Advantech Stock

Okay. Good afternoon, and good morning, everyone. Welcome to Advantech's First Quarter '26 Earnings Call hosted by UBS. This is Ally Chen, covering the industrial sector at UBS. It's our pleasure to have Advantech's management team joining the call today.

On the line, we have Eric Chen, President of GM, CFO; Linda Tsai, President of Intelligent Systems Sector; and Grace Liao, the IR Manager. So for today's meeting, we will start with Grace's presentation and open up for Q&A later. So now let me pass to Grace.

Thank you, Ally. Good morning, and good afternoon, ladies and gentlemen. Thank you for your time today. This is Grace Liao, the Senior IR Manager of Advantech. Regarding our Q1 2026 financial results, Q1's revenue reached TWD 20.4 billion, increased 17% year-on-year, 14% quarter-on-quarter.

Gross margin rate reached 39.1%, slightly lower on both quarterly and annual basis, mainly due to component cost. Operating profit reached TWD 3.7 billion, increased 28% year-on-year. Operating profit rate reached 18.3%, which greatly improved from 15.7% in Q4 '25. Q1 effective tax rate was 18.4%.

Net income reached TWD 3.3 billion, increased 22% year-on-year. Earnings per share in Q1 '26 was TWD 3.85. Q1 '26, both top line and bottom line reached a record high and also beat the company guidance. For regional performance, in terms of U.S. dollars, Q1 '26 revenue reached USD 644 million, increased 22% year-on-year.

For regional performance, all regions reported double-digit growth. Major 3 markets continue to contribute 70% of our total sales with slightly shift in regional mix. North America increased 13% year-on-year, driven by semiconductor equipment and data center projects.

Europe market increased 19% year-on-year due to strong medical equipment and channel sales. China market increased 38% year-on-year, benefit from channel sales, semi equipment and transportation projects. Korean market showed a 44% increase rebound from low base last year, and Taiwan market enjoyed 75% year-on-year growth driven by semiconductor and automation projects.

For sector mix, perspective, all sectors enjoyed positive growth year-on-year. Both IoT automation and Intelligent System increased 19% year-on-year, driven by semiconductor, energy and transportation projects. Embedded sector increased 15% year-on-year, benefit from strong growth of medical equipment in North America, Europe, Middle East and Africa.

Intelligent Service increased 3% year-on-year, driven by health care in Europe and the Middle East and Africa market. However, retail in North America slowed down due to component shortage. For balance sheet, this is also my last page, inventory accounts for 18% of total assets, while inventory turnover days slightly improved to 97 days, reflecting improvements in readiness of future shipments. Cash conversion cycle, CCC, maintained 84 days within a healthy range.

Now I'm handing over the time to President, Eric, to share overall business outlook. Thank you.

Thank you, Grace. Good morning, and good afternoon, everyone. Thank you for joining today's meeting. This is Eric. Let me start with a few comments on the first quarter results. In the first quarter, our top line and operating profit exceeds our expectations. Our gross margin was in line with our guidance. Top line performance was mainly driven by strong demand from the semiconductor and the medical sector, also the transportation sector as well.

In addition, higher DDR4 and SSD price promote customers to press orders early and push the faster delivery. In the first quarter, our OpEx ratio declined by 3.1% year-over-year and operating profit improved by 1.4 percentage points with operating profit up 27% year-on-year.

With a stable tax expenses, we achieved a record high first quarter results with earnings per share of TWD 3.85. In terms of regional performance, China, Taiwan and emerging markets delivered significant growth of 38%, 75% and 24%, respectively.

Demand in China was mainly driven by the distribution channels, transportation and energy sector. Taiwan delivered the strongest result driven by the semiconductor and factory automation sectors. From a sector perspective, the iAutomation and iSystems segments performed well, benefiting from strong demand in semiconductors, energy and transportation sectors.

The Embedded sector benefited from increased shipment of medical equipment in North America, Europe and the Middle East and Africa. iService YoY increased by 3% only driven by growth in health care projects in Europe and Middle East, partially offset the weakness in North American retail business.

So this concludes my comments on the first quarter. Next page, thank you. Let's look at the B/B ratio trend across regions as shown on this page. The first quarter B/B ratio rose to 1.77. In the U.S., the B/B ratio was 2.37 mainly because key account placed order aggressively to secure product allocation and rising DDR4 and SSD prices.

The B/B ratios in Europe and China were 1.76 and 1.30, respectively. It is also worth noting that both B/B, bookings and shipments increased by 48% and 11.6%, respectively, compared with the fourth quarter of 2025.

Next page. Looking ahead to the second quarter, we expect revenue to range between USD 650 million and USD 670 million based on an exchange rate of USD 1 to TWD 31.5. In terms of margin, we anticipate second quarter gross margin of 38% to 40% and operating margin of 16% to 18%.

Next page. I also highlight then upcoming event that COMPUTEX. We have arranged a series of activities designed to engage different target audience. On the afternoon on June 1, we will host an Edge AI conference at Hua Nan International Center.

The conference will cover 3 key themes: regional leadership in the era of Edge AI, real-world AI impact across industry and acceleration of WISE platforms and ecosystems. Day 2 will include an on-site visit to Advantech events at the COMPUTEX exhibitions.

For investors, we will arrange more than 10 rounds of product briefings and booth tours. Day 3, will focus on our Annual World Partner Conference. It will be held at our Linkou campus with business matchmaking and the sector forum as key activities.

So we would like to honor to have you join us for the day 1 or day 2 events. Many investors have already reserved a spot for the day 2 on-site tours with Grace. So please feel free to reach out to her to register. This concludes my guidance for the second quarter, and thank you for your attention.

Thank you, Eric. So I will hand over the time to Ally. Thank you.

Okay. Thank you, Eric. Thank you, Grace. So now let's move on to the Q&A session. We will start with questions we collected from investors before the call and then open up the floor later. So now on the first one about financial and outlook. What is the expected sales mix target in 2026 and '27? And what's the demand for non-Edge AI project expectation?

Let me try to answer the question. We expect Systems and iAutomation to have a stronger growth momentum than Embedded and iService in 2026. Demand from semiconductors factory automation and energies remain promising and products such as Sky servers, IPC, box PC and industrial communication solutions should benefit.

Embedded should benefit from demand in medical equipment and robotics, but we expect this growth momentum to be lower than in semiconductors. In robotics, AMR and AGV demand is stable, while humanoid robotics will take time to move from engineering sample to mass production, even though we currently have around 130 pipeline on hand with total revenue of TWD 120 million.

iService is facing key chip allocation constraints, which may put some pressures on order fulfillment in the first half. So regarding the demand for non-Edge AI projects because Edge AI project accounts for about 20% of our first quarter revenues, most revenue is still generated from our edge computing and devices. At this moment, we do not expect demand from Edge AI product or project to be negatively impacted by Edge AI requirement. So this is my answer to the first question.

Thank you, Eric. The second question is about -- so I think the first part, what is the sales mix for Edge AI project in first quarter? You just answered that it's 20%. And I think another question is about which verticals are driving Edge AI-related orders?

Okay. Edge AI revenue in the first quarter was USD 132 million, accounting for 20.5% of total revenues. We classify Edge AI revenue into 2 categories: Edge AI products and Edge AI components. We always have 2 categories to calculate Edge AI performance.

In the first quarter, Edge AI product revenue grew 67% to TWD 123 million, while Edge AI component revenue grew 58% to TWD 9 million. Here, we define the Edge AI component as a pure buy and sell model with no value added to Advantech products. That accounts for only 6.8% of our Edge AI revenues.

