Advantech Co Ltd

TWSE:2395

Earnings Call Transcript 2021-Q1

[Operator]

This conversation is not intended for the media and is off the record. Participants will be removed from the call if they cannot be properly identified. This call is not for the purpose of sharing or receiving nonpublic or otherwise confidential information. Attendees or public side market participants who may not receive and should not request nonpublic or otherwise confidential information about issuers or securities or about the markets for securities.

Good day, and thank you for standing by. Welcome to the conference call with Advantech. [Operator Instructions] Please be advised that today's conference call is being recorded. [Operator Instructions]

I would now like to hand the conference over to your first speaker today, Mr. James Wang. Thank you. Please go ahead.

[James Wang, analyst]

Thank you. Hi, everyone. Thanks for joining Advantech's first quarter earnings conference call hosted by Goldman Sachs. This is James Wang, technology and industrial analyst at Goldman Sachs. The speakers today are Mr. Eric Chen, Advantech's President of General Management; Ms. Linda Tsai, Advantech's President of IIoT; and Ms. Grace Liao, Investor Relations Manager of Advantech.

At this point, I'd like to turn the conference over to Ms. Grace Liao. Grace, please go ahead. Thank you.

[Grace Liao, executive]

Thank you, James. Good morning and good afternoon, ladies and gentlemen. Thank you for participating in Advantech's first quarter 2021 results conference. The presentation material is ready to download on our IR website at www.advantech.com/investor and Taiwan [indiscernible]. This is Grace Liao, the IR manager of Advantech.

During the meeting today, I will give 10 minutes briefing regarding our first quarter 2021 results and the second quarter guidance and leave around 30 minutes for Q&A section.

Luckily, today, we have the chief senior management to join us in the Q&A section. We have Mr. Eric Chen, the CFO and President of General Management; and Ms. Linda Tsai, the President of Industrial IoT to share their views regarding business strategy and the industry trend during the meeting today. Now let's start with the presentation.

Please go to Page 2. As usual, please take a few seconds to read the safe harbor notice. Please go to Page 3. The first quarter financial results. Our Q1 sales revenue reached TWD 13.2 billion, increased 17% year-on-year and 3% quarter-on-quarter. Gross margin rate was 39.6%, improved both year-on-year and quarter-on-quarter basis. Operating expenses rate were 22.2%, declined 2.1% year-on-year. Operating profit rate were 17.4%, increased 2.7% year-on-year but slightly down quarter-on-quarter.

In nonoperating side, Advantech booked TWD 72 million for fixed asset disposal gains in Q1 for one time. With effective tax rate of 24.2%, net income reached TWD 1.9 billion in Q1, increased to 48% year-on-year. Earnings per share were TWD 2.48 in Q1.

Please go to Page 4. The first quarter performance by region. In terms of U.S. dollar, first quarter revenue increased 24% year-on-year. Most markets have [ reported 40% ] year-on-year revenue growth. The major 3 markets account for almost 70% contribution of our total revenue. North America increased 11% year-on-year. Europe market increased 8% year-on-year, while Greater China increased 76% year-on-year, which is the best performer in Q1.

So overall, North Asia increased 13% year-on-year. Both Japan and South Korea market increased 17% and 40%, respectively. However, Advantech Technology Japan, ATJ, declined 12% year-on-year in Q1. Our Asia and [ intercom ] market total increased 36% year-on-year. Almost all the Indonesian market enjoyed double-digit growth, mainly due to the strong macro rebound across the board.

Please go to Page 5, the Q1 performance by strategic business group. The industrial IoT group increased 54% revenue increase year-on-year. The revenue of embedded IoT and service IoT increased 7% and 18% year-on-year, respectively. The cloud IoT reports 37% year-on-year growth. In all business groups, only applied computing group, ACG, declined 14% year-on-year, mainly due to major project ended and ATJ underperformed.

Please go to Page 6. The working capital and the balance sheet. Advantech generated TWD 7.8 billion in Q1 for cash. [indiscernible] that a record high cash level indicating we are quite sufficient in working capital. The cash conversion cycle, CCC, is back to normal level under 100 days in Q1, mainly due to the improvement of inventory turnover days, which is also a healthy improvement on the balance sheet.

