Advantech Co Ltd

TWSE:2395

Earnings Call Transcript 2022-Q1

[Hong Ji Yang, analyst]

Good morning, everyone. Welcome to Advantech First Quarter 2022 Earnings Call. My name is Derrick Yang, tech analyst at Morgan Stanley. It's an honor to host the call with the Senior Management for Advantech. So joining us today we have the CFO and President of General Management, Eric Chen; President of Industry IoT, Linda Tsai; and IR Manager, Grace Liao.

So without further ado, let me pass the call to the management team for the briefing.

[Grace Liao, executive]

Thank you, Derek. Good morning and good afternoon, ladies and gentlemen. Thank you for your time today. This is Grace Liao, the IR Manager of Advantech. Let me share the screen right now. Okay. Please see the agenda today.

In the beginning I will give 10 minutes briefing regarding our first quarter financial results and second quarter guidance and leave around 40 minutes for Q&A section. Meanwhile, Mr. Eric Chen would like to express his sincere apology that he's not feeling well today and also lost his voice. He will join us on air during the conference. However, Linda and I will answer the questions from investors. Thank you for your understanding.

As usual, please see the safe harbor notice. For Q1 financial results, both top line and the bottom line performance set company's new records. Q1 revenue reach NTD 16.1 billion, increase 22% year-on-year. Gross margin rate was 38.2%, slightly improved quarter-on-quarter basis, also shows strong defense force in GP side.

Operating profit was NTD 3 billion, increased 32% year-on-year. For now items Advantech books NTD 129 million for FX gain in Q1. The effective tax rate was 18.99%. Net income reached NTD 2.57 billion, increased 34% year-on-year and 13% quarter-on-quarter. Earnings per share in Q1 was NTD 3.32. For regional performance in terms of U.S. dollar Q1 '22, revenue reached USD 578 million, increased 25% year-on-year. Almost all regions enjoy double-digit growth compared to the same period last year.

Both North America and Europe market enjoy over 30% year-on-year growth in Q1. Other Asia and InterCon market overall increased 50% year-on-year. Both EMEA and India market were the best performers with 89% and 74% year-on-year growth respectively due to major projects contribution.

For SBG performance, the Industrial IoT is the biggest BU, accounts for over 31% of total revenue. However, Q1 revenue growth's lower than average due to high base of last year. Embedded IoT increase 27% year-on-year driven by strong demand in medical projects and gaming sector back to growth. Applied Computing Group, ACG, increased 86% year-on-year mainly due to contribution of a medical projects and a low base last year. Service IoT increase 66% year-on-year driven by major breakthrough in iHealthcare, iCity and iMobile solutions.

For balance sheet, debt ratio reached 42% due to dividend payable increased in current liability in Q1. Inventory level set new company records due to component shortage, however, high-risk inventory, HRI, remain low. We will keep monitoring the inventory structure in the following quarters.

For the booking to shipping ratio historically is in the level of 1.1 in Q1 '22. B/B ratio reached 1.36, which is lower than the level of last year. The overall delivery lead time was gradually revealed.

For Q2, financial guidance based on the FX assumption of USD 1 to NTD 28.9, Q2 revenue guidance is in a range of USD 530 million to USD 550 million. Gross margin is in the range of 36.5% to 38.5%. Operating margin is in a range of 16% to 18%.

This is all my presentation and I'll now handover to Derrick. Thank you.

[Hong Ji Yang, analyst]

[Operator Instructions] Yes, so while we are waiting for questions coming in, I think we have already gather a few questions by investors previously. So maybe Grace will comment on those questions first.

[Grace Liao, executive]

Yes, sure. So I will start answering the question of 1.1. Okay. The impact of COVID control in China. I think the impact of a COVID control in China mainly has 2 effects. The first is that if the limited production activities due to China authority didn't allow people to pose district movement, the production activity can perform by the laborer who lives in our center only. Thus, the -- inductions production value in Kunshan decrease around 70%, 7-0 compared to the regular months operations.

