Advantech Co Ltd

TWSE:2395

Earnings Call Transcript 2022-Q3

[Patrick Chen, analyst]

Okay. Let's get started. Good afternoon, and good morning, ladies and gentlemen. Welcome to Advantech's Third Quarter '22 Earnings Conference Call. My name is Patrick Chen, Head of Research at CLSA Taiwan, and I will be your moderator today.

It is our honor to have Mr. Eric Chen, our CFO and President of General Management; Mr. Miller Chang, President of Embedded IoT; and Ms. Grace Liao, Investor Relations Manager with us today to discuss about the third quarter results and the business outlook.

Grace will start with the third quarter results briefing, followed by Eric's commentary on business update and 4Q '22 guidance. And lastly, a remarks and Q&A sessions hosted by both Miller and Eric.

So now without further ado, let me turn this call over to Grace. Grace, please go ahead.

[Grace Liao, executive]

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

In Section 1, I will give 10 minutes of briefing regarding the third quarter 2022 financial results. As usual, please take a few seconds to read the safe harbor notice.

For the third quarter financial results, both top line and the bottom line performance set company's new record. For Q3, revenue reached NTD 18.6 billion increase of 20% year-on-year and 11% quarter-on-quarter. Gross margin rate was 36.4%, declined 2.2 percentage points compared to the second quarter due to the impact of strong U.S. dollar and unfavorable product mix and the changes of PPV, purchase, price variance. Operating profit was NTD 3.38 billion, while operating profit rate was 18.2%, improved from 16.8% in third quarter last year, benefit from expenses control and operating leverage.

For non-op items, Advantech booked NTD 259 million for FX gains in the third quarter. For the third quarter, effective tax rate was 18.9% (sic) [19.9%]. Third quarter net income reached NTD 3.18 billion increased 40% year-on-year and 30% quarter-on-quarter. Earnings per share in third quarter reached NTD 4.1.

In the right side is the year-to-third quarter '22 performance. For sales, revenue reached NTD 51.6 billion with 20% year-on-year growth. Gross margin rate was 37.7%, while operating margin rate reached 18.4%, both improved year-on-year basis.

For year-to-third quarter, effective tax rate was 20.1%. For third quarter, net income reached NTD 8.21 billion, increased 37% year-on-year. Accumulated revenue and profit also set new records of the company.

Year-to-third quarter '22 earnings per share reached NTD 10.59, almost equal to 2021 annual EPS.

For regional performance in terms of the U.S. dollar, year-to-third quarter '22 revenue reached USD 1.77 billion, increased 16% year-on-year.

Major 3 markets, North America is the biggest contributor was 34% year-on-year growth. Europe market increased 23% year-on-year in terms of U.S. dollar, while in Euro local currency enjoyed over 30% growth. Drivers in North America and Euro markets, including smart medical, networking and gaming projects.

For China market, slightly declined 2% year-on-year due to COVID control and channel partner inventory adjustment also last year is a high base. For the North Asia, total increased 9% year-on-year in U.S. dollars. Actually, both Japan market and the Korean market enjoyed over 20% year-on-year growth in local currency.

For Others, including strong demand in smart medical, SEMI equipment and IEM systems.

For Emerging markets also outperformed due to strong demand in smart city, smart medical, energy and transportation. For the performance by segment, the industrial IoT is the biggest contributor for over 29% of the total revenue. However, industrial IoT was flattish year-on-year, mainly due to the China market slowdown. Embedded IoT increased 18% year-on-year, driven by strong demand in medical, automotive, smart factory and gaming projects. Applied Computing Group, ACG, increased 56% year-on-year, mainly contributed by medical projects.

Geographically, strong growth in North America, Europe, Middle East and African markets. For service IoT year-on-year grew 30%, driven by smart medical, smart city and also mobile DMS projects.

For the balance sheet, this is my last page. Both inventory dollar amount and turnover days declined quarter-on-quarter basis. As you can see, the third quarter inventory turnover days are 117 days, lower than 125 days in the second quarter.

We expect the inventory turnover days by end of this year from back to the Q4 last year's level, which approached 100 days. The overall progress right now is on track.

That is the financial briefing of third quarter '22 results. Now I hand over the time to President, Eric Chen. Thank you.

