and grew slightly faster than revenues. As a percentage of revenues, R&D expenses grew only slightly compared to the comparable period in 2022 to 18%.
In the middle, you see a graph about SG&A. SG&A expenses remained flat in the period 2023 with CHF44 million. As a percentage of revenue, it declined by 130 basis points to 10.2%. Here, we see clearly our operating leverage capabilities, and we were able to manage and keep our SG&A flat despite the growing revenues. And this, at the end, leads finally to an adjusted EBIT of the CHF62 million. As mentioned by Stephan, we are very pleased to have achieved this EBIT in the first half year despite the exceptional results already achieved a year before. EBIT margin remains at a very good level of 18.6%.
Let me now shed some light on R&D. Please keep in mind that these figures on these slides are IFRS figures to make the comparison a little bit simpler. Let's start with the chart on the left side. Here, we show how R&D accounting works. As discussed many times, the R&D expenses you see in the P&L excludes capitalization of R&D costs and includes amortization. These are the bars in the middle of the left chart, CHF20 million we capitalized in the first half year 2023, and we have CHF15 million amortization of capitalized R&D costs.
So the orange column, you see is CHF67 million, and it shows how much R&D costs we have had in the first half year 2023. If you look at the chart to the right, we have run the same exercise again for previous years. You see here that the difference between the two bars, R&D expense and R&D costs, fluctuate over time. Depending on the project at a given time, capitalization and amortization vary and generating this difference.
Let's now have a look at the complete income statement. We have grouped some lines to make it easier to follow. In the right left column, you find the P&L for the first half year 2023 according to IFRS, which is CHF332 million revenues with an EBIT of CHF58.5 million and a net profit of CHF46.1 million. In the columns on the right, we show the corresponding adjusted figures. The adjusted are the usual ones as there are CHF1.8 million for share-based payments in relation with our employee share option program. This time, the IAS 19 has nearly no impact and the amortization of intangible asset acquired in the adjustment is CHF1.4 million. This is in total CHF3.2 million for EBIT adjusted and CHF1.8 million for EBITDA.
The financial result was negative this year, mainly due to foreign exchange, which was driven by the U.S. dollars. We see here a foreign exchange loss of CHF3.4 million from last period with CHF3.1 million foreign exchange gain. About two-thirds of this foreign exchange loss is realized and one-third belongs to unrealized foreign exchange losses. In terms of taxes, the adjusted tax rate for the first half year is 16.4%. And this, at the end, leads then to a net profit of CHF48.3 million practically in line with the first half year's result.
On Slide 13, you see now something about cash generation. Free cash flow in the first half year was negative by CHF13 million. As you can see easily on the chart, the increase of net working capital was the main reason for this negative result. Due to highly monthly revenue in June, trade receivables increased, beside also inventories increased over the -- in the first half year compared to December. And this has a negative impact on net working capital or like the net working capital increase so that we have to face net working capital changes of CHF67 million in the first half year.
Operating cash flow in the first half year 2023 was CHF10.5 million plus. Net cash using in investing activities at the end for the cash flow was mostly investments into R&D with CHF21 million and stood at CHF23 million cash out. So slightly lower than the NOK 24 million in 2022.
Moving to Slide 14 on the balance sheet. Also here, I'd like to have two important items in our balance sheet, the working capital and our net cash position. In the last slide, we talked about the working capital from a cash flow perspective. Here, the balance sheet, we see a similar picture. When compared to year-end 2022, the biggest variation is trade receivables, driven by the high monthly revenues in June 2023. But also inventories increased, which amounts now to CHF126 million versus CHF118 million in December 2022. Last but not least, at the right side, we show our net cash position. We still continue to have a solid net cash position of CHF55 million in June 2023.
And with that, I hand over to Stephan again.