Please go to Page 7, the guidance of a second quarter of 2021. Well, this is on the basis of the exchange rate assumption of USD 1 versus TWD 28.3. We expect Q2 revenue in the range of USD 480 million to USD 500 million, while the gross margin would be in the range of 37% to 39%. Operating margin was between 16.5% to 18.5%. Looking forward, the demand remains strong due to infrastructure opportunities in [ IE ] and smart upgrades in the semiconductor sector. Though the supply chain remained tight recently, however, with early action and design flexibility, we will strive to minimize the impact of a supply chain issue.

That's all for the briefing of our first quarter financial results. Let's open for a Q&A session now. Thank you.

[James Wang, analyst]

[Operator Instructions] [Foreign Language] Operator, we are good to take questions now.

[Operator]

[Operator Instructions]

[James Wang, analyst]

Okay. And while, we're waiting for some questions from investors on the line, let me just quickly ask a few quick questions, if I may. So my first question is still regarding the order momentum. So could you please share with what's Advantech's current B/B ratio? And also how sustainable will the order -- sort of the order momentum be? And if you could also sort of like highlight a few key applications that's seeing stronger demand in the coming few quarters, that would be great.

[Eric Chen, executive]

Thank you, James. This is Eric speaking. Actually, our B/B ratio [indiscernible] [ is strong ] in the first quarter of last year. In the first quarter, the B/B ratio reached up to 1.66. B/B ratio from 3 regions include China, the U.S. and in Europe were larger 1.6. This is the first time we encountered the [indiscernible]. In the past 2 or 3 years, the B/B ratio was around 1.1. In last year, the B/B ratio was lower to 1.0x. The reasonable B/B ratio in our internal service becomes [ quite high ] as to -- the first one is a material shortage impact. Old customers wants to add to their product from Advantech as early as possible. I think they have a real project on hand. Without the supply of our IoT or EIoT product, their project might cause a delay.

And the second reason is the price issue. We informed our customers that we will increase our selling price in quarter 2 due to the component price up. This action also triggered the customer demand to press their order events to avoid the price up. So from our analysis, the 1.3 B/B ratio should be a reasonable figure to reflect our organic growth and customer real demand for the [ circa 40 ]. 80% order belongs to booking, and the rest of the 20% will come as a double booking. So this is the picture for our B/B ratio. I want to let you know, for the 20% double booking orders are most of the purchased items belongs to standard products and the [indiscernible]. So in the supply chain point of view, our inventory risk is quite low.

So this is just to let you know, we have around 20% double bookings orders. This all belongs to standard products and [indiscernible] item. Okay. So this is my answer on the order booking.

[James Wang, analyst]

Okay. And also I have a very quick follow-up questions, especially regarding the COVID-19. So I just wonder that if the COVID-19 situation improves globally in the coming few quarters, would you expect a pretty significant demand uptick in the short period? Or do you think it will be a more long lived, but more moderate sort of like demand resumption? So it would just be great to hear your view. And also, could you also share with what approaches would Advantech do to sort of like make sure your customers can be sort of like better service?

[Linda Tsai, executive]

This is Linda speaking. I'm the President of industry IoT. At this moment, some of the country, they might have different progress of vaccine. But as Eric mentioned, we have high B/B ratio. Of course, some of the reason is because of the lead time is getting longer. Customer pays the PO earlier than before. And second is because of the material shortage and the price up. But on the other hand, we do see some of the market, it's coming back compared to last year. That is one of the reasons that we have higher bookings.

Last year for Advantech, I think our business is one like really minor decline because we are -- last year, we are strong in semicon in some of the medical applications, not all of them. We are strong in smart manufacturing or the warehouse logistics. Those applications that I mentioned previously still go strong this year. But this year, at the beginning, there we see some of the low light of the market that the other side of the medical or the gaming is slowly coming back. That beginning of the year, we have the project, which that -- they have lower volume last year, but they said they're coming back. That related to dental or eye or any kind that's not really life related, those medical are coming back.