[Eric Chen, executive]

Thank you, Grace. Good morning, and good afternoon, everyone. Welcome to join the conference today. This is Eric, and I would like to start with some comments on the third quarter results, then followed by the fourth quarter guidance.

[indiscernible] in the third quarter was slightly better than our predictions. It was mainly due to the firm order, on-time delivery and release material shortages. In addition, due to the new Taiwan dollar depreciation up [indiscernible] 9 in TWD in Taiwan dollar terms was 4% ahead of U.S. As to the region performers, the China region still struggled due to the strict COVID control. As a result, the EBIT ratio has dropped below 1 from July, whereas the rest of the areas in the U.S., Japan and Korea still show a positive growth momentum.

Europe is another region we need to pay attention to. The energy price was sky high recently, which might slow down the overall business demand.

From the product aspects, IoT suffered from a weak demand in China. The China region accounted for 50% of IoT revenues, which led to a trend itself. On the other hand, the IoT, SIoT and ACG performance were good, mainly driven by the solid demand from the medical sector.

In terms of gross margins, the strong U.S. dollar and the product mix negatively impacted our gross margin performance compared with quarter 4 as strong U.S. dollar bringing a negative impact on our gross margin by over 1 percentage point, also higher-margin products in IIoT still were strong.

While [middle] margin product in EIoT and ACG were strong, leading to a 2.2% gross margin decline in the third quarter. Overall, with a [major top 9] and a reasonable control in all [caps], even the gross margin was below our estimate, the operating profit ended up in line with our guidance. So this is a comment regarding the third quarter.

And regarding the trend of the B/B ratio, as you can see on this page, the B/B ratio reached its peak at 1.72 in the fourth quarter of 2021. This year in quarter 1 and quarter 2, the B/B ratio was maintained at 1.26 to 1.24. Starting from quarter three, the B/B ratio was 1 to 0.87.

The reasons why B/B ratio dropped mainly are 2. The first reason is in the past several months due to the component shortage and the second, price adjustment. Most customers pressed their order in advance to get high priority of shipment with an adjusted price. There are -- the COVID control in China made the situation even worse. Our channel partners start to review their inventory and net adjustment due to strong market demand. Overall, the year-to-month B/B ratio was 1.07 close to our historical data of 1.08.

Next page please. Order book in the fourth quarter, even though the component shortage situation has improved a lot, the demand in China still has no strong signal for rebound and there is also conservatives active in the market. So we expect fourth quarter revenue to be between USD 550 million to USD 570 million a bit under exchange rate assumption of USD 1 to NTD 32.

In terms of margin, the fourth quarter gross margin is expected to be between 37.5% and 38.5% (sic) [39.5%]. And the operating margin is expected to be between 18% and 19.5%.

This concludes my comments. Thanks for your attention.

[Patrick Chen, analyst]

Thank you, Eric. So Grace, may I confirm that we will do the Q&A session directly without any prepared remarks first. So we'll do the Q&A directly. Sure. So now let's kick off the Q&A session. [Operator Instructions]

[Grace Liao, executive]

Actually, Patrick, we do have gathered several questions beforehand. And I...

[Patrick Chen, analyst]

Yes. Go ahead with the prepared Q&A first. [Operator Instructions] So now go -- please go ahead, Grace.

[Grace Liao, executive]

Okay. For the -- actually, this is the question list we gathered beforehand. For the section 1 financial and outlook related questions, may I invite Eric Chen, President, to answer all the questions from 1.1 to 1.5. Thank you.

[Eric Chen, executive]

Okay. Thank you, Grace. The first question is regarding the B/B ratio steady above 1 since August. So the question is really about the IoT industry [indiscernible] and 2023 outlook and key drivers and potential risk.

Let me try to answer the question. Advantech belongs to the IoT industry. As you may know, the IoT market covers a lot of industry sectors such as medical, factory automation, power and energy, et cetera. However, we informed that demand from China has dropped since July, especially in the factory automation sectors.

Our [indiscernible] sectors and the slow demand in the factory automation sectors leading to the IIoT being flat. For year 2023 as ESG becomes a more and more valuable topic and global aging population issues, the key drivers would mainly come from power and energy sectors, such as EV batteries, energy storage and related applications.

Medical sector also is a key driver in Advantech. We have a lot of design win cases in the U.S., China, Japan and Israel, which we secured ourselves in the next 2 to 3 years. Besides, network infrastructure is also a key driver as ransomware threat is still evolving.

