HMS Networks AB

STO:HMS

Earnings Call Transcript 2022-Q2

[Operator]

Good morning, and welcome to the HMS Networks Q2 2022 Earnings Call. [Operator Instructions] Please note this event is being recorded.

I would now like to turn the conference over to Staffan Dahlstrom. Please go ahead.

[Staffan Dahlstrom, executive]

Thank you, and good morning, everybody. Thanks for joining this call, and welcome to -- at least here in sunny Halmstad, the Southwest Beach of Sweden, we have a beautiful morning, I hope you have it as well.

So I will start with a couple of slides updating us on the business, and then Joakim will take the second part with more details into the financial numbers. So we're following the standard procedures as we normally do.

But let's move directly into the quarter 2 numbers. And we are happy to present another good and solid quarter. Actually, our net sales, a little bit better than we expected ourselves because we saw good deliveries out in end of the quarter in June because we got some -- a little bit better components than we thought from beginning, so I think we landed Q2 that was good and better than we expected due to component availability, plus 27% growth. But of course, we also have support from a favorable currency mix with the depreciation of the Swedish krona.

We continue to see a very good order intake. As you know, for the last, I think, 6 quarters, we talked also about the boost effect where we see that our customers are concerned about long lead times, component availability, so they also tend to place their orders in -- ahead of time from their normal behavior. So this is giving us a continued boost, somewhat lower than the previous quarter, but still significant for us. Joakim will dive more into these details. But 35% growth is, of course, very good for us.

We continue to deliver good results. SEK 143 million on EBIT, a combination of slightly improved quarter-by-quarter on margins, stable OpEx, well stable, we are increasing OpEx quite much. But of course, with net sales growth of 27% and fairly stable gross margins. We're also leaving room for some good profitability.

I think what is maybe the weak point of the report is our cash flow that is lower than normal. And this, Joakim will go into the details. But in general, one big effect is that we are building up more inventory. We have a fantastic order book, so we want to make sure we can deliver this. We are seeing some easening on the component market. So we are trying to get quite much inventory in here. But as you know, many of our products maybe consist of 100 different components. If we have 99 of them in inventory, it doesn't really help, we need 100 in inventory. So this is also giving some buildup of inventory and planning challenges.

I think you've already seen quarter 1, so I skip the year-to-date numbers. It's very solid and it follows -- quarter 1 and quarter 2 follow the same lines.

Let's take a moment just look on this boiler plate for our business. HMS is hardware meets software. We make communication products where we allow our customers to interconnect machines on the factory floor to communicate with each other, also communicate between machines and devices up to IT systems wirelessly or wired. And you see on the products, it's a combination of hardware products, but of course, a lot of software content inside these products.

The 4 main brands, Anybus, Ewon, Intesis and Ixxat is doing different -- solve different problems for our customers. And the 3 recently acquired business, the last couple of years, WEBfactory, Procentec, Owasys is more completing our offers in some verticals. We work with 2 different customer groups. We have the makers of industrial equipment and we have the users.

The makers are companies like Atlas Copco or Bosch and these companies that use our technology, building into their machines or their devices and then deliver that as part of their package. The users are normally larger end users, could be Volkswagen, BASF and these kind of companies that use automation technologies to integrate different systems in their facilities.

And if you look on the go-to-market, on the left side with the makers, we have 2 major businesses. We work with device manufacturers where we sell our embedded technology into their applications. So we are part of their designs. This is today, 43% of our revenues. Here, we make a design win and we have a very strong portfolio of design wins which makes us successful when customers sell a lot of products. So right now, we have a lot of customers with good tailwind and this is also seen in our orders. So here, we work with direct sales. We have salespeople, well, direct salespeople at our subsidiaries now in 17 countries focusing on these device manufacturers.