And secondly, we do have some of the gambling project or lottery project. We are receiving the order that will be shipped by the end of the year. I believe some of the application -- some of the market had low sales last year. Those are expected to coming back at the second half. Of course, it still depends on the vaccine situation. In U.S.A., it's going very well. So you will see that U.S.A., we have a good booking and revenue momentum, and Europe because different countries. Right now still [indiscernible] this recovery, but the strong is not that high. But in China, we have a strong rebound.

So I want to particularly focus on China after COVID. In addition to one I'm talking about that, for the gambling and lottery that could be from U.S. and Europe, but in China, we see that we have the strong demand because the EV car, it's not that Advantech is doing any EV car, but the battery is a key element for EV car. And we know that the largest battery manufacturer for EV car is in China. So on the first half, even quarter 1, we see the strong demand from the battery-related manufacturing from China.

And secondly, as our previous China growth momentum is Apple-related equipment, including iPhone and AirPod. And iPhone demand is okay. It's not that strong because there's no really big new iPhone this year, but AirPods still have very strong demand. In addition for China, another good momentum this year and the coming year is their energy strategy. They are talking about carbon 0 -- carbon net 0 emission. So we see the demand of energy, renewable energy from wind power and solar. So aligned with China [ 45 ] strategy -- so also sort of explain why China in the first half, even quarter 1, with the strong booking.

So I hope I answered part of your question is that, what will be the more new demand post-COVID, where those market is coming back, as I mentioned, around like medical and also gambling and gaming related.

[Operator]

[Operator Instructions] We have the first question coming from the line of [ Han Ku ] from China Life Insurance.

[Unknown Analyst]

I would like to ask a first question about how do we see the infrastructure and the plan in China and U.S. to affect our business prospects? As far as we know, most of China's new infrastructure is already under construction or may be in effect in 2021. And if U.S. is going to have more EV charging business plans, how do we see ourselves in -- how do we see our revenue contribution in such areas?

[Linda Tsai, executive]

For the revenue contribution, it's hard to give the number right now, but I want to share for China, U.S.A. for the infrastructure, the demand, some of them are similar, some are different. But in China, I'll address a little bit, since last year, 45 projects. For infrastructure on the transportation-wise, this transportation is an important market for Advantech. And this year, we'll continue to invest on that one. But currently, the transportation, we haven't seen the biggest infrastructure on railway or on road. I know 2 years ago, there is a big factor on road traffic for the ETC. But on the other hand, for China, for energy, the investment and the opportunity for Advantech, I think they will bring us the new demand, especially on renewable energy. Advantech provides the controller and the end-to-end gateway and communication product, especially for the wind power or solar-related rental energy. So that will be the one.

And regarding for China, for the EV car, we focus on the automobile manufacturer that their manufacturer will be upgraded to require to have the new device and the product on Advantech. The other one I mentioned is that for the EV car, some of the components are new, especially battery is a key element. We have receiving a lot of new demand on the battery-related manufacturer. So that's also a very important key momentum for us.

In the U.S.A., their new infrastructure again, on energy and also on transportation. But on transportation-wise, we may particularly focus on the rolling stock because the investment is particularly related to Amtrak. So for that one, we will work with rolling stock and those distinct integrator, together for the rolling stock investment, including many kind of systems.

And on the energy-wise, again, on the renewable energy, even though their factory is in U.S.A., but for the energy, we joined the big 5. Some of them are in Europe, like ABB, Schneider or -- GE is in U.S.A. So on energy, on renewable energy, we are designing, not only in U.S.A. also from Europe since that 5 or 6 years ago. And we will pay attention to exactly that which type of energy, no matter it's wind or solar or any power station we will work.

So hope to wrap up on your question is that, both China infrastructure, I think energy will be the key market that we will focus on. And as for the infrastructure and transportation in China and U.S.A. will be slightly focused differently.

