HMS Networks AB

STO:HMS

Earnings Call Transcript 2022-Q4

[Operator]

Welcome to the HMS Networks Q4 Presentation for 2022. [Operator Instructions]

Now I will hand the conference over to CEO, Staffan Dahlstrom; and CFO, Joakim Nideborn. Please go ahead.

[Staffan Dahlstrom, executive]

Thank you. Good morning, everybody, and greetings from a rainy Stockholm where me and Joakim Nideborn, our CFO, is sitting around the table here to give you a short update of the report we just published this morning. So I will go for a summary and introduction to the company and then Joakim will dive into the numbers for Q4. We're pretty happy with Q4 strong development. We see good development in sales in our organic growth, surprisingly good order intake and we'll dive more into that later and we're very happy with the good EBIT development, a lot of the growth is falling through to profits for us and an EBIT margin of over 25% is beyond our target. So this makes us very happy. Good cash flow back after some weaker quarters and resulting in an EPS of SEK 3.25. So all in all the full year of 2022, very good for us; plus 27% in net sales, continued to grow in orders and very good development on the profit side.

But before going into more numbers, I would like to give a few slides about HMS in general. Our business, Industrial ICT (Information & Communication Technology), is a quite interesting market. On one side, it's I would say a more industrial market with customers that are a bit conservative in jumping on the latest technology, but we also see part of this as an IT market with software and technology that is evolving in the industrial area. We're quite well established. We have more than 9 million devices connected around the world and we're also quite successful in this newer world of IoT where we have over 400 machines connected in our Talk2M cloud system for remote service. And of course we focus on technology with 5G, AI and the new things; but the majority of the growth we are seeing now is much more on the traditional products. Customers are investing in automation, in sustainability, in improving their business.

As a company, we are 762 employees this morning and we operate with 17 subsidiaries around the globe and we also have partners and distributors in 50 countries. We are located with headquarters in south part of Sweden in Halmstad, but the majority of our employees and our business is out of Sweden. Right now we are halfway through our 2025 plan, we have 3 important targets. We have a big focus on sustainability. For us, sustainability equals CO2 emissions where we want to be net positive both with what we do ourselves that is a smaller part of our own emissions, we are around 5,000 tons of CO2 in our emissions. But we focus a lot on helping our customers because some of our customers are quite big emitters and last year I guess we saved over 1 million tons in CO2 emissions for our customers by using our products and helping them in reducing travels and improving their energy efficiency, et cetera.

We also believe that happy and high performing employees generate loyal customers and we like to drive our loyal customer development. So we focus on Net Promoter Score for employees where we scored very good and also Net Promoter Score where we still scored good. But after a year with cost price increases and very long lead times, we have seen a drop from excellent numbers to good numbers so we are still over 30%, but we need to work harder to gain back the confidence from our customers by reducing lead times and improving the supply situation. And target is to reach more than [ pi billion Swedish ] in revenue 2025 and as you see we are taking a good step this year in that direction, but we are not fully there yet. But we have a few years ago so we're quite confident that this will be possible. So we talk about our business as we help our customers enable valuable data and insights for machines and systems.

So it's about industrial connectivity, connected machines so they can talk to each other, but also talk to IT systems and cloud systems. The business we focus on is industrial. We have 2 separate parts. We have industrial automation which primarily is manufacturing, process industries, but also transportation and infrastructure and you see pictures here with harbors and logistics, warehousing. We also have a segment for power and energy where we see more and more interest in battery solutions and smart system to mitigate some of the challenges we see in power generation, but also power distribution. It's an interesting area. And we have a smaller business in building automation, it's 7% of our revenue. It has potential and we are doing some initiatives there to grow this faster, but it's not what you think about home automation. This is residential, but commercial buildings I would say; large shopping malls, airport, hotel complexes, et cetera; but they will have similar communication technology.