Second is the logistic lockdown impact, which is more serious than the production activities. Until today they are transported either by air, by sea or by truck and still not able to -- back to normal. So we don't -- we can't deliver our finished goods to our customers on their premise schedule. Also the supply of raw material also suspended. If the raw material does not enter our factories there would be a risk of material outage and also cause the production to stop.

As the question of when, Kunshan and Shanghai operations were back to normal. According to our local management team's feedback, the lockdown control will gradually ease in May. We expect in mid of May our production capacity Kunshan were back to around 50% to 60% and by end of May it will be back to 100%. That would be the impact of China control. Yes.

And second question, the impact of the Russia, Ukraine impact to Advantech business, also the demand of pan-Europe. Actually, the direct sales revenue for Russia and Ukraine only accounts for less than 1% of our total revenue last year and also Q1 this year. Therefore, I think in terms of sales and accounts receivable the impact is relatively small.

If we look at European booking status in Q1, the B/B ratio was align with our corporate average. We don't see any significant changes so far in pan-Europe demand. But for long term, if the war is continuous, it will be harm like several industry sessions, automobile and the semiconductor and also cause inflation in the future as well. That was the second question.

And the third question is that the impact of weak NT dollar against U.S. dollar and our impact to the revenue on the cost expenses. Well, Advantech is a international company with over 28 branch office around the world. So most of other subsidiaries are doing business with local customer in terms of a local currency. For example, in China, all the receivable is in renminbi and in Japan, mostly for Japan yen. As in Europe, most of the transactions are based on euro dollar, okay?

So in terms of revenue, U.S. dollar accounts for around 55% of total sales income. On the procurement side, since most of the high-value key components such as CPU, memory and flash is all caught and paid in U.S. dollar, the U.S. dollar accounts for 80%, 8-0, of the material cost, okay? And though I am not able to give out specific numbers, but I can address more color on the impact of weak NT dollar. Internally, we do have the assumption that if NT dollar depreciation to NTD 29 to USD 1, it will bring a positive impact to our top line. However, operating expenses will also increase. Therefore, the overall operating margin will be negatively impact around 0.2% roughly. That would be the FX issue to the company.

And for the fourth questions, maybe I can leave the component shortage issue to Linda to answer the question.

[Linda Tsai, executive]

Yes. This is Linda. Regarding the question of when do we expect the component shortage to ease, from the market is that commercial product, consumer product, and we see the demand for the consumer product is getting slowing down. And even though at this moment on the quarter 2, we're still quite facing some of the serial shortage for some of the components, but we do expect and we hope the component shortage should get improved by the end of the year, but may not be really the result of the shortage we have. But on the quarter 4, I think with the end of the year, maybe there will be some improvement and definitely for next year.

And at this moment, since the beginning of the year till now and at the end of quarter 2, we suffer the severe shortage still many on the power regulated of the component because those components, the manufacturing process is still to the 01. So the wafer allocation for our supplier is less. So I think the power component-wise will be the one we face a shortage of the most. And the secondly is that some of the Internet controller, especially Advantech's almost by more than 90% Intel-based product. So we also have the severe shortage on some of the Intel product line, especially on the Internet controller.

Yes. So there is the feedback to the question we have on the 1.4 on the component shortage.

[Grace Liao, executive]

Thank you, Linda. So we continue to the 2.1. The key developments and outlook for SBU. So I will also leave the question to Linda. Thank you.

[Linda Tsai, executive]

Right. Also [indiscernible]. So our key development for the product team is still very similar like we will do is that for the coming years, we look at the growth market in semicon in infrastructure and some of the medical that where we focus also for electricity. So our key development is still develop those vertical-focused product, that's for one.

And second is wireless technology is crucial. So in the coming quarter, we will invest more our development in product design on wireless-related module and device for the connectivity for the IoT. And the third is the key development for Advantech, again, is our solutions business on software. So gathering the resource we have in engineering team on the software and our regional sales force, so this will be the third, our key development for product division team.

And from the past quarter, 102 because of component shortage, some of our engineering has been spent time doing the redesign in order like to resolve the component shortage issue, but I think this we're getting less in the coming quarter. So we were back into the key focus that I just shared previously on the IoT product on our vertical focus market.