We also have makers of machines. We call them machine builders. This is 35% of revenue. Our ambition here is that our technologies, our products should be part of their bill of material when they build all their machines. In most cases, we are more an option. So if a machine is sold and this buyer of this machine want, for example, a remote access or want to interconnect this machine to the previous machine on the other machine in line here, we are then specified to be an option to solve this problem.

Here, we work with a combination of direct sales to large customers and distribution sales. And again, here, this is also driven out of machine builders selling more machines. So this is also related to investments and CapEx investments at machine builders' customers.

And the smallest part of our business is end user & system integrators. This is 22% of our revenue but also growing and quite interesting. We've seen this with the acquisition of Procentec, where we do more and more business here. It's either project sales where our system integrators are working with a larger project, where you work with the end user who build new factory or refurbish an existing factory, make some integration or improvements.

And there, we work with participations in this project and help the system integrators, but we also work with, we call it, product sales where we advertise our products. We talk about its greatness and specifications. And simply, we get customers who just want to buy it because it fits their specification. And this is done either through traditional distributors but, to a larger and growing extent, also new e-commerce distributors that focus on e-commerce for factory automation and building automation.

We are in the almost middle of our 5-year plan here. And we have the humble vision of becoming the world's greatest Industrial ICT company, where ICT is Information & communication Technology. And we're taking steps in that direction. We're following our mission by enabling valuable data and insights, allowing our customers to increase their productivity and their sustainability. So this is really important for our customers. And we have a lot of strategic discussions with our large customers about productivity and sustainability.

For 2025, our goals are -- 3 of them are environmental to become net positive in our CO2 emissions where we do good steps in that direction. We believe that happy and high-performing employees generate loyal customers, so we focus a lot on having good Net Promoter Scores for employees and also customers. We see good results there. And financially, we believe that we would like to continue growing and combine this with a good profitability. So our ambition for 2025 is to have revenue greater than SEK 5 billion and maintain an EBIT margin over 20%. So no changes there.

If we jump into some business updates before the numbers, I want to show 2 slides here. First, from a market point of view, all markets are growing. We see actually quite stable and strong business despite difficult macro situation, COVID in China, lockdowns, war in Ukraine, logistics problems and component situations. But underneath there, we also see good support from mega trends, increased automation. Partly also the trend that more and more customers are reconsidering manufacturing in Asia, moving production closer to their European markets or American markets. We see a lot of new investments in Eastern Europe and Mexico for building new production capacity, but this is a market where labor costs may be higher than on some Asian markets. This means that people also invest -- our customers invest more in automation.

But we also see good support from trends such as energy monitoring. Remote access of machine is a very hot topic here post COVID when more and more customers want to have remote access to their machines because availability of machines has been a challenge. But also, sustainability and green energy is a factor for many of our customers.

We talked about the component shortage. It continues. I already mentioned that the customers are continuing to place orders earlier than normal. We estimate a boost effect of SEK 150 million in the second quarter, slightly smaller than quarter 1, but still substantial.

We feel we have improvement on the sourcing during the quarter, but it's not going from good to bad. It's going from -- sorry, it's not going from bad to good. It's going from bad to less bad, I would say, we still have a lot of challenges and this will continue for some quarters, we believe. But there are some still -- there are some lights in the tunnel, we think that.

From an acquisitions point of view, as we reported in quarter 1 report, we acquired the remaining shares of Procentec in April. And we now are busy with the integration, especially in Asia and North America where we see good opportunities.

We also announced that we acquired our long-term main distributor in Australia, Global M2M. It's a small business. It's a 4-man operation, SEK 20 million in revenue. And they were spending -- 90% of their revenue was really reselling our products. So good fit. The reason we do this is that we believe that this part of the world is interesting for us. We are underpenetrated there. And we see Australia, New Zealand and Oceania as a growth market for long term. So this is interesting. And with this acquisition, we quickly get a bridgehead to expand in this part of the world.

