Advantech Co Ltd

TWSE:2395

Earnings Call Analysis

Advantech's Q3 Results and Q4 Outlook

Advantech's third quarter revenue fell to TWD 15 billion, a 12% QoQ and 19% YoY decrease, with gross margins improving to 40.1% driven by material cost savings and regional mix. Operating profit dropped to TWD 2.51 billion with a 16.7% rate, while net income fell 14% QoQ to TWD 2.58 billion. The U.S. and Europe saw declines, but Japan's industrial equipment and smart automation demand grew 22% YoY. For Q4, revenue is expected between USD 465-485 million, with gross margins predicted to range from 38.5% to 40.5%, and operating margins between 16% and 18%.

Third Quarter Performance Highlights

The company's third quarter revenue saw a decline of 12% quarter-over-quarter and 19% year-on-year, reaching TWD 15 billion. The reduction in revenue also affected operating profit, which decreased to TWD 2.51 billion, with the operating margin reducing from 20.1% last quarter to 16.7%, affected by higher expenses due to a smaller revenue base. Despite this, the gross margin improved year-on-year by 3.7 percentage points to 40.1%, benefiting from lower material costs and favorable regional mix. Net income fell by similar margins of 14% quarter-over-quarter and 19% year-on-year; however, earnings per share for the third quarter stood at TWD 3.01. Accumulated revenue for the first three quarters dropped by 4% year-on-year, though margin rates improved slightly.

Dynamic Regional Performance

Regional performance was mixed, with year-to-third-quarter dollar revenues declining by 10% year-on-year to USD 1.6 billion. While North America saw a modest decline and Europe a slight increase, China experienced a significant 20% drop due to consumption downgrades and weakened demand. In contrast, Japan outperformed with a 22% year-on-year growth, and North Asia saw a 5% increase. Emerging markets struggled, with a collective 24% decrease in revenue, but areas like India continued to show strong momentum. The company is focusing on global expansion and investment in innovative technologies as part of its long-term strategy.

Segment-Based Performance Variances

Performance varied across different Strategic Business Groups (SBG). While Industrial IoT (IIoT) decreased by 15% year-on-year due to the Chinese market slowdown, Embedded IoT observed a 4% increase driven by automotive, smart factory, and gaming projects. Revenue from Industrial Cloud and Video Group (ICVG) and Service IoT both declined, with 13% and 16% drops respectively, affected by high baselines and sector-specific slowdowns.

Strong Balance Sheet Position

Inventory levels have been effectively managed, leading to a reduction in inventory-to-asset percentage from 21% to 16%. However, due to decreased revenues, inventory turnover days increased slightly to 116 days. The cash and cash equivalents remain healthy at 27% of total assets, ensuring sufficient working capital for the company.

Fourth Quarter Outlook and Revenue Guidance

After subdued demand in the industrial market, the company anticipates a decline both year-on-year and quarter-on-quarter. Material cost savings have been realized, yet competition and an unfavorable product mix have put pressure on margins. The company forecasts fourth quarter revenue between USD 465 million to USD 485 million, with an operating margin range of 16% to 18%. Additionally, emerging countries such as Mexico and India are expected to maintain high growth rates despite revenue declines in specific regions.

2024 Prospects and Growth Drivers

The company is projecting single-digit revenue growth and stable profitability in 2024, with anticipated improvements in the second half of the year. Growth drivers will include ESG-driven demand, AI adoption for edge computing, and continuous demand within the medical sector. The company aims to address a shifting market through strategic initiatives, including tailored products for the Chinese market and other internal and external economic indicators.

Maintaining Margins Amidst Pricing Pressures

Even with aggressive local competition in China, the company plans to maintain its average selling price and gross margins. Positive factors include improved utilization rates and better product mix, with anticipated growth in IIoT. Nevertheless, the strong U.S. dollar and potential rise in transportation costs pose risks that could impact margins. Overall, the target remains consistent gross and operating margins for the next year.