And regarding the RBU, which mean our regional sales force, for Advantech that we are designed for the business for the coming 1 or 2, even 3 years. So the end demand still remain very strong that we get share on semicon market and our infrastructure and energy-wise because of the demand for the ESG and also the online for the logistic, the warehouse. So the demand from those is still very strong. So our sales force team are working on those design opportunity for the focused market.

And the order momentum share on the B/B ratio, even quarter 1 B/B ratio, 1.3 is slightly lower than last year, but compared to the historical B/B ratio we have, still remain at very high order momentum. Yes.

So continue to the next question regarding the policy and the momentum in China. Is it [indiscernible] we're thinking the production and this strategy in the next 2 years. I think for the production strategy, Advantech had the production facility in Taiwan, China and also in Japan, and this still remain no change and due to Advantech product is a diversified product line. On the volume scale wise, it's not that as much as those like contract manufacturing.

So far, we have no plan to do the -- expand the production outside of China, Taiwan and Japan. But on the other hand, that we do invest on the system integration, the last mile integration production capacity in all our regional office, which means that in Taiwan, China and Japan, we built the [ board ] and the enclosure, the key component modules, and we will ship to our original source office, and they will have an integration center to do the last mile integration so that we can provide a diversified product to the needs of different customers.

For the business strategy wise, in China, in the past 2 years already, we already developed a lot of the China silicon product line to fulfill the need from the local market. So I think that is the one additional investment in addition to the current portfolio we have, we designed the products specifically for China market. Yes.

Regarding the production, again, I want to share with that is that in Taiwan and China, actually our production volume in dollar are quite equal. So 3 years ago, due to China and U.S. trade war because they are 25% of import tax is the product made from China. So at that time, we already have the flexibility to move some of the product line from China to Taiwan. So at this moment, as that previous question mentioned about the lockdown in Kunshan, of course, the logistic-wise is very difficult. But some of the products we have already have the dual production location in Taiwan and China. So in the past month, some of the product, we are able to upsize the production output because we are able to produce in Taiwan in addition to China.

So here's the feedback for the question on the 2.1, 2.2 and 2.3. Yes.

[Grace Liao, executive]

Yes. Indeed, thank you, Linda. Actually, I think the flexibility and also customization of our production line is one of our strengths, and we are able to do the location, leveraging the capacity between Taiwan and China during this difficult time. Yes. Thank you.

So I guess we will continue to answering the operating and all the questions to 3.1 that inventory level is quite high right now, your inventory management strategy. Well, indeed, I think inventory level has reached a record high for sure and for 2 reasons.

One reason is that the key component shortage caused the production and also shipping is not smooth recently. And second reason is that material cost last year was an uptrend. As a result, we built about 20% exists quality then demand for common parts. Well, I think starting this year, year 2022 due to the down trend in the PC, notebook and mobile industry. We stop building the existing material quality and also decrease the safety stock in our ERP system. By doing so we expect the inventory level at the end of this year going to be the same as the level of last year. Okay.

And for next year, year 2023 according to our COO, he had a goal of reduced our inventory DOH days of inventory on hand to 95 days within 2 digits. So this is our internal targets for the inventory level. I think right now is quite high. But as I mentioned before, high-risk inventory indicator is still low. So I think the overall structure is quite healthy, and this is for the short-term impact from the component shortage. And in the long term, for example, next year, our inventory level is going to gradually back to normal, yes. That's for the inventory management strategy.

Well, so maybe we can start answering the questions online and hand over the time to Derrick. Thank you.

[Hong Ji Yang, analyst]

Yes, sure. Thanks, Grace and Linda. So we have quite a few questions online. So the first one is regarding your second quarter guidance. This is from article investors. And the question is that your 2Q -- the midpoint of your 2Q revenue guidance is implying a 7% Q-on-Q decline on the revenue side. Is that too conservative?

And also a relevant question is that during the press release, you mentioned that there will be 8% to 10% of the revenue being pushed out from 2Q because of the component supply issue and also the COVID control measures in China. Could you give us a rough breakdown between these 2 factors regarding that 8% to 10% of the impact on the top line?