As to the risk side, the high interest rate directly impacted consumer market in which the demand for retail, gaming and[indiscernible] sector will slow down. Also, the energy price in Europe has risen a lot, which will attract some critical component made in the Europe country may postpone production stages, which might cause the network of global supply chain issue again.

Besides, the impact of U.S. CHIPS and Science Act still need to be determined. We are worried about last -- it will lead to a downtrend in the semiconductor industry in a longer trend. The IEM sector in Advantech serve the semiconductor industry, and it's also a key driver in Advantech Taiwan, Korea and China.

And last but not least is strong U.S. dollar. As a result, we suffered the local currency depreciation, which might cause a high inflation rate, slowdown local market demand and increased employment costs. Taking our Turkish subsidiaries as an example, the local currency Lira has depreciated by over 50% compared to 1 year ago, that we must orderly adjust our employee salaries to cover inflation.

Besides, as I mentioned earlier, the strong US dollar also negatively impacted on our gross margins.

So [indiscernible] answers the key drivers still comes from the medical sector, the networking infrastructure and the IEM sectors. For the risk categories, a strong U.S. dollar and also the inflation rate [indiscernible] we have about and for the longer term, the U.S. CHIPS and Science Act still need to watch. So this is my answer for the first question.

And the second question regarding the quarter 3 GP and the guidance for the GP [indiscernible] also the have the chance to suggest. My answer is our margin performance is highly related to raw material costs and its channels. IIoT is our main margin driver with more than 50% gross margin.

Three go-to-market channels include general account, key accounts and channel with different gross margins.

In quarter 3, in addition to the product mix, 2 additional factors led to the gross margin below -- lower than our guidance. For the first factor, IoT performance was spread -- adjusted as we mentioned earlier. While EIoT and ACG, all had excellent performance. But product mix is the first factor.

And the second factor was the inventory provision accrual. Our inventory level was high. So we need to accrue the inventory provision expense based on our accounting policies, which also brought negative impact on our gross margin performance as well.

The next was New Taiwan dollar depreciation in the past and exchange rate was never an issue. However, unfair exchange rate of the New Taiwan dollar in the third quarter pushed our gross margin performance by more than 1% compared to the second quarter. So combined with the product mix, inventory provision accrual and a strong U.S. dollar [indiscernible], we failed to meet our gross margin guidance.

For the first half of 2023, we foresee weak demand in consumer market. Therefore, we have a great chance to optimize our raw material costs. Also, we expect the material shortage issue there is and a high price [indiscernible] in the market were no longer exist. Also, the inventory level will be lower than current status. So the inventory provision expense accrual will become a positive status. Thus, we have a great chance to improve our gross margin level in the 2023. However, the formal guidance will be released in the first quarter IR meeting in February 2023.

As to the ASP, considering the supply chain status impact and FX impact, we don't have a plan to lower our ASP in current stage. We still -- we watch the market closely to reflect a reasonable ASP if the key material price is sorted. So this is my answer for the GP guidance for the last year's outlook.

And the next question regarding the inventory situations and our outlook. For Advantech in-house inventories, the turnover days was 117 days with around USD 540 million in the third quarter, given that the impact of components shortage is no longer critical issue. The management teams started to reduce the inventory level below USD 500 million by the year-end and improve the turnover days by more than 10 days and the end up result were close to the 100 days.

For the inventory level of our channel partners, the different regions have different status. For example, in China, most of the China partners are selling Advantech's products such as IPC and I/O card. They are doing -- fast-moving business and intend to build certain inventory level to fulfill their customer needs in a reasonable lead time. So their inventory level compared with other regions is high.

In the third quarter, our China region booking was slowed because the China partners started to adjust their inventory levels. However, for our regions, this is not the case. In the U.S., most of our business are trading by sheer cut.

The channel business is relative more in Europe. Most of our channel partners are demand-focused system integrators and their net demand is highly relied on their ongoing projects. Therefore, they have no intent to build asset inventory due to their business nature.

Besides the inventory level of the 2 more partners, we also pay attention to our key project fulfillment. We a few projects that postponed their deliver schedule recently overall the project business ever schedule is still on the right path.