So for us from a technical point of view, it makes sense to have all these segments. We have 2 types of customers. We have makers of industrial automation, these are the Atlas Copcos and ABBs of the world. And we also have users of automation system, these are the Volkswagens and [indiscernible], these companies that use automation system in their production facilities. If you look on our business model and how we take this to market. On the left side with our makers we have 2 segments, device manufacturers and machine builders. On the left part device manufacturers; it's our biggest business, 44% of revenue in 2022. There we have a direct sales force that work with design wins where they become embedded inside these customers' products. It's a quite long sales cycle, but it's also very long lifetime of the product so we can sell the products for a very long time to these customers. And actually this part has been very good in 2022, has been one of the drivers of our good growth.

In the middle of machine makers, we see machine builders. Here we offer connectivity, remote surveys and things like that. This is today 27% of revenue. 2022 been a little bit affected by long lead times and we have had some challenges here. But the ambition here is to work with direct sales to large customers, distribution sales to small customers. Of course we would like to be part of every machine, but in reality we become more like an option on their specification. If this machine should have remote access, they use our product; if this machine is integrated in an automotive plant in the line, they should have some connectivity, then we get order. And finally, quite quick growing business for us is the end users and system integrators where we last years have focused quite much with acquisitions and some organic things. It's 29% of revenue and of course here we see an opportunity to come closer to our end users and many of our left side here makers, they sell to these customers.

So for us, coming closer to the end users is important for us to understand the applications. And here we work both with traditional distributors, but also we see more and more e-commerce specialized in industrial automation where we also see good growth. So let's take a business update quarter 4. Annually we always report our design wins. This means that we have 2 phases that the customers are won by HMS when they start integrating our technology inside their robot controller or gluing equipment or whatever kind of equipment they do. When they start this and when they make the decision to use us for connectivity and start their design of the product, then it's a design win. Later we also measure a production win when they enter market. The blue part here, the active base, this is the customers that are through the production phase so that's where we get revenue and we see that the baby blue here is new customers that have decided to use our product, they're integrated, but they're not out in the market yet.

And we see a quite stable inflow of design wins, little bit reduction from last year, but we also see that most of our customers have like we also had during the year supply challenges and of course we see with electronic components that there's a lot of end of life and end of life notice. So we have spent a lot of time with redesigning our products, but our customers have also spent a lot of time with their redesigns, which makes their bandwidth for talking about new products have been limited. But we think the 146 new both indicates stability in the market and an attractiveness with our current product offer. The red part is older product that more or less are retired so this means that they will not generate revenue anymore. We see quite normal minus 93. So all in all we see a stable development. But also note that some 10, 15 years ago this was the majority of business, 76% back in 2012. This business has been growing good for us, but now it represents 44%.

And it has been our strategy over the years to continue to grow in this segment, but also acquire and develop new businesses to make us more stable and less dependent on only this business model. So we feel this is a good year. Keeping in mind the challenges with supply chain, we feel this is a stable development. And if you look in the quarter, we are happy that we could get this good development on sales, but it's also been related to our supply situation that we've actually been better than expected. We have products with maybe 100 components. We don't only need 99 of them, we need 100 components to deliver. And we've seen that we've been more lucky than the previous quarters to fill up our planning with products we can deliver so this has been good for us. And we also see a good demand from Europe, from Asia, we see part slowdown in Americas after couple of strong quarters. But still all in all our customers remain quite positive for the future.

Everybody is concerned about what will happen in the coming quarters, but we don't really see that in our orders and we don't see that in customer projects. They are still invested. Going forward we think that supply situation will continue to improve. However, the temporary easing or good success we saw in Q4 could be also seeing a backlash in quarter 1 because it's about getting 100 of all 100 components and we're still having some challenges with companies like Intel and these large ones that still have a very unpredictable delivery situation for some of the key components in the industrial area we are in. And we've done 2 smaller M&A things. We acquired a very small company in UK under our Procentec business. It's a small company doing certifications and trainings for device manufacturers mainly and by acquiring them, we get closer to some of these customers in UK and we also see that this is a good way for selling more of these trainings and expertise services to customers.

