Advantech Co Ltd

TWSE:2395

Earnings Call Transcript 2021-Q3

[Pauline Chen, analyst]

Okay. Hi. Good day to everyone. Welcome to Advantech's Third Quarter Results Conference Call co-hosted by Credit Suisse. This is Pauline Chen. I'm the tech analyst at Credit Suisse. Today, we are very happy to have Advantech's management team, Eric Chen, President of General Manager and CFO; Miller Chang, President of Embedded IoT; and Grace Liao, IR Manager, to answer any question you may have. Grace will start from third quarter review, followed by management team's key highlight on the outlook, and we can go to the Q&A session. But before we start, just a gentle reminder, please change your name with company name on the back so it's easier for us to recognize. Grace, you may start now. Thank you.

[Grace Liao, executive]

Thank you, Pauline. Good morning and good afternoon, ladies and gentlemen. Thank you for your time today. This is Grace Liao, the IR Manager of Advantech.

According to our meeting agenda, I will give our third quarter 2021 financial results and hand over to Mr. Eric Chen, our CFO and President of General Management, for a business update and fourth quarter guidance. And also in Q&A section, we also want to invite Mr. Miller Chang, the President of our Embedded IoT, to join us and share his view regarding the business trend. And as usual, please take a few seconds to see the safe harbor notice.

For the third quarter 2021 financial results, please see the table here. Our third quarter sales revenue reached NTD 15.5 billion, increased 19% year-on-year, which also set a new company record. For the gross margin rate was at 36.8%, slightly improved on a quarter-on-quarter basis, however, declined 3% compared to the same period last year. For operating profit was at NTD 2.6 billion, increased 19% quarter-on-quarter due to the gross margin rate slightly recovered and also benefited from the operating leverage. For the net income reached NTD 2.27 billion, increased 17% year-on-year and also 27% quarter-on-quarter. For the earnings per share in Q3 was NTD 2.95.

For the year to third quarter 2021 performance, sales revenue reached NTD 42.9 billion, increased 12% year-on-year. Gross margin rate was at 37.6% while operating margin rate reached 16.5%. Accumulated nonoperating item increased 69% year-on-year due to 2 reasons, disposal gain of fixed assets for NTD 85 million and also gain from financial assets for NTD 44 million. For year to third quarter, earnings per share reached NTD 7.74. Okay.

For the regional performance, in terms of U.S. dollars, year to third quarter '21 revenue reached USD 1.5 billion, increased 19% year-on-year. For the major 3 markets, including North America, Europe and China account for almost 70% of the total revenue. China market was the biggest contributor and enjoyed 37% year-on-year growth for the first 3 quarters. Europe market also performed quite aggressively with 17% year-on-year growth due to macro recovery in pan-Europe.

Overall, North Asia increased 9% year-on-year. Please see the detailed breakdown here. Both of our Japan and South Korea branch outperformed with 14% and 22% year-on-year growth, respectively. However, Advantech Technology Japan, ATJ, was still relatively weak with 6% year-on-year decline. Our Asia & InterCon market overall increased 38% year-on-year. Both ME&A market and also India market were the best performers with 103% and also 36% year-on-year growth due to macro projects contribution.

For the strategic business group performance, you can see in the table. Industrial IoT was the biggest BU, accounts for over 1/3 of our total revenue and also enjoyed 35% year-on-year growth in the first 3 quarters due to new infrastructure demand from China and also semiconductor IEM smart upgrade. And you see the Embedded IoT increase 15% year-on-year due to recovering demand from major markets. Service IoT increased 27% year-on-year driven by smart medical projects. In all business group, only Applied Computing Group, ACG, declined 7% year-on-year mainly due to lull season between projects and also ATJ underperformed.

For working capital and the balance sheet, Advantech generated over NTD 7 billion of cash in third quarter '21, maintaining the high cash level, indicating we are quite sufficient in working capital. For inventory, turnover days still higher than historical level due to aggressively inventory build for order shipments.

That's the last page for my presentation for the third quarter financial results. And now I will pass the time to Mr. Eric Chen to share the business update and also the fourth quarter financial guidance. Let's welcome, Eric. Thank you.

[Eric Chen, executive]

Hello, everyone, good afternoon and good evening. Good morning, okay. This is Eric Chen. Let me, allow me to give some business update and the quarter 4 outlook.

As you may know, the third quarter was better than our predictions, it was mainly due to the firm bookings in the second quarter. Also, we overcame some key material shortages. That said, we have conducted spot buys in the gray market to keep the delivery promise to our customers. Hence, the gross margin declined 2.4% year-on-year.

Forward look in the fourth quarter, some critical IC, such as Intel LAN chip and the TI power IC, their fulfillment status worsened in quarter 2. Also, China recently released a new rule to limit electricity consumption to ensure they're carbon neutral in year 2060. It will bring a negative impact to our production as well as delivery. So we estimate $40 million to $50 million order cannot fulfill during this quarter. On the margin side, the average selling price was steadily increased because of the new price order that we shipped out this quarter. Therefore, we can improve our margin performance if the material price is stable and the product mix remain the same pattern.