[Unknown Analyst]

And my second question will be regarding the -- sorry, about our revenue recognition delay. As per our previous -- as we previously mentioned, that there will be the 10% to 15% of revenue delay from first quarter to second quarter and due to the component shortage. Do we see this trend to continue from the second quarter to third quarter? Or do we think that the second quarter will possibly deliver most of our delayed order?

[Eric Chen, executive]

Let me answer your questions. Because the component that [indiscernible] supply on many concentrate in audio codec and [ LED ] chip, also the power [indiscernible] and IP and [indiscernible]. So at present, we only get around 40% to 50% of the order quantity in the quarter 2, quoting our procurement head for a feedback. The supply allocation i progressing, where we base in the quarter 3, but at this time and for a new order [indiscernible] is longer than [indiscernible]. So probably the quarter -- second quarter, the revenue is in [ threat ], but in the quarter 3 and quarter 4, the station will -- getting better and better if the component shortage issue can be sorted. So it is my answer regarding quarter-by-quarter guidance.

[Unknown Analyst]

Okay. Let me paraphrase this. All you mentioned is that only 40% to 50% of component could be delivered in the second quarter. So we will see continuous delay in the second half of this year. But we see better supply in components side. So we think that the delay will be less and less. Is that correct?

[Eric Chen, executive]

Yes, yes.

[Unknown Analyst]

Okay. My last question will be regarding gross margin. As per our forecast, we can see that the second quarter -- gross margin in the second quarter is a little bit lower than the first quarter. May I ask the reason, is it due to the product mix, material price increase? Or do we see some other factors that may affect our margin?

[Eric Chen, executive]

Yes. Mostly, [ it comes ] as a material cost-up ratios, a lot of [ components ] and right [ to live ] have one 10% to 50% and this will lead to our cost of goods sold increase of around 1.8% in our estimates. However, we do transfer the cost-up ratio into our customers. We already issued -- announced our price adjustment guidance in the quarter 1. And that in general, we have up our selling price for 3% for core-labeled products and 6% for system products. So [indiscernible] after [indiscernible] such as CPU memory and [indiscernible] reselling price were caught by market price. And perhaps the certain markup rate to [ repay ] their price change. So we do expect quite adjustment where our gross margin ratio and [ take down ] our gross margin target. So this is quite important because we -- the component already primed up into quarter 1, but we [indiscernible] the second part in quarter 2. So they have become that. So we expect in the quarter 2, our gross margin were guided a little bit. But for the 4 years, we still have the confidence to maintain our gross margin in our plan -- as our plan. So for the quarter 2, it's the most challenging seasons both in terms of margin performance. This is my answer.

[Unknown Analyst]

Understood. And may I ask, do we have a guidance for the full year gross margin range?

[Eric Chen, executive]

4 years.

[Linda Tsai, executive]

4 years, 2021.

[Eric Chen, executive]

2021, 4 years margin guidance, right? Our target to speak on 40% of the gross margin, our plan.

[Unknown Analyst]

40%, I see. Okay. My last question was about service IoT in the industry. Since that we see multiple -- demand recovery from multiple industries, do we think that there will be potential operating margin hike in service IoT area? Or do we think that we will have to expand our R&D so that the operating margin will remain the same?

[Linda Tsai, executive]

Well, service IoT, this is 1 business group that they have 3 focus areas. And operating margin, I think -- our service IoT is improving year by year. And this year, if you look at the business, I think the medical will grow, as I mentioned previously, and largely warehouse because that's also booming because that -- a lot of the goods need to be transported. Retail, we're not so sure yet for the second half. So with all the combination on the high side of the medical and logistics, we believe that service IoT performance this year for the operating margins should improve. And I would not say -- it should better than last year. It depends on what will be the target compared to other business groups, maybe not yet to the level but the operating margin for [indiscernible] improved year-by-year.

[Operator]

[Operator Instructions] We have the next question coming from the line of [ Willi ] Chen from JPMorgan.

[William Chen, analyst]

Just wanted to clarify some numbers first. So Eric, you mentioned your B/B ratio in the first quarter is it's 1.6 or 1.3. Just wanted to clarify first.