And we also made -- after end of the year, we made a change in our ownership in our Spanish business Owasys that is kept as a separate business for us. We went from 60% ownership to 80% ownership. The remainder of the 20% is still owned by 4 really good entrepreneurs that is running the business and we are super happy with this combination that they are part and driving the business and run the daily business and we help them as the main owner long term, but interesting business that they will be able to develop over the next couple of years. If you look on the year as all in all, it's more or less the similar things. Fantastic year, the trend has been favorable for us. We believe that these trends will continue, but let's keep a close eye on the sourcing situation and how this order situation. We talked about boosted orders that customers place orders for filling up their safety stocks and longer lead, placing orders with longer outlook.

But Joakim will dive down a little bit more into these details in a few minutes. And if you look just on the full year and make some reflections over the 30 years plus we've been in business. If you look on this, of course we had a slow start in the '90s, but all in all it's been a successful growth journey. We IPOed in 2007, had a little bit bump like others in 2009 during the financial crisis, but came back quite quick. The last 10 years have been a good mix of organic growth with strong markets, but also our new acquisitions that have been helping us to become a bit broader. We also saw in 2020 that this early phase of COVID gave a lot of uncertainty in the market, but we quickly bounced back and last couple of 2 years have been fantastic for us. So we think it's a beautiful graph and we are committed to just keep on developing this graph for the coming years.

All right. Joakim, should we move into the details and numbers?

[Joakim Nideborn, executive]

Let's do that and we're starting out with order intake. So as you've seen a strong quarter, SEK 718 million; 3% growth versus Q4 in '21 that was filled with boost orders, organically small decline with only minus 1%. For the full year glad to see that reaching above SEK 3 billion, 21% growth, 10% organic. And now for the second quarter in a row, we see a book-to-bill less than 1 so we're starting to ease a bit of our order book; 0.94 for the quarter, still 1.22 for the full year. So there has been a strong order intake for sure throughout the year. I think Staffan touched upon this already, but we have a little bit different trends that we see in the market. In Americas we've seen a declining trend throughout the year in orders, which continues in Q4. Still on good levels though, still growth, but it's pretty clear that the trend is bit weakening. However, in Europe and also I must say in Asia, we see a little bit different situation where we see a bit of a tick up in Q4 in comparison with Q3 for instance.

So this was surprising for us and I'm going to comment more on this on next slide, but it's for sure that the market is still performing quite well. To summarize what's driving this. We can see that it's still the embedded business within our control-centric offering that is doing very well. So that's I think the same for Q4 as for the whole year. And to talk about the year, we can also say that Asia has been very strong. We've had a lot of long orders from some of our key customers there that's been driving for sure some other boost, but also very strong underlying demand from Asia. So that's a bit larger than it's normally been for us. But everything has been good, I mean it's a year that's for sure our best year ever and nothing to complain about really. So maybe to talk about what's most interesting and maybe where we are a bit surprised ourselves looking at this graph as we show now for 2 years showing our underlying demand as we see it and what we refer to as boost orders.

So here we said in Q3 where we saw this was declining quite rapidly. We did not expect that we're going to get these boost orders. And maybe just to talk about what we have been seeing here for the last 2 years. There's 2 things really. One is the fact that customers are increasing safety stock due to these longer lead times and more uncertain deliveries. This effect probably peaked out in Q4 '21, Q1 '22 when we saw that several customers were actually going from 3 to 6 months or 6 to 9 months in safety stock and even some customers that is up to 1 year now. The other thing is the fact that the deliveries have been uncertain not only from us, but from several suppliers and therefore, most customers or many of the big customers at least are placing very long orders. So instead of placing orders for 1 quarter, they are now placing orders for 1 year. So when we talk about this boost effect, we're really referring to a situation that occurred before 2021.

I think that's important to say because otherwise you would say that in comparison to Q4 '21, there is no boost effect in '22. It's just that the behavior from the customers would still be there in the sense that they're placing long orders in a larger extent than before. So I think that's important to remember and we are not so sure that this will be a rapid decline of this boost effect or a reversal of the boost effect. So as long as this situation is in place, which it still is where uncertain deliveries and still some components are difficult to obtain, we still think that we'll see this longer orders for customers in many ways. And before it was more about placing forecast for a longer period and then short orders for shorter period. Now we don't really see the forecast, now we see the orders instead. So I hope that clarifies a bit. Let's discuss it further in the Q&A if there are more things that need to be clarified there.

