Advantech Co Ltd

TWSE:2395

Earnings Call Transcript 2023-Q1

[Hong Ji Yang, analyst]

Good afternoon, everyone, and welcome to Advantech's First Quarter 2023 Earnings Call. My name is Derrick Yang, the tech analyst at Morgan Stanley. It's our honor to have the top management from Advantech here joining us to discuss the first quarter 2023 results and also to share their views on the outlook. And today, we have 3 speakers on the line. The first one is Eric Chen, CEO and President of General Management; second one is Linda Tsai, President of Industrial IoT Group; last but not least, Grace Liao, Manager of Investor Relations.

So without further ado, let me pass the call to management for the opening remarks.

[Grace Liao, executive]

Thank you, Derrick. Good morning, and good afternoon, ladies and gentlemen. Thank you for your time today. This is Grace Liao IR Senior Manager of Advantech. For today's agenda. In the beginning, I will give you briefing regarding our first quarter 2023 financial results and President, Eric Chen, will share overall business update and second quarter guidance. During the Q&A section, both President, Eric Chen and President Linda Tsai will answer the questions from investors and also share the company outlook accordingly. As usual, please take a few seconds to read the safe harbor notice, okay?

So for Q1 revenue, Q1 revenue reached TWD 17.4 billion increased 8% year-on-year. Gross margin rate reached 39.7%, greatly increased from last year and also previous quarters. Operating profit was TWD 3.5 billion increased 16% year-on-year. Operating profit rate reached 20.1%, also hit a new high since second quarter 2020. Q1 effective tax rate was 19.7%. Net income reached TWD 2.96 billion increased 15% year-on-year. Earnings per share in Q1 '23 was TWD 3.8. Both top line and bottom line performance in Q1 '23 set company's second high records.

For regional performance [ interest of U.S. dollar ], Q1 '23 revenue reached USD 571 million, slightly declined 1% year-on-year. For the major 3 markets, North America and also Europe enjoy year-on-year growth at 7% and 13%, respectively. China market is still relatively weak with 22% year-on-year decline due to reopening uncertainties and also ongoing inventory adjustments. For North Asian market enjoyed 18% year-on-year growth, while Japan market was the strongest performer with 39% growth compared to the same period last year. Taiwan and emerging markets were double-digit decline in Q1 '23 due to low seasons between projects.

For SPG performance, the industrial IoT declined 11% due to China market remained weak. Embedded IoT increased 18% year-on-year, driven by strong demand in automation, medical and gaming projects. Applied Computing Group, ACG, slightly declined mainly due to the high base from medical project last year. Industrial Cloud and Video group, ICVG enjoyed 26% year-on-year percent due to the strong momentum contributed by enterprise networking and industrial survey projects. For service IoT reported a double-digit decline, though fleet management project enjoyed positive growth. However, the major decline was due to shipping low season in medical projects.

For the balance sheet, this is also my last page, debt ratio reached 43% due to the dividend payable increase in current liability in Q1. Those inventory absolute dollar amount and inventory turnover days has significantly declined year-on-year basis. We expect the inventory level will gradually back to normal given the supply chain getting revealed.

Now I'm handing over the time to President, Eric Chen, to share overall business outlook and the second quarter guidance. Thank you.

[Eric Chen, executive]

Thank you, Grace. Good morning, and good afternoon everyone welcome to join the conference. This is Eric, and I would like to comment on the first quarter results and [ followed ] by the second quarter guidance. The [indiscernible] in the first quarter was slightly better than our prediction. If it was mainly due to the firm order, big delivery and release material shortage. In addition, due to the Taiwan incoming dollar depreciation, our top line in TWD turns was 9% ahead of U.S. dollars stars. As to the regions [ performance ], the U.S. region was on track, the EU and Japan regions deliver outstanding results due to the fixed shipment or into the first quarter.