So based on the current business outlook, the overall impact of the supply chain, we expect fourth quarter revenue to be between USD 530 million to USD 550 million based on the exchange rate assumption of USD 1 to NTD 27.9. In terms of margin, the fourth quarter gross margin is expected to be between 36.5% and 38.5%. And then operating margin is expected to be between 16% and 18%. So this conclude my update, business update and the fourth quarter guidance. Thank you.

[Pauline Chen, analyst]

Okay. So we now can move to the Q&A session. We have collected several questions from investors online. It can be sorted into several different categories. I think the financial performance will be the first question on the investor's mind. But before we enter into these questions, I do have a few questions following Eric's Q4 guidance. When you say about the revenue guidance was impacted by the power shortage and also the supply constraint in Intel chip and also TI chip. That $40 million to $50 million revenue impact, do you think, do you have any view that when it will be recovered? That's the first question.

[Eric Chen, executive]

During procurement, that was the impact. It probably will be recovered in the second half of next year. For the first half next year, it could be impossible to recover an order of some critical IC shortage. So next year, we can recover in the second half.

[Pauline Chen, analyst]

Okay. Okay. Very clear. And regarding your OP margin guidance, I just want to make sure that if I heard it right. In the printed number, it doesn't really show any improvement. But in your commentary, did you say that the margin could potentially increase sequentially if raw material and product mix remain stable?

[Eric Chen, executive]

Yes, yes, yes. We are trying to maintain our gross margin to 40%. But it's hard to say because our procurement department need the ICs. Some of the IC increased their selling price in quarter 4. So I'm not quite sure we can keep the same assumption of the raw material price can keep as stable as the quarter 3.

[Pauline Chen, analyst]

Okay. Got it. So chip price probably will be the swing factor.

[Eric Chen, executive]

Yes.

[Pauline Chen, analyst]

Okay. Got it. Okay. So then on the financial questions from investor will be on the preliminary outlook for next year. This year has been a very strong year in terms of revenue growth. Do you expect the revenue growth to accelerate or decelerate into next year? And have you factored in any consideration in terms of the chip shortage and also China power restriction?

[Eric Chen, executive]

Okay. According to our book-to-bill record in September and in October, the Asian region, include China, Japan and Korea, book-to-bill declined. Emerging country and Taiwan achieved flat, while the U.S. and Europe regions still in an uptrend. So for the preliminary outlook of 2022, we foresee in the first half the growth momentum here is slightly decelerating due to many supply chain constraints as we mentioned before.

As for the second half, the growth momentum, it's too early to predict since the overall supply chain have decreased. So for this year, sales performance, we expect the total consolidated revenue, where we see USD 2 billion and when averaged USD 1 billion is one thing. And that is really double our revenue after like 8 years. For the year 2022, the management team expect a median 2-digit growth should be a reasonable target. So we will release our formal guidance in quarter 1 IR meeting, let's say, early March in 2022. So this is my answer.

[Pauline Chen, analyst]

Very, very clear. Then the second question is also regarding your margin target. I remember earlier there was a midterm target talking about gross margin 40%. OP margin will be somewhere around 16%, over 16% to 17% that level. Do you think that kind of margin expectation can be achievable next year or is still achievable on medium term basis?

[Eric Chen, executive]

It's achievable in the coming year, not next year, yes. This year, our gross margin have dropped 2.4% year-on-year. It was mainly due to we conduct spot buying in the gray market for the shortage component. And those shortage component price in gray market is sky high. Another factor is the raw material, average unit price is up. So the spot buying and raw material price up impact our gross margin by 1% and 1.5%, respectively, accumulated totaled 3.6% negative impact to our gross margin performance.

So to ensure our profit were not engulfed by raw material cost up, we adjust our selling price in the second half. And most of that impact sales and the achievement we'll look at in the fourth quarter. So we did the price, the gross margin will become better and better. We will steadily recover our gross margin in the near term. So this is, we have quite strong confidence that we can improve our gross margin step by step, yes. Operating margin trend, we keep changing the guidance to increase 18.5% in the coming 2 or 3 years. Our expense ratio have a great chance to lower to 20% by driving the top line continued growth, also the operational scale advantage. So the overall operating margin I expect to maintain at 18.5%. Yes. This is my answer to your question.

[Pauline Chen, analyst]

Yes, very clear. Thank you, Eric. Then the next question is regarding your capacity expansion plan. Earlier, you mentioned about the expansion by 30% level in both China and also Taiwan. Can you give us some update on this capacity expansion plan and also your CapEx number for this year and next year?