[Grace Liao, executive]

I would answer the question first and maybe Linda can add up later, okay. And according to our original version, actually, we are -- I think our bookings on hand is very, very aggressive since last year. So in booking point of view, I think it definitely is a very positive year for Advantech this year. And our original plan going to be grow quarter-by-quarter this year. And starting from Q3, with the component shortage is going to be revealed. I think there will be more aggressive quarter-on-quarter growth in the second half.

However, in Q2, we do suffer from the impact of COVID control in China, but we are able to mitigate the impact through multiple ways and also flexibility to leveraging our capacity in Taiwan and other regions. So I think there is a limited impact in Q2. However, the top line do suffer a little bit and fulfill the orders going to be postponed in the following quarters this year. And I think there are going to be some defense force in the bottom line both in gross margin and operating margin. So I think the GP level and also OP level on, we're seeing our guidance range. Yes. Maybe Linda can add up more information.

[Linda Tsai, executive]

Yes. I think on the quarter 2, as mentioned that component shortages still remains very challenging for us. But I think the other one COVID lockdown in China, even though we are able to ship some of the production to Taiwan is still limited. So on the quarter 2, we will significant impact by China because in our -- the regional -- the China market, we are not able to ship out. And if you look at the lockdown impact for outside of China because Advantech, our logistic is that we ship out to our regional stores office.

So actually, in April, the impact for COVID lockdown in China is not really significantly impact to our other sales office like USA, Japan, Korea or Europe or the other office because all those products already were shipped to their before lockdown. So we will see on quarter 2, maybe in the coming 1 to 2 months. USA, I mean, other countries may slightly impact. But immediately in April, the China sales is impact immediately because in China, it's our production, also warehouse is there.

So here, I think the portion of that asking that on the component shortage on the lockdown, I think on quarter 2, lockdown, I think it's still like quite a significant impact to us and, of course, component shortage as well. But on the quarter 3, because of the lockdown, as Grace just mentioned, we expect our production will back to maybe 30 -- 60% by the end of May. So our production will upside the production output as soon as we could from end of May or June to ensure that at least on the quarter 3, the lockdown, the production, the [indiscernible] were not that move after to quarter 3. Yes.

[Hong Ji Yang, analyst]

Okay. And then a relevant question to this is that could you give us a rough guidance regarding your 2022 full year revenue?

[Grace Liao, executive]

Well, first of all, actually, Advantech give our official guidance on quality basis. Therefore, we don't have a full year official guidance to disclose that for the first thing. However, according to the bookings on hand, actually is very, very aggressive. The booking level is historically high right now. And the visibility is like over 3 quarters to around 1 year because more and more clients are willing to confirm long-term orders. Therefore, I think, again, year 2022 is actually a very, very positive year for Advantech. And I think the revenue will be in the low double-digit growth for this year.

And maybe Linda can give us more color regarding the strong demand by sector or even by major markets. Yes. Thank you.

[Linda Tsai, executive]

Yes. Since last year, because of the component shortage and actually, a lot of our customers already placed the order for the long lead time. So if you would look at the B/B ratio this year and the backlog we have until end of the year, I believe that this year, as Grace mentioned that we are also expecting a low double-digit growth this year. And again, the strong demand, as I shared previously that the industry from semicom, for medical also from the end of last year, the gaming industry is coming back. And we talk about the energy ESG-wise, of course, on the EV car in China, in Korea and Japan, U.S.A. and EV car related, especially better related over the factory wise also are the strong demand to support all of that, our customers are waiting to place the order for the lead time that they expect.

And the booking this year that so far the 1.36 B/B ratio, our customer expects that the growth of those markets will still remain strong this year or early next year. The [indiscernible] right now because it's loans, our customer is placing the order much earlier than before. Yes.

[Grace Liao, executive]

Well, I think longer visibility definitely is very positive to our like procurement management and also due the bottling power with our suppliers. And I think right now, the B/B ratio is slightly back to normal. And I think for the long term, when component shortage is going to be eased and more long-term and sustainable level for B/B ratio is around 1.2 to 1.3 level. Yes. I think that's for more long-term view for the B/B ratio in the near future.