For the product aspect, IoT still suffered from the weak demand in China. The China region accounts for 50% of IIoT revenues, which led to a negative result. On the other hand, the IoT and ICVG [ performance was good ] mainly driven by the solid demand from the medical and network computing sector.

And regarding the gross margins due to the ease of the material supplies and drive cost back to normal, our gross margin performance increased by 1.5% year-on-year. We expect the gross launches in 2023 to have a great chance to keep at 39% above.

Overall, with [ stable ] margin performance and a reasonable control in all packs, the operating profit end up with 50% growth better than the top line growth. The [ results ] on the first quarter results.

Then let me go on the BB ratios. Regarding the trend of the BB ratio, as you can see on this page, that BB ratio picked at 1.26 in the first quarter of 2022 and went down to 0.92 in the first quarter. In 2023, quarter 1, the BB ratio was maintained at 0.82. If we look into the regions, the U.S. and Europe region has declined to on [ 0.84 to 0.3 ] respectively and the China region was 0.92.

[ InterCon ] region was the lowest at 0.7 [indiscernible], the loyal BB ratio mainly came from the low season of few medical projects in the Middle Eastern markets with the BB ratio at only 0.38. The reason for BB ratio continues strong, many at [indiscernible] the first is the inventory adjustments still ongoing in our general partners and customers. The second is a conservative market demand customers tend to press rush orders instead of [ regular ] orders. Next [ batch ].

Looking forward to the second quarter, even though the component shortage situation has improved a lot, and demand in global markets still has no solid signals for rebound. So we expect second quarter revenue to be between USD 560 million to USD 580 million based on the exchange rate assumption of USD 1 to TWD 13.4.

In terms of margin, the second quarter gross margin is expected to be between 37.5% and 39.5% and the operating margin is expected to be between 17% and 19% [indiscernible].

This is the picture of our new U.S. campus [indiscernible] in the middle of [ Albuquerque ]. The new campus location is in [indiscernible] companies California nearby the current [indiscernible] office and the total expenditures for the Phase 1 is around -- at USD 70 million, including the design [indiscernible] and internal decoration. The new campus will showcase at Advantech brands shows technology and vision and support Advantech U.S. business growth to $1.5 billion.

This concludes all my comments, and thank you for your attention.

[Grace Liao, executive]

Thank you, Eric. Well, Derrick, this is all the presentation from the company, and let's get to the Q&A section.

[Hong Ji Yang, analyst]

Thanks, Grace and, Eric. We have gathered a few questions before the meeting from our investors. So I think management will answer those questions first. And after that, we will take online questions from investors. Yes. So the first question is regarding your guidance for the revenue and margin and also CapEx for 2023. Could you give us some rough ideas?

[Eric Chen, executive]

For the second quarter guidance, I just mentioned earlier, I don't want to repeat again. But for full year guidance, we don't have [ secrets ] to this far. But in turn, we have the project to keep sales and profit growth growing year-by-year at least our internal projects. Regarding the CapEx, the major spending will include Linkou, the new headquarters project in the U.S. and 2 new SMG [indiscernible] that are for Taiwan and for Japan. The overall CapEx this year is around USD 60 million.

Linkou project will be complete in quarter 3 and our 2023, World Partner Conference will be held in this new building. We will have a grand open in the quarter 3. The U.S. headquarter project will be divided into 2 phases of construction with [indiscernible] office and 1 140,000 square feet warehouse. The phase 1 project is expected to be complete in 2021. So this on my answer regarding normally -- roughly, we will have USD 60 million for this year's CapEx.

[Hong Ji Yang, analyst]

Okay. And maybe 1 follow-up question on this as well is with compared -- now versus maybe a quarter ago, would you say that you are turning a bit more positive on the growth outlook for the year? Or are you turning less positive on that now versus a quarter ago?

[Eric Chen, executive]

I think we don't have very precise just as I mentioned earlier, we don't have very precise bigger [ details ] the situation [ we became more ] positive or more negative so far. So we will release our guidance quarter-by-quarter yes.