[Eric Chen, executive]

Okay. The major portion of CapEx this year is ongoing Linkou Campus Phase III construction and 2 SMT line extension. One SMT line were installed in the Linkou manufacturing center and then the other in the Kunshan factory. The Linkou Phase III total construction fee is around USD 50 million and expect to complete in the middle of the year 2023. However, since the overall construction period were less than 3 years, the construction expenditures in year 2021 and year 2022 is around USD 20 million. And besides our Korea subsidiary, we have purchased 4 raw building for local service business expansions. The total budget amount is around USD 10 million. So overall, the CapEx in 2021 is about USD 50 million and in the year 2022 will be USD 60 million, slightly higher than the year 2021. So this is my quick answer regarding the CapEx and capacity.

[Pauline Chen, analyst]

Thank you, Eric. And regarding the order visibility, the question is about the B/B ratio. So the main reason for current B/B ratio to show some slowdown, what's the reason behind that? And your order visibility, is there any change on your order visibility as well?

[Grace Liao, executive]

Miller, can you answer this question, please?

[Miller Chang, executive]

Yes. I can answer this question. About the B/B ratio, show slowing down. Yes, it is. But you can see the number from our financial team that present our B/B ratio achieved 1.64 in Q2 and 1.45 in Q3. Main reason is from China. Because they have very high booking in Q1, Q2. So they're slowing down a little bit on Q3. But for U.S.A. and also Europe, they are getting better. So their booking is higher than Q2 compared to Q3. They are getting higher. So I think that the average still higher than our previous year. Usually, our B/B ratio is about 1.2, very healthy status for our industry. So even though they showed some decline, some decrease, but still very high than our expectation. So we are still confident about the B/B ratio currently.

So for the order visibility, we did not see any change for our order visibility even this Q4, now and to next year, Q1 and Q2, we are still very positive, no change for order visibility.

[Pauline Chen, analyst]

Okay. Thank you, Miller. While we have you here, may I have a follow-up question to you. Because I just noticed that, sorry, it's not on the question list. I just now noticed that in the presentation. In the presentation, when there is a breakdown about EIoT, Embedded IoT gross margin, actually was slightly down from second quarter level. I remember last quarter, it was 35% to 40%. This quarter, it shows 30% to 35%. What's driving the margin decline?

[Miller Chang, executive]

That's because of our business in Embedded IoT. About 45% there are represented from own label product. Own label product means only like motherboards, small computers, kind of the own label product. So if the IC component change goes up, they will impact to our product profit immediately and very significantly. That's the main reason.

[Pauline Chen, analyst]

Okay, very clear. Thank you so much. Okay. And then the follow-up question is regarding the supply chain management. But the first question, I think, Grace and also Eric already mentioned about the shortage.

[Miller Chang, executive]

Yes.

[Pauline Chen, analyst]

Okay. And I think they also, the management team also talked about the, when they are going to see a balance, probably will be in the second half of next year. And regarding the ASP, will you be able to raise the pricing again to mitigate the supply chain impact? And if so, when and at what kind of level? Or is there any other action plan?

[Miller Chang, executive]

Yes. Yes. Internally, we are discussing about our cost impact to our profit. So it's a big problem and also a big topic internally. So yes, we are going to discussing about the cost, component costs. If in Q4, now the cost up issue, the chip IC, especially from LAN chip, power IC, [indiscernible], their price up that we will consider to raise up our ASP from next year Q1, okay? Currently, the target is about 3% to 6%, depends on different product division. Okay. So yes, we will consider and now it's under discussion internally. The range is about 3% to 6% and formally announce we say to be in next year Q1.

[Pauline Chen, analyst]

Got it. If I may add a few follow-up questions regarding this price and also the other mitigation plan. When I talk to other supply chains, general feedback is that it's very difficult to persuade customers, especially in the U.S. and European market to change their design source. So if it's from China customers and maybe it's easier to change the design to the second suppliers, but U.S. and European customer is very difficult to do that. Are you seeing a similar situation for your different region?

[Miller Chang, executive]

It depends on customer and also their industry. For example, in the medical industry, it's quite difficult because you need to face many, many certification. But if the, so customer normally, they won't set the component change. They will need a very long time to do the certification. So that's the challenge. It's not only the cost but also the [indiscernible] delivery time. But for some industry, they are more easy, easier for us to change the component, even replace the component through another partner build. So that will take out some of our costs and also our time to fulfill our customer delivery. So it still depends on the customer and also our service market.

[Pauline Chen, analyst]

Okay. Got it. So medical is more difficult? And how about the CIoT or like energy-related segment?

[Miller Chang, executive]

For the network computing segment, yes, it's still very difficult. Yes, because as I've mentioned, they need a very long time for the general certification. The second one is regarding to the like consumer, like retail segment. It's quite easy for us to request the new model, new chip to redesign and convince our customer to accept our solution.

[Pauline Chen, analyst]

Very clear. And then the next question is regarding the regional performance. I think the first one will be on China performance. In the opening remarks, I think management team already highlighted the China slowdown starting from third quarter, right? So I guess we are probably already answered to the first question about the China budget cut and also some slowdown. Do you think that kind of slowdown is more like temporary? And is there any sign of recovery in your view?