[Eric Chen, executive]

1.66, 6-6. 1.66.

[William Chen, analyst]

Okay. And then can you talk about the April order condition?

[Eric Chen, executive]

Yes. In the April -- you mean April? B/B ratio is [indiscernible]. We will release revenue announcement, a press announcement in -- this Friday.

[William Chen, analyst]

I see, okay. But do you think the order backlog in April continue to remain strong? Is that the number -- is that the direction we are expecting?

[Eric Chen, executive]

Yes.

[William Chen, analyst]

I see. Second question is you mentioned about ASP hike for your product, right? So I heard it's 3% to 6%. Is that correct? Just want to clarify.

[Eric Chen, executive]

Yes. Yes.

[William Chen, analyst]

3% to 6%.

[Eric Chen, executive]

I have 3% price up for the core-labeled products. And for system product, the price increased around 6%, but it depends on the distribution market competition, yes.

[William Chen, analyst]

I see. So I think the second quarter guidance, if you take the midpoint of the revenue, it's probably implied of 5% growth, so -- which means that the volume will probably be negative year-on-year. So I think previously you mentioned, I think in first -- I think in the previous analyst meeting, you mentioned the delay will be 5% to 10%. So is that better than our previous guidance or slightly weaker in our previous guidance regarding to your component shortage condition?

[Eric Chen, executive]

I think the current quarter 2 guidance is more -- is similar with our estimate internally. So in the quarter 1, we -- in our first half IR meeting, we announced that in quarter 2 where revenue impact of 5% to 10% because of the [ future ] results. The guidance is met with our estimation.

[William Chen, analyst]

I see. And then next question is regarding the condition in China. You -- I think Linda mentioned about the -- some of the strong EV orders from automotive OEMs. Can we talk about what's the contribution for this EV-related increased battery or auto OEM sales in China? Is it low single-digit, mid single-digit or double-digit? Just a direction-wise numbers will be fine.

[Linda Tsai, executive]

Yes. Okay. If we talk about the new demand on the EV-related business, it's hard to tell the growth rate because last year is almost at a very low level. So I don't know how to like -- whether it was the growth rate because that would be a very high number. Regarding the contribution in revenue-wise, because some of demand are from channel partners and some of them are from [ our right ] customers, but it's not easy to give you the roundup number of the -- why is the percentage of the China revenue come from that? But that's why I shared previously, this quarter 1 and even the first half, China's strong because the one -- first one is business as usual. We are strong on the equipment for the electronic for Apple with a new goal momentum from EV-related manufacturing that.

So I hope I answered your question, even though I did not give you the number you want. But that will -- I will discuss the how we can provide that, but that is the growth momentum for us we have, and we see it will stay last of the year.

And also, the other one on [ the shares ] because you asked China, the same -- the new growth momentum, we also see that from Korea because another big manufacturer for battery, rechargeable battery, not only for EV car or for any battery also in Korea. And we also have very good performance in Korea for -- not just only because of battery, also for the semicon, yes.

[William Chen, analyst]

I see, I see. My last question is regarding to the demand from North America and also Europe. I think previously -- in the previous analyst meeting, you mentioned that growth in first quarter will be single-digit for U.S. and Europe. I think apparently, that was doing better, right? So what's the outlook in the -- for those markets in the second quarter? Are we going to expect growth there?

[Linda Tsai, executive]

You were asking Europe and...

[Grace Liao, executive]

North America.

[Linda Tsai, executive]

North America. Okay. For North America, because this is our biggest market share over there, and our vision is diversify in U.S. as well. But our expectation for North America, I think the second half will be better than first one. But still, I mean, semicon is the biggest market we have. And secondly, on the growth of IoT, the data management and data backup and storage, it still remains strong, then -- that will be another growth engine. And the third one I mentioned about the medical. On medical related, the industry, we have the market share and also is a strong portion for us in U.S.A. team. And lastly, last year, we have very good business on warehouse logistics because a lot of the e-commerce-related business going up, and we supply a lot of the product for warehouse logistics. And this why it still -- keeps very good growing momentum.