[Hong Ji Yang, analyst]

Okay. Okay. And then the next question is, is it reasonable to assume 2023 gross margin to be higher than that in 2022, given the easing component supply? And if so, is it possible to quantify the impact?

[Eric Chen, executive]

I think yes, the assumption is reasonable. Several factors favors our gross margin performance this year such as material cost savings. In the first quarter, other factors contribute around 1.8 percentage points to our gross margins and the decline of the price cost. Price cost normally accounts for 1.5% of our COGS, cost of goods sold. However, during the past 2 years, congestion period the price costs even reached to 3% of our cost of result. And now almost a price cost in each region are back to normal, but this is the second favor. And regards is the inventory provision expense reverse due to the inventory amount continuous decreasing the provision expense will be adjust.

On other hand, negative better mainly came from [indiscernible]. As you may note, IoT has the highest margins and the performance is not so good in the first quarter also the demand in China market is still not a strong rebound yet. So therefore, its negative impact our gross margin up by 0.5% as well. Considering the overall positive and negative factors, our gross margin performance has a great chance to be [ better ] higher than last year. So the assumption is reasonable.

[Hong Ji Yang, analyst]

Okay. Thank you, Eric. And the next question is regarding your BB ratio. I think you have shared some color on the BB ratio for each region. But could you share some color of the BB ratio for each segment for your business segment?

[Eric Chen, executive]

Okay. For the BB ratio by segment, SRPU was 1.16, it's above 1. [ EIot ] was 0.87 and IoT was [indiscernible]. The BB ratio was only [indiscernible]. The BB ratios continue to drop, as I just mentioned earlier, there are 2 reasons, the reasons that our channel partners and our key customers still are ongoing their inventory adjustments and the second is conservative market demand, customers no longer presser long-term orders, and they just press the rush orders.

[Hong Ji Yang, analyst]

Okay. And the next question is regarding your new U.S. headquarters what products and industries will this campus be focused on? And will there be any color on the capacity in the U.S.? If so, what is the cost structure versus the corporate average?

[Eric Chen, executive]

Okay. In the U.S. market, mainly focused on the network security, medical, gaming and manufacturing sectors, the search team in the U.S. as good as design in [indiscernible] business and the [indiscernible]. The new U.S. campus will not set up any SMB production machines but we have enlarged [ local ] assembly and service capability by around 50% to support better business growth. Meanwhile, we will provide our customer systems many value-add service such as [ product lifecycle ] extensions, [indiscernible] service, FDA and local integration and setups.

For the cost structure of local assembling and repair service, even though the name for our brand in the U.S. is slightly higher in our region, but the productivity is better than Japan and in Europe in our internal comparisons. So overall, the cost structure of the local assembly and repair service in the U.S. is close to the corporate average. So this is my question -- my answers.

[Hong Ji Yang, analyst]

Okay. And then the next one is regarding your long-term growth forecast. Are you still expecting the long-term growth for this IPC and IoT industry to be around 10% in the next 3 years?

[Eric Chen, executive]

We aim to reach USD 1 billion in 2030 as organic growth. This is one of our goals for the next era of the [indiscernible]. If we use [ 2022 USD 2.2 billion ] stocks, the compound growth rate needs to maintain a 10% to 11% in to reach $5 billion in 2030. So to answer the question, our long-term organic growth will be held at 10% to 11%. Yes, this is right. But please be aware that eternal M&A is excluded from the [indiscernible] billion revenue growth.

[Hong Ji Yang, analyst]

Okay. And then maybe a follow-up to that is you expect the growth rate for Advantech to be 10% to 11%? And how about the overall IPC market growth in the next few years. Is that going to be similar to Advantech's growth or slower than your company growth?