Thank you, Roland, for going through the financials. Let me give you know some business background to the numbers. In the first six months, we made really good progress in winning new projects. Our design-win volume was significantly higher than in the first half of 2022. One example is a double-digit million design-win for autonomous driving with a leading car manufacturer ramping up in 2026 and later. This performance on winning new projects in our industrial and automotive target markets will be the base for our long-term growth.
Of course, there needs to be new products, too. One good example is our new module for demanding automotive applications, combining advanced Wi-Fi and Bluetooth technology with the automotive module requirements. We add new customer projects, new products. We will be even better if we have strong partners. In the last six months, we formalized our partnership with GMV for automated driving. This will enable our automotive customers to develop safe automated driving systems faster and more efficient.
We also expanded our correction service to new areas. This will help to improve the accuracy of our positioning solutions. And just this week, we announced a partnership with Orbcomm for satellite IoT connectivity. Let me explain this a bit more in depth. The market demand for asset tracking or agriculture is very simple. Customers want to connect those devices to the cloud wherever they are on the planet. Well, cellular can also do part of the job. About 10% of the earth's surface has cellular network coverage.
What about the other 90%? The answer is not new, satellite communication. However, the problem is also not new. Satellite connectivity equipment is very expensive. Here comes our solution. We can combine satellite and cellular communication in a single module. This means we run the software needed to communicate with satellites on our cellular chips. There's no need for a dedicated satellite communication chip anymore.
To enable this, the position of the receiver needs to be known, and therefore, we add a GNSS chip in the module. The market potential for this is significant as the demand for global IoT coverage is predicted to grow with about 40% on average in the next years. In summary, jointly with our partner Orbcomm, which provides the complete system, we will enable a multimillion dollar market.
Moving to Slide 20, where we will talk about the outlook for the business. Although we report in Swiss francs, our business is exposed to foreign currencies. On revenue, for example, is about 85% generated in U.S. dollars, the rest in euros. The chart on the left side shows the development of our main currencies compared to the rates used in the 2023 guidance issued in March. You can see that especially the dollar lost value versus the Swiss franc. The table on the right side shows the exchange rate sensitivity in our business. It says, for example, that a 10% weakening in the U.S. dollar causes a minus 9% negative impact in our revenue.
On the next slide, I'm going to show you what that means for our guidance. If we start on the left side on the slide, you will see 3 bars for each guidance KPI, revenue, EBITDA margin and EBIT margins. Let's start with revenue. The light gray bar represents the guidance issued in March this year. By converting this to today's situation, we derive the same guidance with actuals for the first half of the year and with the current exchange rates for the second half of the year, which is 9% lower. From the lower range of the converted guidance, we established a new guidance for 2023.
Apart from exchange rate, the reduction of lead times and more careful ordering to adjust to the overstocking effect are expected to negatively impact revenue in the third quarter. We expect that this will improve in the fourth quarter 2023 again. The picture is similar when we look at profitability, where exchange rate movements and changes in the product mix were the main reason for the guidance update.
Here on Slide 22, we bring the overview of the new revised guidance. It reflects transparently the current expectation, and we have internally, and it is our best view into 2023. It's worthwhile to mention that currently, we already have about 90% of the lower end of the guidance as orders in our system. It's important, therefore, to reinforce that this change in guidance does not reflect any change in our competitive advantage or industry dynamics. We not only haven't lost any major customer, but we won new businesses because we are competitive and we are innovative.
If we move now to Slide 23, here, we have our ambitions as communicated last year during Capital Market Day. Note so far, I haven't mentioned anything regarding 2024 and beyond. While we see the third quarter as a low point and an improvement in the fourth quarter, the visibility is low to talk about next year. We plan to hold a Capital Market Day in November. This will be the best opportunity to reflect on the cycle we are going through. And at that stage, I will also have the opportunity to reflect on my first year as u-blox CEO, and our plans for the future development of this great company.