For the sectors, for the demand from the sectors, Edge AI related demand mainly come from the factory automation, robotics, smart city and transportation sectors. By geographies, the U.S., Europe and China accounts for a large portion of these orders. This is my answer.

Okay. The third question is about regarding the B/B ratio. What percentage of order backlog is for delivery in second half 2026 or 2027?

Okay. Based on our ordering system, we have a central ERP system called SAP system. We have a central data. The percentage of our first quarter order with delivery days more than 6 months out was 37% in January, 57% in February and 47% in March.

Overall, delivery schedule for more than six months of this year represent 47% of the total quarter 1 bookings. Advantech -- normally at Advantech, a customer order fulfillment generally fall into two categories: We have standard product and DMS or tailor-made products.

For standard products, the lead time from order to shipments is typically under three months. For DMS and the tailor-made products, lead time depends heavily on customer requirements. In most cases, the shipping occurs within six months. For the quarter 1 bookings, the overall is 70% -- 47% delivery days more than 6 months. This is my answer.

Thank you, Eric. Next question is about material cost impact and the reactions. In terms of profitability, what extent can the increased cost be passed on to customers in terms of different kinds of projects? Any signals that higher project pricing is hurting order intake?

Okay. Thanks for the questions. Advantech go-to-market sales strategy have three priorities. Key accounts, a channel partner and general account. For general accounts, we have full pricing power for key account and DMS business.

When our design products represent a relative small portions of the customer total system cost. Here, I just give you an example. We provide a high reliability Embedded board, Edge AI system were used in the medical device such as surgical robotics or MRI systems, or in a semiconductor equipment such as front-end modules or wafer sorters.

We are more likely to pass a cost increase through our customers. Because, again, our offering is just a small portion of the whole systems. This type of project represent around 70% of our design-in business. However, in the other side, for projects serving the retail market, for example, the kiosk or POS systems, customer tend to more cost sensitive.

Free passing through a cost increase is not always practical, but in this case, we negotiate with customer to agree on proper pricing adjustments. At this stage, we don't see the higher project pricings materially affect order intake in some semiconductor customers. They tend to place an order cover the next 18 months to secure further allocation and capacity to Advantech. We don't see any order intake. This is my answer.

Okay. Thank you, Eric. Next question is about the progress of replacing DDR4 with DDR5, and what has the price increase so far? Has the price momentum eased?

This is Linda. On the migration from DDR4 to DDR5 in Embedded and industrial customer is still ongoing, and typically takes 15 to 8 (sic) months and depending on applications. In quarter 1 and quarter 2, 2026, memory price still remain an upward trend, especially on DDR5.

It's roughly like 30% to 50% QoQ driven by strong AI demand. But in DDR4, stay at a more moderate level, but the ongoing supply is still very tight because the industry continue to face our legacy product. Thank you.

Okay, thank you. For the price increase, for other components such as CPU and other passive components, what's the extent of the price increase, and what is the inventory level of these critical components? Is there any sourcing issue?

From early-to-mid-2026, in addition to memory and SSD, we are seeing the pricing pressure on CPU, especially from Intel and AMD. It's around 10% to 20% price increase, depends on the SKU. Again, it's driven by strong AI demand and limited supply.

In addition to CPU, we also see that AI-driven demand contribute a higher PCB cost, also a longer lead time. Overall, the component availability remain tighter than historical level, and the sourcing condition are becoming more competitive as the lead time extended across more component.

We are also putting the long-term PO vis-a-vis to our supplier. We continue to manage this through diversified sourcing with different strategic partner and the long-term purchase commitment with our upstream supplier, and the closer engagement to support and make sure the supply continuity. Thank you.

Okay. Thank you. Thank you, Linda. And then next question is about regional and sector performance. What are key order drivers by each sector and by different market in second quarter 2026? How is first quarter 2026 new project design win progressing versus fourth quarter last year?

Okay. The key orders drives by sector and by market are as below. For the factory automation, including vision inspections, warehouse management and safety, restrict launch detections is mainly for factory automation.

For robotics, including AMR and AGVs, we are also receive many RFQ for humanoid robot. As mentioned earlier, we have a lot of pipeline with more than TWD 120 million total revenues. Smart city and transportation, including video surveillance, such as railways, heavy duty vehicles, traffic management and roadside video surveillances.

Factory automation demand is primary in Asia. For robotics, demand is primary from the U.S., Europe and China, with a small portion from Korea. Smart city and transportation demands mainly from the U.S., China, Asia and Europe.

For the healthcare, demand is mainly from the U.S., Europe and Korea. For the indicator design in indicators, compare with last quarters, below some data for your reference. In first quarter 2025, secured 46 design win with an estimate annual revenue of TWD 67 million.

In this quarter -- in first quarter this year, secured 53 design win with an estimate annual revenue of TWD 158 million. Compare with last quarter, the design win count increased by 7, but the EAR means estimate annual revenues, increased by 2.3x.

This is the data. Please note that design in activities can be affected by customer demand cycle. Therefore, a 6 months review window provide a more accurate and meaningful compare with just a single quarter. This is my answer.

Okay. Thank you, Eric. Next question is about what are the possible impacts from Middle East uncertainties on Advantech, and what's the company strategy to mitigate risks?

The impact of Middle East crisis has been primarily on smart city infrastructure project, especially in transportation sector, where the implementation plan time line has been experiencing delay.

Overall, the affected business portion remain relatively limited. However, most of business are actually facing indirect impact, including the 1 we shared previously on the increasing cost and the extended lead time for the key component. Thank you.

Okay. Thank you, Linda. Next question is about what would be the highlights of Advantech's COMPUTEX exhibition?

Well, as Eric mentioned earlier, I think, we do have a full series of three days of events during COMPUTEX, including our Edge AI conference in Hua Nan International Conference Center in June 1. During the COMPUTEX exhibition, we do have lots of application and the physical AI showcases in the Nangang center -- exhibition centers in June 2.

In June 3, we do host WPC World Partner Conference in our Linkou Campus with our grand keynote and also sector forums in different partners -- global partners and the customers in the Linkou Campus to have a further cooperation and to build the ecosystem in the future. I think, for investors, we'll welcome the investors and also the media to join us in the June 1 and June 2 event.

We also have a keynote speech by Miller and Richard, right, in June 2 or June 4.

Afternoon of the June 4.

I think we've finished the questions we have on hand. Now we will open up the floor to allow participant to raise questions. [Operator Instructions]. I think while we are waiting for questions from the participants, maybe let me start with a follow-up on B/B ratio. The B/B ratio was like 1.77 as of end of first quarter. Is there any updates like B/B ratio as of most recent ones? Thank you.

I think the aggressive B/B ratio in Q1 2026 indicating 2 parts. First of all, I think we do see very strong demand in the market sides from the enterprise customer, especially in robotic and also automation and the semiconductor equipments.

That is real demands from the end markets. However, with the balance of the supply chain and also continuously cost up in the component side, I think most of the customer is prompted to place their orders within 18 months, which means, I think, they are quite aggressive in their order behavior to secure the sourcing allocation from us.

Okay. I often get asked by investors about how to calculate the B/B ratio. In terms of shipment, is that defined as the quarterly shipment, or can the management team elaborate a little bit on how to calculate B/B ratio?

Let me try to answer these questions. For the B/B ratio is called bill-to-bookings. The ratio compares the shipment versus the order. Just mentioned earlier, we have a central ERP system. We call it SAP HANA. When the new order pass, we will keep the order as an order date.