[Eric Chen, executive]

I think for the IPC growth market point of view, the overall IPC market growth in 2023 to 2025 is around 7% to 8%. However growth rates in different regions and sector might have different performance. From a region point of view, the high-growth area will be China, India and Vietnam. Japan and Korea are in between the U.S. and the EU might be the lowest of regions. From the second point of view, IPC in the EV car, the battery and the energy sector might have higher growth momentum. On other hand or the semiconductor sectors that gross rate will be aligned with the averages. IPC is a mature market and Advantech has a high penetration rate in the global market.

However, the global gross rate still contend this sector demand therefore, [ 7% to 8% ] gross rate adjustment predictions and viewpoint. Also, I want to emphasize that Advantech wants many IoT products and solutions from old systems and software to fulfill different sector means, therefore, the IPC overall gross rate is not equal to Advantech because we provide more in IPC products. This is my answers. Maybe Linda, Linda Tsai, IPC business that can give some extra comments on these topics.

[Linda Tsai, executive]

Right. So I'll give some more flavor on the IPC market. We talk about the IPC. That's what Eric has mentioned about. In addition to the IPC for Advantech, if you look at IoT we can actually start from the very a, level of the device for the data acquisition I/O module, industrial communication and gateway. I think that is the part that even though the revenue is small because of the ASP of the per unit is lower than the PC-based product, but there is where we see may have a higher growth rate because in IoT, we need more devices come back to each other through [indiscernible] technology. So that's additional common addition to that people -- the market view, Advantech is IPC company, but I think we are more than IPC as an IoT company. Thank you.

[Hong Ji Yang, analyst]

Okay. And then our next question is more regarding your SBU and RBU. So for Advantech software business, I think the Chairman was mentioned in the earnings call that it was progressing slower than expected. So in terms of the revenue contribution, what is the status right now? And how is that compared to the original expectation? And also, is there any particular recent for the slightly slower and expected progress? And also how in this software business, how will Advantech differentiate with other peers providing similar offerings?

[Linda Tsai, executive]

Regarding these 2 questions for the software, I think I would answer all together. Indeed, for software business, I mean, the progress is lower than our expectation. I think mainly is because the software business really require last mile customization services. It's not that hardware product that we have to send the product and we serve the customer is ready to use. For each of business requires, again, customization. So the project lending is longer than expected, so which means that we need more design cycle than expected.

And the fragmented business in manufacturing, energy, retail are all different. So it's hard to duplicate the success on each other vertical. Yes. And regarding the differentiation, I would say most of the software from our IPC peer, mainly focused on IP type of software, which they provide the visualization dashboard for data management or device management in some of the selective applications. Of course, Advantech also offered a similar IP type of software. But I have to say, however, I mean, what differentiate Advantech software than other IPC peer, I think, is more on the IoT software and the middleware. So what I mean here is that we advantage not just only provide the IT type application for the dashboard for the vertical use. We also provide the IoT service solution that really help our system greater reduce their total cost of ownership, so they can easy for them to connect different POC sensor or devices with the fiction resource and time frame.

So by using Advantech software suite, we are targeting at provide the end-to-end, the software services on sensing device to [ the market ]. So here is my sharing and comment for these 2 questions about the software business update and while the differentiation Advantech solution, especially on software service to other peers.

[Hong Ji Yang, analyst]

Okay. Linda. And the next question is could you share some color regarding the demand outlook by your business segment and also by region?

[Linda Tsai, executive]

Right. Okay. The demand outlook for business group and also for our regional, I mean by regional RBU. I think before I answer that, I want to share a little bit color about the vertical demand, as you may know, Advantech are focused on diversified industrial market. This year, by quarter 1, we see on the highlight on the [ performed ] well sector, especially on health care, gaming gambling, energy-related also network security and factory automation. We see that the demand and demand is good, but they are still low life that this year, probably zero line, maybe quarter 2 or quarter 3, we see the low light on the semicon and general industrial equipment requirements.

So that growth feedback for the market demand. And in terms of regional sales office, the 3 big region office, U.S.A., Europe and China and U.S.A., Europe is the number that Eric shared previously and also on our demand outlook, they are benefit these 2 regions are highly benefit from health care and also gaming gambling and network security. So demand although is good.