To conclude, I would like to have a few words recapping why I'm so convinced about u-blox great future. u-blox will benefit from global megatrends. Climate change and resource scarcity will require that we make best use of our resources. Solutions for asset tracking, our positioning in autonomous vehicles will directly benefit from this trend. Demographic change is clearly visible already now. Solutions for remote wireless connected health care equipment will become widespread. Urbanization will drive up the need for automated parking, car sharing, delivery services, micro mobility, all those applications need solutions for exact positioning and wireless connectivity. The digital transformation is everywhere.
The fourth and fifth industrial revolution will require remote monitoring and operation of industrial equipment, autonomous indoor vehicles, virtual reality and so on, solutions for indoor positioning and outdoor positioning, wireless connectivity will be key for this digital transformation. We provide solutions enable -- to enable our customers to determine their position precisely, have a reliable wireless connection to the cloud combined with more edge computing capabilities. Our solutions are reliable and safe. This means they do what they are supposed to do, and they are secure. This means it's hard to compromise them. Our solutions are easy to implement and designed to work for thousands of customers.
In summary, u-blox future is bright because we enable megatrends of our society.
So this concludes the presentation part of this webcast. We are now ready for questions and answers. Rafael, do we have any questions?
Rafael, do we have any questions.
We do. Thank you, Stephan and Roland for the presentation. So we now start with the Q&A session. [Operator Instructions] And the first question comes from Christoph Grau from AWP (ph). Christoph, are you there.
He's not ready yet, but maybe we can go ahead with the next one.
Okay. We move on the queue. Christoph, if you want to ask a question, so join the queue again. The next question is from Harry Blaiklock from UBS. Please go ahead, Harry.
We have one from the call which is already ready.
Okay. So there will be Emrah Basic (ph), is that correct?
Yes, it's correct. Can you hear me?
We can hear you well. Thank you.
Okay. Thanks a lot. Yeah, just I have a couple of one. I will just go over the first one. So you already gave some indication on Q3. So I assume that July and August have not developed that great yet or had not developed great. Did you have a -- like what's the reason why you did not communicate your new guidance a month ago already with your preliminary results?
I’ll take it. So we are in a situation where we have reduced lead times to market standards. So we come from minimum order times of more than 50 weeks. And in March time frame, we reduced lead times to below 20 weeks, even down to 12 weeks. And this means, on the other hand, that there is a low visibility because customers start ordering very late. That's one point we have to consider. And then this was -- at this point in time when we did the revenue update, it was still too early to come to any conclusion of our -- on the second half of 2023. We observed what was going on in July and beginning of August and came to the conclusion that we -- that's now the time to act.
All right. Thank you very much. The second one would be on your net working capital. What is your -- what is your expectations or assumptions for the rest of the year? Can we expect a similar seasonality as a year ago for the second half?
Maybe I can take this one. It depends on what you are thinking of in the second half. Now in the second half 2022, we saw quite a big increase of inventories. This is today not foreseeable as such. So I would -- we are working hard to improve net working capital in the second half of 2023 again to make it better than the first half.
Okay. Thank you. And then just a last quick one, very detailed one. Your amortization of acquired intangibles was -- I didn't see it in the documents. Is that approximately similar number as last year, [indiscernible] million?
The amortization of?
Of acquired intangibles.
Yeah. That's a similar number. It's the -- roughly the CHF1.4 million. You find it in adjusted numbers.
Okay. Thanks a lot. Thank you. That was it.
Thank you. So the next question is from Serge Rotzer from Credit Suisse. Please go ahead.
Okay. Good afternoon, gentlemen. Basically, I didn't want to ask a question, but I had some problems to manage your end, webcast, to be honest. But well, now I'm live, then a question here. Why didn't you came earlier with a trading update. I'm really wondering now. So here also the follow-up question, at what time the Board of Directors accepted the first six months result? Because at that time, you are obliged to came with a trading update.
I think the first part of the question I answered, so let me start with the second part of the question. The Board of Directors accepted this guidance update yesterday.