The booking means, for example, for the April, all the new order came in from April, we keep as the booking. The order date cannot be revised by the manuals. They create by the system automatically. This is, we so-call the bookings. For the shipment as invoice date, as you know, we will generate invoice after the finished goods ship out from Taiwan or from China, Kunshan.

B/B ratio, the B, booking means the order entry in a certain period, especially we calculate by monthly base. For another B, it's called billings, as it's about how many invoice we generate and send out to our customers. This is we call the B/B ratio.

Understand. Understand. Thank you. Actually, so if our revenue is already growing very strong, and B/B ratio is increasing, which means our order backlog is also increasing a lot.

Yes, exactly. Yes, exactly. But pay attention for, because the fulfillment time is -- normally, we get a certain order. We have huge amount of certain order, but the delivery, that means the business might be happens in the coming 2 to 3 months for the standard products. For the design product, it really depends on customer required date. Normally, I just mentioned earlier, it will be shipment within 6 months.

Understand. Okay, thank you. And then separately on the gross margin front, last earning -- last analyst meeting, we understand that we should be able to -- Advantech should be able to pass over most of the cost increase. Meaning that the input cost difference between the signing of the agreement and the delivery day, the cost, the price gap can be largely passed over to our customer. Is this still the practice now?

Yes. As we mentioned in the previous investor conference, actually we take more aggressive pricing policy to our customer. First of all, we do have overall ASP hike in October 2025. That is the first wave of ASP hike with the hiking range of 4% to 8%.

From beginning of this year, we take more aggressive pricing policy with bi-weekly adjustment -- pricing adjustment to our system level product and monthly adjustment to the board level products. We are able to transpass most of the pressure to pricing pressure to our customer.

As Eric mentioned before that, actually, the IPC and also the overall purchasement cost of in customer points of view, it is a small portion. It's quite limited to their overall CapEx. Therefore, I think there is a lower sensitive to the -- in the cost of pricing sensitivity.

Going forward, I think we're still facing the upward pressure from the component side. As Linda mentioned that, besides memory, we do have several items that is still under pressure. we will be more cautious to review our overall cost structure and if necessary, we will continue to pass the pricing pressure to the customer. This is a continued theme of the whole year.

Okay. Thank you.

And all [indiscernible], there's a time gap -- a time lag, how to say that -- the time lag between the new order, also the existing order. We will compensate a little bit for the time lag. If the component is still going higher, then we need to a little bit time to adjust our price.

Usually the time gap is, roughly 1 to 2 quarter.

Yes.

Okay. Okay. Thank you. [Operator Instructions]. We have Meryl on hand. Meryl, please go ahead.

Hello, management team. Can you hear me?

Yes, please.

Yes.

Okay. Hi, management team. Thanks for having me. I'm Meryl from the Taipei Times. I believe last time -- like in our news conference last time, we talked about we have this forecast for our Edge AI percentage to account for about 30% of our total revenue this year, which it was 20% last year.

According to what you just said, I believe we can have a more positive outlook for our Edge AI products this year, right? I would like to ask if we have a new prediction on the specific proportion of Edge AI percentage of our total revenue. This is my first question.

My second question is that, because I think Advantech has been releasing positive outlooks on our robotics sectors as well. I would like to ask, because I think it's either Eric or Miller, like you guys said, we have been cooperating with about 20 robotic clients last year.

I would like to ask if the number has been increasing, like did we cut into new robot clients or we are sticking to the 20 clients that we had last year, and we are still sticking to them, instead of like developing into new customers. Thank you.

Thank you, Meryl. I'll try to answer your questions. First of all is the Edge AI revenue contribution target this year. I think our target is still maintain a 30% by end of this year. I think right now the progress is on track and slightly beat the expectation.

Q1 is 20.5% of a total revenue contribution from Edge AI. According to Eric, that Edge AI revenue is actually in first quarter has reached USD 132 million. I think we are quite positive for the Edge AI progress this year because both the Edge AI products and Edge AI components seems very -- it grows very aggressively.

I think right now we do see a very positive feedback from customer side in the factory automation, robotic and the smart city transportation sectors, especially in U.S., Europe and also China market, which is our major three markets.

I think the first question, right now is on track and I think we are quite positive with the progress right now. The second question is about the robotic clients globally. Last year, around 20 customers, and we are still stick with those key accounts and the major players globally. However, I think robotics still is a early stage for the global.

I think the real contribution is gradually coming up rather than a rapid growth in the short time. I think right now Advantech do have a very good positioning with, we do have a fully product offering for the building block for the robotic applications, including all the sensing technology, all the calculation for sensors and also the modules. However, I think the real contribution right now is still very limited in the first half of this year. I think we will continued to co-work with those key accounts globally.

Just 1 appendix from my side. We have endorsed the robotics engagement, just not only for Embedded sector, but also for the Intelligent System sector. I think that Linda can update a little bit about the progress for the robotics.

Yes. for robotic, some of customer design using Embedded board, some of them in the box. As you may know that, last year NVIDIA released Jetson Thor, and they also have 1 is called Jetson Thor IGX. That product's especially targeting AI robotics.

Either it's human robotics or robotics wheel arm. With this new platform, we also have some of the good customer we are working on the designing. The new platform for this year is that Intel also launched Panther Lake.

This is also the one with the several application they focus. One of the important is on the robotic as well. At the beginning, since quarter -- end of last year, this year, we are working with some of the customer, especially in USA., on that the new platform from NVIDIA Jetson Thor IGX, and also on Intel Panther Lake.

[Operator Instructions]. I also have one follow-up question on the demand front. How will we view the demand? Where it come from? Is it more of a top-down upcycle in terms of automation, in terms of CapEx cycle, or do you see an uneven demand coming from a different subsector? And if this is all about a cycle, where are we in the cycle? Are we just at the beginning, and how long would you expect?

I think because Advantech's business is quite diversified, so we cover quite different sectors. Therefore, I think both of the drivers do have a positive effect to our business. For example, I think we do have a policy-driven related sector.

For example, like automation or even like semiconductor kind of subsidized by the government, especially for U.S. or even China markets, I think policy-driven is one of the angle here, including semiconductor high tech...

In that nature.

High tech and also like, for example, like energy or infrastructure related. For second, we do see lots of emerging sectors, for example, like robotic and also like maybe like AI embedded technology, especially in the healthcare, for example. Emerging technology or emerging sector is one of the driver here. Maybe Linda can add on more information about this question. Thank you.

Yes. I think I will see that on some of the vertical market on the demand cycle, especially on semicon, energy infrastructure and the data center. On semicon, of course, everything is driven by AI demand. This is still at the, I would say, the beginning of cycle because our target customer are the semicon equipment builder, no matter is the front end or the back end, the customer globally.

We still see a very strong demand from our customer where we are already designing. And recently, there are more design requests from our customers. I think on the semicon equipment builder, they are still at the early design cycle, and they are demand from all the fab, one of the very important from Taiwan and others.

On energy side, there are two perspective because the power is very critical for all the data center. We're targeting that, that's already is Advantech that focus market, energy sector, smart grid.

We see the demand for smart grid that we provide the smart substation and virtualization, also the connectivity. That's also the demanding. And I would say still at the beginning because that's all fulfillment for the data center, how they're going to build out their smart grid infrastructure.

Lastly, about this data center. We are not doing business with data center, but with our automation product and customer. In the data center, in addition to the energy, they need a lot of gateway and automation control.

That's also flowing in the right data center through our automation customer. On semicon energy, especially on the infra side, on smart grid and on the data center also is on infrastructure wise, it's benefit to us. I think it's at the beginning of the increasing cycle demand. This is my answer.