We've also been busy with R&D. We're now presenting and releasing our next-generation products for remote access, the Ewon Cosy+, where we have a lot of new functionality for cybersecurity which is a hot topic with many customers that they want to secure their assets. And here, we have a world-leading solution, not only for remote access, but also remote access where we use the latest technology for encryption and other security features.

At Procentec, we also released our new AI-based software, SNAP Analysis, where we use this tool to help our customers to improve their network uptime in a new way. Very exciting product.

And we talked about our slightly bad cash flow. This is based on component inventory buildup. We see that this impact our cash flow, but we believe it's the right strategy to build more inventory. We have a fantastic order book of SEK 1.4 billion. So we want to just be prepared for keep on delivering this for the coming quarters. So we feel that this strategy is the right one.

All right. Joakim, financial results.

[Joakim Nideborn, executive]

Yes. Thank you, Staffan. So let's start, as we normally do, with talking about the order intake. I think Staffan has already done a good job explaining the boost effect and that we reached this SEK 850 million. So we believe that we're quite satisfied with that result and the market is still strong all over across the brands and across the regions. That's good to see. We're now meeting -- for every quarter, we're meeting tougher and tougher comps and also the comps are inflated with boosted order effect.

Just to elaborate a bit more on that. So the SEK 150 million on the boost side that we see in Q2 is SEK 100 million less than we had in Q1. And we see that this is declining throughout the quarter. So we expect that to continue and that this boost effect will probably wear off during the second half of the year, meaning that the comps will become more challenging to face them.

In terms of -- I also wanted to comment on the FX side, since we have a major impact, much larger than we normally see. So the growth of this 35% in the quarter, we have 14% out of that from the FX side, in total SEK 85 million that is building up on the FX side. SEK 50 million of those comes from revaluation of the already existing order book.

So as you know, we will look at the closing FX rate and the closing order book, which is determining the order intake in a sense. And the fact the Swedish crown, with everything going on in the macro environment, nobody seems to be wanting to hold Swedish crowns and that is, of course, very good for us in this case here.

And as you -- I think I've said it before, we have about 60% of our sales in euros, 25% of our sales in U.S. dollars. So obviously, this is giving us a good help when the macro situation is as it is today.

Still a good book-to-bill, 1.36 in Q2, something that we believe will come down closer to 1 throughout the rest of the year with hopefully continued slow improvements on the sales side and then this boost effect wearing off.

Just try to give you a view on basically the underlying demand, we have this graph that we've been working on for a couple of quarters. What I did this time was also adding in this FX revaluation on top of the boost effect to show you that the -- this effect is, of course, they're in all quarters, it's normally quite small. But since it was so big this quarter, I wanted to show it clearly.

So basically, what we're saying is that the underlying market and underlying demand is slightly better than Q1. It's -- as we said in Q1, we felt that we definitely saw sort of a tick-up from these levels around SEK 500 million that we had throughout 2021, and now we're more around the SEK 600 million. So small improvement since Q1, still solid market, but maybe not as fantastic as it looks when you have a look at this SEK 815 million.

Okay. Let's go over to the sales side. And as Staffan already commented, we were better than we expected. I think I said in the Q1 call that we found it difficult to be more than 10% better than Q1. And we had a fantastic June, where we got in some components that we didn't expect and managed to get out a nice chunk of the backlog. And so closing the quarter on SEK 601 million, meaning 27% growth or 17% organic growth.

Also year-to-date, I think we have a strong start with 20% growth, of which 11% is organic. And I think this plan and usually, we posted record quarter for all our brands, which I think also shows that the market is strong on a wide level since we have some different types of customers and also some different types of channels to -- for different brands. That's quite good to see.

I think Staffan has already been talking about the component availability and maybe as to comment on that briefly, we think that we'll have this gradual improvement but there will be bumps on the road. We see already now that it's -- the visibility is not great. And just going on what we can see, we can say that we're going to have a super Q3, but we hope that we'll solve some things underway as we did in Q2.