[Hong Ji Yang, analyst]

Okay. And the next question is regarding your B/B ratio. It states that in the first quarter, the B/B ratio is about 1.3% to 1.4%, while in the last quarter, it was about 1.7%. And what's your view on the B/B ratio into 2Q and 3Q? And do you think it's an indication of a slower demand outlook? Or it's because of a better order fulfillment rate?

[Grace Liao, executive]

Well, thank you. Regarding the B/B ratio question, actually, I think, as I mentioned, the historical B/B ratio is in the range of 1.1. And starting from last year, starting for Q1, I think the B/B ratio is quite high due to the component shortage and also the component cost stop. So I think the high B/B is not sustainable and comfortable level for the company because it means the lead time to the customer is very, very low, and it's quite -- it's due to the impact, severe impact from the supply side. Okay.

And given the very positive and strong demand in the booking side from the major markets. Actually, we think with the components side going to be revealed starting from Q3, gradually starting from Q3 this year. I think the B/B ratio is going to be maintained around this level, 1.3 around this level. And we foresee next year, B/B ratio going to be more tool to the healthy level, like I say, for the long term, 1.2 or 1.3 level is a more healthy and sustainable level for the company, which means the delivery time is not so well, which is the win-win situation for both the customer and the company. Yes.

Maybe Linda can add up more like a backlog observation from end markets.

[Linda Tsai, executive]

Because right now, the time is long, so our customers are already aware of the lead time. So I think this year, the BB ratio will not be like too much like too high or too low or become stable. And again, -- we hope that we can deliver and shorten the lead time. I think that's the goal for Advantech. We are now like asking customers to place orders much earlier because the lead time is long. Now it's because of material shortage.

When the material shortage will be eased at the end of the year or early next year, and our lead time will become normal, I think B/B ratio will become, as Grace mentioned, 1.2 or 1.3, even previously, we only have 1.1. Somehow it's implicated the booking, but somehow it implicate as our lead time is low. Yes. Our goal is to have the lead time back to normal. So we can fulfill customer sooner than need.

[Hong Ji Yang, analyst]

Okay. And the next question is regarding your margin. It says that it seems that there are some changes of your gross profit margin range among different product segments in the first quarter. For example, both ACG and IoT, gross margin are higher than 2021 level, while the service IoT gross margin were lower versus 2021. Could you give us some color regarding this margin change?

[Grace Liao, executive]

Well, I can answer this question from my end, and also Linda can also help to add up more information. For gross margin up, I think for ACG and the IoT is the reason is quite different. For ACG, I think a lot of the revenue is -- some of the revenues come from NRE and also prepaid -- prepaid revenue for the component price. And I think this is one of the reasons that the gross margin is higher than before.

And for Cloud IoT, I think the product mix within the Cloud IoT within the BG is quite different because right now it's under the component shortage and high-margin products are shipping in the first and low-margin products happening to delay. So the product mix is quite changing within the Cloud IoT compared to the previous time. Therefore, I think when the component shortage is going to be eased in the second half, the Cloud IoT gross margin is going to be slightly back to normal level. Yes.

And for the gross margin, which is a downtrend, for example, service IoT, I think because it enjoy very, very good revenue growth in the first quarter. And some of the projects is in a slightly lower gross margin rate. Therefore, again, the product mix also impact the overall GP for service IoT. And for the Advantech Service Plus, AS+, I think the gross margin declined because the raw material cost increased, therefore, is a erosion for the GP for AS+.

I think this is my answer to the gross margin changing by SBG. Maybe Linda can have -- add on more information on your view.

[Linda Tsai, executive]

Okay. On the margin-wise, on quality, some of the business growth may be lower than last quarter, mainly is on the product mix because some of the quarter 1 for some of the team, they have ship out for maybe specific few customer with large volume where the profit could be higher or lower than average. So mainly is because product mix. And again, for Advantech starting from, I think, last year till now, we have increased our price twice due to the component increase. And this time shift because the customer place order much earlier.