And in terms of net sales, we also had a very strong ending to the quarter. We managed to push out SEK 464 million (sic) [ SEK 764 million ] so increased by 34% or 22% organic. Also for the full year, a strong year 27% growth, out of which 17% organic growth and reaching about SEK 2.5 billion was a nice mark to pass. Here is really where we see that we're able to deliver the strong backlog that we've had on embedded products where we had a really strong order intake in Q1, Q2 and then many customers have started placing those orders for a couple of quarters ahead that we managed to deliver. And we will see both Asia and Europe on those embedded orders driving growth. I think overall it's good as you see the numbers, but this is what's pushing the mark a bit upwards and maybe this is a little bit better than what we had expected. We managed to -- I mean the backlog has always been there, it's just been a matter of being able to convert with those components that's been difficult to obtain.

And we see maybe some temporary relief in the supply chain. We managed to solve most problems in Q4. Still there are a couple of dark clouds ahead that we need to manage. We managed quite well I think throughout the year to fix that so let's hope that we can continue to do that in '23 as well. There has been a discussion around pricing and we see now that in Q4 we have 11% growth driven from price increases comparing to Q4 in 2021 and for the full year, it's about 9%. So this is a bit back heavy. We've been discussing this before as well. If you don't remember, we made 1 price increase towards the end of the year in 2022, 1st of January and then we made a second one from 1st of July. And this is where we see now a larger effect in Q3 and Q4 compared to the first part of the year. And then this leaves us with still a strong order book even if it's declining slightly from Q3 with the book-to-bill being 0.94.

So SEK 1.4 billion is of course by far the largest order book we exit the year with, 63% up from Q4 2021. So this leaves us in a good place for getting a good start of 2023 for sure. And then you have on the right hand side, we've been showing this also for a bit, the orders that we have for delivery that's further out than 3 months. That is quite stable. It was maybe more interesting throughout 2021 where that was increasing a lot every quarter and now for this year as you see, it's been quite stable on the same track around the 60% and we expect to be something similar when we still have these long lead times. Over time I'm sure that will come down, but we don't really see that trend yet. Sales per region so not too much to say about this. I think Europe is finalizing the year very strong 64% of the total, Americas 19% and APAC 17%. We believe over time this will be some 60%, 20%, 20% and we've seen some movement there. But I think that's the main message we have here.

Okay. Let's talk about our profitability as well and you see here also a record quarter of SEK 192 million compared to SEK 109 million a year ago. So as Staffan said, 25.1% margin and really nice to see that we can on this 25% level. It's the same as we have for the full year. The adjusted EBIT margin is 25% with SEK 626 million EBIT. Couple of drivers behind that. I mean one is the gross margin that we managed to improve and you see now in Q4 same level as we had in Q3, 63.6% compared to 60.8% 1 year ago and couple of notes on that. We see that spot purchases, we still have them, is declining slowly so we have I think SEK 2 million less than we had in Q3, significantly less than in the beginning of the year. We also see that the price increases that we made especially from half year 2022 is having full effect now in Q4. That's good to see that we're pushing those out as well. So for the full year, we're rounding up with margins of 62.9% compared to 62.4%.

And then just let me remind you that in '21 we saw completely different situation where we started out the year with good margins close to 64% in the first 2 quarters and then started to see a bit of a hit on the margins due to the price increases on components where we needed some more time to push these to our customers and '22 has now been the complete opposite where we've been improving the margins throughout the year. And I think all in all we're in a good place starting out 2023. I think we've done a decent job here in managing the difficult climate in increasing prices. So I think we should be able to protect those margins throughout 2023 as well. On the OpEx side, maybe a little bit higher than what we had expected. A lot of things are happening. We have some marketing trade shows that is going on now again that wasn't there in maybe a year ago. We're increasing OpEx by 14% organically in the quarter, 15% for the full year.