[Miller Chang, executive]

I guess I can talk from the other way. Actually, until today, we did not see any customer cancel their order, okay, from our sales sector, different sector in China. And also, we did not see any order postponed from a customer in China. So yes, your question about cash flow. We did not receive any information about customers that reported that they have any cash flow issue So, no. Okay. So the sales are still quite healthy for us. However, the booking ratio, you see the number is a bit lower than Q3 and will continue to be a little bit lower than Q4 because of the year end. The year-end issue, probably not only in China, but also will impact to other countries. Customer may plan their order for the next year. So maybe some order adjustment will happen in Q4, especially in last month of December this year. So we will see the number, the booking number will be a little bit changed. That's quite normal.

[Pauline Chen, analyst]

Okay. Okay. Okay. So the China B/B ratio slowed down is mainly because of the year-end adjustment, it's not because of the cash flow or a budget cut issue.

[Miller Chang, executive]

At least for our served market, we did not see that issue.

[Pauline Chen, analyst]

Okay. Very clear.

[Eric Chen, executive]

From financial indicators, DSO, I mean, the AR turnover, the data in China is still very, very healthy. We don't foresee any DSO, AR issue [indiscernible].

[Pauline Chen, analyst]

Okay. And then regarding the rough sales mix in China, the major segment is green energy and also infrastructure. And what's the rough product mix that is not green energy and infrastructure-related? Do you have any...

[Miller Chang, executive]

I think China this year, they are very aggressively to enter the semiconductor industry, very, very aggressive. So at this point, we also got a lot of order to support them, the industry. And also for news on 5G, everybody knows, China for 5G, they are most aggressively and very, very aggressive to build up their 5G infrastructure. So this, about this question, not only related to one single sector, but almost all Advantech products that we are selling, they're quite very aggressively. And also for some cloud services, infra, also very aggressively, very positive.

[Pauline Chen, analyst]

Okay. So including cloud, okay. But for those segment like semiconductor, green energy, infra and cloud, is there any rough sales mix breakdown?

[Miller Chang, executive]

You mean the percentage?

[Pauline Chen, analyst]

Yes. Percentage will be great.

[Miller Chang, executive]

We probably need to give you more precise number after the meeting.

[Pauline Chen, analyst]

Okay. No problem. No problem. And then on the U.S. market. Yes. So earlier comment, I think it was from the earlier conference call. There was a commentary talking about the suppliers do not want to change to a second source, and they also do not expect supply chain constraint to improve until second half of next year, right? So would that further push out your U.S. market recovery expectations? For the U.S. market?

[Miller Chang, executive]

No. I don't think so. No. If you see our report for Q1 and Q2 actually U.S.A. and Europe, they are not so good. Not so aggressively as China, right? On the second half of this year from Q3, U.S.A. and Europe will catch up very soon. One reason is because of the component shortage that some customers, they pay for changing the component. They pay for changing the component in order to support their production. And also, our supply chain and our manufacturing side, they are very aggressively to support U.S.A. and Europe their production and request. So that's one of the reason that U.S.A., even though the first half of this year, their growth is not so good. But from the second half this year for Q3, Q4, we see that they will continue to get back to the growth momentum. They are very positive. I can expect that U.S.A. this year, end of this year, they probably can meet the double-digit growth and continue to have the same performance in next year.

[Pauline Chen, analyst]

So double-digit growth next year. Okay.

[Miller Chang, executive]

Yes.

[Pauline Chen, analyst]

Okay. Good. Yes. Okay. So in your earlier comment, as in the financial outlook when we talk about the first half revenue would decelerate because of the supply constraint. If we try to map that commentary into different business unit, business group, which business group is going to see the deceleration? It's more like across the board or relatively which segment will underperform or outperform?

[Miller Chang, executive]

You mean that by different sector by our different divisions.

[Pauline Chen, analyst]

Yes. Yes. When you have...

[Miller Chang, executive]

This year until, you have 2 months.

[Pauline Chen, analyst]

Yes, Miller, the question would be more on the first half next year because I think Eric was talking about the revenue growth would decelerate in first half next year. But second half will be too early to say, right? And then, yes, so for the first half 2022, the deceleration, if we try to look at your different business segments, IIoT, EIoT, SIoT, ACG, et cetera. Is the deceleration very similar across different business group or any specific business group will relatively outperform?

[Miller Chang, executive]

This year, the most growing segment is our Industrial IoT. But I think overall, each of the individual product division of Advantech internally, we will oppose any decelerate growth rate for next year. We will still post positive growth for next year. But the growth rate probably cannot meet that this year, 35% for example, for EIoT landmark, okay? But overall, we think that every sector will post a very positive growth rate for next year.

[Pauline Chen, analyst]

Okay. Got it. Okay. Then on the Europe market, the growth has been, the year-on-year growth has been increasing recently. And what's the key drivers?