Okay. Let's continue looking at the backlog. And here, we have a buildup of about SEK 200 million more. So SEK 1.4 billion in backlog, obviously quite good. And we're not sure that we're going to continue to build this given that we see this boost effect wearing off. Also on the right-hand side, you see this graph with orders for delivery longer out in time than a quarter. And I guess what we can say is that this is stabilizing.

You see that it was trending up a lot throughout 2021. Now it seems to be stabilizing. And I think that tells us 2 things. One is that our delivery performance is getting a bit better in the customer side. And I think also that the customers are becoming done with building after their safety stock. They are on the levels that they want to be at for the most part. And I think this works together to keep this rather stable.

Sales per region. We normally have about 60% in Europe and 20% in the U.S. and 20% in APAC, and it's about the same situation, so no big changes. It fluctuates a little bit throughout the quarters. But as I said before, all in all, all the regions are performing well. We see all-time high numbers in all regions, maybe not in the Americas since we had a very good quarter a few quarters ago there, but it's solid across.

Then maybe let's talk about the profitability, which is maybe the most tricky part this time to explain. And again, a record result, SEK 143 million, 23.7% margin. of course, always nice to see. The gross margin is a tricky number to understand. We have -- we're quite happy with the result reaching 62.2% and seeing the continued improvement since, I guess, Q3 last year when we started to see this, the main impact from cost increase on the components.

We still have a huge cost inflation on the component side. I think Q2 is the worst-hit quarter of all the quarters we've seen. But now we're starting to see results from the price increases. So we've been discussing this before that we made some price increases first at year-end and then also end of Q2 -- sorry, Q1. And that is really starting to give results now and as we expected to see. But you also want to see the results from those measures.

And we also get some help from the fact that the Swedish crown is weak and that we'll have some volume that is helping the utilization on the manufacturing overhead costs. So all in all, I think that improvement is helping. And as we said before, we think this is going to continue to trend upwards and we're going to reach the 63-plus percent that we're pretty convinced with the measures that we've taken.

On the OpEx side, we've been continuing to invest. And maybe the numbers looks high with 21% organic growth of OpEx, but you should also remember that during 2021, we were very, very thin on marketing and sales activities. It was still tough with the COVID situation. So I think we've been working to strengthen the sales organization, to build up better teams, strong teams they can focus also on some verticals. So that's been working out quite well. And then we're now doing fairs and trade shows and various customer events again. And it's good to see the activity is picking up. I think we need this for the lead generation to be competitive going forward as well.

And then, of course, we -- as everyone else, we also see a bit of salary inflation, especially in the U.S. and in some parts in Europe. We're just getting to the very high single-digit numbers. And this is, of course, also impacting the cost side. So earnings per share, I'm not going to spend too much time on this, SEK 2.33, good. We had the adjustment in Q1. Otherwise, this would also be a record EPS. Not too much standing out there. So let's just continue to maybe the more interesting part with the cash flow.

And you see this graph is, of course, not how you want to see it develop. We knew and I think we also commented on this in the Q1 call that we were going to continue to build inventory. And now when we see some releases on the component side, we definitely do not want to miss out since we do not have the simple components as is available or that something would happen there. So we're taking the hit and building this up with SEK 50 million in the quarter.

And then given the very strong end of the quarter with a super strong June, this builds receivables quite a bit. So I think this is something that will wear off when sales normalizes out. But right now, it's building up a bit and that also impacts with SEK 60 million here. All in all, we believe that we're okay on the working capital side, even if it's a bit higher than what we've seen before. We don't expect this high buildup to continue. There might be a little bit buildup on the inventory side, difficult to know exactly the timing. But I think all in all, it's under control.

And year-to-date, you have roughly the same numbers with the receivables, but the inventory side, we have built SEK 80 million from year-end. So that's quite a bit. But as we said, we think it's for a good cause and we want to make sure that we can deliver during the second half.