So in summary, our channel partner inventory is quite high in China are ready to review start from the quarter 3. Channel inventory in the U.S. and in Europe is less on an average level, because they have not any intention to build their asset inventory.

So this is a question regarding our inventory for Advantech side, also for the channel partners.

And the last question is regarding the CapEx. As you may know, Advantech is an asset-light business model. Our annual capital investment is not high. This year, our CapEx total in Advantech is USD 50 million, half of them mainly for [indiscernible] into campus project under the new buildings purchased for the service center in Korea. In the coming 3 years, the CapEx will be slightly higher than this year, mainly coming from 2 spending areas. One is the ongoing project at Linkou Phase 3 campus.

Now the construction work are nearly 60% complete. We will start all this declaration in the second half of the 2023. The total spending for Linkou factory is around USD 60 million. We expect USD 30 million to investment in the next 2 years.

The expanding area is the new regional headquarters in Southern California, United States, expect to be complete by 2026.

The total construction cost for Phase 1 is around USD 8 million, which includes the design fleet, hire cost and office furnishings. From now to the year 2024, the total expenditure is about USD 10 million.

Besides, we plan to have [SMP-9] installed in China and Taiwan next year. Right now, Advantech have 23 [SMP-9], 11 in China and 8 in Taiwan and 4 in Japan.

In addition, investing in automation tools such as IoT tooling, percussion equipment and enterprise software is also under plan.

As to the geopolitical risk this year, in our annual risk assessment with our management team, geopolitical risk ranging shift from the low-risk category to the high. Hence, we will refer the issue and have a formal discussion in our risk management committee in the year 2023 and sending our proposal to the meeting for further discussions. Once we have a clear decision, we will have a press release planned. So this is question -- answer regarding the CapEx and the geopolitical risk.

And the last question is regarding the impact of strong USD. Actually, the strong USD will favor outcome for [indiscernible] revenue since USD revenue accounted for 51% of our total revenue and sales figure assets the [indiscernible] consolidation revenue was 4% higher than in U.S. dollar.

However, our USD procurement portions accounted for [80%] with high-value key components such as CPU, memory and Flash [indiscernible] and paid in U.S. dollar. Therefore, the strong USD will have a negative effect on the cost of goods sold.

In terms of assets gain and lost, a strong USD will be a positive item in our YTM number and operating impact. We gained around USD 9.5 million, a strong U.S. dollar. So combined with the positive impact on the revenue and assets gained and a negative effect on the cost of goods sold, based on our estimate, the overall operating margin will decline slightly. So this is my answer regarding the strong US dollars. Thank you.

[Grace Liao, executive]

Thank you, Eric, for your comprehensive answer from the question 1.1 to 1.5. For the next section, for the RBU regional performance and also regional opportunity, I would like to invite President Miller Chang to answer question 2.1 to 2.3.

[Miller Chang, executive]

Good afternoon, Grace. Let me answer the 3 questions first. The first one, 2.1 is regarding for the end demand by provision. Actually, Q3 was not good. The demand was not good as you can see our booking. Although our [indiscernible] legal high booking China and Taiwan region is significant demand drop in Q3 and reflect our YTM due to the ratio of below 1.0.

However, from North America, Europe and North Asia and Japan and Korea, which is still remain positive. YTM, year-to-month, the booking numbers still better than our actual number. That's the reason, they are still positive. And also, we see some recovery in our October booking. This is a good sign for us but still too early to say to confirm that Q4 demand will all recovery. So this is to answer 2.1.

Regard 2.2, overall demand outlook in China. Actually, China demand is still down from Q3 -- actually, Q2 this year and continue to Q3 this year. Some positive demand can shift the market. Some positive for a market like medical equipment, building, technical, industrial equipment, manufacturing, IEM and also transportation or some infra networking. We have quite a big market potential and also strong position there in China.

Then, also some new areas, new market with high growth potential like green energy, the renewable energy, energy storage [indiscernible] for which are still positive in China. Then, of course, some weak market like safety, consumer machine and also our President just mentioned, our channel of distributor, some of them have cash flow issue, even high inventory issue. So they are still weak. And this is to answer the 2.2 question for China market.

Then for 2.3 about policies [indiscernible] China. The not specific party change at the country congress. However, some strategy and direction that we are executing like China net product, we have established the regional productive vision tool Shanghai campus to work with our China local CPU and silicon partners to offer the intellectual computing platform for China market to really execute the China chip, China season, China design by our team and the China and service from China [indiscernible] is to answer the 2.3.