[Miller Chang, executive]

Yes, very similar to U.S.A. First one is their order fulfillment rate is higher than first half, okay? That's because, as I mentioned earlier, our factory, our supply chain, we provide big support to our Europe and U.S.A. region. So we support the product order intake to fulfill to our customer delivery on time. That's the big reason.

And secondly is, everyone know that because of COVID impact, the U.S.A. and Europe is back to, the city is back to be open from the beginning of the Q2. So that's the main reason our booking, our procurement, our ordering process getting smoothly from Q3. So that's the main reason. So not a particularly special sector, they got higher growth movement, no. Every sector, we have seen the impact of growth.

[Pauline Chen, analyst]

Okay. Okay. So it's not really automation outperforming, retail outperforming, it's more like a reopening and order fulfillment rate is improving. Okay. Okay. Then for next year on the strategic business group, if we can, if you can kindly give us some ranking about the growth rate by different business group, okay, for next year, just a rough ranking of who will relatively outperform. I know you said that every BU is working very hard to grow, but it will be nice to just have some rough idea.

[Miller Chang, executive]

Okay. Actually, right now, it's still under our internal discussion. Actually, Q4 is a big season for us. Everybody, every division and sales team, our regional office, we have very intensive discussions back and forth. Actually, right now still under discussion. I don't have any number I can provide for you. But as I mentioned earlier, overall, our company, we expect that we still maintain the 10% more growth for this year. This is for sure. So based on the guideline product division leader and regional sales leader, we were discussing it a lot, very intensive to try to perform this, our target.

[Pauline Chen, analyst]

And if there is any risk you can think of for next year, what would that be?

[Miller Chang, executive]

Still material shortage.

[Pauline Chen, analyst]

Okay. Material shortage.

[Miller Chang, executive]

So I can support to answer that question from our supply chain vendor. For example, like our main, I'd say, partner supplier, they even told us they cannot fix the issue next year Q1, Q2. So I cannot support to answer the question for them. The supply material constraint issues still happen in Q2, even Q3 that the situation were not so good for us. So the big potential risk is still the material shortage.

[Pauline Chen, analyst]

Got it. Very clear. Okay. And then the next question will be regarding the AIoT ecosystem. Chairman mentioned about, shared about his ambition and also the new plan for AIoT last time. And what's the estimated financial cost of the investment in the software and SRP and as well as the new business unit?

[Eric Chen, executive]

Listen, can try to answer these questions. The major portion of the investment is probably coming from people cost. Most of our planned are coming from people cost. It account for 70%, more than 70% of our total OpEx. So we have invest more than 250 software engineer. Most of them would do consulting, some that are wide cast platform development and vertical industrial solution business development. The total investment cost is around USD 50 million per year, accounting for 1.5% of our total OpEx. So this is our investment, especially in the people cost total USD 50 million. Even though the AIoT platform and the solution business revenue contribution were not good so far, the team is confident that they can meet the breakeven point in the coming 3 years. They have a strong commitment to meet the breakeven point maybe in the next 3 years. So regarding your questions, the total cost investment, mainly from the people cost and is roughly around USD 50 million per year.

[Pauline Chen, analyst]

Okay. Yes. So okay, 1.5% of the OpEx. So if we consider this together, what's the rough OpEx ratio we should be using for next year?

[Eric Chen, executive]

I guess it's around 20% to 21%.

[Pauline Chen, analyst]

20% to 21%. Okay. Got it. And then the, is there any indicator to evaluate your IoT platform? I remember earlier, there were some numbers talking about membership, penetration rate in major markets. Is there anything we can try to get a better view about your progress in the IoT platform?

[Eric Chen, executive]

Normally, we have 3 indicators to evaluate the performance of the AIoT platform. The first one is we are doing a membership just as you mentioned earlier and a certain amount of revenue target. This year, we changed, we established 3 business unit, service business unit. And then they account for their revenue target. So with the revenue also one of their targets, especially for gross rate. Their gross momentum is very strong and then they're fee-based model. And the rest is a number of legal corporation of domain-focused SIs. So we use these 3 indicators to trace our AIoT platform performance.

[Pauline Chen, analyst]

Okay. So that kind of data, can we see that in your website? So how many partners and how many membership, is that available?

[Eric Chen, executive]

Not really. But in our campaign, I guess, in our past event, we also elaborate these kind of numbers for our audience. So it's not so confidential, but we don't put this data, this information in our corporate website.

[Pauline Chen, analyst]

Okay. Okay. Very clear. And then the last question or sorry, the last 2 questions. One is regarding the competition landscape. I think some of your competitors are turning more aggressive in China and Europe. And what's your view on that? And the second one is that, they are also seeking more aggressively for strategic alliance for all this key supplier like MediaTek/VIA. If you can share your view regarding that, it will be great.

[Miller Chang, executive]

I'll try to answer that.

