Advantech Co Ltd

TWSE:2395

Q1-2025 Earnings Call

[Kevin Chen, analyst]

So yes, hello, everyone and welcome to Advantech's Q1 2025 Earnings Results Conference. I'm Kevin Chen, Tech and Industrial Analyst at CLSA Taiwan.

Today, we are honored to have Advantech's management team with us. Joining us on the line are Eric Chen, President of General Management and CFO; and also Linda Tsai, President of Intelligent System; and also Grace Liao, Senior IR Manager.

So today's agenda, we will ask Grace to have a run through about the first quarter results and Eric will follow to give us the business update and also the second quarter '25 guidance and then we will move on to the Q&A session.

So without further ado, I will now pass over to Grace. Grace, the floor is yours.

[Grace Liao, executive]

Okay. Thank you, Kevin. Good morning and good afternoon, ladies and gentlemen. Thank you for participating in this conference. This is Grace Liao.

Regarding our first quarter 2025 financial results, Q1 revenue reached TWD 17.35 billion, increased 25% year-on-year and 6% quarter-on-quarter. Gross margin rate reached 40.5%, slightly improved compared to the same period last year.

Operating profit reached TWD 2.9 billion with OP rate reported 16.9%, which is greatly improved from 13.8% in Q1 '24 due to lower expenses rate resulting from revenue scale up and better expenses control.

Q1 effective tax rate was 17%. Net income reached TWD 2.73 billion, increased 37% year-on-year. Earnings per share in Q1 '25 were TWD 3.17. Q1 2025 overall performance were near the high end of original guidance. Probability outperformed with GP rate, OP rate and net income rate, all enjoyed significant increase year-on-year basis.

For regional performance, in terms of U.S. dollar, Q1 '25 revenue reached USD 528 million, increased 19% year-on-year. For regional performance, most of the region reported a double-digit increase due to low basis last year and also enterprise spending recovery.

Only North Asia relatively slow, which declined 5% year-on-year due to political uncertainty in Korea market. For major 3 markets accounts for 70% revenue contribution as usual. However, the portion of North America and Europe is getting bigger.

For North America, increased 23% year-on-year, driven by semi equipment and also autonomous mobile robot, AMR projects. For Europe market, increased 25% year-on-year due to transportation, medical equipment and also gaming projects. For China market, increased 11% year-on-year, benefit from recovery of channel sales and also energy and automation projects.

In the product mix perspective, to cope with our sector-driven strategy, we will disclose sector mix starting Q1 '25 as in the table, all 4 major sector enjoyed double digit growth year-on-year. IoT automation increased 20% year-on-year, benefit from a strong performance in energy projects in North America and also China markets.

For Intelligent System, year-on-year increased 27%, outperformed in semiconductor and also transportation projects in Taiwan and network security equipment in Middle East and Africa markets.

For Embedded sector, enjoyed 11% year-on-year benefit from strong demand in medical equipment in North America and also Japan, Europe markets. And in the other hand, gaming sector outperformed in Europe markets.

The last one, Intelligent Service enjoyed 41% year-on-year growth, driven by health care, hospitality and also transportation inspection equipment projects.

For balance sheet -- this is also my last page. In balance sheet, cash and also cash equivalents accounts for 29% of total assets. Working capital remained sufficient. For inventory [Technical Difficulty]

[Kevin Chen, analyst]

Hello, everyone. So we are waiting for the IT problem to be fixed. So please wait patiently and I think the problem will soon be fixed.

[Grace Liao, executive]

No sound.

[Kevin Chen, analyst]

Hi Grace. We can hear you now.

[Grace Liao, executive]

No, Kevin. Sorry. We have technical issue right now, so we are already back online. Can you see us?

[Kevin Chen, analyst]

Yes, we can see you. And I think that the previous discussion was and lose your voice at about balance sheet. So probably I would suggest you start from this page.

[Grace Liao, executive]

Sure. Sure. Okay. I will repeat the balance sheet slide. Cash and cash equivalent accounts for 29% of the total assets. Working capital remains sufficient. And inventory remained healthy and the content for the trading up B/B ratio also factor in supply chain flexibility on the tariff situation. Overall, cash conversion cycle is under 100 days, which is a comfortable level for the company.

So I -- this is my last page and I hand over the time to Mr. Eric. Thank you.

[Eric Chen, executive]

Yes. Good morning and good afternoon, everyone. Thank you for joining the meeting today. This is Eric Chen. Allow me to add some comments on the first quarter result.