And then also I expect to see that we have the [indiscernible]. Frankly, I don't have the correct answer now. Internally, we are working with our global regional leadership to set up the target [indiscernible] for next year. We may have a clear picture for overall market sales in later Q4 than we [indiscernible] are you that we hope to see Q4 in the positive trend. We'll watch how carefully to the market, especially in China, in our key customer and also our channel partner. That's the Feedback for 2.2 -- so that's a feedback for in 2.3.

[Grace Liao, executive]

Okay. Thank you, President Miller. So for the following 2 questions for the question 3.1 is the revenue breakdown by vertical and also the rough percentage between customers or consumer related and the public spending quality-related sector, I would like to pass the question to President Miller.

[Miller Chang, executive]

The new breakdown by vertical, our service market are very diversifying. Our service industry have seen more than 10 service industry, also different focus by different country or region. However, the major focus market are the high end in [indiscernible] section cementation. This is our IoT and ERP service market.

Network premium manufacturer versus EIoT and SIoT space in market. They are all big service industry from the fintech, contribute more than 10% revenue each. Others like [indiscernible] they're working military, et cetera. I don't have the exact number on mind, but they maybe contributed at least 10%. So they acquired diversify for check. Most of these are -- we might be in such a focus than B2B business and as you may have [indiscernible] our business model. So I don't think that we will make any consumer product to the market.

However, our customers in their business, mainly related to revising our in terms of PC to build up the factory equipment to support and to build up to manufacturing the consumer services. So then it gets from the impact from the consumption. So this is the answer for 3.1.

Then, also for 3.2, okay, the IoT sector is weak this year. I think the main reason of the impact for our IoT sector in China region, a big impact by China region. In China region, it contributed around 45% of the business to our IoT sector. But [indiscernible] you may also aware of the semiconductor industry and also we get the equipment maker are going down from the Q3. And it also impact our IoT sector business in North America.

And about the question, the part of the core application, yes, green energy, as I mentioned earlier, EV charging station, auto parts and also working, those markets have very focused to develop the solution to service because the new market application, our IoT and also SIoT sector and EIoT sector came up very focused developed in our product to sell in the emerging markets. We are very positive to enter those new areas. This is the answer for 3.2.

[Grace Liao, executive]

Okay. Thank you, Miller. I will pass this time to Patrick. I saw some questions in the chatroom.

[Patrick Chen, analyst]

Yes. So a couple of questions regarding third quarter results. How much is the impact from the inventory provision in the third quarter? And can it be reversed?

And also related to third quarter results, why does the strong U.S. dollar resulted in a noncash FX gain? Do you hold cash in USD? These 2 are related to the third quarter results.

[Eric Chen, executive]

Let me try to answer the question for the inventory provision. Yes, it is variable because our inventories were high. So the inventory age is getting older, so we need to accrue the inventory spend based on our IFRS in coming quarter. But in Q4, we have aimed to roll down our inventory to USD 500 million and the turnover days reduce to over 10 days. So the inventory provisions were reverse again.

For the third quarter, the inventory position in third quarter had a negative impact of around 0.2% compared with quarter 2. This is my answer regarding first question.

And a strong USD actually, just as I mentioned earlier, USD accounts for around 51% of our total sales revenue. So it's not realized. Again, it's just part of our nonoperating gains. Again from the realized, we have a larger portion USD on hand and a half of them is under the book value. So because all of our sales order just I imagine report is accounted for 51% of the AR, order receivables and order [indiscernible] most of the currency we adopted USD. So this is the reason we have no operating gains in the quarter 3.

[Patrick Chen, analyst]

The second question is regarding the progress on the software platform. How does that are tracking against your expectations, please?

[Eric Chen, executive]

Allow me to answer the question first and maybe Miller can give some color on these comments. I think for the software and servicing question, the focus region will be China, Taiwan, Asian regions. And the quarter, we are designed for the software solution to, internal, we call YIoT is around [indiscernible] this year and YTM achievement was on track.