Capacity Allocations and Investments

Capacity is strategically distributed with Taiwan accounting for 48%, China 46%, and Japan the remaining 6%. Over the next couple of years, significant capital expenditures are planned for production upgrades and expansions, particularly in Japan and Taiwan, with a focus on serving local and global markets by Direct Market Services (DMS). The company's capital investments underscore their commitment to meeting future demand and achieving operational efficiencies.

Commitment to R&D and Expansion in India

R&D investments will rise to 8% of total revenue as the company transitions from partner-centric to solution-centric operations, calling for more expertise in IoT and emerging technologies. Additionally, given India's economic growth prospects, the company is bolstering its capabilities there with new centers for design and operations, as well as tapping into the pool of e-commerce talent to support IoT platform development.

Earnings Call Transcript 2023-Q3

[Carrie Liu, analyst]

Thanks to everyone for joining today's call. My name is Carrie Liu. I'm the coverage analyst of Advantech here at Citi Research. Today, we are honored to have Eric, President of General Management; Miller, President of Embedded IoT Group; and Grace from the IR team with us to discuss Advantech's recent results and growth outlook. Grace will walk us through the financials first. And then after that, we will open the floor for questions.

Without further ado, I will now hand it over to Grace. Grace, please go ahead.

[Grace Liao, executive]

Thank you, Carrie. Good morning and good afternoon, ladies and gentlemen. Thank you for your time today. This is Grace Liao, the Senior IR Manager of Advantech. Please see the agenda. In Section 1, I will give [indiscernible] briefing regarding third quarter 2023 financial results. In Section 2, President, Eric Chen will share business updates and Q4 guidance. In Q&A section, we will also invite President Miller Chang to join us and share more insights and market trends to the investors. As usual, please take a few seconds to see the safe harbor notice.

For third quarter financial results, in the left side, third quarter revenue reached TWD 15 billion decreased 12% quarter-on-quarter and 19% year-on-year. Gross margin rate was 40.1%, improved 3.7 percentage point year-on-year basis, mainly benefit from material price soften and favorable regional mix. Operating profit was TWD 2.51 billion with OP rate of 16.7%, decreased from 20.1% in the previous quarter, mainly impacted by higher expenses rate resulting from a smaller revenue base. Effective tax rate was 17.2% lower than average due to tax exemption on dividend income. Third quarter net income reported TWD 2.58 billion decreased 14% quarter-on-quarter and 19% year-on-year. Earnings per share in Q3 reported TWD 3.01. In the right side, for year to third quarter revenue performance for the first 9 months sales revenue reached TWD 49.4 billion decreased 4% year-on-year. Gross margin rate was 40.3% improved 2.6 percentage point year-on-year basis. Operating expenses slightly improved due to increase in R&D, traveling and marketing expenses. Operating margin rate reached 19.1%, moderately improved year-on-year basis. Through nonoperating items, other than [indiscernible] booked TWD 178 million for FX gain. For the first 3 quarters, net income reached TWD 8.55 billion, up year-on-year also set company new records. Year to third quarter earnings per share reached TWD 9.98 share-based adjust after stock dividend of 2022.

Next page. For the regional performance, in terms of U.S. dollar year to third quarter revenue reached USD 1.6 billion declined, 10% year-on-year the major 3 markets accumulated for 71% of our revenue contribution as usual. North America is the biggest contributor, which is down 4% year-on-year, while Europe markets increased 1% year-on-year, drivers in North America and Europe, including smart automation, gaming, enterprise networking equipment. For China market declined 20% year-on-year due to recovery uncertainties and consumption downgrading and also caused and demand weaken in China. For North Asia, overall, increased 5% year-on-year and Japan market is the best performer enjoy 22% year-on-year growth driven by strong demand in industrial equipment and smart automation projects. For emerging markets underperformed with a 24% year-on-year decline. However, the momentum in India [indiscernible] remains strong. During the off season, of Advantech continued to strengthen the global presence and invest in forward-looking technologies to cope with a sector-driven strategy, we can share more details during the Q&A section.

For the performance by SBG, the industrial IoT accounts for 26% revenue contribution declined 15% year-on-year mainly due to China market slowdown and also the semi equipment weaken. However, the IoT GP performance also improved due to better regional mix.