So when we do the price increase, we apply to the new PO on the existing parallel may not be able to increase the price due to the contract. So on the margin, where Grace share at the beginning is that on the quarter 1 and our margin is slightly higher than previous quarter. So that is a sign that our price increase has been slowly applied to the new order taken or some of the new shipments already. Yes.

[Hong Ji Yang, analyst]

Okay. Okay. And the next question is more of a long-term one because like in the past decade, Advantech has been growing at around 10% CAGR. And what will be the driving force for the company to further accelerate the CAGR to, for example, 15%. What would be the key driver for that?

[Grace Liao, executive]

Well, yes, in the very, very long-term point of view, actually, Advantech's topline historically, CAGR is around 10%. And going forward, sharing by Chairperson, Ko Chen Liu himself and also Linda just mentioned that we will keep investing the product integration and also like a wireless IoT technology as well. Therefore, we will keep -- enhance our R&D and also software capability in the future to grab on the AIoT big trend in the future. And we do see lots of research institute like [ Garner ] and also [ Market and Market ] says that there is a huge opportunity in the next 5 years regarding the AIoT big trend in the future and also lots of IoT application going to be coming up.

And the opportunity is going to be heavily laid in like softer platform and also solution domain knowledge kind of SRP business. Therefore, we will start investing heavily in our R&D and software and enhance our software capability. And we foresee more shopper business solution-wise in the overall business mix. Therefore, both top line and the bottom line is going to be increased and the growth rate would be slightly higher than the historical average.

And maybe Linda can add on more our investor in wireless and also in the software wise and our strategy in the next 3 or 5 years in the future. Yes.

[Linda Tsai, executive]

So regarding the original question about that the growth rate, the common growth rate, how Advantech will target or achieve that 15%. They are currently we're looking at 10% roughly every year. If go for 15%, we believe that we need MMA to have annual compound growth rate of 15, but Advantech is be cautious for the MMA because we're looking for the synergy, not just for the revenue financial investment, that's the key. So I think if we want to maintain 15% year-to-year growth rate in the coming years, I think MMA is needed.

So back to what we're sharing is that what is our investment internally or what could be our external candidate to look at MMA, indeed, on the solution where KC Liu, our CEO, has been sharing our AIoT strategy in the past year. This will still remain the key investment area for us. And we expect those investments somewhere will -- to the value add to help our hardware selling to [indiscernible] integrator.

The other one is wireless connectivity because wireless connectivity on cellular on NORA and WiFi will be widely adopted on the ALT area. We already have some of the team on the wireless product development on module and sell a router or the sensitive device-wise. And we are also looking at whether we can have an external partner to speed up our product development for the revenue growth or even any suitable that the company that we can do the MMA. But again, we will be looking at very on the caution wise on that.

[Hong Ji Yang, analyst]

Okay. And the next question is regarding -- since Grace touched on the software business. The next question is regarding your software business. It goes like could you give us an update on this software business regarding the revenue contribution? And where do you expect that to go in the next few years? And what would be the key success factors for this business? Who are your major competitors?

[Grace Liao, executive]

Well, strategy wise, yes, we are focusing on the development of a software business and solution business internally. And so far, we have not disclosed the contribution and the progress for software and solution-wise in regular basis. However, we do have several indicators to monitor the progress right now. Actually, the progress is on schedule and it's quite promising. And the key indicators, including like the revenue contribution from software and solutions and the contribution per membership and the number of membership base and also like a regional sector breakthrough is quite meaningful to us because we would like to extend our software as a solution, not only regional wise, but also sector-wise to open the product offering as industrial apps to the end users, enterprise end users.

Okay. So we do have zero key indicator to monitor the progress right now, and right now is quite promising and hopefully, in the near future, when the contribution from software and also solution, big enough, for example, is maybe high single-digit revenue contribution to the total sales. Maybe we can disclose on the regular basis for investors to track, easier to track in the future.

And for the competition, the next question for the competition right now. Actually, maybe you probably already know that for IPC markets, the global peers like Siemens, GE, ABB, Schneider, they are already moving from S to cloud for many years. And right now, they are more focusing on the cloud side and some of them do all stores to edge opportunity to Advantech already. Okay.