On the other hand, China -- although the quarter 1, the booking is a little bit increased. But inventory at our customer side may not still [indiscernible] until end of the quarter 2. So China on the first half still is conservative, but we are looking at the rebound probably on the second half. As for North Asia, I think Korea and Japan, Japan performed very well in all sectors. Especially, we have some new design win of the ODM project in Japan business, bring a very good outlook. And Korea, also impact by all semicon because most of our semicon equipment machine builder, we ship to Samsung, LG and Hynix, those that local Tier 1 companies as impacted by their demand and high inventory. So that's about the serving of demand outlook for our regional sales office. But in terms of the business group, it's quite [ refined ] to our business good.

As for IoT, the first quarter 1, we declined double digits. Look at the quarter 2 because semicon industry, I [indiscernible] a big important portion for the IoT. So on the quarter 2, we may still have the low demand on that, but expect to recover quarter 3 and quarter 4, that's what we are communicating with customers.

On [ Embedded thing ] EIoT, ICVG more on the design in, they are mainly focused as I mentioned previously on health care, gaming, gambling, also some on energy and ICVG is on the video-related and also on the network security. Those design in business, ODM, we still see a good outlook so far. And as SIoT, SIoT although we look at quarter 1, the number decline. But if we look at booking because part of is SIoT, they are focus on medical application. They have good design -- new, good design win medical application, bring good booking for SIoT, yes. So here is the outlook demand outlook from a different perspective from regional office and also from the vertical sector, application also from the business group. Yes.

[Hong Ji Yang, analyst]

Okay. Linda. Maybe 1 small follow-up question because Eric earlier mentioned that the BB ratio in North America and Europe was about 0.83%, 0.84% in the first quarter. So does that mean that the growth from these 2 regions are going to be slower in the coming few quarters?

[Linda Tsai, executive]

If you -- see the average of Advantech BB ratio, I think U.S. and Europe probably is not lower than an average especially, I think for Europe and U.S.A., we see good booking, as I mentioned here, mainly from health care and gaming, gambling. So the booking will bring the future business in the coming quarter or coming 2 quarters. So at this moment, I think U.S. and Europe, we have to highlight, as I mentioned that, but the low light is that the semicon is a decline part.

[Hong Ji Yang, analyst]

Yes. Okay, okay. And then the next question is for the emerging markets, it seems that you have seen a quite significant decline on the revenue in the first quarter. How is the order spirit in the emerging market?

[Linda Tsai, executive]

Right. I think the decline for emerging markets, I think that's part of the comment on what you mentioned previously by Grace is that they are the low season for 1 or 2 large medical project we have. So that result in the quarter 1 decline. But apart to that 1 or 2 medical project auto demand from manufacturing, from energy and from other sectors, the booking and the demand is still there. And the gap, of course, maybe still cannot fill up the decline from that 1 or 2 project because the low season for the quarter 1. But the good thing is the other sector, the demand is still increasing Yes.

[Hong Ji Yang, analyst]

Okay. Thank you, Linda. Now I think we have answered all of the pre gathered questions. Now we can open for the Q&A session to take questions from online investors. [Operator Instructions] So our first question is I think it's also regarding the growth driver by the region. What's the growth driver in the U.S. and Europe and in China? And do we see the IoT demand recovery in China? Or do the service industry shows stronger demand overall?

[Grace Liao, executive]

Welcome Linda to answer the question.

[Linda Tsai, executive]

Okay. Because they combine several questions over there. I think for U.S. and Europe. Again, as previously mentioned, that if you look at the global demand, health care is a big driver for us. And the focus region for Advantech U.S. and Europe, and also gaming, gambling. But in terms of IoT team, the market will focus on manufacturing and semicon equipment or industrial equipment, those are the low line no matter for which country we have because the decline for the semicon and machine builder is quite a lot. I don't think it will get recovered until Q3 or Q4.