Okay. Thank you, Linda, and the team. checking if anyone have any question.

While we are waiting for further questions, I would like to recap the key points that we deliver in -- during the last investor conference. Because we, this year -- beginning of this year, approved by the board, actually, Advantech do have majority changes in our new dividend policy.

I would like to take a few minutes to recap the key points for that. We do have a new dividend policy beginning of this year to realize more, the profit sharing to the shareholders and also try to optimize the ROE and the value creation of the company. The key point for the new policy would be including three parts.

First of all, dividends, format shifting from stock dividends plus cash dividends. Right now, shifting to 100% cash dividend base. Second, we increase cash payout ratio, raising from 70% to 75%, up to 70% to 80%. This a kind of a range.

The third part is, we also announced the special cash dividends for the next three years, for additional TWD 2 per a share annually, sourcing from our capital reserves. And this is for the next three years, a period from 2026 to 2028.

Therefore, with the new dividend policy take, the year 2025, for example, that our total EPS last year is about TWD 12.25. With 75% cash payout ratio, that would be TWD 9.2 per share, plus TWD 2 special cash dividend additionally. That was a total TWD 11.2.

Therefore, The overall cash dividend payout is TWD 11.2 out of TWD 12.25. I think the total cash payout ratio would be 91.4%. That is higher than the historical range in the historical. So therefore, I think this is again, the new dividend policy from the management team and also approved by the board. This is a try to realize the profit sharing to every shareholders and allowing me to recap this key points to the investors. Thank you.

Okay. Thank you, Grace. I saw we have two questions. First from Rohit. Rohit, Please unmute yourself. Yes, please.

Thanks for the opportunity. If you could give us some more color on what exactly are the kind of products going into semiconductor equipment customers and into data centers, if you could provide some flavor. Second is, both put together, what will be the sales contribution from this?

Okay, thank you, Rohit. Maybe Linda can share.

Yes. For semicon equipment builders that we sell, our product is on edge computing. And from the front-end tool of the semicon equipment tool, they need that server grade of that computing over there. That's all their engine.

In addition to that, some of our semicon customer, they also require the IO, DIO, AIO and some connectivity where Advantech can provide that bundle selling together. That's for semicon. Some of semicon customer, they also, like, require the rack integration.

There's also new emerging business that we're incubating instead of just providing a rack server used on the semicon tool, also the full rack integration. Data center, we are not selling server to data center, but data center-wise, on the infrastructure, they are the energy need to be monitoring.

Those requiring the gateway, again, also with some of the IO connectivity. That's why we work with our OEM customer for data center. Some of the OEM customer, they are the automation OEM, and we work with them closely, and with them, they sell to data center. I hope that answered your question.

Got it. That's very helpful. Both put together semicon equipment customers and the business for data centers, what would that be as a percentage of sales for one quarter, just to get a sense?

The big portion of the revenue should be on semicon tool. The portion, because we are the -- I mean, the Advantech business -- Most of the semicon business -- I mean, semicon equipment builder, semicon tool, the front end, back end, mostly it come from Intelligent System team.

From Intelligent System team, quarter 1, we have like 234, I would say like 30% to 40% because this quarter 1, one of the growing driver is semicon from U.S., Taiwan, Japan and Korea. I would say that 30% to 35% minimum is from semicon, or could be higher.

Could be higher. Yes, could be higher. On the other hand, data center, because we are selling gateway, the ASP is much lower. The gateway is not a high performance server used on the tool, so data center is more like we're selling the gateway, could be the ARM-base. That revenue portion is not that big. It's more on the quantity-wise. Those are mainly from automation product line -- IoT automation product line.

That's helpful. Just one follow-up on the memory side. How are you kind of -- how is Advantech securing memory supplies for the next, say, you know, few quarters? Are we directly speaking to the memory companies and signing long-term contracts, or are we relying on the spot market, in case there is a shortage?

On the memory side, no, we do not talk to Micron, Hynix and Samsung directly. We work with the module house in Taiwan. And module house, several of them in Taiwan, they have the long-term agreement with Samsung, Hynix and Micron.

Between Advantech and module house, we have the long-term agreement with them that, that whole year, the long-term agreement, and we show them our forecast. That's how we can guarantee the allocation. But really in case if our demand is out of our forecast, then we will still work with our module house because they have the inventory, and then we have the buffer, even though our demand is higher than our long-term agreement, LTA.

Okay, thank you. Next question comes from Lorraine. Lorraine, please unmute yourself.

Thank you for taking my questions. The first question is about your order backlog as of the first quarter or as of the April. And then can you share the percentage of your total backlog that will be delivered for the next 6 months? One more follow-up on this question is that would you foresee any factors that will prevent you from deliver this product within 6 months schedule, likely maybe CPU or memory shortages?

For the B/B ratio, as Eric mentioned during the previous session, that overall this year, the order schedule delivered in the second half of this year, which means more than 6 months deliveries, around 47% of total Q1's booking. And I think this is based on the component situation in the current moment.

For IPC, I think the preparation and it is more of -- usually take maybe around 6 to 8 weeks, more than 6 to 8 weeks. So I think this is probably is quite fixed in the whole year. I think under the supply chain situation right now, there is unlikely to push the delivery before the schedule right now.

So I think for the booking situation this year, considering the pricing -- the component pricing still went up for the following quarters, I think our B/B ratio could be in the high range for the following quarters. That is from B/B ratio points of view. Maybe Eric can share.

I can share the backlog situations. We do not disclose these numbers. But just for your reference, from now till December, the B/B ratio -- or the backlog, I mean the backlog is over TWD 1.3 billion, and for the second quarter, at over TWD 700 million.

But due to the shortage on DDR4 or SSD, we have more conservatives. Our guidance is below -- a little bit below the backlog. Here the backlog, it's most come from our customers. But the reality is sometimes, we will encounter the material supply issue. So we just give a certain discounts, then give you the guidance. The backlog actually is over TWD 700 million, just for -- this is just the beginning of the [indiscernible]. We will gradually increase the backlog till the second quarter. Just for your reference.

I have one more follow-up. Could you also share on the current bill of material for memory and CPU on your component and system level product?

Sorry, can you repeat your question again, Lorraine?

Sorry. The BOM cost as of the first quarter 2026 on memory and CPU on your system and component level products.

In BOM cost, structure points of view, actually we don't disclose the detail as a usual basis. Roughly...

It very depends, yes.

It very depends because we have like Embedded board or the memory chip down, and we could have the edge computing with the memory module, and we have the server. With the RDIMM is very expensive. In terms of the memory cost, over of bill of material, the percentage really very depends on different product line. Some of the boards on the system, it depends on what the chip set.

So Lorraine, which means we are not able to disclose more detail in the BOM cost points of view. I'm sorry.

That's okay. Thank you.

Thank you. Probably due to all the limits of the time, maybe we can take one last questions. Any inquiry from the investors or from Ally's side?

No? Okay. I think, we are all good here. Any final remarks from the management team before we conclude the call?

Not exactly. I just welcome you to join us on the COMPUTEX event, especially for day 2. We already arranged more than 10 rounds of product briefings, also the booth tour. So it's our honor to invite you to join our COMPUTEX event. Thank you.

Okay. UBS also host a COMPUTEX tour, so if you want to join, please register with us. Okay? All right. Thank you, management team. Thank you, everyone, for joining the call. Let's conclude the call today here. Thank you. Bye.

Thank you. Bye-bye.

Thank you. Bye.