For embedded IoT up 4% year-on-year, driven by automotive smart factory and the gaming projects. Industrial Cloud, the video group, ICVG declined 13% year-on-year due to the high base last year in cloud infrastructure and media streaming projects.

For service IoT declined 16% year-on-year both smart medical and retail slowed down by the positive growth in fleet management projects.

For our balance sheet, this is my last page. For balance sheet the dollar amount of inventory has been managed effectively, resulting in a decrease in the inventory to asset percentage already down to 16% from 21%. However, the inventory turnover days have slightly increased to 116 days due to the reduction in the revenue base. For the cash equivalents, accounts for 27% of our assets, indicating we have sufficient working capital.

This is the financial briefing of the second quarter '23. Now I hand over the time to President, Eric Chen, to share business updates and Q4 guidance.

[Eric Chen, executive]

Next page, please. Thank, Grace. Good morning and good afternoon, everyone. Welcome to join the conference today, this is Eric, and I would like to comment on the third quarter results, followed by the fourth quarter guidance.

Due to the weak demand in the industrial market across the low BB ratio starting from the first quarter, as you can see in the slide from the quarter 1 to quarter 3 or the PD ratio rose [indiscernible]. So the third quarter sales performance led to a 19% -- 19.4%, a decline year-on-year and 11.9% declined quarter-on-quarter.

On the margin side, due to an average of 4% material cost savings, we know we encounter our intensive price competition in the Chinese market and unfavorable product mix. Our gross margin in the third quarter was 40.1%. Year-to-month gross margins were 20.3%. The forecast is under control and operating margin were 16.7%, which meets our guidance.

For the effective tax rate in the third quarter, we got around TWD 150 million in tax-free cash dividends from [indiscernible]. Therefore, the effect tax rate was about 3% lower than the second quarter. As a result, the diluted EPS in the third quarter was TWD 23.01.

Regarding the region performance in the U.S. and Europe due to hot seasons and some key accounts postpone their [indiscernible] that region led to a 2-digit decline in the third quarter. In China, the booking was better than the first half average and the shipment aligns with our target. For the Japan and South Korean market, the Korean performance was spread in the third quarter, but year-on-year has declined by 16% due to low demand in the semiconductor and equipment users sectors. Japan market was on track and the reserve were good YTM with 22% growth.

From the region -- from the product group aspect, IIoT suffers on the Chinese market slow performers. China market represents about 51% of IIoT total revenues and a strong performance in China, resulting a 15% decline.

With a strong rebound in the gaming sector and project order and time delivery, IIoT maintains a 4% positive growth. [indiscernible] suffers from the medical project end of life and low demand in the retail market, which led to a 16% decline. This is regarding the SBG performance.

Next page. Looking forward to the fourth quarter, [indiscernible] suffer from a low booking in the quarter 2 and quarter 3, so we expect fourth quarter revenue to be between USD 465 million to USD 485 million based on the exchange rate assumption of USD 1 to TWD 32. In terms of margin, the first quarter gross margin is expected to be between 38.5% and 40.5%. And the operating margin is expected to be between 16% and 18%.

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

[Grace Liao, executive]

Thank you, Eric. Well, let's hand over the time to Carrie and maybe we can answer the Q&A section.

[Carrie Liu, analyst]

Yes.

Sure. Thank you very much, Eric, and Grace. We will now open the floor for questions. Management has kindly prepared several questions for investors as a preference. We will go through those first, and then we will open the floor for online participants to raise questions later. So first of all, on the financials and outlook front. The first question would be regarding the outlook for 4Q in 2024 and also whether the management can talk about more specific drivers for the RBU and SBU?

[Eric Chen, executive]

Okay. And let me answer your questions. For the quarter 4, the RAM projection is expected to be between 465 million and [indiscernible] just as I mentioned before, and a great margin between 16% to 18%. For a full year of 2024, there are no specific figures we can share so far. Our official guidance will be announced every quarter. But overall, we aim to have a high single-digit revenue growth with stable profitability in 2024. Again, we aim to have a high single-digit revenue growth with a stable profitability in 2024. Besides, due to the low BB ratio in the third quarter and the Chinese New Year holiday seasons revenue in the first half will likely remain slow. For the second half, we expect the performance will be better than the first half due to some project business being in the mass production and the deliver stage also at a high inventory issue should be gone.