[Grace Liao, executive]

Let me try to answer this question and ask Miller or Eric to add on more information on this. First of all, I think Ennoconn was a respectful peer to Advantech for sure. However, in China, I think we used to be worried about the China competition because Ennoconn is trying to or looking after or coming after for our customers. However, Advantech's proven that our proposition value is quite different. It's more like a total solution provider versus like edge or hardware kind of a provider. So in customer point of view, we are not in the same level of comparison. And also our customer overlap is quite limited. So as a result, we can trace back for the contribution from China market. Actually, China is quite recent in our regional Asia and also right now officially be the biggest contributor of our business. So actually, I guess, in China, the competition is quite, I think, the whole pressure is quite limited to us.

However, in Europe market, actually, Ennoconn is more aligned with like Kontron or S&T, which is a European-based IPC company with very high reputation. So I think our competition is more challenging than our imagination. However, the Advantech's strategy in Europe market is trying to improve the on-site design capability as soon as possible. For example, we also build up our R&D center in Germany and also build up like a technical support on-site in the pan-Europe market. And actually, I have to say right now it's about to bear fruit. And as you can see that our performance in Europe market is quite good recently and could be sustained as a quite good potential growth in the future. So I think our strategy in Europe is quite successful because we improved ourself as a solution provider and in the same level comparison with a European-based company. And right now, I think more and more recognition from our customers in pan-Europe.

And your, back to your second question, I think the strategic alliance with MTK/VIA and also Google or Ennoconn, I think all the synergy for the alliance is that it remains to be seen because I think the first 2, MediaTek and also VIA, is more like a partner in the private place projects. And also for Google, it's more like the digital transformation partner. We're quite limited of our information. Right now, we don't see any, like a real business strategy level kind of collaboration. Instead, we only see maybe like a financial alliance where even like a system phase-wise kind of a cooperation so far. So I think that all the synergies have still remain to be watched. And on the other hand, I think the most challenging for Ennoconn right now is the recent bond raising plan right now. So it's kind of challenging for Ennoconn to keep delivering in financial-wise in the coming years. And I think that's the reason why the capital market holds more like a conservative view toward the whole case. That's the fact. That's my answer to this question and maybe Eric or Miller can quickly add on some information. Yes. Thank you.

[Miller Chang, executive]

Okay. So this is Miller speaking. Actually, we should not comment on our peer company. We should only follow our own way to keep strengthening our business. Actually, you can see our number, our reported number year-to-year. Our China and Europe, we are still growing very significantly in China, 37% year-to-year growth; in Europe, 17% growth. Very strong growth momentum even though those are head-to-head compete to many peer company, but we're still very strong, have very strong position in China and Europe. So that's the very simple answer to the question.

[Pauline Chen, analyst]

Yes, very clear. Yes.

[Miller Chang, executive]

And regarding for the alliance partner, for sure, for the silicon partner like Intel and the NVIDIA LSP and also the software partner vendor like Microsoft, they are there for more distributor in worldwide region, every country. We have a very big number of the Microsoft software distribution business with Microsoft for more than 15 years. So those kind of alliance partner is for a long-term ownership and business collaboration with Advantech with all our partner together. So that's my answer.

[Pauline Chen, analyst]

Thank you, Miller. Thank you, Grace. Yes, I think Miller, you highlighted one interesting point that is very important to just focus on what you can do and improve. And that will lead to my next question regarding how do you retain your R&D talent? Because earlier, you also mentioned about engineer is very important, right? And then can you share with us or maybe Eric, I don't know, can you share with us how Advantech plans to retain those engineer and also the R&D talent. What's the incentive you are providing to keep them to work with Advantech?

[Miller Chang, executive]

That's a very good question. I got the same question many times recently. Yes, I try to give you some. The retention for engineering and also other staff, the most important is the habit, get them interested to work with Advantech continuously. The second is compensation, right, the very easy answer. But the compensation is not only one choice. We need to give them habit, the direction, what the next new product and solution that Advantech want to provide to our market, right? So if we can use that, we can continue through innovation for our product and solution and provide to our customers. Then our employee will be very, very interested to stay with us, to support us, to deliver, develop, implement the new solutions and products and solutions to our customers. So that's a big, big target for us to retain our talent to work with Advantech continuously.

[Pauline Chen, analyst]

Very clear. Yes. So the last question would be the GIRC. What's the next region according to your GIRC plan?

[Eric Chen, executive]

We launched the GIRC program in the year 2020 as a new member. Under GIRC concept, there is regional organization structure that covers a set of business, corporate management and Advantech Service Plus, before we call [indiscernible] and right now we're changing the name to Advantech Service Plus. In the new structure, the current subsidiary right now had been a pure sales office function only. But still, it will also focus on local content, development such as parent integration, ESG and brand awareness and local service business development. The progression of GIRC has gone smoothly so far in the region, including Japan. We just merged AJP and ATJ as a one goal company, should start from next year, next January. We also have refined our organization structures for both entities.