So finally, looking at the debt situation. Starting to look maybe a bit more normal given that we had this acquisition of the 30% of Procentec. We removed some of this option-related debt and now it's normal interest-bearing debt instead. And I think 0.69 in net debt-to-EBITDA is, of course, we're very happy with that level, not a big problem. And we still think we have plenty of room to continue with the M&A agenda, looking for interesting companies and we have some firepower to do what we need there.

So I think that was basically it from us. And let's see if there are any questions, so I hand over to operator.

[Operator]

[Operator Instructions] Your first question comes from Joachim Gunell from DNB Markets.

[Joachim Gunell, analyst]

Staffan and Joakim. So as the delivery capability, clearly, ahead of your expectations during the latter part of the quarter. Can you just shed your thoughts here with regards to how you -- I mean do you see that as more about a one-off and continue to expect this more gradual improvement throughout Q3, Q4 as opposed to extrapolate what we saw here in June?

[Staffan Dahlstrom, executive]

Joakim, do you have a good answer for that?

[Joakim Nideborn, executive]

Yes, I can answer that. So I think that what we said, Joachim, is that we -- we believe that on the big level overall, we see that there is a slow improvement on the component availability side. We see that the confirmation that we get tend to stick. So before, we saw a lot of reconfirmation of orders which made planning very difficult and it was very difficult to see what's going to happen in the coming quarters. So now we see that we have better performance there from the suppliers. Still, there are various things that makes it difficult. And now you had the COVID shutdowns in China which is still somewhat impacting here and there.

And so basically, what we can say is that we believe that it's going to become better in the coming quarters but there will be some setbacks, we know that. There will also be some things that we sold. So it's difficult to say. I gave a range on the Q1 call that we could be plus/minus 10% in Q2. So that's how difficult it is. That's a pretty big range. And I'd say maybe we're a bit more optimistic towards Q3, but it's -- we don't want to make a guess where that will end up at the moment, it's still too uncertain.

[Joachim Gunell, analyst]

Understood. And perhaps the question [indiscernible], I mean, we've seen how industrial automation end markets tend to have this like 2-year long up cycles. We are approximately 20 months into this. And given the fact that your products connect assets out in the field. Are you seeing any sort of inflation from specific end markets that business momentum is slowing or are showing any signs of call it cyclical correction signs?

And last, perhaps you can help us just understand how you think about the trends you alluded to. I guess, I mean reshoring, energy monitoring, et cetera, are those sort of trends being basically done from the cyclical amplitudes of HMS business model, like you said?

[Staffan Dahlstrom, executive]

I think first, if we compare this to other setbacks we had in 2009, et cetera, I think today, our business is much broader. We used to work only with device manufacturers. Now we have machine builders, we have also end users. I think we are more broad and this makes us more sustainable to different things. We've also seen a little bit different in our building automation section versus industrial automation.

But I would say, in general, business-wise, customers are still quite optimistic for different projects, but there's some uncertainty that is higher now. People are talking about will it be soft landing next year, how will it be? But they seem to keep on investing. And especially this with increased automation, increased digitalization is a hot topic because I see quick -- quick wins and quick profits out of taking these steps in Industry 4.0 and these other trends.

So I think, so far, people are quite positive going forward. And I think our position is fairly strong and it's more broad-based than it used to be. So I wouldn't say we are really worried. But of course, we are a bit careful on the new expansion investments, of course. But on the other hand, we have good profit levels and we want to make sure we capture the opportunities we can as well. So we are -- we are in a mixed mode at the moment.

[Joachim Gunell, analyst]

Understood. And just a final one for me. With regards to the new product releases here. The SNAP Analysis product here from Procentec, for instance, it seems like you're really starting to elaborate with more like subscription services based on network diagnostics, et cetera. Can you comment a bit on the gross margin profile on that? And I mean what's the -- I mean, what's the install base that you could tap into for such a product?

