Advantech Co Ltd
TWSE:2395
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Advantech Co Ltd
Earnings Call Analysis
Q3-2024 Analysis
Advantech Co Ltd
During the third quarter of 2024, Advantech reported revenue of TWD 14.9 billion, reflecting a 2% sequential increase but remaining flat compared to the same period last year. This stagnation in revenue is primarily attributed to declines in key markets, with North America and Europe experiencing year-on-year declines of 17% and 27%, respectively. Although Taiwan performed robustly with an impressive 18% growth, this was not enough to offset the drops from other regions.
Gross margins improved to 41.3%, a 1.2 percentage point increase from the previous year, driven by reduced material costs and a favorable product mix. Operating profit stood at TWD 2.45 billion with an operating margin of 16.4%, reflecting a 1.6% increase from the previous quarter. The improvements in margins suggest that Advantech is effectively managing costs even amid stagnant revenues.
For the first nine months of 2024, Advantech's total revenue declined by 12% year-on-year, totaling TWD 43.5 billion. Net income for the third quarter was TWD 2.26 billion, a 7% increase quarter-on-quarter but down 13% from the previous year. Looking ahead, Advantech provided guidance for the fourth quarter, projecting revenue between USD 480 million to USD 500 million. The expected gross margin for this period is between 39% and 41%, with operating margins projected between 14.5% and 16.5%, reflecting a cautious optimism.
While the North American market is expected to see a recovery with projected single-digit revenue growth driven by semiconductor demand, Europe and China currently exhibit mixed signals. The outlook for Europe remains uncertain, but signs of stabilization in China's market—previously down 4% year-on-year—are being noted with a potential for gradual recovery.
Advantech is focusing on strategic investments in research and development, particularly in the Edge AI sector, with an increase of 10% in R&D spending. Operating expenses rose mainly due to the introduction of employee stock options (ESOP), contributing about TWD 400 million to costs in 2024. Despite maintaining tight control over headcounts, the company aims to bolster productivity through innovations.
Advantech's book-to-bill ratio climbed to 1.07, reflecting positive trends in bookings and shipments. This ratio indicates that for every dollar billed, there is over one dollar in new orders, a signal of potential revenue growth in upcoming quarters. The healthiest outlook is noted in new design wins in the U.S., which have exceeded USD 700 million since 2023, suggesting a robust pipeline for future revenue.
As Advantech adapts to changing market conditions and shifting customer demands, the management expressed confidence in navigating geopolitical uncertainties and potential operational impacts from the U.S. elections. The company is determined to optimize local operations and supply chains while continuing to invest in broader market opportunities.
The anticipated merger with AURES is projected to increase Advantech's top line by approximately 4%, with projected revenue of around USD 80 million from AURES in 2026. However, AURES's lower gross profit margin may negatively impact Advantech’s overall gross margins by about 0.2%. The integration efforts are underway to realize synergies and reinforce sales across markets.
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Good afternoon, everyone. Welcome to Advantech's 3Q 2024 Earnings Call. My name is Derrick Yang. I'm the tech coverage analyst at Morgan Stanley. Today, it's our honor to have Advantech's senior management with us to discuss the 3Q 2024 results as well as the outlook into the coming few quarters. So with us on this webcast, we have CFO and President of General Management, Eric Chen; and also the President of Embedded IoT Group, Miller Chang. So without further ado, let me pass it to Eric for the prepared remarks.
Thank you, Derrick. Good morning, afternoon, everyone, and thank you for joining today's IR meeting. This is Mr. Eric Chen, CFO of Advantech. Please review the agenda. In second one, since press is [indiscernible], I will brief you regarding our third quarter 2024 financial results, then I will provide a business update and our guidance for quarter 4. And during the Q&A session, we are honored to have Miller Chang, President of EIoT join us to share additional insight and marketing trends with you.