Okay. Got it. And probably back to the net working capital. As you expect a clear decline, I understand that some is due to FX, but still you are also operationally declining in total sales and volume. So net working capital should do much better or isn't it? So inventory should go down and also the management of the receivables should come -- should help that you really can improve your free cash flow by the end of the year or what is wrong in my assumptions?
There is nothing wrong in your assumptions as such. It's -- but as you also know, predicting net working capital is maybe one of the challenging things in accounting because there are so many parameters to influence that. But yes, it's -- for sure, as I said before, the -- to again make the inventory three times as high as at the beginning, as we did in 2023, this will not happen.
But you have a clear idea of the EBITDA, point one. Point two, CapEx should not increase. Point three, inventory should go down. Point three (ph), you said you had difficulties to invoice the money by the end of June. So probably you can push this forward for December. So I don't see why visibility is low to guide a little bit more on free cash flow. What is the unpredicted effect or...
No. First of all, I said the monthly sales in June created a high receivable number. And this, of course, can happen again. So...
So you tell me that it's going to be back-end loaded in 30 days payables, then you risk again that free cash flow could put pressure. Is this what you tell me?
30 days -- no, 30 days receivables means the receivable number is depending on the last month. And if you have a very high month as we have in June, you have correspondingly high receivables because what you sell in June, invoice in June, you never get paid in June already. So -- and this difference -- this makes a difference.
Yeah, I understood it. But so you expect, again, high deliveries at the end of the quarter, so for November, December?
No. What I said is, I said, it's difficult to predict, and therefore, I have an expectation, yes, but this could be wrong.
Okay. That’s fair. Many thanks. Good luck for the second half.
Next question, so let's try again with Harry Blaiklock. Harry, are you there?
Hi, guys. Can you hear me?
Yes. Hi, Harry.
Sorry about that. I was on the webcast and it whacked. I got cut out as well. So I might have missed a few minutes, apologies if I am repeating any questions. First one was just I was wondering if you could provide a bit more color on your comments around pricing. You mentioned there's no significant [indiscernible] impact. But what does that mean you're experiencing? Is that some level of pricing pressure or not at all? And then also linked to that, how do you expect pricing to progress through this year and into 2024?
Well, we mentioned earlier that we have long-term agreements in place, especially for the first -- which covers especially the first half year of 2023. As we mentioned, if I remember right, already in March. And those long-term agreements, obviously help on the volume, but also on the pricing side to have a stability, and therefore, we didn't see any huge price exposure here.
Okay. Got it. Are you able to provide anything around what proportion of revenues are covered by long-term agreement.
Sorry, I didn't get the last part of your sentence.
Are you able to provide any indications around what proportion of revenues are covered by long-term agreements, even though that's just ballpark, like rough number?
This I can't. So what I can provide is what I mentioned before that if you would take the lower end of our guidance, about 90% of this would be covered with orders, which we have currently in our systems, and we still have a few months to go in this year.
Okay. And then on gross margin, I know you said that's mainly driven by some FX, but mainly product changes in product mix. Could you provide some details on that? So is that higher module sales without your chipset, higher cellular, or what's the driver of that product mix change having a negative impact on gross margin?
Yes, this change came mainly from a higher share of cellular.
Okay. Got it. And 1 more question, if I may. I know you can't provide that guidance around next year. Can you give any kind of indication on the shape of recovery in 2024? I know you've already mentioned that Q3 is likely to be the bottom. You're expecting a sharp recovery, or is that kind of more gradual?
I mean at this stage, our visibility goes until the end of 2023, and this will be reflected in our guidance. What I can say with confidence is that nothing changed in terms of the fundamentals for us in the industry. I tried to highlight this towards the end of the presentation. The structural demand for our products driven by those megatrends is absolutely intact. Therefore, for me, it's just a question of timing, and I cannot assess at this point in time 2024.
Fair enough. Thanks very much, everyone.
Thank you. The next question in the queue is for Torsten Sauter from Kepler.