And regarding the key driver of the growth [indiscernible]. Firstly, it comes from ESG-driven, new industry demand such as EV charging, energy storage and environment monitoring basically regarding the ESG-driven new business. Secondly, is the AI adoption for edge computer. We foresee more and more edge AI use cases in specific domains such as industrial AI-based visual inspections and the AIoT security platforms and et cetera.

And the last is the medical sector, we still have a lot of design win process coming from the medical sector. So 3 key drivers mainly from the ESG-driven business and the AI adoption for the edge computer and the medical sectors.

For our outlook in the fourth quarter since the booking was slowed in the third quarter, we expect revenue in specific region will decline as well. some of the emerging countries such as Mexico and India still have a great chance to maintain a high growth rate listed from the region at performs. So the operating margin was slightly lower than the strong quarters mainly due to 3 large events hosted in the fourth quarter. We just finished the IIoT WPC. WPC means, Walk [indiscernible] Conference last week and the AIoT will be host at the end of this month. Also the marketing expense will be slightly higher than quarter 3. So this is why the guidance in the quarter 4 has slightly declined. So this is my input regarding the question 1.

[Carrie Liu, analyst]

And then for your second question, it's about book-to-bill ratio. I think, Eric, you have briefly touched on the book-to-bill ratio. Anything you would like to add, for example, other than book-to-bill ratio, is there any other leading indicators that investors can follow and engage your end demand?

[Eric Chen, executive]

Okay. For the quarter 4 BB ratio, we expect -- we have slightly increased compared to quarter 3. And for the overall IPC and embedded computing market, I think a step change for the customer to consume their overbuild inventories. Also the global economic outlook is unclear. So our customers tend to hold their demand to postpone their projects. This is the main reason for why our BB ratio still in a low rate.

In the Chinese market, a lot of consumer confidence is rolled due to the real asset crisis, hence, some customers -- our customers downgrade their requirement and adapt low-spec solutions to overcome the difficult periods. We will keep monitoring these situations. In the meanwhile, our product team has also taken action and [indiscernible] the China market purpose products that can fit the local demand to boost the Chinese market, many adapt to China supply chain, such as China cord CPU, China LCD and fracturing memory assumption like that. So we already take actions to develop some China market purpose, China for China product to put the Chinese market demand.

For the indicator, internally, we have the BB ratio out, we have designed in a design win ratio, and we also address the new product and new customers' contributions as well. And for the internal indicator, we always reference and make of GDP growth in each country's PMI, CPI and China fixed assets investment. Yes. This is my answer.

[Carrie Liu, analyst]

Thank you, Eric. And then the next question will be about ASP. Investors would like to know whether you have any plans to adjust ASP up or down? And also, for the margins, how should investors think about the margin trends for both growth and operating margin for next year?

[Eric Chen, executive]

Okay. For the ASP trend, ASP means average selling price, we have more [indiscernible] pricing strategy in the China market due to the local competitions and the demand increase or other regions we did foresee and no pressure to lower our ASP. Regarding the GP and OB trend, we target to maintain a consistent GP and OP performance next year. The positive factor on the margin side, we foresee a better product mix with IIoT return to groups. This year, IoT dropped around 15% also IoT is our gross margin main contributors. So we foresee next year, IoT will return to growth. Also the utilization rate in the production side have a chance to improve. Right now, the pricing side utilization rate in China is around 75% to 78% only, in Taiwan is around 85% to 90%. So we foresee we can have a high single-digit growth then our utilization rate will be improved as well. So these positive factors on the margin side.

For the negative factors, SP softened in China, just as I mentioned before, and strong USD may impact our GP as well and the transportation cost my first is the concrete in the middle as expense. So if the company in the middle is our control the transportation cost might be a sky high. So this is another negative factor in terms of our GP performance. So overall, we will maintain a consistent GP and OP popular next year.