Good afternoon, everyone. Welcome to Advantech's 3Q 2025 Earnings Call. My name is Derrick Yang. I'm the tech coverage analyst at Morgan Stanley. Today, it's our honor to have Advantech's senior management with us to discuss the 3Q 2025 results as well as the outlook in the coming few quarters.

With us on this call, we have the CFO and President of General Management, Eric Chen, President of Embedded Sector Miller Chang; and Senior IR Manager, Grace Liao. In today's call, we will have the prepared remarks from the management, followed by the Q&A session.

Without ado, let me pass it to Grace for the briefing of the 3Q results first.

Thank you, Derek. Good morning, and good afternoon, ladies and gentlemen. Thank you for your time today. This is Grace Liao, the Senior IR Manager of Advantech. Regarding our third quarter 2025 financial results, third quarter revenue reached TWD 17.77 billion, increased 19% year-on-year and a flattish quarter-on-quarter. Gross margin rate reached 38.9%, slightly lower than guidance range due to material cost impact.

Operating profit reached TWD 2.7 billion with OP rate reported 15.2%. Q3 non-op items gained TWD 568 million, mainly due to dividend income and disposal gain of investments. Third quarter effective tax rate reached 16.2%. Net income reached TWD 2.77 billion, increased 22% year-on-year. Earnings per share in third quarter '25 was TWD 3.20.

In the right side, accumulated year to third quarter '25 performance. Year to third quarter sales revenue reached TWD 53 billion, increased 22% year-on-year. Gross margin rate was 39.8%. Operating expenses increased 11% year-on-year, which factor in AURES integration. However, expenses organically increased 5% year-on-year. Operating expenses remain strictly controlled. OP margin rate reached 16.5% moderately improved year-on-year basis. For the 3 quarters this year, net income reached TWD 7.49 billion, increased 18% year-on-year. First 3 quarters earnings per share reached TWD 8.67.

For regional performance, in terms of the U.S. dollar, year to third quarter '25, revenue reached USD 1.7 billion, increased 25% year-on-year. For regional performance, most of the region reported double-digit increase only North Asia year-on-year flattish due to political uncertainty in Korea market. For the major 3 markets accounts for 68% revenue contribution.

For North America year-on-year growth 23%, driven by semi equipment, robotics and medical equipment projects. For Europe, market increased 22% year-on-year due to medical equipment, transportation and gaming projects contribution. For China, market year-on-year increased 14% due to strong channel sales and automation and energy projects. For Taiwan, market year-on-year increased 24% due to strong optical and semi equipment projects and also transportation projects.

For the sector performance for the first 3 quarters this year, all major sectors enjoyed double-digit year-on-year growth. For IoT automation, year-on-year increased 15%, driven by energy infrastructure budgets in North America and also China, and automation projects penetrate quite well in Europe and Taiwan markets. For Intelligence Systems year-on-year increased 34%, outperformed in semi equipment, video streaming and also robotic projects. For embedded sector year-on-year increased 11%. Strong demand in medical equipment, especially in North America, Japan, Europe, Middle East and Africa market. Automation doing quite well in North America and also China market.

Gaming sector doing quite well in Europe. Last one, intelligent service sector year-on-year increased 58%. Organic is 24% year-on-year. Besides AURES synergy, strong organic growth in health care, hospitality, mobility inspection projects.

For our balance sheet, cash and cash equivalents accounts for 21% of total assets, lower than the previous quarter due to cash dividend payment in third quarter this year. Inventory under control. Inventory turnover days is 93 days and the cash conversion cycle, CCC, is reported 84 days, which is greatly under 99 days, at the comfortable level for the management team. Overall, capital efficiency improved and our overall financial structure is quite healthy. This is my last page.

So I'm handing over the time to President, Eric. Thank you.

Thank you, Grace. Good morning, and good afternoon, everyone. Thank you for joining the meeting today, and this is Eric. I want to share some comments on my share on our third quarter's results. In the third quarter, our top line performance exceeds expectations in U.S. dollar terms. However, our gross margin and operating profit were slightly below guidance due to increase in DDR4 component prices, which reduced our gross margin by around 1 percentage point in the quarter 3. Operating expense in the third quarter grew by 11% year-on-year, 0.7% quarter-over-quarter. This increase is primarily due to the consolidation of AURES and onetime relocation fee and decoration fee for our Japan Osaka office. If we include these fee factors, the organic growth rate for operating expenses will be 5% year-over-year.

Regarding the regional performance, the U.S. and the European market shows significant rebound with growth rate of 23% and 22%, respectively. In the U.S., strong demand but not in the medical, video streaming and semiconductor sectors. In Europe, just as Grace mentioned, the demand was primarily driven by the transportation, automation and medical sector and the gaming sector as well.

The Chinese market grew by 14%, driven by the factory automation and energy sectors. The Taiwan market grew by 24%. In contrast, Japan's market posted single-digit growth only, while Korean market declined 6%, largely due to political issue in the past few months.

From a product perspective, the iSystem and iService sector performed well. ISystem benefiting from strong demand in video streaming, semiconductors and energy. The iService sector saw a remarkable 58% growth due to the AURES consolidation. Excluding AURES, the group growth was 23%. The other 2 sectors, including high automation and embedded design sectors, continue to perform on track. So this concludes my remark regarding the third quarter.

Next page, yes.

Now let's review the trend of our B/B ratio across different regions. As indicated on the page, the B/B ratio for the third quarter decreased from 1.08 in the second quarter to 1.01 only. In North America, the B/B ratio peaked at 1.19 in the second quarter, but softened to 0.88 in the third quarter due to the issue with design and project cycle.

Europe is showing substantial strength with a B/B ratio of 1.10 despite the challenges posed by the summer vacation period. The Chinese market remained stable with moderate growth and the ratio has consistently been at or above 1.0 throughout Q1 to quarter 3. In the third quarter, the B/B ratio was 1.01. It is also worth noting that our shipment has consistently increased in the U.S. dollar terms since the first quarter of 2024. I saw a few questions regarding the B/B ratio, and I will explain in more details in the Q&A session, especially for the October B/B ratio.

Next page. So as we look ahead to the fourth quarter, we expect our revenue to be between USD 550 million and USD 570 million based on an exchange rate of USD 1 to TWD 30.4. Regarding margins, we anticipate our fourth quarter gross margin will be between 38% and 40%. In addition, we procured the operating margin to be between 15% and 17%. This conclude my guidance for the first quarter. Thank you for your attention.

Thank you, Eric. So I will pass it on to Derrick.

Thanks, Grace and Eric, for the prepared remarks. Now we will start the Q&A session. And we have already gathered some questions from investors in advance. So management will go through them first, and then we will take the questions from the line. So the first question is regarding the preliminary colors into the 2026 outlook. So not sure whether or not management can share some views on this outlook into 2026?

Let me share my thought. Actually, we are currently in the target second stage for 2026. And the overall future -- figures for each product group and regions will be more precise by the end of November. Preliminary feedback from the U.S., chinese and EU business leaders indicates that the 3 major markets are positive on automation, medical and semiconductor sectors, and offset double-digit growth target for the next years. I met with our Europe business leader, Jash, who is very positive about the automation sector in Europe. So the corporate goal is also to achieve double-digit organic growth next year. So this is our goal to set a listed double-digit organic growth next year. As usual, we will provide official guidance unless every quarter.

Okay. Thanks, Eric. And then the second question is, how are the shipment and order momentum so far as we enter into 4Q 2025? And also, can we share some initial colors on the B/B ratio for each region?