In the first quarter, our top line slightly exceeds our expectations while our gross margin and operating profit were in line with our guidance. Operating expense in the first quarter shows 16% year-on-year growth, but a 4% quarter-over-quarter decline.

The high increase rate is mainly due to the Aures consolidation. If we decrease it, the organic growth rate will be 6%. The operating expense was down 1.5% year-on-year and 2.2% quarter-by-quarter. This is regarding the operating expense.

In terms of regional performance, the U.S. and European market demonstrated a significant rebound of 26% and 25% respectively. In the U.S. market, strong demand were noted in the medical, video streaming and semiconductor sector. And in Europe, this demand was driven by transportation, gaming and medical sectors.

The Chinese market showed 11% growth with a B/B ratio of 108, indicating a positive sign of recovery. Market in Taiwan were flat due to a high base effect. Japan's market remained flat and Korea did not perform well, partly due to the ongoing political issues.

From a product perspective, the iAutomation and iSystems sector performed well, benefiting from strong demand in video streaming, semiconductor and energy sector. iService experienced a remarkable 41% growth due to the Aures consolidation. Excluding the Aures consolidation, the growth rate was 14%.

The Embedded sector benefited from increased shipment of medical equipment in North America, Europe and Japan. However, it faced a decline in DMS business in Japan. Overall, the growth rate for the Embedded sector was 11%.

So this concludes my comments for the third quarter and next page -- next page, yes. Let's look at our B/B ratios across different regions. As the page shows, the B/B ratio for the first quarter slightly decreased to 1.08. In the U.S., the B/B ratio was 1.05, while in Europe and China, it increased to 1.1 and 1.07 respectively.

It is worth noting that our bookings and shipment has consistently increased since the first quarter of 2024. This is regarding the B/B ratio.

Next page. As we look ahead for the second quarter, we expect revenue to range between USD 530 million and USD 550 million based on an exchange rate of USD 1 to TWD 32.4. In terms of margin, we anticipate the gross margin for the second quarter to be between 39% and 41%. The operating margin is projected to be between 16% and 18%.

This concludes my guidance for the second quarter. Thank you for your attention.

[Kevin Chen, analyst]

Okay. Thank you, Eric. So I think we are now moving to the Q&A part. So we have prepared some of the Q&A list we collected from investors. So I'll go through it and we'll ask for the management to answer accordingly.

So first of all, I think the first part is about the financials and also the outlook. So I think the first question has been answered.

So this is about what is the B/B ratio and also, I think investors are caring about the demand outlook into second quarter '25. And also regarding to what's our plans for U.S. and also the China's production, including scale, location and time line for the expansion? And will this -- any kind of expansion plan affect our 2025 CapEx plans?

I think this will -- Eric for answering the question. Thank you.

[Eric Chen, executive]

For the first question, we anticipate the booking number for April, I mean, for April will exceed USD 210 million. Actually, this afternoon, the number already exceeds USD 210 million and booking in the U.S. and China appear promising.

We foresee a strong possibility that the ratio could exceed 1.1 in April, just in April. For the whole quarter, the B/B ratio is still too early to predict since there are many uncertainty involved.

The primary drivers for the growth will be the health care, energy and semiconductor sectors. Demand for the semiconductor sector remains strong in North America and Taiwan. Additionally, the health care sector is showing positive demand in North America, Europe and Japan. The energy sector is also positive in the Chinese market.

So to answer your question, for this month, April, our B/B ratio is expected to over 1.1. For the whole quarter 2, it's still early to mention. Yes, this is my answer for the first question.

And for the second question regarding the U.S. and China production, based on our estimate from now till 2032, because we have a footprint to achieve a certain goal to 2032, we can meet the increasing demand using the current production site, equipment and labor expansion from now till 2028.

Consequently, our production site will remain in Taiwan, China, Japan and subcontractor in Malaysia, which we refer to as [indiscernible], Taiwan, China, Japan and subcon in Malaysia [indiscernible]. But however, from 2028 to 2032, we plan to extend our [ SMT ] production line either in the ASEAN region or the U.S. Geopolitical consideration will be primary factors.

This production value distribution among our estimate will be 36% in China, another 36% in Taiwan, 10% in Japan and 18% from the new site. 36% for Taiwan and China, 10% for Japan and 18% from the new site. This is our estimate.

And from our CapEx this year, we are currently focused on 2 main projects. The first is our North America headquarter located in Southern California, which we expect to complete in the third quarter of 2026. The total construction fee is around USD 80 million. And the second project is the new manufacturing center in Huaya. We anticipate to launch in the second quarter of 2028 with estimate construction cost of around $100 million.