But however, look at Asian IPC market, actually Advantech is probably the only mover to follow the global value up pattern from edge to cloud. We -- as you may know, that we're already the leader in the edge side with very, very high market share globally. And we also enter the software in year 2015 by launching wise passed to the market and entering the solution market in year 2019 by launching a wise marketplace and also industrial apps, all kinds of industrial apps. Therefore, we're already moving from edge to cloud for maybe 5 or 6 years.

And right now, still, we still have a long way to go. However, we will not consider Siemens or GE or AB Schneider, they are purely competitor because I think the target all years is quite different. For example, there's a very kind of high level of solution with very expensive membership fee. Therefore, their target audience kind of big cap enterprise company. And for Advantech, we are focusing maybe in the mid or small cap and focusing in Pan-Asia for example, for the first -- for the beginning period.

So right now, I think there is not kind of a head-to-head competition between Advantech and the global peers. However, I think this is a good thing that everyone is investing in the solution on cloud side. And this is the right trend to go. And I think we do have more confidence in the next 5 years to grab the opportunity from AIoT because we do have heavily invest internally and also trying to do the external investment just like Linda mention. And we do have the confidence to grow in the near future. Yes.

Maybe Linda can add on more information.

[Linda Tsai, executive]

Yes. So for the software solution development business-wise, I think Taiwan and China are still our main focused country area and then South Asia. So other than this region, of course, we are low touch. So we invest on the product also on the sales wise. Okay. And vertical-wise is that we focus on vertical smart manufacturing, energy, environment, retail hospital. So we have selective focus on the vertical market where we will promote our software solution together with our hardware. And by doing so that we are now massively scaled up to all the vertical market or even to all the global regions.

We want to be success in the key regions like Taiwan, China, South Asia, in our focus area where those markets are already strong with Advantech hardware product line. Yes.

[Hong Ji Yang, analyst]

Okay. And the next question is also relevant to this software development. It goes like what would be the hurdles for the FSI and developers to create industrial apps on your wide-path marketplace? I think that demands the [indiscernible] question because it makes sense that you need to have more apps on the marketplace to get the wheel spending. That's how you get this software business running. Could you give us some color on that?

[Grace Liao, executive]

I would pass the question to Linda for the FSP strategy in the future.

[Linda Tsai, executive]

Yes. Regarding the DFSI developer, if they want to develop their industrial app or WISE-PaaS, I think the [indiscernible] is not the technical part is that the connection between Advantech and DFSI is that there are other like, I would not say we're really competitor because no one is re-dominating the market, whether they develop the solution, the app based on Asia or based on AWS or based on other vendor have, I think that is the most hurdle that we will face is not really on technical side.

So what Advantech right now is that working with the partner is that we are not just working with them to develop the industrial app on our WISE-PaaS or any platform, but also we are engaging business together. It means that for Advantech we are still quite have strong market share footprint in some of the industry. We are able to leverage Advantech global footprint and branding to bring this solution business to our DFSI or we say the domain focus on, yes. So here is what I want to share, okay, regarding the question about the hurdle and difficulty how to develop the app WISE-PaaS. Yes.

[Hong Ji Yang, analyst]

Okay. And next, we got a few housekeeping questions. The first one is that do you have any potential plan to increase your price in the coming quarters because of this increasing component price?

[Grace Liao, executive]

Well, for the -- maybe I can answer for the -- first and then Linda can add up more. Okay. For the ASP high, actually, in this cycle, we do -- Advantech do have twice at ASP high. The first one is in April last year and second one is in Q1 this year. And we will plan to review all the local services items, including the CTOs, the RMA and also enlarge the drafted shipment services. We will -- for regional wise, we will start reviewing the process from Japan, Korea and also Europe region. To the data we got so far, we don't rise any local assembly services charge for the past 10 years is quite -- it's not reasonable since the labor cost in the past 10 years has risen a lot. So we will review it by regional and try to have more healthy and balanced way to do the internal business and local delivery. Okay. So by doing so we expect it would bring positive results to our margins performance in the future.

And this is from my point of view, and I will leave for Linda to add on more information. Yes.