Okay. The B/B ratio for quarter 3 remained stable. We have a B/B ratio of 1.01 as the bidding continued growth. For the entire fourth quarter, it's still too early to map the distinction. However, I will just give you an information. In October, the B/B ratio was very aggressive rebounding to 1.19. This increase was primarily driven by the end of summer vacation in Europe and the Chinese holidays lead to aggressive order placement.

In October, the B/B ratio grew 1.23 for the EU, 1.20 for China and 1.19 for the U.S. as we received a lot of design order for the U.S. U.S. not perform -- our B/B ratio not performed quite well in the third quarter. But in October, it rebound to 1.19. This is regarding the B/B ratio. We just confirmed the figures in October. For the 4 quarters, it's still too early to make predictions. Thank you.

Okay. Thanks, Eric. And the third question is, as you observe any impact from the tariff recently? And also, do you have any major plans to mitigate the impact? And also what are your customers' feedbacks on those plans?

Okay. Let me explain this question. The U.S. market represents 31% of our total revenue. In the first half of 2025, 93% of the product we sold to the U.S. were import from our plant in Taiwan, only 6% from China and 1% from Europe, 93% import from Taiwan, only 6% from China. As a result, the high tariff in China will not affect U.S. customers and their business. The majority of our U.S. customers need our products at our Taiwan production plant, which is currently under tariff exemption period. And the tariff rate for most of our product is full to the U.S. and remains 0 tariff rate.

However, if Taiwan face high tariff, we will implement 3 key initiatives. I will explain. The first, expand our truck shipment service to our U.S. customers. I just gave you an example, one of our customers, key customers, very big customer, who previously maintained a single warehouse in the U.S. In the past, we shipped our product to their warehouse and then they distribute 40% of their customer outside of the U.S. Now we offer truck shipment service directly to their U.S.-based customers, enabling them to avoid high tariff imports by the U.S. government. So we delivered the end-to-end service to avoid high tariff imports by the U.S. government.

And second, we will increase the local assembly service at our U.S. production site. We have strong capacity in the North America. We plan to ship the PCBA to the U.S. plant and complete the final assembly with high-end components such as CPU, hard drives and memory locally. This stretch will reduce the tariff impact since the import value of the PCBA is lower than that of the core assembly systems if the tariff is quite high.

And third, adjust pricing based on our trading terms. Currently, 40% of U.S. orders are under as-was terms, which means customers are responsible for paying the tariff by themselves. For the remaining 60% of order, we will raise price to offset the tariff impact, especially on standard products. For key account and project-based business, only a small number of customers are likely to seek tariff for from Advantech. In such exceptional case, we might absorb 30% of tariff as a matter of principles, but subject to specific terms and conditions, including no postponements or adjustment to payment term or shipping schedule.

So overall, the tariff impact on the U.S. market now is limited. However, we are concerned about the price increase may lead to a decline in demand, which should affect our business in 2026 is what we are afraid of. If the tariff is high, we will increase the price, then the market demand will decline. So this is my explanation for tariff and corresponding action for Advantech. Thank you.

Thank you, Eric. And then we will move on to the next one. It's regarding the component price hike. So how much was the impact from the increase in component prices on your gross margin in the third quarter? And do you have any plan to raise your ASP? And if yes, what's the estimated timing of that higher ASP in terms of the contribution to your revenue?

Okay. The increase in material costs, particularly for the key components such as DDR4 and SSD led to a decline of around 1 percentage point in our gross margin during the third quarter. If pricing continues to increase, the GP impact for the fourth quarter will be greater than in the third quarter. So this is for sure. Since we prioritize secure raw material supply ensuring on-time delivery to our customers, there's always a time gap between cost increase and the completion of the selling price adjustments.

At the beginning of October, we officially issued a price adjustment notice to our customers and worldwide business leader, with increase of 4% of board products and 8% for system products. However, for specific projects with long-term agreement, price adjustments are still under ongoing negotiation with customers. We expect the price adjustment to positively impact new orders and standard products in the first quarter of 2026.

For existing project orders and the margin recovery, it depends on the test of less pricing discussions. Take the U.S. sales team practice as an example, they try to collect a down payment and increase the selling price for most of the projects that will consume DDR4 or SSD. For existing projects order, as mentioned earlier, they will negotiate with customers to revise the future price. So we already made an official announcement for 4% board level price increase and 8% for system level price increase worldwide in October.

Thank you, Eric. And then the next one is still on this increasing component cost. So how is your inventory level for DDR4 right now? And do we have any issue securing them on the supply side right now?

Since the second quarter, we have proactively advanced procurement to align with customer demand and the market trend. However, due to a sharp increase in demand beyond our expectation over the past few months. Our replenishment has fallen short of demand. As a result, our inventory level remained low and the overall market continued to experience a tight supply-demand imbalance.

Given that a major supplier had implemented strict spot pricing and allocation control, we must now ask customers to make advanced payments before we prepare materials. This step is intended to secure mutual commitment and ensure the timely available of materials. To date, although we have faced challenging procure memory and SSD components, we have not encountered any significant supply disruptions. We didn't encounter any significant supply disruption. This is very important. We anticipate this supply issue and unstable price into the middle of next year. So far, the inventory level is not so enough, but everything is still under our control. This is my answer.

Thanks, Eric. And then we got another one on this component supply issue. How is the transition for Advantech from DDR4 to DDR5 for your products so far? And is DDR5 also seeing a tightening supply right now?

The transition for DDR4 is on progress, in line with our product road map. Of course, that path varies by application segment by different product group. At the beginning of this year, our product division had already started the transition. For standard products, the transition is going more smoothly. For telemed, our customer design products transition are mutually slower due to the way involved the qualification circles. We usually need the customer approval for primary component change for the telemed products. So this is what we -- our current stage.

As for the question of DDR4, it's also in short supply, we are not sure whether it's a part of major supplier marketing strategy or reflect the real situation. For those questions, we have no comments on this part. Thank you.

Thanks, Eric. And then the next group of questions is regarding your regional and sector performances. And the one we get is, what's the growth that we are expecting to see from each regions, including North America, Europe and China and also their respective key growth drivers heading into 2026?

Thanks for the question. This is Miller speaking. About the region from three key main region, North America, Europe and China, we do expect to have a double-digit growth continuously in 2026, next year. About North America, as our direction aligned with the U.S. government, their strategy to focusing on automation, especially the semiconductor move back to U.S.A., medical, military sector, defense and also the professional audio/video sector. Those sectors will continue a strong growth.

Then talk about the Europe, Europe is not a easy country to deal with, especially the cultural difference and also the Europe government, they emphasize the protection of the employee works right. However, we still see some sector with strong growth momentum such as automation, energy, oil and gas, agriculture, military, which are expected to maintain a strong growth momentum until 2026.

When talk about China, I believe China situation is somehow unique. They are continuously developing their own technologies and component supply chains. Unfortunately, we established an R&D center at Kunshan nearby Shanghai in 2013, 12 years ago. Now most of the demand in China domestic market is supporting by our China team in Kunshan. So about the automation, semiconductor, medical and also transportation sector are projected a very strong growth in 2026. So this is the answer for the question.

Thanks, Miller. And then the next one is a bit similar, but maybe from the BU's perspective. So what's your view for each business unit demand outlook for 4Q? And how are we looking at 2026 in terms of the relatively strength and weakness among these different BUs?