And the impact on that there is semicon, [ semicon how to put that ], the silicon ban of U.S. and China. And the other question regarding the China. In China, last year, the second half last year is our low season. So the quarter 1, we see a little bit rebound. It's not yet to the high level we are looking at. We look at the China IoT team, we see the growth, the key driver for us will be on energy related, especially green energy. That's covering on the EV related on the factory battery related is a very big market for Advantech also for the IoT theme. On the other part for the China machine builder, we do see a lot of the product machine builder. But economy-wise, also for the -- some of the -- that we talk about sales for the iPhone, the demand is not as strong as before.

So we expect for China for steam, we will key driver for energy-related also from our general automation from the channel team because our channel team play a strong sales force in IoT setting. So our general team to general automation is a diversified automation market yes. And for IoT, IoT is our focus in is health care. So IoT can benefit a lot from U.S.A. Europe also partially some of the new project is not win from the emerging country for the health care. Yes.

[Eric Chen, executive]

I'll give some comments regarding the questions asked. According in the Gartner group market of [indiscernible] the growth areas such as the IoT security, IoT software and solutions will enjoy around 50% of growth rate reported a certain core application areas such as robust and EV charge station, internally, we already set up [ Edge ] product divisions to serve particular demands. The product offers will cover from system refill and even the third party so well. So we are really focused on high-growth areas to the IoT application to catch up the AIoT [ transformation business area ]. So this is what we are doing in the past 1 year.

[Hong Ji Yang, analyst]

Okay. Eric, and Linda. And the next question is, is there any potential impact from the ongoing bank issues and potential commercial property market deeper risk in the U.S.?

[Eric Chen, executive]

The answer is no because for the U.S. just as mentioned earlier, we are doing very well with the clear government action. As the bank growth situation happens, our management team already will communicate and investigate our customers the impact to our customers. And so far, the entrance almost no impact for these situations.

[Hong Ji Yang, analyst]

Okay. And the next question is that amid this China reopening and global travel resumption. Will this present any upside to the retail-related business with more tourism demand across the globe versus during the COVID period?

[Grace Liao, executive]

Welcome, Linda to share more market views on China. Yes.

[Linda Tsai, executive]

Yes. I think on China, I think on the [ tourist ] wise activity to become more and more. But for the -- our retail business in China is a very small portion for Advantech. So you may benefit, but overall for Advantech China, maybe it's not that significant because the business is small for Advantech in retail.

[Hong Ji Yang, analyst]

Okay. And the next question is, can you talk about the China localization? Is that impacting your opportunities going forward?

[Linda Tsai, executive]

I see it's not impact. Actually, it's an opportunity for Advantech. Actually now, I think, started 3 or 4 years ago, we already have our China product team to focus on China silicon. So this is opportunity we are looking at because we have a strong design in China and the manufacturing, also the ecosystem for the China supplier. And in some of the industry that sensitive for like security, energy or the financial-related those industries will be in high priority for China government to request for the China mid product, yes.

So over there, in China, we provide [indiscernible] on the standard product. Also, we have the flexibility to customization engineering product for customer. Yes. We see the opportunity for Advantech because the investment for China team has been for 10 years and now is the time that we can grab opportunity.

[Hong Ji Yang, analyst]

Okay. And the next question is whether or not we are seeing opportunities for Advantech, I mean, it's AI proliferation?

[Linda Tsai, executive]

Okay. I'll answer that question. I think the AI, we talk about industrial AI, we're not talking about customer. We look at the interest rate AI, the opportunity from the manufacturing and from the market device. [ Infact we ] focus on AI opportunity, not position or a software company. We provide ourselves on the power of the ecosystem to provide the hardware and the private HDK level and work with our ecosystem and to grabbed AIoT business. And at this moment, Advantech working with different solid company that probably everyone knows.