Korea, we also preach the Korea GIRC projects in Taiwan and InterCon region and has settled down with a new GIRC reporting structure, organization structure and the parent. Right now, we are under discussion about North America. We just started the program to discuss North America managing directors and expect to be complete in quarter 1 of next year. And then the Europe region will be the last region to implement GIRC because there are so many countries in the European region. So it's more difficult to handle the GIRC concept in the Europe region. So we put Europe as the last region to implement. So far, we almost complete all of the regions, also include China, except the U.S.A and the Europe region.

[Pauline Chen, analyst]

Okay. Got it. Very clear. So yes, I think that's the question I got from the online. [Operator Instructions]

[Grace Liao, executive]

Pauline, I guess there is an investor. Daniel Yen is raising his hand.

[Pauline Chen, analyst]

Yes. Yes. Daniel Yen. Okay. Yes. Hello. Daniel, you may.

[Daniel Yen, analyst]

Yes. Can you hear me now?

[Pauline Chen, analyst]

Yes. We can hear you.

[Daniel Yen, analyst]

Perfect. Perfect. And thanks for giving us this overview and the possibility to join in. Actually, I would like to dig in a little bit deeper into the supply chain issues. Can you give us maybe a rough understanding what are the process nodes that you see the most short shortage in, especially with regards to your business, of course. I would expect that most of the chips you are using are anyway advanced nodes. But how does this play out? Where do you see the biggest shortages? And when you see the shortages, currently, it is expected to loosen into second half year '22. Is this basically true for all the nodes or are there some process nodes that might be available earlier on?

[Grace Liao, executive]

Thank you for your question, Daniel. I will pass this question to Miller.

[Miller Chang, executive]

Okay. The supply chain shortage is, I have to say, from a partner vendor point of view, the supply chain issue is getting better compared to Q2, Q1. Actually, the situation is better. Now there's only some limited shortage from the supplier, mainly from the IC partners I mentioned earlier for WiFi, LAN chip IC and also some power IC, power management IC, which is quite serious. Some of the parts we only can get 30% of the supply of our total requested demand.

So however, our procurement team and our supply chain is pushing the partner, all partner very closely to get the, almost have a conference discussion every day to be more patient. So that's one of the reason we can still fulfill some major, a customer that request. And this is one way. The other way for some new design solution, we will try to begin the second source development policy. So the second source vendor, our engineering team also work with the second source partner to evaluate if their solution can replace the existing supplier, that they got more supply chain to supply our material demand. This is the second way that we can do, try to get a better supplier, whether from the first vendor or the second partner, second vendor.

The third way is we are trying to convince our customer to pay for the extra cost that allow us to buy from the spot market. But this is depending on customer, their decision. Some of our customers, their demand is very urgent. Their end customer can pay for the extra cost increase. So the customer willing to pay for the extra cost. So in this way, that we will also buy for them, buy the material from the spot market that can also speed up our production and delivery. So yes, we have many way to support customer. The only one purpose for us is to try to support our customer-related product delivery. It can be very smoothly and also on time for their request. I hope I answered your question.

[Daniel Yen, analyst]

Yes. Thank you. To some extent, yes. And then can you give maybe a more specific view on the process nodes that you are using? And a follow-up to your answer would be, how long does it take to get the certification for a second source? Is this different, I guess, depending on the industry vertical, right?

[Miller Chang, executive]

Yes. The second source material certification depends on the chip and the component. For sample, if this is just a DRAM IC, that may only take 1 or 2 weeks for certification, right? But if this is a power IC, as I mentioned earlier, for the big shortage item, because the power management design is very important for a system and also for all of our product.

So that will take at least 3 months for the evaluation internally, not including customer evaluation. So it will take a big effort for not only Advantech but also our customer side to do the product performance evaluation. So it depends on different product and component shortage. But yes, Advantech internally, our engineering team, we have a quite formal process implementation that can support our different product division, their product and component evaluation are very efficient, yes.

[Daniel Yen, analyst]

Okay. And a final one, also basically a follow-up on your answer, given the shortages, especially on the power management ICs, which is at least generally on the market when you listen to many market participants, it's expected to last longest. Why do companies refrain to certify second sources or even third sources if it takes, let's say, just 3 months because the shortages are likely to take much longer than that to be solved, right?

[Miller Chang, executive]

Yes. Yes. I don't want to point the individual power management IC supply. Actually, everyone in the industry know that they have a big coverage for all different kinds of IC component. Okay. I have to say almost every product division internally has already used their product for a long time. People don't want to understand why the services were impacted so much, but actually it is. So yes, as you mentioned. For a new product solution, we are gradually evaluating a second source. But for the ACG product division, as I mentioned earlier, not only in Advantech we need to evaluate the power management IC for 3 months. Our customer and their customer also need a long time for evaluation and get the certification. It's a big problem for both Advantech and our customer. So it's not only a 3-month job. It's 3 months, plus 3 months and also a certification, quite a critical long time. Okay. I hope I answered your question.

[Daniel Yen, analyst]

Yes. So how long would you expect it would take in some cases? Does it take then, I don't know, 9 months or even a year to get the full certification for certain products?

[Miller Chang, executive]

If you have a specific customer from an industry, I can support to answer your question.