[Carrie Liu, analyst]

Next question is on capacity. Could you please provide an update on capacity by each region? And also, what would be the CapEx plan for 2024 and 2025?

[Eric Chen, executive]

Okay. The capacity allocation this year, Taiwan account for 48% with listed 48% regarding the production rate, reproduction quantities, China for 46% with S&T, SMD and Japan for the rest of 6%. In Japan, we have 4 SMD line. The utilization rate in the China plant around just I mentioned, below 90%. And in China, [indiscernible] is around 75% to 78%. And in Japan due to a local business first and the utilization rate was almost full. This is the situation in Japan. For the year 2024 to 2025 CapEx plant in Japan, we have our SMT production upgrade and capacity expansions and many for Japan's tier 1 customer and local requirements and local business. In Taiwan, we will start a second center construction in [indiscernible]. Our Board meeting just approved this project and mainly for the global market by DMS account. The second migration side is expected to be complete in the year 2026 or early of 2027. Besides, we will enlarge our outsourcing porting to [indiscernible] outsourcing partner for the Asian markets. So this is our production allocations. We will enlarge the Japan maturation capacities. Also, we will build up the second [indiscernible] site in [indiscernible] and expand the outsourcing point Malaysia's third party for Asian market.

[Carrie Liu, analyst]

Thank you. The last question for financials and outlook will be on R&D. Could you talk a little bit more about your R&D investment plan in the next 1 to 2 years? And also investors would like to know what would be the rationale behind the expansion of operations and also R&D centers in India?

[Eric Chen, executive]

Okay. Advantech continue to invest in R&D, especially in the borrowing areas for [indiscernible], for solution business because we are moving forward from a partner-centric company to the solution company. So we also need expertise in IoT verticals and emerging technology and [indiscernible]. And R&D expense is expected to account for 8% of our total revenue. In year 2022, the R&D expense accounts for 6.8% of the total revenues, in 2023 year-to-month it was 70.1% increased 0.3%. So we have the plan to enlarge our R&D investment to 8%.

For the India market, India enjoyed high GDP growth in 2023 to 2030 and will be the 1 fast growth market, so we expect our 30% growth in Indian market in the next 3 years. So we plan to expand [indiscernible] site capacity plant in India. Right now, we have 2 offices, 1 in Pune will be the so we design center to support AIoT edge [indiscernible] agreement and the AIoT vertical domain solutions and this is a service center we are look in Pune. And in Bengaluru, India operation and service center, we have built up the capacity for SKD and CTOs and MA is our plan to enough the Pune and Bengaluru capacities. Besides, considering the strong solar capacity in India, we also build up our e-commerce talents in India to focus on our IoT month commerce platform development. This is our plan in India for Pune is a [indiscernible] design center and for Bengaluru will be the operation and service center.

[Carrie Liu, analyst]

Thank you, Eric. We will now move on to RBU and SBU related question. First question would be the outlook for 4Q 2023 for the China market. And also regarding the recent export control from the U.S. government to China. Do you expect to see any negative impact for your business?

[Miller Chang, executive]

Right. This Miller. Let me answer the question regarding for 2.1 China business for Q4 this year. Actually we saw a small number of the order which should be shorter orders. Overall, the cover signal in China are still not clear. Then about the treatment issue, of course, the shipment will affect our corporate needs. But the impact on the Advantech business will be [indiscernible] very limited. There are 2 reasons. The first one, our current AI product from module to system and restricted this. And second reason is according to our AI internal or our AI product division, only 2% to 3% of our revenue come from the sales in China. So as I mentioned, the impact will be pretty limited. Okay. That's the answer for the question 2.1. Okay.

[Carrie Liu, analyst]

Okay. And then for the second question is about European market cover. When do you expect the market to recover? Is it going to be first quarter next year or even longer than that? And then also what about your strategies for the European market? Are you planning to adjust your ASPs? Or if there is any other new opportunities that you're seeing from the market?