So we are working because the solution is quite diversified for different vertical markets. We also have a dedicated team that in Taiwan, also in China and to divide the AI focused product line and working with our AI ecosystem, mainly for the software partner to provide the really like end-to-end solution to the end user yes. So here is my sharing.

[Eric Chen, executive]

Just share on the internal practice, we that the [ new AI we face ] we really drive AI in many areas, such as [indiscernible] [ AI ] automatic robot application tools to automatically generate a lot of -- to request a lot of job within man powers in the factories, also in the finance area. This is one of the use cases for Advantech AI. And now we use AI to do the forecast, especially for the standard product forecast. The AI results better than human trust around 10%. The accuracy rate is ahead of human costs at 10%. This is a non use case for the AI. Also, we are just trying to adapt ChatGPT to adapt as the presales tools right now we are undertraining our progress because ChatGPT need some of the competition to do the trend. So we are just ongoing for ChatGPT internal use case. So this is about our AI adoption in a beta process, internal process optimizations just share to the north.

[Hong Ji Yang, analyst]

Okay. Thank you. Thank you, Linda and Eric. And the next question is more of a housekeeping one. Could you share the BB ratio by segment again? And maybe the investors joined the call late?

[Eric Chen, executive]

Let me check the figures. The IoT was the low is 0.73, by the ELD is 0.87 and SRV is above 1, 1.16 that listed the 3 major business units, a PB ratio in the first quarter.

[Hong Ji Yang, analyst]

Okay. And thank you, Eric. The next question is during the last earnings call, the management mentioned that because of the component supply tightness, you have lost some of the orders from your customers in China. How is that the progress on that front? And what strategy are you going to use right regarding that less share loss? And also as the market share loss led to slower growth in the China business maybe in the past 2 quarters and in the next few quarters? Yes.

[Grace Liao, executive]

Ask Linda to answer the questions.

[Linda Tsai, executive]

For the China market, I took the question shortly to you though, we did lose some of the support to the competitor. At this [ stuff ] actually not just the beginning of the year, from the end of last year, we already worked with the team to work with our customer again. And the strategy, of course, there will be a different type of strategy. One is that we will provide our latest product because most of our customers are required for the most updated product. That's where entire really good at no matter from the IPC but other product wise. And the second is that because Advantech it is not only provide IPC only, we actually use IPCs and strategy, then which means that we still product together IPC with around the IPC, there will be a detain and there will be the IO. There will be a communication, tried to have a total cost ownership lower to customers to buy Advantech.

And the third one is that on the price point, some of the products, especially on the peripheral wise, on the memory wise, the market price dropped. And so for that part, we will refi and to the customer. So with different strategy altogether that we have working with our China team working with the headquarter that can directly then for the NIM account, we are going to win with the summer strategy I just share. Yes. And that's what I sharing.

[Hong Ji Yang, analyst]

Okay. And the next question is, do you expect the gross margin tailwinds from the falling component or raw material cost to sustain into second half this year or eventually Advantech will need to pass the lower cost to your customers so that the gross margin might come down in the coming few quarters?

[Eric Chen, executive]

In gross margin, just as I mentioned earlier, there are a lot of the favorable factors to Advantech is first one as a mature cost savings and the second one is price costs back to normal. Also the inventory provision to be reverse service all the positive betters who went -- for the marketing side, we don't see the customers have a strong demand to assets to roll down our price especially real memory and brush something like that. So we still can keep our decision set price to protect our gross margins. The only negative factors just as a I mentioned earlier, it's a product mix because IoT will refund after maybe in the second half. So for quarter 2 and the challenges of [ products ] I believe. Yes.

[Hong Ji Yang, analyst]

Okay. Thank you. Thank you, Eric. And the next question is, do you have any plan to raise your prices in view of inflation pressure? Yes, could you share the increase by segment and region?

[Eric Chen, executive]

So far in the headquarter side, we don't have a plan to raise our price. I'm not sure for the business group side, maybe Linda can share some comments on these topics.