And then you know that Q4 is always sort of an expensive quarter for us given those marketing activities that we're doing. So I think all in all in order to get to that nice EBIT margins; we have the gross margins working for us, we have currency as well that is helping us a little bit here and there's some operational leverage that we are growing in a good pace here as well. That is driving our net sales then to increase by 34% in the quarter and EBIT is actually 25% up compared to 1 quarter ago, also for the full year those numbers are good. And now just to quantify those currency effects. We have SEK 13 million push on the EBIT from positive FX effect in the quarter and SEK 39 million in 2022 so for sure that's a good help. Looking at earnings per share, SEK 3.25 in the quarter and SEK 10.89 for the full year. The Board has proposed a dividend of SEK 4 instead of SEK 3 a year ago. Maybe that's the most interesting news on this and no main things that are strange otherwise between the EBIT line and the earnings after tax.

So cash flow, also good to see that this is coming back a little bit. We are sequentially, I mean from Q3 to Q4 we are growing the business 22% on sales and of course that also builds some working capital, but not in the same pace. So even if we have the working capital that is minus SEK 31 million in cash flow, that is still on a decent level I think. And we have a small inventory buildup. We haven't had a pretty big build up throughout the year, SEK 167 million for the full year, 31% in the quarter. But this is flattening out. I think we've done most what we need to do and will be more flattish and maybe even we could be able to reduce inventory for the coming quarters here. But I think at this point in time, it's all about being able to deliver and not take any unnecessary risks. So it's not this inventory chase that we normally see, it's really about delivery. So it's not a big concern of ours and good to see again that we are building the cash flows.

Final slide for me. Looking at the balance sheet a bit more then. So we have reported debt of SEK 300 million, out of which only SEK 46 million would be what could be seen as real debt and we have these leasing parts SEK 155 million and debt related to options of SEK 99 million as well. So I think all in all we end the year with a very strong balance sheet. We have only 0.39 in net debt to EBITDA, which of course leaves us with a lot of room for future investments, acquisitions where we hope that we can be a bit more active for the coming years. We haven't really managed to convert what we had hoped for throughout 2022, but we hope that we can do a more interesting job of looking ahead with that.

Staffan, if you want to summarize.

[Staffan Dahlstrom, executive]

Yes. Thank you, Joakim. As I said, we are happy with the quarter. We are little bit surprised that quarter 4 orders was as good. We've been expecting something a bit slowdown, but the markets and the customer remains positive. They are concerned about some kind of uncertainty coming up for 2023. But we see that there's strong long term drivers in increased automation, sustainability. We are starting to see some of these effects with nearshoring and some moves around the world with more regional than global in your supply chain. So I think this also drives and helps the business for HMS. I think we need to make up our mind should we be careful or should we still focus on growth and we are focused on being a growth company. We are still investing, but we are staying agile and we're trying to avoid what we call sticky cost.

So of course we hire more people, we do more investments. But we expect the growth to continue, but there's some uncertainty in 2023 that is really difficult to get our arms around at the moment. And the full year, fantastic year. The thing that we are not happy with is the M&A side. We compensate this with good organic growth. But of course our strategy is to have half of the growth from organic and half of the growth for M&A. It's good to see that the organic growth is compensating for the lack of M&A. But on the M&A side, we've been seeing that we haven't really found the right targets and some of the discussion we have last couple of years have been on the wrong price level we think. So we are not stressed on buying companies. We need to find the right candidates to the right price and we keep on searching, but let's work on that. But all in all a good year, we're happy with it and looks promising for the future.

With that, Joakim, should we open up for Q&A?

[Joakim Nideborn, executive]

Let's do that. [ Jonathan ]?

[Operator]

[Operator Instructions] The next question comes from Simon Granath from ABG.