Internally, we have set up some indicators to monitor their progress such as a number of revenue in an industrial app developed in market brand and number of core partner and codevelop. I think we don't have the intention to gain a lot of revenue from our software solutions, the main purpose to add value to our embedded computing platforms also try to help our solution partners get out their Industry 4.0 deployment like that. By doing so, it will accelerate our hardware platform setting and form entry barrier for the insert. So this is my point of view regarding the software business and the Solutions business. Maybe, Grace and Miller can add some comments on it?

[Miller Chang, executive]

Yes, just on the comments from Eric, our YIoT solutions business division gradually 4% on 4 areas like energy management system, IEMS, factory, also retail and machine management and basically consolidate our focus in the market [indiscernible] and we source market that by integrated our internal resources can also not only evolving results but also sales resources, okay?

Then, for them we will consolidate the leadership in China, a point that high the China YIoT business development. We see that we enter in Taiwan and China region, there are more larger consociated as to say, to engage our customers by providing support and engage our new business.

Then, overall investment, we are still relatively focused as I mentioned earlier, now we engineer resources in Taiwan and China, but also business development skills and resources in Asia region. The only one issue, I can say, not kind of make a big progress is in Western side, like Europe and also in North America. We did not see a big partners. We will push out maybe identify key markets, 1 or 2 and put some resources to tech the market first. Thank you for these questions.

[Grace Liao, executive]

This is great. I would like to echo Eric and also Miller's comment on our YIoT business. And also, there is a key message to deliver in our second quarter investor conference in early August that we are -- we would like to accelerate our YIoT business and also enter the switching model in the future, which will start to gather all resources in Asia and also Southeast Asia and focus on like a smart energy management solution in the facility, okay?

So our subscription model will be our focus area in the future and hope -- we are able to deliver like local and local solutions to our customers, which will be greatly lower the technical entry barrier from our enterprise customers. And we are hoping in the future to add more ARR annual recurring revenue from the substation business in the future. That is my and information on the business. Thank you.

[Patrick Chen, analyst]

Let's go with Gary first.

[Unknown Analyst]

Management, can you hear me well?

[Patrick Chen, analyst]

Yes, we can hear you fine.

[Unknown Analyst]

Okay. Regarding the B/B ratio, obviously, third quarter has hit the recent low. But if we look back into further history, how does that compare to the lowest point ever maybe during the global financial crisis. And usually, when we are at this kind of point, how long the low B/B ratio could last, please. .

[Eric Chen, executive]

Grace, can you try to answer the question first because I have no exact figures on my hand -- on my mind.

[Grace Liao, executive]

Yes. Thank you for Gary's question. I will try to answer this question. Actually, our average B/B ratio is around 1.08. And I think last year, as you can see in this chart, last year, in 2021, the BB ratio is unusually high due to the supply chain tightness and also the long lead time of the components.

So I'm trying to say that last year, the high B/B is not a normal level. And actually, this is the consequences of supply chain imbalance. And starting from this year, year 2022, the component shortage is getting revealed and also, we are gradually -- it's still the capacity expansion also in Taiwan and so the order fulfillment is gradually improved. So the B/B ratio is back to normal since beginning of this year.

And yes, the booking situation, especially in China market is kind of weak recently for more than 3 months and this is definitely the key indicator that we are going to monitor because we do see like a channel partner inventory adjustment is beginning in July this year and also trouble -- booking issue is also in the adjustment period recently. So we will quitely monitor the real demand in China and all the indicators like new booking behavior and also order could fall and also canceling indicators in China. Yes.

[Patrick Chen, analyst]

While we are on the topic, we have a written question, is it possible to get the B/B ratio by region?

[Grace Liao, executive]

For the public disclosed information, actually, we can only provide the company as a whole indicator, indicator is not the split by the region. However, maybe we are considering next year -- maybe next year, we will actually trying to -- the frequency for the B/B ratio will be adjusted from monthly disclosure to quarterly disclosure.

However, besides the overall B/B ratio in next year, we are considering to discuss the 3 major markets by different regions, okay? But in this current moment, in Q3, I don't have the specific B/B by region on hand. Maybe Eric and Miller can add more color on this question.

[Eric Chen, executive]

Yes. I have to discuss this topic before we will formally release our B/B ratio start from next year from monthly to quarterly, but B/B information will get more detail. So we will be breadk down B/B ratio by 3 major regions, for the U.S., Europe, and for China. We will do it by next year.

[Patrick Chen, analyst]

Do you have any follow-up or Gary?