As usual, please take a few seconds to read safe harbor notice. For the third quarter financial results, revenues in quarter 3 revenue reached TWD 14.9 billion, representing a 2% increase compared to the previous quarter, and it remained flat year-on-year. Gross margin. The gross margin rate improved to 41.3%, reflecting 1.2 percentage point increase year-on-year, primarily due to a reduction in material costs and favorable product mix. Operating profit was TWD 2.45 billion, resulting in operating margin rate of 16.5%(sic) [ 16.4% ], a 1.6% increase quarter-on-quarter, already was a slight decline of 0.3% year-on-year. And the effective tax rate was close to 18%.
Net income. Net income for the third quarter was reported at TWD 2.26 billion, showing a 7% increase quarter-on-quarter at a 13% decline year-on-year. EPS earnings per share for quarter 3 stood at TWD 2.61. For year-to-third-quarter 2024 performance, overall top 9 in the bottom line figures increased quarter-by-quarter, but there was still a significant year-on-year decline. In the first 9 months, sales revenue reached TWD 43.5 billion, representing a 12% decline year-on-year. Gross margin rate was 40.6%, an increase of 0.3 percentage points year-on-year.
Operating expense rose by around TWD 0.6 billion, mainly due to the approval of ESOP expenses. I will explain more details about response. Operating margins fell to 15%, a decrease of 4.1 percentage points due to weak performance. Our operating items amount to NT$ 1.4 billion. For the first 3 quarters net income was TWD 6.36 billion, down 26% year-on-year. Earnings per share were TWD 7.39. For original performance year-to-third-quarter revenue reached USD 1.36 billion, reflecting a 15% decline year-on-year. The major three markets, which account for 71% of the revenue [indiscernible].
North America was the largest contributors experienced a 17% year-on-year decline. Europe saw a significant decline of 27%. The U.S. and European region have postponed project and still demand in the logistic, gaming, and retail sectors. China market declined by 4% year-on-year, but customer demand is gradually becoming more stable and increasing.
In North Asia, the overall decline was 14% year-on-year. Japan experienced a 27% decline by Korea grew 10%. The Taiwan market demonstrated an impressive 18% increase, making it the best-performing region in the world. The industrial equipment, OEM, and semiconductor sectors mainly drive this growth. Emerging market overall declined by 9% year-on-year. However, momentum remained strong in Moscow and Brazil.
Let's look at the performance by SBG. Industrial-IoT accounts for 30% of revenue contribution and declined 4% year-on-year, mainly due to the more stable demand in China market, Taiwan and Korean market also represents positive growth. Embedded-IoT was down 19% year-over-year. ACG was down 14% and ICVG declined 24%. The three SBGs were all impacted by customers postponing their projects. SIoT declined 20%(sic) [ 22% ] year-on-year, three major sectors includes logistics, retail and health care, all shows negative growth.
Here is the [indiscernible] balance sheet overview. In quarter 3, the total inventory value was NT$ 9.9 billion, representing a decrease of around TWD 0.9 billion year-on-year. The turnover days of inventory were 105, which is a reduction of 11 days compared to the same period last year, where there was a slight increase from the second quarter. Among receivable turnover days were at 58, but comparable turnover days were at 67. Overall, the cash conversion cycle improved from 111 to 96 days year-on-year. This concludes the financial briefing for the third quarter results. The next second is the third quarter comments and the fourth quarter guidance. Let me add some comments regarding the third quarter results.
Our top line result aligns with our expectations by the gross margin and operating profit were slightly better than our guidance. Regarding the region performance, the U.S. and European market experienced slowdown in customer demand and project delays, leading to a high digit sales declines. Conversely, the Chinese market shows signs of greater recoveries with only one single digit decline. The markets in Taiwan and Korea performed well, posted share double-digit growth due to the strong demand for semiconductor and [indiscernible]. From a product perspective, we [indiscernible] with demand across various sectors, including gaming, retails, logistics and network security platform. However, if you look at our B/B ratio on the page, the value will state our bookings and shipments up -- are under, up, or trend.