[Miller Chang, executive]

Okay. Actually, it is difficult for me to predict when is the European economy will cover. If I can see our booking number keep the increase for the next 2 or 3 months, they will be more happy to share the positive message, right? So now still not so clear for me from the euro market recovery, then yes, of course, Eric mentioned earlier, we have not any ship plan to -- for the euro on the ASP adjustment, no, okay? Then yes, there are some new emerging market business [indiscernible] like EV charging impact, low bad, MR lager, autonomous mobile global, also smart agriculture, right? Those emerging market that currently we are not just invest resources in Taiwan from the product development, but also to invest the business and sales development in region. So taking a sample in Europe, I mentioned that EV charging go by market sector or our focus for next growth engine in Europe, which is very significant that we put the resources for this region to further grow our business in Europe. Okay.

[Carrie Liu, analyst]

I see next question is about Japan. I think Grace, in a prepared remarks talk about strong growth momentum coming out of the Japan market. Could you please talk more about the key growth drivers? And if there's any challenges that you're seeing for the market going forward?

[Miller Chang, executive]

Okay. Yes, this year, Japan is very positive. The business are quite good, driven by several verticals like medical equipment, better equipment and also Japan that regard the sales service checking system and gas system that also roll back application, okay? And so as the reason we foresee they will continue to grow this year.

Then you talk about any biggest challenge. I think the 1 this turnoff effect are the change in rate. But this is a rate issue is but we cannot come to, right? Because of our protection in Japan are more [indiscernible] year, okay? So the exchange rate the Japanese yen is keep decreased. So we may be considered to negotiate with our partner channel and also customer to adjust the quotation, okay? This is quite a challenge from external factor.

Internally, I do see some big opportunity instead of the challenge, okay? As I mentioned earlier that we will plan to construct our new AC Advantech service center in Kyushu, okay, to upgrade our services to our customers in Japan. Then together to upgrade our existing A and C Advantech Japan Manufacturing Center. Okay. Now we have 4 [indiscernible], then we will continue to upgrade the capacity there. Now the 50%, roughly the Japan revenue has come from made in Japan, [indiscernible]. So we can expect that we will invest the resources and our capacity to service high quality to provide high-quality or Japan reaching customers, where this is our continued investment direction and strategy in Japan, right?

[Carrie Liu, analyst]

And then the next 2 questions are actually correlated and about geological tensions. We've just talked about China, but what about Middle East and also the crosstrade relations as well as the U.S. What kind of the challenges that you are seeing due to the geopolitical tensions, do you have any plans to relocate your capacity further? Do you have any concerns about these tensions might potentially have a negative impact on your financials? And also lastly, specifically for the U.S. market, whether maybe any policy-driven projects or orders in the future?

[Eric Chen, executive]

Let me answer these questions. The impact of the U.S. elections is still not clear from our site. And regarding the geopolitical factors, they are to impact to Advantech. The first, as we shut down our Russia office in 2022, which led to a revenue cut down of around [ USD 50 million ] per year. This is the first impact. And the second is a few DMS customers. asking us to develop China plus 1 leveraging strategies to ease their concern about the Taiwan Strait political compete. This is why we plan to upgrade and extend our Japan [indiscernible] capacities and third-party [indiscernible] in Malaysia. So right now, all things on track. We have the plan to upgrade and expand our Japan mutation capacity, also the outsourcing to Malaysia progress is on track.

And regarding the BB ratios have declined in the U.S. is mainly due to our customer inventory is high. Also, the demand from the semiconductor sector is weak. Take 1 of our semiconductor customers examples. In last year, the revenue is around 16 million and this year, a downgrade to 2.3 million of 2.4 million only. It's a clear decline for the semiconductor.

And according to our data on hand, the design in and design win indicator in U.S. is healthy. And as you may note, the design in business accounts for the U.S. around 70% of total revenue. So we foresee the U.S. region revenue were growth positive in 2024. Normally, a design in case we take around 9 months to 1 year to complete the prone productions. So we foresee in the next year, a lot of parts of the business is in mass production and mass delivery stage. So we are quite confident that the U.S. will return to the gross momentum in the year 2024.