[Simon Granath, analyst]

And particular congrats to you guys, Staffan and Joakim, for the strong results. A couple of questions from me. So starting off, just circling back to the boosted order topic. Did I interpret it correctly that you expect the recent trend to continue ahead given that there are still some uncertainties in the supply chain and thus you do not expect the potential revert as a normal distribution curve as we have previously talked about to materialize? Obviously there's some uncertainty, but any comments are helpful.

[Staffan Dahlstrom, executive]

If I start and then, Joakim, dive in. I think quarter 4 shows that the expectation we had that this should be some kind of linear curve bouncing back in a couple of quarters proved to be wrong. We see both that some of this boost effect continues and we see stronger than expected demand. So I think this will not be a fully theoretical finest curve that goes up and goes down again. So we are a little bit -- the uncertainty have increased. We're happy we've seen this, but we were initially expecting this kind of boost orders to start to correct in 2023. What we see now in Q4 is a different scenario. So I think Joakim, what do you say? This is difficult to assess at that moment.

[Joakim Nideborn, executive]

Yes. I think I don't disagree with anything you said, Staffan. We're thinking a lot about this on our side of course as well and we were a bit surprised what we saw in Q4 and it's pretty clear that there are still component challenges out there. The lead times are still long, which is causing the customers to place those long orders and we still see a lot of investments going on. That's pretty clear in the industry. So given what you read in the papers, it's maybe surprisingly strong how the business holds up and I think it's very difficult to speculate more in the future what's going to happen. But we were pretty convinced of whether we were going to see this reversal throughout 2023 and I think what we saw now in Q4 is maybe causing us to reevaluate that a little bit.

[Staffan Dahlstrom, executive]

In addition, I think we can say if we look at how we act internally, we are allowing ourselves to have much higher inventory. We are saying that even if things are getting better in lead times, we are still placing order to our suppliers with very long time ahead. So I think we and many others have burned our fingers with this kind of optimized inventory, slower short supply cycle and stuff like that. So I think people are concerned and this will not be a quick return to just-in-time attitude. It will take a couple of years before customers really adjust to optimizing the inventories we believe because the expenses for our customers have been so high in not being able to ship their machines or build their cars or whatever they do. So I think this will have a slower correction than we initially anticipated.

[Simon Granath, analyst]

That's very helpful to get all that color on the topic. Just moving back also on the sequential growth in real demand orders here. Is there any particular trends that have been accentuated here in Q4? I know that we previously have been talking about nearshoring, but also you have other trends that are giving tailwinds to your operations actually. But could you talk a bit on the nearshoring topic thing?

[Staffan Dahlstrom, executive]

I think people talk about nearshoring. Sometimes when we talk to customers, we get a feeling that not so many customers are moving existing production away from China towards Europe and Mexico. It's more the decisions of where to place your new production. That's clear that the new invest and that's where you have most of the investments as well. So I think in media, we see a lot of discussions about this. We see that the actual change is a bit slower, but for sure our customers is placing more of their new production sites closer to their big markets in Europe and in North America, but it's not a quick change.

[Simon Granath, analyst]

It makes a lot of sense. And it looks like Ewon had a strong quarter. Is this in part driven by recent product launches or does it mainly relate to a strong market?

[Staffan Dahlstrom, executive]

I think that is mostly related to a strong market as such and we had a really good start to the quarter with some good shipments out there. So it's a mix of course, but I don't think that the new launch is the driver in this short time.

[Simon Granath, analyst]

Great. And just a final question from me. OpEx was up 35% quarter-over-quarter, which partly reflects seasonality as you touched upon, Joakim, but still it's up. Are there any recurring items included here, elevated personnel bonuses, et cetera due to strong orders?

[Joakim Nideborn, executive]

There's a little bit of that. I think what we are trying also to take the benefit of the strong business as we have. So going into Q1 we'll see also, as you know, salary increases with relatively high inflation that is going to push everything up. So I'm not sure that Q4 will stick out so much looking ahead even if there are some costs that are normal for Q4, but not normal for the other quarters if you put it like that. So Q4 specific costs, there is a bunch.

[Operator]

The next question comes from Joachim Gunell from DNB Markets.