Okay. From the sector point of view, I think the first 3 quarters and talk about the fourth quarter will be very similar as the first 3 quarters. From the strong sector, I believe because of the AI technology will continue to drive the growth of the industry. So such as automation sector, medical sector, especially the semiconductor equipment is a great example. This year is quite good. We will foresee the continued growth in the Q4 this year. But also the robotics sector, renewable energy sector, energy storage sector, health care, medical maintaining a very strong growth momentum.

So moreover, our ruggedized edge computing system also has fully developed and continue to show a strong growth in the mining and also military defense sector. This is a positive side. Regarding for the weak sector due to the consumer capped spending as income drop, so that reflect some weak sectors, such as retail and also gaming sector in some regions.

Thanks, Miller. And then the next one is regarding the Edge AI revenue contribution for the third quarter and also maybe for the first 3 quarters of the year. And also any expectation for the outlook from this Edge AI business into 2026? And what's the margin that you are making from these Edge AI products versus your corporate average right now? And do we expect that to be higher or lower in the coming few years?

Okay. Let me answer the question. Edge AI products accounts for 9.4% of our total revenue in 2024. In the third quarter of this year, revenue accounts for 17% of around TWD 289 million, increased from 9.4% to 17% in the third quarter. Internally, we divide Edge AI products into product level and component level. Component level means purely buy and sell, such as GPU card. The Edge AI product growth rate was an impressive 156%, accounting for 90% of total Edge AI revenues. In contrast, the Edge AI component grew by 118% and accounts for only 10% of our total Edge AI revenues.

Regarding the margin of Edge AI products, the Edge AI product in automation, iService is 4% above the corporate average. In IoT and energy, it is in line with its average. As for Edge AI component just buy and sell, the margin is below average. This is my answer regarding the Edge AI.

For the 2026, we anticipate the Edge AI will have more penetration and account for at least 25% of our total revenue. In terms of margin contribution, it's still too early to make the predictions. But we expect if we can sell more Edge AI product, we will gain some gross margin benefit from it. This is my answer. Thank you.

Thanks, Eric. And then the next one is also regarding the Edge AI. So what are the main sectors where Edge AI is currently applied? And are there any new emerging Edge AI or robotics applications and also the contribution from ACE series in fiscal year 2025 and 2026?

Okay. Let me answer the question. Edge AI actually has been implemented into many vertical sectors from the existing service sectors such as medical equipment, industrial equipment. These two big vertical sectors contributed a very significant business results to Advantech as of date. So for Edge AI and robotics application, as an emerging sector, over the past 2 years, after we established a product division to dedicated robotics product and solution development and also marketing deployment, now we have more than 200 million projects in design pipeline. It is quite a good news from Advantech global sales and region. So about the Edge AI and robotic application, especially, we are very confident that it will contribute our business in coming years.

Then about the ACE, application computing on edge, the product series, the product concept has been released in Q3 2025, actually just 1 quarter earlier. And we do expect some new products such as ACE RSeries for robotic market, ACE iSeries for industrial market. We will start to release the product to the market by middle of 2026. This is an update from the Edge AI and also robotic application business progress for you. Thank you.

Thank you, Eric and Miller. Now we have already answered most or all of the previously gathered questions from investors. Now we can take the questions from the line. If you have any questions, feel free to raise your hand. After your name is pronounced, please go ahead and ask your questions.

Derrick, we do see some investors raise hands online. So maybe we can take the questions.

Yes, sure. So the first question will be from Rohit Kadam. Please go ahead.

Thanks, Derrick. Thanks, Grace, and thank you, everyone, for this presentation. I have a couple of questions. First is on the U.S. B/B ratio, which dropped to 0.88. Now, are there parts of the U.S. industrial CapEx where there is some sort of a slowdown is what you're picking up? And also, is this because you think there was some pull forward of demand in the first half, which is now normalizing? That's my first question, please.

Let me answer the questions. Just as mentioned earlier, the U.S. B/B ratio in the second quarter was 1.19. But in the third quarter, it declined to 0.88. But in October, the B/B ratio rose to 1.19. So about our internal design indicators, we still have very positive pipeline. The designing and design win indicators shows Advantech USA already got a lot of pipeline -- design win pipeline on hand, and it will secure our business for the coming 2 to 3 years. So for the third quarter, I think the B/B ratio declined just for the design win cycle because in sometimes, we will slow down for the design order placement from the customers. This is my answer.

That's very clear. And the second question is, if you could just share the organic growth number in dollar terms for this quarter as well as for the 9 months of this year?

This year, this quarter?

This quarter.

Yes, this quarter and also for 9 months, that will be very helpful.

I think most of the revenue is organic growth. Only for Intelligent Service 58% due factoring AURES integration. However, Intelligent Service organic growth is 24% year-on-year basis. This is for the first 3 quarters.

He means YTM organic growth. AURES accounts for 4.7% of our consolidated revenue. So if we did drop AURES from our total gross, it would be 20.3%. It's our organic growth. This is the figure of our organic growth. Thank you.

Thank you. And then the next question is from William Yen.

Can you maybe just talk a little bit about the competitive environment within Mainland China, that would be great? I guess I've seen your margins be very strong over a number of years. And I'd just be interested in just sort of how you see that competitive threat within the Mainland evolving? And I guess what do you think what are the key success factors that allow you to keep those margins so high?

Regarding for the China market, yes, there's quite a big competition there because of the China local domestic peer company try to cut the cost to try to provide a very similar product to our customer. But however, our industry, our service market are quite concerned about the longevity of long-term services. So not only talk about the price, but also talk about the quality and also the long-term support services. That's the big reason that we can get back some business design, and design win in the past year and contribute the result from this year.

Another important figure is that we did invest a lot of the resources in our China supporting team from the product services and also technical support as well. So that's the reason, the local competition is even higher. But however, our team is still quite strong to compete with our competitors and also get a big design win. That's the answer for your reference.

Let me add some color for how Advantech to protect our gross margins. Actually, we do very hard. Actually, in China, our selling price dropped about 2% compared with year 2022 or 2023 because China price competition is very, very hot recently. The reason we can strengthen our gross margin and keep at around 40% mainly from two factors. The first one is, we drive our operational efficiency very hard. In our production line, we adapt a lot of AI solution to compensate a lot of the labor investments.

Also, our procurement team have a KPI for the cost savings. They do a lot of efforts to reduce our material price. Just for your information, most of our products -- take our product as an example, 90% of the product cost came from material costs. The labor and overhead only accounts for 10%. For the board level, the labor and overhead only account for 6% or 7% only. For the system product, it account for 10%.

So how to secure the material price, also drive material cost saving is very key for Advantech to protect our margins. Also, just mentioned earlier, we have a very strong manufacturing capacity, both in Kunshan and Taiwan, both regions have a very good add to improve our production efficiencies. So this is the reason we can keep our margin at around 40% for a long run. This is my answer.

If I could just have one follow-up. You talked, I think, earlier about the services component to the people. Clients choose you because of the product quality as well as the after services. That services business, is that a separate revenue stream? Or is it essentially captured in the product revenue when you divide it not by geography but by products?

Actually, internally, we have a product group called Advantech Global Services. It's around 250 million Advantech service. Normally, we provide CTOS, we provide RM, we provide local assembly service and some project installation, such as voice IoT project installation and turn on some software figures to serve our industrial customers. So the margin is around 28% because most of the AGS, we treat the CPU memory and we treat the -- I'll just give you an example, for the IPC, we have chassis, we have motherboard.

We also add on the memory CPU and peripherals. We separate the IPC as a different calculation factors for the CPU memory and hard drive. We will contribute as AGS revenue. And for the chassis, for the motherboard, we will belong to automation systems revenue. So this is a total different margin and total different BU, we have a different revenue target for both BU. This is my answer.