[Carrie Liu, analyst]

Thank you. We will now move on to the strategy and development-related questions. First question will be regarding to M&A. So as your peers are quite aggressive on M&A, what would be your actions and strategies in M&A for the coming years?

[Grace Liao, executive]

Let me try to answer the questions and welcome Eric to add on information. First of all, as a policy, I think Advantech is really engaged in pure financial investment. Our focus is to create synergy. Maybe is it technology-wise, we regional-wise where even in the customer were supply chain, to cope with the company's long-term strategy and also to complete our technology road map. And second of all, to our existing investment portfolio could be separated in 3 types. First of all, is the IoT supply chain and alliance, which is more focused in a listed company. And the second part is the co-creation and the domain [indiscernible] integrator and more like an incubation concept. And this is more in the business or technical partnership and the target would be more start-up and analytic company. And the third part is the VC or PE funds, we also leverage external experts to evaluate IoT opportunity in a local niche opportunity for us, including the markets in U.S., Europe, China, Asia, okay? So Well, going forward, actually, for the deal size, we aim to be more flexibility in the deal size to create higher synergy. Of course, we were seeking for the Board's approval for a matter of materiality. For the future focus, including like industrial IoT, connectivity and also like domain SI in the vertical, we are more focused and also including the candidates with strong AI capability. For example, in the early September, we already complete 100% acquisition of the [indiscernible], which is a U.S.-based global AI vision capture solution company. And through the acquisition, we are able to and the advanced semi equipment and also a medical high definition image area. So going forward, we will try to be more open mind in this kind of AI capability or high-end technology company to complete our technology road map.

[Eric Chen, executive]

Just 1 comment from my side. Our Board of director encourage Advantech management department to have a big deal in the M&A in the past year. We always do the small deals for the MMA. But for the future, if we want to reach our double revenue scores we need to go head to search for big deals, especially for the area or the HAI or the IoT new ESG-related vertical application area for something like that. So this is my comments.

[Carrie Liu, analyst]

Thank you, Eric and Grace. Next question is about HAI. So investors would like to know what kind of products or applications that you will be providing for HAI? And how should investors think about the revenue and profit contribution in the next few years? With the competitive landscape be very different for HAI versus industrial PC?

[Miller Chang, executive]

All right. Let me answer the question first and then maybe everything can support, it. Yes. Our duration for the HAI is trying to support our edge devices or edge computing to upgrade AI capability. So the offerings will start from that we are providing the AI acceleration module to AI interest system than to AI, machine learning and change system, okay? Those are on the hardware portion. And also, we provide HAI switch solution. The way the case implicated with our platform to our customers, okay, to speed up the AI deployment. And then regarding for the revenue expect, now the revenue to say the good news still a very low single-digit percentage of Advantech total revenue, quite low. But from -- we see the growth momentum. The requirement is quite high. So if you say the 2024, 2025 that we may expecting to achieve the more high single-digit percentage of our total revenue. The event can double digit at 10% more of our total revenue. That's our expectation that we are in on that.

Regarding to the competitive landscape, I have to say, as I mentioned that we are trying to support our extending customer is busy service sector to upgrade their edge computing to AI capability. So roughly 50% of our business will come from our existing edge computing system IPC system market, okay? And the 15% will come from the new location developer segment, okay? So from the existing market, our current service market, we'll keep upgrading since our customers to upgrade, support customer upgrade their AI solution, that continue together with our new customer, new partner in different of the area, especially from emerging market to support their AI solution development. So that's the quick answer for me.

[Eric Chen, executive]

Just 1 comment from my side. We just completed internal word for -- regarding our EBO, EBO means emerging business opportunity of Advantech by year 2030. And the top slide, I'll just list for your reference, all our management team have highly consensus. The first 1 were industrial AI solution. And the second 1 is industrial AI platform and [indiscernible] smart transportation and first is energy storage solution and the last is environment monitoring. So we define this by category as our growth engines. And for the AI, it accounts for the #1 and #2. So far, I think the revenue from the revenue -- in terms of revenue is around 80 million contribution so far. But for the future, I believe it will become a rush portion of our -- 1 of our solutions accomplished with the edge computing. So we are have areas we have bright on the AI adoption, especially in the edge AI will gradually extend to the edge computing and for the different domain focus specific for different domain purpose. This is my comment.