So on the North America, on the quarter 1, it's -- the growth rate is okay. And in the quarter 2 and 3, we expect will be slightly higher. One of the reason is because in U.S.A. under vaccine, I think probably is one of the countries in the world, they have very good progress on that one. And regarding Europe, because there are many countries in Europe, the performance of the Europe may differ from different sales teams. On the infrastructure-wise, for the energy or the equipment, which is -- the strong momentum is still coming back. On the other side, on the first half, on the gambling, it's still not there yet, but we are receiving the order of the lottery and the gambling for the second half shipment. And on the medical-wise, some of the medical for dental or for the surgery-wise, also coming back.

So on the Europe second half, I still look at the bright side, but the risk will be, in euro, will be on the COVID-19. The risk on the COVID-19 euro is higher than in U.S.A. So that is the one uncertainty.

[Operator]

[Operator Instructions] We have the next question coming from the line of [ Liz Ricafort ] from [indiscernible] Asset Management.

[Unknown Analyst]

So my first question is just regarding the competitive dynamics currently, how you're seeing the competitive environment and how you see this evolving longer term?

[Linda Tsai, executive]

Okay. On competition landscape, Advantech is a diversified company. So we have many kind of competitors. It's not easy to name any one as one's competitive to Advantech. So may I know that -- which market of the region you particularly want to ask?

[Unknown Analyst]

Yes, of course. So I guess previously, we've heard a lot about Innocore doing quite well and also when they purchased Kontron, doing quite well. So just trying to understand if you're seeing those competitors being a little bit more aggressive in trying to get clients or whether that's not really an issue anymore.

[Linda Tsai, executive]

Right. I see. Okay. Thank you. Regarding Innocore, Kontron S&T, the most -- the related countries or region is Europe and China. Beside these 2 regions, we don't see much about the competition with Innocore or Kontron S&T. This new region have different competition with them. In China, a few years ago, indeed, we see the competition because they are coming after our customer. But on the recent year, even last year, we are getting less competition with Innocore in China. Perhaps, we have that -- perhaps that they are going to the different market than us, even though it's still on IPC, but Advantech is doing value proposition business. We are now driving for the revenue without considering the margin.

So in summary, on China, we haven't competed against with Innocore. I'm sorry, Menocort -- Innocore, yes, only on few accounts, but that's not much of the competition.

But on the other hand, in Europe, because Kontron S&T, their homeland is in Europe and Kontron is a respectful company in Europe. They have very good brand awareness over there. So indeed, the alliance of the Innocore, Kontron S&T do have a -- do create a strong competition against Advantech in Europe, especially on the embedded market. And so with the brand -- when Kontron, they leverage Innocore on their low-cost manufacturing and S&T as the IT consulting service.

For Advantech, in addition of our Advantech footprint over there, we also have a design center in Germany to service the customer who might require customization locally. So even though the competition is very strong in Europe against Kontron S&T, but Advantech is not just product building, we also invest the design team in Germany to work and compete against Kontron for local design in business.

[Unknown Analyst]

That's really clear. And so I guess, longer term, you're hoping to be at the same level as Kontron S&T in Germany in terms of the design you're offering, or do you think that the product you offer is on the same level as Kontron S&T already?

[Linda Tsai, executive]

Yes. For Advantech, Kontron, because I'm talking about the embedded team, but one of the strengths for Advantech is that we not just only have embedded team for each computer, for the modules, we also have the connectivity product, data acquisition gateway, the end-to-end gateway from industrial IoT team. I think that made Advantech Europe as one company provides the complete solution from the same team to data acquisition to edge computer and to the solution. We are talking about that some of the solution finally we have working there. I think that's one of our value proposition as the total solution.

On the design service on the long run, that's also the strength of Kontron over there because that's their homeland. As I shared that the design center we have in Germany, we already have that team since 3 years ago already. So in the long run, we are offering the wide range of the Advantech product portfolio and also the local design service in Europe. This is not just only that we do that to compete with Kontron, not just because of Kontron, because we have many competitors in Europe that's not a Kontron, but that's -- Advantech investment in Europe to grow local business.