[Staffan Dahlstrom, executive]

I think with this Procentec offer, it's all about helping customers to -- the ultimate goal is to have high network uptime. But we started -- they started that business, and we acquired a couple of years ago, with more being a troubleshooting tool when you have a net failure, we could then help them fix the problem, find where it is and then fix the problem. That's still a portion where you need some hardware tools and some software tools.

But that market is also evolving to -- more and more customers would like to invest in, okay, how can I make sure that I don't get these problems? So we have some -- we talked about being reactive, proactive and -- but we see with this SNAP tool, it's much more of understanding more about your network structure and the traffic you have and doing more of a predictive thing.

So we see that, that market is very interesting for the future, but it will also take time because a lot of customers are still in this reactive mode how to solve things. And they're slowly moving in to be more proactive. But the predictive part is still in the early days.

So from a margin point of view, it's a software sales only. That's good gross margins. But we believe that it will take some time before this is a larger part of our revenue. But that's a big value for our customers, to really make sure that the network uptime is there. It costs a fortune for them when it's not.

[Operator]

Your next question comes from Simon Granath from ABG.

[Simon Granath, analyst]

Staffan and Joakim, congrats on strong quarter. Initially, I'd like to just discuss a little bit on Ewon's performance here in the quarter. It was a very, very solid results. And would you say that you saw any extraordinary impact on Q2 sales here from new product launches? And how should we think about this brand going forward?

[Staffan Dahlstrom, executive]

Should I start here, Joakim? Well, I think what we've seen with the Ewon in the results have been --we had a difficult component situation, especially related to Ewon. I think part of the good June result was also a good -- surprisingly good output for our deliveries related to this product. The majority, almost everything there is our existing product offer. The new Cosy+ will help us. But I think this will continue this fantastic double-digit growth we have seen year-over-year-over-year.

So I think this will continue to perform very well. So we see that we are expanding this business. And we went from a situation a couple of years ago where this was fairly new and a little bit odd way of doing things. Now, after COVID, it seems to be a lot of more acceptance with customers because they couldn't get access to their -- to the installations. So remote access, what we do with Cosy and other Ewon products is today moving from being a nice option to almost a mandatory component for when you deliver a machine, especially under the warranty time over this machine.

What we're trying to do here is also to make other services around this to make it more sticky with the end users, to make sure that they don't only use it when the manufacturer have the warranty time of the machine, we also want to make it sticky over time. But the business model today is mainly, I would say, we sell the hardware.

And quite many of our customers keep on using the free version of the software. And we are seeing a better conversion to a pro version that you pay for, but we can still do more things there. So a lot of the success right now is based on a hardware -- accelerated hardware unit sales rather than a better penetration with software. But this will continue, and we see a very good market going forward for this.

[Joakim Nideborn, executive]

And maybe if I can just add, Staffan. We -- one thing that can be good to know just looking at the numbers quarter-by-quarter, we had a really tough start to the year on the component side with Ewon. This is a business where we don't normally hold a very big backlog. So we had some backlog and then we managed to get in some components in Q2 so we could push out some of the things that we didn't manage to deliver in Q1. So to look at it fairly, maybe 10% of the revenue in Q2 should have normally been in Q1 if everything was normal. That could be good to know.

[Simon Granath, analyst]

That's very clear. Furthermore, your order intake has been very strong after COVID, which I interpret has mainly stemmed from increased investments in automation to cope with increased costs, driving efficiency, et cetera. But another thing that has been a topic more recently is near shoring. And my question is whether you are currently bearing any fruit from this effect? Or would you say that, that is further down the road?

[Staffan Dahlstrom, executive]

I think a lot of customers talk about this, but it's also -- it doesn't happen overnight. I think that maybe the strongest signal is that we see that European and American companies are not investing in new capacity in China. They mainly invest this in Mexico, Eastern Europe instead, this is really a clear near shoring. But I think most of this is not done, most of this is ahead of us. So I think the discussion is there, but it's -- of course, starting building new factories, it's a multiyear process. So I think this will help us for the coming years. But the trend is there, it's clear.