[Grace Liao, executive]

I guess Patrick Chen of CLSA is raising his hand. Please, Patrick.

[Patrick Chen, analyst]

Sorry, I was muted again. I have a question on inventory. Do you expect the fourth quarter inventory, days of inventory to further rise? And is there a targeted inventory level that you are seeing amidst this component tightness situation?

[Grace Liao, executive]

Okay. Thank you, Patrick. I will leave the question to you, Eric.

[Eric Chen, executive]

You're talking about the inventory level, right, in our books?

[Patrick Chen, analyst]

Yes. DOI. Yes.

[Eric Chen, executive]

If you'll recall our DOI, it's a slight higher than our expectations due to we have some key component shortages. So we built our inventory level to, if you are at a certain level, to procure strong bookings. Unfortunately, some are key IT shortages, so we can't deliver the finished goods at the same period. So this caused our inventories a little bit higher than our previous quarter, but we expect the inventory situation are getting better and better in the next year.

[Patrick Chen, analyst]

If I may follow up on your 4Q revenue guidance. You mentioned that there is around $40 million to $50 million orders that cannot be fulfilled. May I ask, can you separate the impact from the China power crunch and the component tightness? Like how much of that $40 million to $50 million is a result of China electricity limitation and how much of that is a result of component shortages?

[Eric Chen, executive]

Actually, in our Kunshan manufacturing, there is no restriction for the power consumption, but we are afraid our supplier in China may have some restrictions. We are the only company with a factory in the Kunshan land free port with a power consumption because power, electricity consumption rate, we do have a lot of power savings in the past few years. So it's quite incredible in local governments. So we are free from the power consumption restrictions. But we are afraid our supplier cannot enjoy this kind of offer. So maybe, I guess, maybe I do not have the exact number in my mind, but maybe it will impact a little bit our capacities. Most come from the supplier side, not from Advantech side.

[Patrick Chen, analyst]

And from the supply side, do you see that worsen from third quarter or is it at a similar level of limitation compared to what you saw in the third quarter?

[Eric Chen, executive]

I think it slightly worsened in quarter 4. Yes.

[Grace Liao, executive]

Well, I guess due to limited time maybe we can take an extra one question. Who wants to ask, please raise.

[Pauline Chen, analyst]

Thank you, Grace. [Operator Instructions]

[Yuk Yeung Lee, analyst]

This is Phelix from Morningstar. I have a question on the order booking and your price hike. So can you give a little bit color on like given that the B/B ratio has already come down a little bit. So is it, like is it correct to assume that the overbooking has come down as well? And then the second question would be on, like given the B/B ratio has come down, do you think after the possible price increase in 1Q, do you expect any further price adjustments after that?

[Grace Liao, executive]

Thank you, Phelix. Regarding the 2 questions you are asking, I will pass the B/B ratio question to Miller. Okay. Thank you, Miller.

[Miller Chang, executive]

The B/B ratio come down, yes, it's just some issue from the overbooking, okay? If our product line and our fulfillment rate getting higher, the B/B ratio will also come down, right? So I have to say, overbooking is one of the issue but not big, but our supply getting better to support our customer also caused the B/B ratio to come down. That means our shipment, you see the number from Q3, our shipment increased from the Q2 to Q3, right? So here also, the index for our supply chain status getting better in Q3. Okay.

[Grace Liao, executive]

Okay. Thank you, Miller. So regarding the second question Phelix is asking for the pricing issue, I will pass the question to Eric.

[Eric Chen, executive]

Just as I mentioned earlier, we have price increasing in the second half and most of the orders, the new order with new price will ship in quarter 4. So we foresee in the fourth quarter on the margin side our ASP will gradually improve. This is for the quarter 4. But however, our procurement, actually there, some ICs still increased their selling price. So internally, just as Miller mentioned, we have internal discussion about how to, the price guidance regarding the next year, next first half. In general, we tend to increase our product, our selling price. The important level, we intend to increase around 6%. For system level, it's around 3%. So it's around 3% to 6%. The range is between 3% to 6%. So this is our guidance. We just communicated with our country sales head. So we will have a formal action plan released in quarter 1, no later than quarter 1 regarding the selling price guidance. Yes.

[Grace Liao, executive]

Thank you, Phelix, and hopeful that Eric and Miller did answer your question. So Pauline, I guess we do have, our time is up. So maybe...

[Pauline Chen, analyst]

Yes. Thank you, Grace. Thank you, Eric. Thank you, Miller. Yes, it has been a very wonderful discussion and very insightful. And thanks everyone for joining us today. Just wondering if management team would like to do any closing remark.

[Grace Liao, executive]

No. I guess we have no remarks. Yes. Thank you.

[Pauline Chen, analyst]

It's such a long call. Okay. Thanks, everyone, for joining us today and you may now all disconnect. Thank you.

[Grace Liao, executive]

Thank you. Thanks. Bye.

[Pauline Chen, analyst]

Thanks. Bye.