So for this year, overall, we expect the total CapEx will be around $80 million annually, which includes the construction expense for the 2 buildings, the expansion of the SMT [ Nan ] in Taiwan and the investment in R&D equipment and AI tools. This is regarding question 2 for the CapEx plan, also explaining further expansion for the production site in China and in U.S.

[Kevin Chen, analyst]

So now we will move on to the next part of the question, which is regarding to the tariff. So regarding to the question 1 about tariff, I think investors are curious about what are the current drivers by sector and also probably the growth ranks by region for second quarter '25 and 2025.

So this question, we will ask Linda for help.

[Linda Tsai, executive]

Okay. This is Linda. I think regarding this question, I think some of the answer already replied and sharing update by Grace and Eric. But here, I would like to explain again. I think from last year, some of our key growth drivers, including semicon, health care, autonomy robot are still our growth driver in quarter 1 and the upcoming quarter.

But in some of the regions, especially in Europe, we see gaming and gambling increasing for quarter 1 and upcoming quarter. And also the key project of video application in Japan and USA. So those key drivers bring us good performance in quarter 1 and also will continue for the upcoming quarters.

And regarding regional performance, with the exception of Japan, Korea and [ LatAm ], the rest of the region, the booking and backlog across most regions remains strong. But however, the ongoing tariff situation continue to face uncertainty for the second half of the year. Yes, so this will be my feedback for the first question.

[Kevin Chen, analyst]

Got it. So comes to the second question. This is about what is the average magnitude about the potential price hikes to the U.S. customers to offset the additional tariff cost? And what is the expected margin impact for second quarter '25 or like for full year of 2025 in this regard?

I will ask Eric for this question.

[Eric Chen, executive]

Okay. The tariff situation has changed rapidly, promising our U.S. team to reverse our customer announcement 3 times. Here are our main principle for addressing tariff issue. The first, Advantech will assist customers with truck shipments if their clients are not located in the U.S.

I just give you an example. One of our key customers previously maintained a warehouse in the U.S. for global shipment, even though 40% of their clients are based outside the country. In such case, we will facilitate truck shipment to help our customers mitigate the impact of tariff. So the first one, we will adjust customer to do the truck shipments.

Second, we plan to expand our local assemblies capacity in the U.S., focus on high-value peripherals such as CPU, hard drive, memory, flash, installation. This is second, we will perform -- we will expand our local assembly capacity.

Lastly, about 40% of our customer orders are under the [indiscernible] condition, meaning customers are responsible for 100% of the tariff cost themselves. For the remaining 60%, we will negotiate with our major customers to develop a proposal to address the tariff issue.

So of our order, 40% are based on the as was term, which means the customers need to pay the tariff by themselves. The remaining 60%, we will negotiate with our customers.

Currently, product made in Taiwan accounts for 93% of U.S. order and fall under the exemption rules, meaning the tariff impact for the second quarter is minimum. Right now we have 90 days exemption rules in effect.

Regarding the impact on margin performance, actually, we conduct scenario-based calculation, use current tariff. The worst case, we decreased our margin by only 0.4%. For this moment, the tariff situations, the worst case is only 0.4%. Okay. This is my answer for the question 2. Yes.

[Kevin Chen, analyst]

Thank you, Eric. So next question will be, how should we maintain our competitive age or let's say, about the market shares comparing with our peers who already have the product lines or the SMT lines in the U.S.? And this will go for Linda.

[Linda Tsai, executive]

Thank you. For Advantech USA, currently, we already have the system integration service center in Milpitas, California and another new service center, which was approved by the Board meeting in 2023. And this new service center, the integration center, will be operational in Tustin, South California by the end of the year. And the new production facility of this one will be around 90% of the current one we have in Milpitas.

So as a result, by 2026, which means that early next year, the total production for Advantech USA output will double and to meet the demand for high mix and low volume of the customer inquiry and also for the strategic key account customer in USA.

And although we don't have the SMT line in USA at this moment, but over 70% of Advantech USA customers are buying system product from us, so with 2 system integration facility in USA, the expansion strength, our capability to service strategic customer with the flexibility and fast turnaround time locally. Yes. Thank you.

[Kevin Chen, analyst]

So next part, we will discuss about the business by region and also by sector. So following recent high tariffs for exports to the U.S., so what is our view regarding to the China's and also U.S. customers' demand so far? And then -- and also the demand outlook into 2025? And also, are there any changes in the visibility or customers' orders at this point?

[Eric Chen, executive]

Okay. [Indiscernible] U.S. business model emphasized on key accounts and project-based work, so we do not anticipate a significant impact in this quarter. However, if high tariffs remain impressed after 90 days, we are concerned that customers may postpone the shipment in the second half of this year.