[Simon Granath, analyst]

Great. And I also find it interesting that you -- Staffan, you mentioned earlier that compared with '09, you're offering now is so much broader and you're selling on [ firmer legs ] in light of that. And if we look at HMS, let's say, a 5-year horizon down the road, would you say that you want to continue broadening their offering? How many brands should we see on an approximation going for that horizon? Or how should we think about the breadth of your offering going forward?

[Staffan Dahlstrom, executive]

I think we have a couple of sweet spots, as we say here. I think we continue to acquire companies that are either bolt-on to existing sweet spots or can create new sweet spots that we've seen, for example, with Procentec, but we still want to stay in this industrial ICT field. So I think we are a communication company and this is where we want to stay. I think today our different brands could almost be a bit confusing.

So we haven't maybe managed this so well when it comes to -- at least from an investor relations point of view. But we kept some brands after the acquisitions that is -- have a strong brand in the market. But when you look on this bucket of brands now with 7 brands, it's a bit spreading in different directions. Let's see how this will be developed the next couple of years, but I think we need to consolidate some of these brands to make it more clear as well. But this is -- it's not earning for us, but I think we can't -- we can't continue to grow this to plus 10 brands. We need to consolidate going forward.

[Simon Granath, analyst]

Great. And as a final question from me and I know that this has been a topic in recent quarterly earnings. And that is on prices, how has pricing impacted growth in this quarter? And do you see further room for price increases going into H2?

[Staffan Dahlstrom, executive]

Joakim, would you like to...

[Joakim Nideborn, executive]

Yes, I can take that. So in the quarter, we don't disclose that fully, but there are a few percentage points added by pricing increases in the range of 5%, I'd say. Further price increases, I think we try to follow what's happening in the market on the underlying cost side. And right now, we're not planning to do it, but it's -- we know that there is also a pretty high-cost inflation pressure. So we're going to continue to see -- to follow what's happened. And if we need to, we'll do the best to push further price increases.

[Operator]

Your next question comes from Viktor Hogberg from Danske Bank.

[Viktor Högberg, analyst]

So most of the questions already asked, just trying to dig into some of it. In terms of the gross margin and it's a follow-on on the previous question, how much of the work you've done on pricing did come through here in Q2? You said you expect it to reach the above 63% over time. What kind of magnitude in Q3 and Q4, if you could help us, anywhere on that would be perfect?

[Joakim Nideborn, executive]

Yes. So yes, summarizing what we already said then. So we've been going from when we started out we were around 61%, I think in -- bottoming out around 61% and now we're 62.2%. And we say that we -- when we're -- when everything is normalized, we're going to be above 63%. So in that sense, I guess we're about halfway there in terms of price increases.

And if we were to see more cost increases on the component side, of course, we need to do further price increases as well. But I think I'm going to stop there since we do have various discussions going on, we don't want to be too open in. So about halfway there and about 63% is sort of the target towards the end of the year.

[Viktor Högberg, analyst]

Okay. Great. And also, I get that it's an uncertain environment and you don't really know the availability for the full quarter in terms of components and delivery capacity. What we expect a gradual improvement in delivery capacity over Q2 and Q3 and I assume tangibly better situation in Q4. Is that what you see? Or would you be more uncertain about Q4 delivery capacity as well?

[Joakim Nideborn, executive]

I guess if you were to go back and listen to the last 4 quarterly calls, we've always been positive if we just wait 1 or 2 quarters more, that's been sort of the story all the way. So this problem has just been pushing forward. And it's not only us, its the whole industry, right?