[Unknown Analyst]

Yes, I do. So during '21 and '22, this has been a faster sales and profit growth years. Years before that since '15, the organic CAGR may be mid-single digit plus some [indiscernible]. So I'm just wondering in the last 2 years, is it purely the fast industry growth because of the supply chain issue or we gain some market share because we managed the procurement better?

[Grace Liao, executive]

Well, I will answer the question first and maybe Eric can add on more information. For the revenue CAGR for the past [10] years is around 10% for the company. And yes, for the first 3 quarters this year, our top line is reached like around 20% year-on-year growth, which is higher than historical level. I think this is mainly due to the recovery opportunities from the COVID and also the new applications for IoT, especially for the new energy, new input and like a smart factory upgraded opportunity.

So I think, yes, this year is a fast growth than before. And looking forward, we are maybe internal target, maybe this maybe a 10% CAGR in the future. But this also depends on the macro -- global macro situation and also the global trend, and we will adjust and also announce our occasional guidance quarter-by-quarter for concrete policy.

[Unknown Analyst]

Okay. Got it. And on looking forward, the next [indiscernible] let's say, do you think the industry has pulled forward the demand too much in the last 2 years such that the growth in the near term might not return to -- well, obviously not return to '21, '22, but possibly return to '15 to '20, which is like mid-single digit or flat because you just put too much forward, then now we have period where the growth has slowed to what we saw back in '15 to '20?

[Grace Liao, executive]

Well, I guess it's too early to comment on that, maybe Eric can give kind of more color on that.

[Eric Chen, executive]

Still early to say, but we have a very sharp demand on the -- just as I mentioned earlier, from the energy -- power and energy, from the medical sector, especially from medical, we have a great achievement in the U.S., in China, and in Japan as well. So also the net infrastructure sector shows a very positive forecast. So it's early to say that for the next year how the situation will be. So it's still too early.

[Patrick Chen, analyst]

We have 2 more written questions. Has the competition in China become more or less intense in the downturn? And what's the reason to keep the [synergy] and guidance in 4Q compared to third quarter, even though USD become even stronger in 4Q?

[Eric Chen, executive]

I can answer the questions about China competition. Actually, we do not see the big competition in our existing business, like our IPC, strong IPC position, our strong embedded position in China, we see no data big competition. So for the existing business, we see that furture is only about demand issue. Then most importantly, for the new business, the [indiscernible] business, they were supported by the government policy for [indiscernible] or some new emerging sectors like energy sector with power, infra, 5G, et cetera.

This will lead not only product development to meet up to the market, but also for the sales to engage focus our customers for new customers, new market absorption. So this I would think that we will really focus on those new business opportunities to sell the opportunity for future growth. However, the situation and the business the market is in some [indiscernible], okay?

So I think the most important is our internal product division and also our sales division, we can grow [indiscernible] purchase the new market in China. I guess, that's my answer.

[Patrick Chen, analyst]

Miller. And the gross margin guidance for 4Q, what are the drivers and why is this still in the same range in third quarter?

[Miller Chang, executive]

I think the main driver has to come from 2 factors. The first one, just as I mentioned earlier, the inventory provision expense will be reversed based on our inventory level. So this is 1 driver. Another driver is material shortage issue. Actually, we do a lot of spot buying in the great markets. The oil price is very high. So after the situation is getting better, the great market -- spot buying in the great market will no longer[indiscernible], which means the energy cost, material cost tend to set stable and sorting.

So another key driver is material cost become more reasonable than the quarter 3. So combined with 2 factors on the Q4 guidanc same as quarter 3, given the USD still stronger.

[Patrick Chen, analyst]

For the interest of time, we probably will have to conclude the call now. But before we go, I mean, Eric, Miller or Grace, do you have any closing remarks or key message for the investors to take away.

[Grace Liao, executive]

Well, I would like to thank you for the -- investors, again, for your participation. And if you have any questions, feel free send me an e-mail to the IR e-mail box. And maybe Miller or Eric, do have other remarks?

[Eric Chen, executive]

Thanks again for all who are participating and also the investors who joined today's earnings call. If there is -- again, if there is anything not clear from what we mentioned, we will provide this later on. Thank you for you joining today.

[Patrick Chen, analyst]

Thank you all for your participation. You all have a great evening.