Additionally, we -- the new engagement project might also result in delays. This is what we worry about if the high tariffs remain impressed after 90 days.

In the Chinese market, we saw a strong booking in April and there are no signs of decline in demand. Our only concern is that some critical components made in the U.S. may be subject to high tariffs, which could increase the total -- our overall product cost.

However, as I know so far, those key components are covered by the exemption rules as well. So right now there's no immediate impact to the Chinese market.

Overall, the outlook in the U.S. and China remains strong in the second quarter. For the third quarter or the second half is still too early to predict. So basically, the first half, we will deliver a quite good result both in China, also in the U.S.

[Kevin Chen, analyst]

Got it. And so next question will be, what is our margin outlook for the edge AI business over the next 3 years? And also what strategies are we planning to improve our overall margins? And are there any new applications or products for edge AI under development that people so far don't know? And if there's any color to share?

[Eric Chen, executive]

Let me try to answer the question first, then Linda can give some color on it. We are taking advantage of the scalability and the benefit of edge computing. We are well positioned to develop and master technology across various edge AI semicon solutions, including offering from NVIDIA, AMD, Intel, Qualcomm, MediaTek, something like that.

In addition, we are enhancing our software service capability to maintain a long-term competitive edge alongside this hardware platform. Our focus includes, first, offer a comprehensive device management service that connect to the Advantech IoT devices, allow us to remote management of them along with the data and applications. This is the first one. We are trying to enhance our software capabilities.

Second, provide a container-based software development kit we call edge AI development kit for our customers to download from our WISE-Edge website and integrate wireless AI application domains.

And last but not least, integrate key sensors at a field site. By combining hardware and software, we anticipate achieving additional gross margin of 2% to 3% in the long run. So we aim to increase our margins through the AI combined software and hardware integrations and try to increase our gross margin by 2%, 3%, maybe 2 years, 3 years later, we can achieve this goal. Yes.

[Linda Tsai, executive]

This is Linda. So follow on Eric's update, I think for the Advantech edge AI product portfolio, it's we target to provide a variety of edge AI product solutions that's including from very high-end edge AI server and computer system and embedded edge AI board and [ survey ] car.

And among this, edge AI server on the high end tend to have a lower profit margin because we have a higher cost. Costs are good for the processor, memory and [ GPU ] car. But most of the edge AI opportunity from our perspective still lays on the edge computing for the car, which means those are the market and the product solution where our margin are already strong.

And additionally, regarding to improve the profit margin, as Eric also mentioned previously, we continue to drive our cost savings and operational efficiency by leveraging our procurement power, supported by our current market share in edge computing, because most of the components are still commonly used on the edge computing and edge AI solution.

And the other one regarding the question for the new application for product for edge AI, I think edge AI keep evolving day by day. Beyond the area we talked about in the past about the smart space, transportation, health care, automation or robotics, we do see the growing market interest in deploying the large language model, LLM at edge.

Perhaps that at the beginning of the year from DeepSeek and also a lot of the company -- and company are trying to adopt those models in their enterprise.

And to address this, we are developing high-performance edge server with the scalability architecture to support different GPU car. And this will position us better to support emerging AI workload and strengthen our competitiveness in the edge AI landscape.

And nevertheless, in addition to the vendor, it's very important for edge AI to build up the ecosystem with the leading technology partner, including NVIDIA, AMD, Qualcomm and Intel and the source of global ISV and to deliver the comprehensive product solution to the market. Thank you.

[Kevin Chen, analyst]

So next question, we will go for our long-term strategy and also our development outlook. So are there any M&A or investment opportunities in near term? And what should -- what could be the current target under our view?

[Grace Liao, executive]

This is Grace. I'll try to answer the question and maybe Eric can add more color on this.

First of all, I think the mindset of our strategic investment and synergy creation, we try to maximize the add value in technology-wise, especially AI-related, domain knowledge and also regional expansion, instead of a pure capital gain or even financial angle, okay?

And second, internally, we do set long-term growth targets and we plan to reach the goal by 2 engines, which is organic growth and also M&A. For resources, not only dedicated EBO team, which means emerging business opportunity team and also ACI, Advantech company investment team internally, but also we're leveraging external investment partner networks, for example, financial advisers and also PE funds to monitor the potential opportunity globally.

So in the future, direction could be in 3 dimensions. First of all, AIoT core technology, which including like AI-related technology or even like connectivity, okay? And second, IoT domain; and third, regional expansion. However, it's too early to comment on the details in the current moment. So I think, if there is a specific target, we will wait for internal evaluation and also wait for the approval by the Board and announce externally. Thank you.