So given what we know right now, we believe that Q3 will probably be a little bit better and Q4 should be better than Q3. It should be moving in that direction. And as we said before, it's super difficult to know what's going to happen. It could be things happening, it changes everything. But what we know right now, yes, that's the way it seems.

[Viktor Högberg, analyst]

Okay. And also just last question and this has been asked in a different way. But with your discussions with customers, it seems that the underlying demand is -- that's not a problem. But in the near term, given comps PMI is coming down, you have had some historical correlation with that, at least to some extent, even with a more broader product suite today, but are you getting any signals from your customers for the 2023 orders? Is that just too far out to be discussing today? Or what are you picking up in terms of '23 and '24 demand? Might be too long or too far out.

[Staffan Dahlstrom, executive]

I think maybe I start, Joakim, but my view is that on some markets like Japan, they are very keen on placing very long-term orders. But on most other markets, actually, we are also trying to refrain from taking too much order long term. So -- but in Japan, I see that there's -- we see a lot of activities that they want to place 2023 orders. Most other markets, we try to say, yes, please wait, we are not ready for it yet because we are not sure about the price level for 2023. So we want to -- if we can hold that for a little bit, it would be helpful. Joakim, do you have any things to complement that?

[Joakim Nideborn, executive]

I agree, I agree with that fully.

[Operator]

Your next question comes from [ Julia Olot ] from SEB.

[Unknown Analyst]

Staffan and Joakim, could you please give us some flavor on the dynamics between increasing the software penetration and the EBIT margin?

[Staffan Dahlstrom, executive]

I'm not sure, I get it. Joakim, do you get the question?

[Joakim Nideborn, executive]

Yes, I can take it. So obviously, building the software penetration will improve the margins since we are facing a close to 100% gross margin. It's still a small part of the overall business. So we have about 5% being software on the overall. And out of that 5%, maybe half or a bit less than half would be Software-as-a-Service type of revenues.

So tough [indiscernible] that we're now releasing the SNAP Analysis. So that will be -- this is still a very small product. And we're talking a couple of millions Swedish crowns. And of course, we are positive. I think that, that will grow. But it will take quite a bit of time for having the organic impact that will have -- so the organic growth that, that will give a big impact on the EBIT margin. I think we talked like tens of percentage or something like that, that will build up in line with that growth. I think the real -- if we were to get a bigger help from that, we were to make an acquisition, I think that would be more software heavy. Otherwise, it will take some time to build that. I don't know if that was helping you or not, but that's the way we see it.

[Unknown Analyst]

That was very helpful. And then what would you think that the main drivers for customers would be to leave the software version 3 for taking the new software solution?

[Joakim Nideborn, executive]

I think what we do is on the Ewon side, we're constantly working to make this pro-offering, as we call it, it's the same as like Spotify. You can use the free version. If you want to get some features, use the pro version, you get some more features. We're trying to make it more attractive by adding features and that we've been working on now, also with the acquisition or the partnership we did with Connectitude in December last year.

And then on the SNAP Analysis side, we have a new product that's -- we think the value proposition is excellent. And now we're just going to get the customers to understand how good it is so that they choose to buy this product. So I think that's a continuous improvement, of course, of the business and business development. And I guess those 2 things will probably be the main things that we're doing at the moment.

[Operator]

That concludes our question-and-answer session. I would like to turn the conference back to our hosts for some closing remarks.

[Staffan Dahlstrom, executive]

Thank you. And thanks, everybody, for joining this quarter 2 call and thanks for good questions. We are super happy that you are so interesting in follow us. We will take a couple of weeks' vacation now and be back in August. So we look forward to keep on working with challenges in quarter 3 on components.

But I think we also can relax a couple of weeks here because things are going in the right direction, we feel, and it's a stable business also going forward. So thanks, everybody. And thanks, Joakim. Thanks for being part of this call, everybody, and we wish you a very nice summer. Goodbye.

[Operator]

Thank you. That concludes our conference for today. You may now disconnect your lines.