Yes. Good afternoon, gentlemen. Well, some of my questions have been answered, but like maybe I would still like to insist a little bit on the 2024 situation and the shape of the recovery. I mean you've continued hiring, investing in R&D, investing in net working capital throughout H1, right? Just to have a feel how you approach the crisis. Are you willing to keep investing and tolerate a low result as in lied in the guidance for the second half? I mean like what's your thinking there conceptually to purchase prices?
And then as a second question, if I may, you said you don't see major changes to fundamentals and to the industry, but we've seen major consolidation in your space. Can you maybe give us a feel how you see yourself affected by M&A in the sector? And how -- yes, anyway, maybe I stop here.
Yes Thank you, Torsten. It's also good because two questions I will be able to remember, hopefully. So the first regarding the second question about M&A. Well, I do not want to speculate. Obviously, there is M&A ongoing in our sector, which is also good because it's a highly attractive sectors. The products are needed for IoT. The products -- I mean, that's probably the really good thing about the semiconductor crisis. Everybody now knows how important to many key trends in our society semiconductor solutions will be. So therefore, it's no wonder that there's a lot ongoing. We feel very well with our plans. And so there's no change from our side on the M&A side.
Now looking into 2024, really is difficult at this point in time because, as mentioned before, we did a regular assessment of our business. We had certain assumptions when the business will come back. We knew that we had low visibility, and therefore, when we had the fact together in August, we updated the guidance. And if I look on this, obviously, the visibility for Q3 is better than for Q4. That's also clear. But we have the opinion that Q3 will be the low point, and we will see improvement in Q4. I do not want to speculate now at this point in time about a steep recovery in Q1. That's, in my opinion, unfortunately, but in my opinion, it's really too early.
Can I ask -- sorry, I mean is this what's the strategy from your side facing such an event, right? I mean are you willing to sacrifice some OpEx? You made -- again, you made hirings, you have continued investing in R&D on a virtually unchanged trajectory. I mean, how do you approach this crisis at all from an internal point of view?
First of all, you're absolutely right. And we also said this before. So obviously, we are taking measures, and we will delay hirings. We will -- but we will not stop our effort to grow because we are absolutely convinced that what we do, both on the R&D side and also on the sales and marketing side will lead to the growth, the structural growth in the future. But no doubt, we will slow down in certain aspects where we are sure that we can afford a certain delay in further ramp-up of cost.
On the other cost side, of course, we will manage very carefully. Roland already mentioned, net working capital is, for sure, a focused topic for us, where we will look into this. So we are taking measures. We are not just continuing as if we would have been perfectly on plan. This would not be appropriate. Torsten, did I answer your question or otherwise just another follow-up?
No. Thanks.
The next question comes from Tobias Kastenhuber, Discover Capital. Please go ahead.
Thank you for taking my question. Regarding gross margin, we've seen a 200 basis point decline in gross margin in H1 compared to prior year. And you mentioned that is due to a weaker product mix. Can you give us some color on the gross margin you expect for H2 2023 compared to H1 2023 like -- do you expect a further decline? And if yes, which [indiscernible] do you expect that decline?
I can take this. Yes, that's -- we continue to see a further change in product mix. And based on the current knowledge, we see a further decline in the product and the gross margin due to a change in the product mix.
Can you give us some color on which [indiscernible]? Do you see that as like another 200 basis point decline compared to H1 or is it there is last year?
Well, we do not -- I understand the background of your question. So we provide the guidance on EBIT and EBITDA. So I cannot provide any numbers on the gross margin at this point in time.
Okay. And then just one follow-up regarding like long-term gross margins. Where do you see the gross margin in the longer term? Is it like average of the past year is around 45%, 46%, or is the rather in the high 40s you've seen in 2022?
I mean our ambition is very clear. And this we showed during the Capital Market Day 2022. And now we see that we have some work to be done. And I would -- on those really long-term questions, which also need a comprehensive view not just look on the gross margin. I would like to ask you to join our Capital Market Day, where we will give an update on the overall strategy, not just a specific long-term KPI.