[Unknown Analyst]

Okay. That's clear. And my second question is regarding services IoT. Could you perhaps provide any outlook on how much services IoT might contribute to revenues in the next sort of 2 to 3 years?

[Linda Tsai, executive]

Okay. For service IoT, there -- we -- our expectation -- I mean the projection for the service IoT for the revenue-wise on the growth rate actually is higher than others. And on the percentage-wise, right now, it's around like 8% of revenue for the service IoT, around the 8%. Since we want all the business group to grow healthy -- very healthily in double digits, but our projection for service IoT, the growth rate is higher than IoT than embedded. And in the coming 3 years, the expectation is for the revenue portion for service IoT, we hope they can reach double-digit of the Advantech revenue.

[Operator]

[Operator Instructions] We have our next question coming from the line of Chi Wong from Dymon Asia Capital.

[Chi Wong, analyst]

I have 2 questions. My first question is the -- I think your component shortage and the strong book-to-bill ratio has been there for a while. But can you talk about whether you believe there is any double booking or double ordering at your customer end? And in terms of how do you actually maybe mitigate the situation of customers potentially giving you duplicate orders and future that could result in some kind of sudden order disappearing when the situation changes. Maybe like -- do you asset-like some customer prepayments for order, et cetera? That's my first question.

[Linda Tsai, executive]

I think previously, Eric mentioned that the estimation for double booking or like long-term PO could be 20%, yes. And secondly, what do we do to ensure that those orders that can -- I mean, will not create the risk for Advantech? Most of the product we sell are standard product. So as Eric mentioned previously, we estimate, even though this 20% of the double booking, but they are standard products, so they will not create a high risk for us. For some of the ODM project, they are not standard products. Our sales will generally ask for the NCNR. Even though some of our customers may not able to agree with NCNR, then we will have a letter of intent for the liability of the special component we reserve for them to minimize Advantech risk. So at this moment, this is the communication with customers.

And for the ODM product we have, not just -- because this year's material shortage, even in the past year, when we discuss those -- the ODM project with a special part only used for this customer, the contract and the letter of intent or the NCR order are in the discussion to ensure minimize Advantech risk. So this is still continuing this year. Of course, we become stricter because right now, become material shortage, we have to ensure that the order will not be canceled. And even though they will be rescheduled for the shipment upon customer request, our sales still will combine the rescheduling into the minimum time frame. I hope that answered your question.

[Operator]

[Operator Instructions] The next question comes from the line of [ Han Ku ] from China Life Insurance.

[Unknown Analyst]

My question is about [ LIDMS ] sector. As far as we can see the sector is having a very -- you can say, gross rate is getting slower. And I'm just wondering that, do we see that -- I'm sorry, do you think that in the second half, we will see a potential recovery in the [ LIDMS' ] revenue? Or is the component shortage continue to track it and maybe lower the total revenue growth of this year?

[Linda Tsai, executive]

So [ LIDMS ], they are 2 business group: one is applied computing, the other is called IoT. So I think you're referring to applied computing. As Eric already mentioned earlier, also Grace, is that applied computing, they are -- one of the portion is from Advantech Japan, ATJ. And the big project is ended. So that is our -- that point is that one of the big project will end this year. Second one for applied computing is last year because COVID, so we have like really high demand for patient terminal project on U.S.A., on Europe. So last year, applied computing has outperformed the business group for Advantech. And so in terms of the Y-o-Y because they have a very high revenue last year even from quarter 1 already, so they are the reason that they decline right now.

If you look at the coming quarters, as mentioned, even though on the patient terminal project, it could be slowing down right now at the COVID. But on the other side of the medical, for the medical equipment for life related, as I mentioned, a lot of surgery or the eye, the dental, those kind of the medical equipment, the demand is coming back. And on the second half, the shipment because of the material issues, so we are unable to share on quarter 1 and only partially in quarter 2, but private computing on the medical-wise will pick up in the coming quarter, yes.