[Linda Tsai, executive]

Right. Last April and this January, the price increase is mainly on the component price increase from our supplier. But from the cost of the goods wise, in addition to the common cost, there are still freight cost, the shipment costs and also the local assembly integration, the cost. So I think on the component-wise, indeed, there are still fuel supplier, they may have the cost of to Advantech again, but compared to last year is much less.

So unless they see significant price increase from some of the supply we have. If there is, then we may consider to refer the cost out to the customer. Otherwise, at this moment on the component-wise, we may not have the price increase. But on the other hand, as Grace share previously, on the freight cost, on the regional system integration testing validation costs, those costs that the charge to customer, we haven't increased for years. So we are reviewing whether those costs affect to the local market and the labor that already increased in the past years. For those that each regional office may have different the price increase because the country is different. Yes.

[Hong Ji Yang, analyst]

Okay. And the next question is that the investor wants to make sure that about your previous comment on the NT dollar depreciation, you want to make sure that whether you mean when NT dollar depreciate NTD 29 versus USD, the impact would be minus 0.2 percentage point with operating margin? Or you mean that every 1% of depreciation against U.S. dollar will impact your operating margin by 0.2 percentage points.

[Grace Liao, executive]

I think it would be -- it would be more like a 29% assumption rather than every 1% of depreciation do have this impact. Yes.

[Hong Ji Yang, analyst]

Okay. So it's your 2Q --

[Grace Liao, executive]

Internal assumption, yes, internal assumption.

[Hong Ji Yang, analyst]

Assumption versus 29?

[Grace Liao, executive]

Yes.

[Hong Ji Yang, analyst]

Okay. Okay. Got it.

[Grace Liao, executive]

Well, due to the limits of time, maybe we will take for last question from the investors.

[Hong Ji Yang, analyst]

Okay. Sure. Sure. The last question is more of a general one. It says that how big and sustainable is a trend regarding this reassuring demand in the U.S. and Europe? And how is that going to reduce your dependence on China? And has this trend changed with the lockdown in China and the spare chain disruptions there? And how is it going to translate into the demand for Advantech's product?

[Grace Liao, executive]

Yes. I will leave the question to Linda. Thank you.

[Linda Tsai, executive]

Okay. I hope I answer this question because I think we will not reduce the portion of China business. That's not our intention. Is that we believe the China market may be under product-wise, the needs maybe will be different than rest of the world. That's how we integrate it. So for the dependency on China on the business is that we are not really depending on any region. I think right now, U.S.A. is still the largest portion of our revenue contribution in China and Europe, and we have other region, intercontinental of Asia.

And so I hope to answer the question on the business dependency wise. So from our product division wise, we are thinking not now even from like 2 years ago because China silicon demand increase in China. Most of our product team already have the product design, especially for China and maybe for rest of the world because we see the needs are sort of different, not just only for China silicon also from some of the functionality. Yes. In the past year, we are more like the global product, design one product sale to rest of the world, but we see the gap is getting more.

And on the other hand, I don't know if investor's asking for production dependency, but I think that is what the answer previously. Production that in Taiwan and China that we are not really depending on that, and we had flexibility to move the production from China to Taiwan or even from Taiwan to China. Yes.

[Hong Ji Yang, analyst]

Okay. So for the interest of time, we may have to wrap up the call here. Sorry that we may not be able to answer all of the questions in the list. But hopefully we have covered most of them. So Linda and Grace, do you have any closing remarks to make?

[Grace Liao, executive]

No, not from me. Thank you.

[Linda Tsai, executive]

No, not from Linda. Thank you.

[Hong Ji Yang, analyst]

Okay. In that case, we will wrap up the call here. Thank you, everyone, for joining us. Thank you, Eric, Linda, and Grace your time. Yes. We will disconnect here. See you next time.

[Linda Tsai, executive]

Thank you.

[Grace Liao, executive]

Thank you, Derek. Thank you, everyone, for your time. Take care. Bye-bye.

[Hong Ji Yang, analyst]

Bye-bye. Okay. Hi, everyone, the webcast has ended. Thank you very much.