Okay. Thanks a lot and good luck for the second half.
Okay. [Operator Instructions] Next question on the queue is from Daniel Lion, Erste Group. Please go ahead.
Yeah. Hi. Good afternoon. Thanks. [indiscernible] as well. I would be more interested -- maybe you mentioned it on your prepared remarks already, but maybe more detail on the end market dynamics. Do you see differences in automotive funds compared to industrials and what submarkets might see some slowdown that is reflected now in the guidance that you provide and stealing off the visibility going forward?
Well, so automotive is, on the one hand, not so homogeneous as it sounds like. I would say nowadays it falls in two categories. One is more the EVs, one is more the traditional ICE cars. And obviously, we are dependent on two things here in the automotive industry. First of all, how does the overall market develop; and second, how much electronic content is there. Now especially the automotive industry suffered a lot under the supply constraints, and therefore, there was a pretty big order backlog, obviously, as we know now, which was then covered in the first half of 2023. We need now to observe very carefully when this order backlog is consumed and pure structural growth continues.
On the industrial side, the market is very heterogeneous. There you have indeed some pockets where some of our customers are still limited in supply from very special parts. So those are small pockets, but they still exist. There you have pockets like home health care, where there was a very strong demand during COVID times and also a catch-up effect because a lot of people painfully recognized that it's absolutely crucial to have sufficient equipment and sufficient buffer stock. And there is now a bit -- a slowdown, which we experience -- which we already see in our books.
Other markets like industrial automation, there, I would say, on the 1 hand, on the long term, we are absolutely convinced it's a very nice market. The market will need our products. The customers appreciate us, and we win design. On the other hand, in the current situation where many countries -- where the economic development in many countries is not as right as some of us hoped, or at least I hope, there is a much more careful investing in there. And this makes it so difficult right now to make a prediction over this year and beyond.
Okay. Thanks. And maybe a follow-up on that. In industrial IoT market, how is the discussion going on with your clients? You're seeing that many projects are simply shifted. Nobody can really afford to cancel digitalization projects in this area. But what does this mean? Is this -- are we talking about shifts of one, two quarters? Do the clients, obviously, do they have view themselves when they want to restart investing again and following up on maybe started projects? How are the discussions in this field?
Yes, you perfectly described the situation. So there's no doubt that we will do certain things on the mid and long term, neither from our customers nor from us. What they struggle with is what is happening in the next few quarters. And so our customers literally have the same problem as us, at least in many cases. And what we -- let's say, what we experienced during this regular update of our guidance, which we did recently. Of course, we went to many customers and really drilled very deep and then found out that, in many cases, they don't know themselves. And we had to rely on the data what we can assume, which will be realistic. And there, one important piece is obviously orders because orders gives you a very clear indication, and therefore, again, to repeat this point, we found out pretty late, unfortunately.
Okay. Thanks. And one last one on the automotive sector. When I understood correctly, you mentioned that there's some inventory, some destocking going on. Now towards the second half -- and what gives you the confidence to see this revising in the fourth quarter? Is this actually the level of inventories that you currently have compared to the previous call-offs or what's actually -- how do you assess this development of this view?
It's the order situation. So we can -- like it or not, inventory level of customers are typically kept very secret due to very obvious technical reasons. So it's very tough to get real fact-based inside. But there is, let's say, an approximation or an indicator and this are the orders. And there, as I explained, if we look at our current business, we see an uptake in the -- or an improvement in the Q4 again.
Perfect. Thanks a lot.
That was the final question. So Stephan, back to you for the closing.
Okay. So thank you for the participation. And also thank you for all the questions. All of them were valid so you -- and I appreciate that you dive so deep in our company. We will be doing some roadshows in the next weeks. So if you are interested in meeting us, please let us know. And for any further questions, Don't hesitate to contact our Investor Relations team. Thank you, and goodbye.