[Eric Chen, executive]

Actually, applied computing group set a low-digit growth in this year. A good reason for that, they have a very good performance in last year. So in a year-on-year comparison, they just set a single-digit growth for these years.

[James Wang, analyst]

I think that's all the questions we have for today's call for now. And I have 2 quick questions here, if I may. So the first question is regarding the M&A strategy. So can you just remind us what is Advantech's future M&A strategy? And also what region or what segment or what products or technology would be the key focus for Advantech in the future, sort of like you complement your overall product and also the technology portfolio? That's my first question.

[Eric Chen, executive]

Regarding the M&A strategy, let me answer your question first, and then maybe, Linda, can give some comments. Our M&A profit mainly to buy into the 3 categories, let's say S1, S2 and S3. For the S1 category, we treat it as technology platforms for the regional inspections. Actually, in the last 10 years, almost all Advantech M&A belongs to this category. For example, we acquired [indiscernible] to provide a robust vehicle on future and the [indiscernible] for transport, for logistic and retail. [ Previous ] model was industrial network communication. And in S1, we still search for the right market for specific segments, also we have kept going on with regional expansion, especially in the emerging countries.

And to the S2 category, the top is we are focused on [indiscernible] oriented, better than our platform to provide [ all these ]. But even now, we don't have a clear M&A candidate on hand. So I don't expect we will have a new field this year for the year 2020.

As soon as S3 category, we define it as our corporation partner business area. We believe the corporation partner will attract more share of AIoT value chain by integrating the software power via IoT platforms, and a widened value-added service in a specific domain, such as [indiscernible], [indiscernible] and in terms of transportation, something like that. Therefore, this is currently our M&A strategy, it's to invest by minority shares, 100% merged is not our intention. Since in my -- core conference with our customers. So this is our M&A strategy [ devices ], S1, S2 and S3. But right now, as you know, we don't have a clear M&A target. So my answer is for this year or even the next year, we don't expect we have a new deal for M&A. This is my answer.

[James Wang, analyst]

And my next question is a pretty straight forward one. So I just want to know that how should we think about Advantech's OpEx trend going forward? So I think the pen for you guys is OpEx has sort of like contract a lot from the first quarter 2020 due to COVID. But I think moving forward for the coming 1 to 2 years, how should we think about Advantech like OpEx trend? Do you think OpEx will, again, be in a very strong expansion mode once the work is back to normal again? Or any sort of like target for the OpEx amount or the OpEx ratio?

[Eric Chen, executive]

On the OpEx side, the forecast in our plan is expected to increase about 5% to 6% year-on-year. But the OpEx ratio will be [indiscernible] due to the top line growth. So in the long run, we don't foresee any specific or best growth in this year or even in the coming years. We will keep the OpEx as spread as usual.

[James Wang, analyst]

Okay. Since there are no further questions to Eric or Linda or Grace, anything you would like to highlight before we end the call?

[Grace Liao, executive]

I think we would like to refocus on our dividend policy. So we share the same mindset that we try to share the profit with all the investors. So Advantech keep a high dividend policy for the past. Therefore, the dividend payout ratio was over 75%. I think most of the investors are very long term and very focused partners and is very appreciated for our high payout policy right now. And we will keep on going with the high policy with the investors.

Any point for Eric or Linda to highlight?

[Eric Chen, executive]

No. Just to remind you, we have a press release regarding the April revenues.

[Grace Liao, executive]

Yes. April monthly revenue will be announced in this Friday afternoon, yes.

[James Wang, analyst]

Cool. Okay. Thank you so much, Eric, Linda and Grace for your time today. And also thanks, everyone, for joining the call today. Thank you.

[Grace Liao, executive]

Thank you.

[Linda Tsai, executive]

Thank you.

[Grace Liao, executive]

Thanks, everyone, for participating. Thank you.

[James Wang, analyst]

Thank you. Bye-bye.

[Eric Chen, executive]

Bye.

[Grace Liao, executive]

Thank you. Bye-bye.

[Operator]

Thank you. This concludes today's conference call. Thank you for your participation. You may all now disconnect. Thank you.