[Joachim Gunell, analyst]

So touching on some of the points Simon asked about. But can you talk just bit think about how the quarter progressed, whether you saw sequentially increased activity towards the back end of December, et cetera, and perhaps also in particularly what product areas you saw that growth?

[Joakim Nideborn, executive]

So I think all in all for the quarter, it was picking up because it started out okay in October, then November was a bit better and December finished off really strong both in orders and the deliveries, which is a bit -- the strong December is a bit unusual for us. We don't normally see that given it's a short demand so that was a bit surprising. That was the general trend. So for the embedded business, the same what I just said was even more extreme whereas for Ewon for instance, we had a bit of the same -- the reverse pattern. It started off good in October, okay in November and then declining a bit in December. So I think all in all what maybe caught us a bit by surprise was that December finished off so strong both in orders and in sales.

[Joachim Gunell, analyst]

And have start of January surprised you in [ manufacturing ]?

[Joakim Nideborn, executive]

January has continued in a similar note not as good as at the end of the quarter, but still quite okay. We don't see -- what you read in the papers, we don't see anything of yet that there's going to be a massive decline or recession or anything like that. Still quite solid.

[Joachim Gunell, analyst]

That's clear. And I mean the backlog continues at SEK 1.4 billion as we have seen through recent quarters. So obviously you have slightly call it above normal visibility here on the call it sales and sales cycle for 2023. So can you just comment a bit about for how long into 2023 this backlog provides you with certain levels of visibility?

[Staffan Dahlstrom, executive]

Yes. I think you could say that is pretty much perfect linear decline throughout the year. There is also some orders already for 2024 that's maybe SEK 200 million for '24, rest is for 2023. And here you have about 40% of the backlog in Q1 and it's declining as I said linearly over the year.

[Joachim Gunell, analyst]

Great. And then when it comes to I mean obviously the design wins you report is not losing importance, but becoming less material for you as your product mix has changed. But with regards to that we are seeing call it with the stats that you've provided to us, it would appear as design wins are somewhat stagnating in terms of year-over-year growth at least and to my surprise I mean Anybus embedded was the main growth engine in 2022. But the numbers you provide here, they don't say anything about the actual value over the design wins, right? So perhaps you can say anything about how this trajectory of design wins basically impact your overall call it attainable growth trajectory from a mid-term perspective?

[Staffan Dahlstrom, executive]

I think just in general, I think you're right that there has been a fantastic year on this Anybus embedded that is the majority part of the design win business and it's not because there are a lot of new design wins. It's the existing design wins that the average income per customer have been growing a lot. So its growth is coming from the existing business, existing customers and they are simply selling more of their products where they use our technology. So I think we could -- what say, Joakim? Can we estimate 20%, 25% something like that up in general?

[Joakim Nideborn, executive]

Yes, I think the average revenue per design win is up even a bit more than 25%. So that's the main driver, of course there is some price in that. There's also that we have -- we see on our large assignments, our large customers are performing extremely well and taking on big volumes in the year. So I think that's helping that number a lot. It's been very stable for many years and we see a pretty clear tick up in 2022 in terms of revenue per design win.

[Staffan Dahlstrom, executive]

And keep in mind, part of that business is probably where we see also this safety stock because we are embedded in their device and product. Without us, they can't deliver. So I think here is the area where we also see most of the effect for this kind of safety stock. When we work with system integrator end users, the users as I talked about, there it's much more if we can't deliver, they will buy something else because we are not so well integrated in that business.

[Joachim Gunell, analyst]

Very clear. And just on a final note from my end. Can you comment a bit here about your strategic priorities for 2023 when it comes to -- I mean you've touched upon integrating your product areas more, investing into growth and as well perhaps what you see as your financial muscle obviously has grown over recent quarters. What do you see in terms of M&A priorities?