[Carrie Liu, analyst]

And then the very last question is about the business update of EMS business and software business as well as whether there will be any indicators that investors will be able to track the revenue contribution or the solution.

[Miller Chang, executive]

Yes. Let me answer first. we have some progress regarding for the question for EMS business, the Intergen energy management system and solution. We have some progress in Taiwan and China, okay. [indiscernible] we performed with our vice IoT plus services, with the partner and customer application put together as a solution. They our focus customer is to main focused system we call [indiscernible]. And the indicator for checking, I have to say that they contribution is very, very small and for the moment, 71% mix, very small, very small number. The team still have a long way to go. And on the other side, besides for [indiscernible], we also have a high factor industrial factory solution. is not another focused segment that we are currently very dedicated resources, okay? We have some technical technology update. They are working with Microsoft closely by leveraging their generated AI technology into our SRP solution the Gen AI, both factory and IMS solution are gradually introducing the GP technology and upgrading our wise IoT services. Where I see this is maybe a break-through [indiscernible] point of view and provide a suitable solution to our customer. So at present, the main market progress is still in Taiwan and China and other regions still need for the breakthrough. So this is my update.

[Grace Liao, executive]

Any add-on information from Eric?

[Eric Chen, executive]

For the [indiscernible] we call include [indiscernible] and inside APM assumptions like that. We internally, we have around 30 minutes quarter, but actual rate so far is still [indiscernible]. So just mentioned the revenue contributions is low 1% below 1%. And for the subscription rate, as I know before, it's around 200 above VIP subscribe our voice IoT platform, our industrial IoT platforms. And so far, I don't have their updated figures that we can share these figures after the [indiscernible].

[Grace Liao, executive]

Thank you, Eric. We think we answered the questions which is gather beforehand. So maybe we can hand over to Carrie and open for Q&A from online investors and also overall or even though the chatbox.

[Carrie Liu, analyst]

[Operator Instructions] If there's no questions from investors, I would like to check if Eric or Miller would like to share closing remarks before we conclude the call?

[Eric Chen, executive]

Yes, this is Eric speaking. I think year 2023, it's a difficult year to Advantech. We encountered the third time a revenue declined in the past 4 years. For the next year, we have some positive reasons such as we have a business delivery in the next year, especially from the U.S. region. Also for China, we do foresee the booking number is on the right direction. So we -- the revenue performance is on track so far. So we have -- I think the China region we are gradually getting better. This is our expectations. So for the product side, we will more work on the edge AI adoption and some ESG-related new and business developments Also, we have the plan to consolidate our marathon side. We just moved the Donghu plant into [indiscernible] migrating [indiscernible], we will consolidate the operation plant in Taiwan together to train our process and improve our operation efficiency. I think which can reflect our OP and margin in the next year. So this is my growth comment from my side.

[Miller Chang, executive]

Welcome and I can add. Actually, this year, even though the revenue business is some decline of profit is still very positive, okay? Then yes, event we are focusing on the content business. So -- every project product design in is still our focus for next year and year after continued growth. Unfortunately, we did not lose any key customer this year. And also we continue to have more and more new project designed in from the key region like 3 big key region, China, U.S. and Europe and also for Japan and Korea. This is a very positive sign than those new product budget design in for sure, will support our future growth continuously, okay? So this is our focus to provide the compute then plus the AI and IoT solution to our customer to service our service market. This is our commitment for long term that we will definitely put all the resources from the product vision, Taiwan and also our region sales region [indiscernible] to service our customer and market. That's our -- this is my comment. Thank you.

[Carrie Liu, analyst]

Thank you. Thank you very much, Eric and Miller for the closing remarks, and thanks to everyone for joining us again. This concludes today's call. If you have any further questions, please feel free to reach out to Grace from Advantech or Carrie, myself at Citi. Thank you. See you next time. Bye-bye.