[Kevin Chen, analyst]

Okay. So these are our prepared question list for the management team. So I think we still have time. So we will open up the Q&A for the floor. [Operator Instructions]

So maybe before waiting to see if there's any questions online, I have one follow-up for the management team. So given that the China, I think they just report about their PMI at the last day, which is today for the April and they seem to have some of the fluctuations.

And I know that we have seen the strong demand from China channels, especially for the -- for their internal domestic demand. But how should we think about going forward, what could be -- what could be the long-term growth rate in China?

And I know that we have adopted some of the local supply to improve our competitiveness regarding to our product and about the pricing competition. How should we think about the market situation in China now?

[Linda Tsai, executive]

Yes. I would provide the comment first and later, I think Eric can make ample flavor. Indeed, in April, we see some of the booking increase from China. But I would say this is because maybe it's a tariff issue. It's not the increasing demand, which mean they just give order earlier.

And the second is that, indeed, China market competition is still very high. But I believe the worst case has been passed. So what we are doing is that how can we improve the margin for China, even though right now the market share is getting stable, improve the margin, as you see that we are going -- we are already implementing more like cost-effective component with good quality for the customer -- for the market, not only China, probably global, so improving the margin.

Second is that getting more and more increasing demand asking for China silicon, which means non-Intel, non-AMD-based or Qualcomm American silicon. For the China-based product, this is already Advantech invest like 5 years ago and we keep investing that. That bring up -- increase our competition -- competitiveness to other competitors. Yes, this is my feedback.

[Eric Chen, executive]

Actually, 2 key actions. We are ongoing, first one, to leverage local supply chain advantages. We have selected models ongoing to try to 100% leverage the local supply chain advantages because China component looks like have a significant cost advantage compared with the global branded. So this is the first one we are trying to address.

And the second one is we are under discussion to upgrade our China PD position because for past, China PD is under Taiwan PD's management line. So we are trying to upgrade China PD to try to deliver local comprehensive product lines to fulfill local customer requirements. This is what we are trying to do for right now.

[Kevin Chen, analyst]

Got it. So is there any questions from the floor?

[Grace Liao, executive]

Maybe during waiting questions, we do have some information to share. And actually, we are quite honored to announce that Advantech will attend COMPUTEX 2025 during May 20 to May 23 and with the main theme of edge computing and WISE-Edge in action. So welcome to visit us in the booth.

Meanwhile, we will hold a very high-profile conference on May 19 at CPC Building Guoguang Hall. The speaker, including our top management of Advantech and also our Tier 1 global partners such as NVIDIA, Qualcomm, Nagarro, for example, so welcome investors and also media partners to join us during the conference. Yes. Thank you.

[Eric Chen, executive]

Also welcome to visit our exhibition in Nangang, Nangang Exhibition Center during the COMPUTEX. You can experience our edge AI, edge computing solutions, especially for the hardware plus software integrated solution. There's a lot of showcase. We are waiting for you to please join us to experience what we can offer to our customers to experience it. Yes.

[Kevin Chen, analyst]

Okay. So maybe one last question from me and we will see if there is any questions from the floor. But I'm still wondering about -- I know there are still a lot of uncertainties, especially in second half, given that the tariff and also Trump administration, their movement is still unpredictable. But how should we -- how is our thoughts regarding our growth into this year for full year?

I understand that we have acquired Aures and our organic growth seems to see some of the recovery. So how should we think about the base case and also maybe the worst case for this year, full year growth?

[Eric Chen, executive]

I think the best case, we will have above 20% growth. Yes, this is the case we want to achieve. And the worst case, I believe will be 15% I just guess because there are still a lot of uncertainty in the second half. But worst case is 15% and the best case is 20%, yes, for this year.

[Grace Liao, executive]

But again, as a company policy, we actually announced our guidance quarter-by-quarter. So this is a wild guess for the full year, it's not official guidance.

[Eric Chen, executive]

Yes. Yes.

[Grace Liao, executive]

Yes. Please understand. Thank you.

[Kevin Chen, analyst]

So is there any further question from the floor?

Okay. It seems there is no further questions. So thank you all for joining today's Advantech's earnings call. If you have any further questions, please feel free to contact Advantech's IR team or e-mail me directly. So I think see you next time, next quarter and have a nice day. And thank you all for attending.

[Eric Chen, executive]

Thank you.

[Grace Liao, executive]

Thank you.

[Linda Tsai, executive]

Thank you.