[Operator Instructions] Before we got the next one, maybe I can ask a couple of questions from my side. So the first one is regarding the component cost. It seems that there's been a lot of focus on this increasing DRAM price. So I'm not sure if Eric can share with us what's the DRAM as a percentage of your total component cost for this year or for the most recent quarter?

Sorry, I don't have the figures on hand, maybe I can provide more detail to you later because internally, we don't calculate list figures. So maybe we can try to figure out.

Okay. No problem. And then the next one is regarding your Edge AI business. It certainly has been growing pretty quick. But could you share with us or provide more information regarding what are the specific products or components that Advantech has been providing in this Edge AI space?

All right. I can give the answer about the Edge AI implementation from Advantech product point of view. Actually, there are 3 product segments. The first beginning is Edge AI platform designing business. That means the customer need AI acceleration module. For example, they come to Advantech, request based on their requirement to provide the AI acceleration module like GPU card, for example, or Edge AI acceleration module, for example. They buy it and plug into their existing system to upgrade their system with the AI computing power. This is the first of the number one design business model that currently Advantech is handling.

Second is Edge AI system. For different diversified vertical market, for example, like medical, like industrial equipment in factory, the customer come to Advantech only to buy Edge AI system, ready-to-use system, they implement the AI solution into their based on our Edge AI system, then we provide the software stack together with our Edge AI system, inference system for their designing business. This is the second business model.

The third one is the Edge AI server. Customers need to implement the large language module or a small language module based on the Edge AI system, okay? They don't like to leverage the cloud solution. They want to implement their own on-prem server system based on their application. So they come to Advantech to buy Edge AI server. And we also provide Edge AI stack, wide stack together with our hardware solution to our customers to implement their solution based on our Edge AI server. So three different kinds of product solution and offering that we currently support our customers for.

Thanks, Eric. So next, we got a question from Benny. Please go ahead.

I have a question. Regarding the U.S. market, for opportunities or a challenge, do you see from the manufacturing reshoring trend? I think that's my question.

Sorry, can you say that again, the manufacturing business, right? About the manufacturing?

Yes. Regarding the U.S. market, what opportunities or challenges do you see from the manufacturing reshoring trend?

Maybe U.S.A opportunities?

Maybe U.S.A., all right, okay. As I said earlier, the automation segment, especially focused on manufacture and factory buildup in U.S.A. market sector, which is a very significant increased requirement and demand to Advantech. So from exiting the IPC business model, also our Intelligent System, especially for the factory automation, machine automation, the demand increased to our product development team. So that's the reason our U.S.A. system got that inquiry. Also, they are under the designing process for our product division and also sales division brought together with our customers locally in U.S.A.

Okay. And then we got another question from Rohit Kadam again.

Just two quick questions. On the Edge AI piece, it seems very interesting. We are doing very well. Who would be our major competitors here? Would it be the same Taiwanese kind of bunch? Or are there some good European and American companies we compete with in Edge AI?

Okay. From the pure hardware product point of view, I think more than 50% of the competition is from Taiwan hardware supplier and vendor. That's for sure. Yes, you are right. However, I think the Edge AI, the real value is provided not only from the hardware point of view, but also from the software application layer point of view. So that's the reason because of different service sector -- vertical sector like medical, like robotics, like the retail market, that did require a different patience to implement it together with our Edge AI solution. That's the reason we are quite closely working with the individual sector, ISV both together to provide the hardware and software integrated solution to service our customers. I hope that answers your question.

Yes, I was just wondering to see if larger needs like say, the likes of Siemens, et cetera, would be a direct competitor in Edge AI? Or would they largely be a customer of yours?

Not really. They are, in some automation area. So as I said earlier, different service sector, we have a different competition. If we only compete with the product or the hardware product, the main competition is from Taiwan, for sure, yes.

Got it. That's very helpful. One last one from my side is the nonoperating income, which you mentioned dividend income. So which entity is this, which gives you the dividend, if you could just clarify?

Dividend income?

I think the typical nonoperating items, the typical income mainly came from the Asus and one of our subsidiary in Asymtek, I remember that English name, mainly from a these two companies.

We can take one last question.

Sure. So the last question will be from Gary.

So regarding Edge AI, I'm trying to understand whether currently, the demand that we're seeing are mostly replacement driven where those customers already bought industrial PC basically, now they want a PC with GPU? Or do you think the majority of new demand where they weren't using industrial PC at all?

Thanks for the question. As I said earlier, the existing vertical market subsector that we encounter, the medical equipment and also industrial equipment is originally our big service sector. They already have the system. Some of them only request Advantech to add on the GPU card to upgrade their system to have the AI computing power. That's for sure, big market.

But for the new market, service sector, especially the AMR, robotic market, for example, customers request a lot of the new initiatives, especially from the AI robotics, the AI algorithm development deployment for the AMR robotic market. So that's the reason the inquiry is not from the generic traditional customer. It's from the new robot application developer.

For example, Korea is a good example, some robotic company, they are only AI software company. They develop the AI mechanism and algorithm to support the mainstream robotic customer, their target customer. So they are not put their attention on the hardware development, but they put their focus on the software AI algorithm development and innovation to support the AI robotic market. So it depends.

Our existing service market is quite a big portion to push the Edge AI solution growth, but also the new emerging territory and also emerging sector, we also put a lot of attention on that. Product team is very aggressively to put all our attention on both sides.

Understood. And a quick follow-up on that is, given we have seen an increase in Edge AI revenue, have we seen any impact on the revenue of the peripherals by industrial camera sensors as well as a software and cloud platform?

Yes, you are right that before time, yes, they only came to buy the ready-to-use system or the embedded platform for the designing for the Edge AI system, okay? But however, moving forward, there are more and more industrial per module requirement coming to Advantech. For example, we provide, we call it, building block solution for robotic application, not only the whole system but also the camera module, like 2D and 3D camera module to support the robotic application, also provide the wireless component to support the LiDAR nad IMU solution, for example, and also work with the region software ISV developer to provide the integrated solution. So the building block not only from the pure Edge AI power, but also including the component and also the software application. Yes, that's for sure.

Got it. Any chance to maybe quantify and perhaps how much revenue is from software and cloud platform as well? I remember you mentioned that number before.

I would say that pure hardware solution anyway could be very easy to accumulate, at least another 50% the total revenue will come from -- will be generated from the power module and also the component integration and also software value added.

For Edge AI projects?

Yes, for, Edge AI project, 50% is not only hardware, but also the component and also the software application integration services.

And traditionally, majority like 90% is just the hardware, the PC.

Yes, that's correct.

So right now, we don't have further questions on the line. I would like to hand it back to Eric to see if he would like to make some closing remarks.

Okay. Thank you for the questions and also for the patience. My ending comments, we anticipate 2-digit growth in 2026. As Edge AI application became more mature and are widely adapted by all customers across factory automation, health care, transportation and more. However, the shortage of key components became a critical short-term issue -- achieved short-term issues. But also, we see the opportunity to grow our presence by leveraging our position as a leading Edge AI computing company, also our stronger supply chain capabilities. We are committed to ensure reliable delivery to our customers and actively manage our ASP to safeguard our profitabilities. This is our long-term strategy to our customers. So this end up my comments, and have a good day.

Thank you, Eric. And also thank you, Miller and Grace for your sharing. Thank you, everyone, for joining us for the call. We will conclude the call here. See you next quarter.

Thank you.

Thank you.

Thank you. Bye-bye.