[Staffan Dahlstrom, executive]

I think we have 2 main areas. We need to make sure that we keep on growing in our existing business, that's clear. We have 1 team working hard on that. But we need to -- we are doing some changes also in how we think about M&As. Of course there is some opportunity to do some smaller bolt-ons still close to our business. I think we are trying to develop a strategy where we think a little bit bolder and think bigger in this. We have good financial muscles. There are some interesting opportunities, but I think we need to work a little bit more on a bolder agenda for the next couple of 3 years when it comes to acquisitions. We've been fishing in the same waters now for a couple of years, but we need to go from sweet water to salt water maybe to get some bigger fishes.

[Operator]

The next question comes from Viktor Hogberg from Danske Bank.

[Viktor Högberg, analyst]

So just checking 1 thing on the order backlog. Did you say that 40% of it was slated for Q1 that will be below SEK 600 million? Could that number increase given the decent start of Q1 or did I misinterpret that?

[Staffan Dahlstrom, executive]

So I'm not sure If I really follow your question, Viktor. So I said 40%, yes, is for Q1. That's correct. And then you said if that number could increase.

[Viktor Högberg, analyst]

Yes. Given the decent start now to the first quarter if you would see a situation where clients would want more.

[Staffan Dahlstrom, executive]

Yes, of course. I mean they're still allowed to place orders for Q1 for sure. Then if we going to be able to deliver on it is a different question I think. Right now we have a pretty fully booked manufacturing facility, but of course that could increase.

[Viktor Högberg, analyst]

And also on the OpEx side, if you could help repeat, I had a problem in my line. What was Q4 specific? How much rolls into 2023? The Q4 OpEx even if we adjust for some items was I think SEK 20 million or something higher than what you commented on for Q4 in connection with Q3. How much of that was driven by Q4 specific events and how much do you expect to roll into the full year of 2023?

[Joakim Nideborn, executive]

And so I think Q4 is, as we said, always higher than the other quarters since we have all the sales and marketing activities and so on in the quarter. Then we have some Q4 specific items that will not be reoccurring that could be maybe some [ SEK 50 million ]. With that said though, we will see cost inflation on salaries hitting us in Q1. I think Q1 will also be a -- even if you take away this Q4 effect, Q1 will be a bit higher than what you've seen before if we put it like that. So there will be a bit of a tick up in Q1 due to salary increases.

[Viktor Högberg, analyst]

Pickup in relation to Q4 or in relation to a normal Q1?

[Joakim Nideborn, executive]

To a normal Q1. I think if you think a bit like this if you take the -- if you lay out the quarters within a year and then you adjust for the Q4 specific items, then I think you will see a bit of a continued increase in Q1 that may be a bit higher than what you've seen between the other quarters in the year given that we'll have the salary inflation. I hope that was clear.

[Viktor Högberg, analyst]

Yes. So in terms of the underlying orders that seem to be remaining at somewhere around SEK 600 million. Would you say -- given that you were positively surprised in Q4 in terms of orders and that seems like customers' demand is still good, would you say that SEK 600 million is the underlying level still or is it actually higher than that?

[Joakim Nideborn, executive]

So what we say is I think it was SEK 633 million, right, that we expected as the underlying. Again what really surprised us was that SEK 85 million in boost effect and then if you take the look at the underlying growth throughout the last year, the SEK 633 million was the strongest of the quarters. That was maybe a bit surprising that it was going to be stronger than what we had in Q1 and Q2, a lot due to what you read in the papers if we're going to be honest. We didn't think it was going to hold up that well. But it's pretty clear that the industrial investments are still good. So if it's SEK 630 million or SEK 600 million, I think that could also be temporary variations. But somewhere in that range is where we see the market at the moment.

[Operator]

There are no more questions at this time. So I hand the conference back to the speakers for any closing comments.

[Staffan Dahlstrom, executive]

All right. Thanks very much for attending this Q4 call. And as we said a couple of times, we closed 2022 with smiley faces and confidence for 2023. There will be some challenges especially on the supply side, but there'll also be some opportunities on M&A and others. So all in all we remain positive and have a growth ambition for the year, but we need to stay agile for any surprises that will come during the year as well. There will come surprises, that's quite certain, but let's wait and tackle them when we see them. So thanks for attending and have a great day. Thank you.