[Linda Tsai, executive]

We will only increase the price because our cost increase and the flat cost increase. And at this moment, I think in the past 18 months, the [indiscernible] has already increased 12% of the price due to the cost material is increased by our supplier. And at this moment, the cost increase is not there. And regarding the inflation in Europe, U.S.A., at that moment, that may not be the reason we will increase the price due to the local inflation.

But again, on the service level because we still provide the local service to the customer and our labor cost is increased. And that part made a fab. But at this moment, the impact is not that significant. So far, there's no plan or the further price increase to Europe for the inflation. Yes.

[Eric Chen, executive]

Just we -- one issue we are reviewing is the founder assembly cost. We found some countries like Korea and Europe, there due to the net cost is increasing, their assembly costs still keeping the same price as 10 years before. So we just reviewed and assembly cost recently. So maybe we can write some service labor intense service charts for this kind of a service, other product costs, the semi and value-added service to increase this part price yes, only for this point.

[Hong Ji Yang, analyst]

Okay. Thank you, Eric. And the next question is Eric, you mentioned that the reversal of the inventory provision could be one of the positive could be one of the tailwinds for the gross margin this year. Could you quantify the impact or the contribution from that part?

[Eric Chen, executive]

Sorry, I don't have the precise figures, but we can provide maybe the numbers after removing if they invest after I want to learn more details about these figures, yes. We can simulate -- but I don't have to precise figures on hand.

[Hong Ji Yang, analyst]

Okay. Okay. And the next question is regarding the growth profile for each of your SBUs, could you share some color on that on the full year basis?

[Grace Liao, executive]

Can Linda share the outlook for the year for the SBG?

[Linda Tsai, executive]

Okay. Because we have a lot of SBG, but looking at the coming year, the trend for the market on the AIoT era, I believe that edge computing because the core business for Advantech was still have better the growth profile because it's driven by the green energy sector and health care is still going there. So they are the big driver still for the computer. But the other growth profile we are looking at is that with all the connectivity required all the data needs to be because of the POC of the drive. And the other portion of our business is on the device connectivity product from Advantech. And for those, the revenue portion is low because our -- as I mentioned previously, our average selling price for those product line is much lower than others. But in terms of the quantity, it's much higher than before.

To summarize is that I think the growth profile is still driven by the market demand and on the green energy device and also on as I mentioned, on the health care, that were the big growth driver yes. And energy-wise, particularly will grow our device connectivity business. Yes.

[Hong Ji Yang, analyst]

Okay. Thank you, Linda. I think we have -- yes, sorry, go ahead.

[Grace Liao, executive]

Sorry, Derrick. I think due to the limits of the time, maybe we can take the last questions from that?

[Hong Ji Yang, analyst]

Yes, I think we have answered all of the questions online. So yes, maybe I can pass it back to you for some closing remarks.

[Eric Chen, executive]

Just quickly [ track on the ] inventory provision reverses, I just got the biggest standard on my teams, it's around 0.7 percentage points. If we can keep the deal below 100 days. Last year, we have around 115. This year, we have a target to reach the deal around 2 digits. So if we can reach the targets limited provision will contribute around 0.7 percentage points to our gross margin.

[Hong Ji Yang, analyst]

Okay. That's on a full year basis, right? 2023?

[Eric Chen, executive]

Yes, full year, 2023.

[Hong Ji Yang, analyst]

Yes, I think we have no further questions online.

[Grace Liao, executive]

Okay. So any closing remarks from Eric and Linda?

[Linda Tsai, executive]

No remark from my side, thank you.

[Grace Liao, executive]

Okay. So thank you. I hand over the time to Derrick. Again, thank you for Morgan Stanley's arrangement for this.

[Hong Ji Yang, analyst]

Okay. Thank you, Eric, and Grace for your time. Thank you, everyone, for joining us for this earnings call. Thank you that we can disconnect right now.

[Eric Chen, executive]

Thank you.

[Unknown Executive]

Bye.