Now let's look at the trend of B/B ratio across different regions. As the page shows B/B ratio for the third quarter was recovered to 1.07, other than the U.S. Europe grows by 16% and 23% respectively. Moreover, China saw a 7% current as B/B ratio remained above 1.0 is uptrend B/B ratio indicate a positive outlook for our revenue in the coming seasons. So looking ahead to the first quarter, we expect revenue to be between USD 450 -- USD 480 million and USD 500 million, assuming an exchange rate of USD 1 to TWD 71.7. Regarding margins, we expect first quarter gross margin to be between 39% and 41%, while the operating margin is projected to range from 14% -- 14.5% to 16.5%. This concludes my fourth quarter guidance, and thank you for your attention.
Okay. Thank you, Eric. So now we will start the Q&A session. We have gathered some questions from investors earlier and management will go through them first. And after that, we will take some questions from the line.
Okay. After [ purposing ] regarding the outlook of in the first quarter 2024 -- I guess, 2024 and the full year 2025, for items I mentioned, consolidated revenue will be between USD 480 million to USD 500 million and also, the gross margin is between 39% and 41% and operating margins between 14.5% and 16.5%. For the outlook of the entire year of 2025 it's still too early to project. The B/B ratio in October was higher than the third quarter at 1.07. So we have confidence that we have -- or started opportunity to [indiscernible] result in the first quarter of next year and also the formal guidance we have been released in the February 2025.
The key drivers -- because they have a question regarding the key drivers were primarily came from formation semiconductors, health care and energy and utility sectors. And then we break down by region for the fourth quarter guidance. In North America, a strong demand for semiconductor and support double-digit growth. Transportation, health care and video equipment [indiscernible] assures recoveries. So we can anticipate single-digit revenue growth in quarter 4. This is for North America regions. China [indiscernible] a recovery in energy, machine [indiscernible] and transportation where our semiconductor and health care agreement have seen declines. We project [indiscernible] single-digit revenue growth this quarter. And for Europe, transportation and industry equipment regime are booking to have a double-digit growth. We expect a high single digit revenue this quarter. In addition, the demand for the semiconductor in Korea and Taiwan remain strong, also the health care in Japan is recovering. So this is regarding the quarter 4 guidance; also the key driver of total growth.
The second question -- the second question is regarding all [indiscernible] because our sales actually underperformed but [indiscernible] remained at a high level, also questions regarding how the company to be effectively managing expense. So allow me to expand reason first. There are two main reasons for this increase in operational expenses. The first is related to the ESOP expense approval. ESOP stand for employee stock option grant. In 2023, we will issued ESOP resulting a total expense of TWD 1.2 billion and under IFRS regulation, we must accrue the expense from 2023 to 2028. And in 2024, the ESOP expense accrual reached to a peak of NT$ 400 million and were gradually at the current year-over-year. If we increase this expense, the OpEx interest rate is around 3.0%. So this is the first reason.
And the second reason is the revise in operational expense is our strategic investment in R&D, particularly in recruiting talent in Edge AI in software engineering and associate investment. This area has been an increase of around 10% R&D spend around NT$ 350 million year-on-year. For expense control, given the personnel costs accounts for 75% of our total operational expenses. Managing that account are crucial. Advantech has seen a reduction in our total head count by 0.8% on a year-over-year basis. [indiscernible] and marketing expense accounts for another 5% of our total expense and we have decreased by 4%. Overall, due to the approval of ESOP expenses, the investment in Edge AI R&D accounts for a large portion of the OpEx increase, even though we have reduced the total head count and marketing expenses, the total expense have still increased. In turn, we aim to improve our employee productivity head count, we review our OpEx regularly and for 2024, organic head count growth is still under strict control. Only a few key talents in the strategic area can be recruit. So this is the way we control our expense, actually, the head count is under real control, also the variable expense. The variable expenses are under control. But we have put more resources on R&D. Also, we have a large portion of the ESOP expense approval. So this is the reason why we -- our expense rate is quite hard.
For the question three, regarding B/B ratio to 1.1 in first quarter '24, and the design win and design status. As mentioned, our B/B ratio is 1.08 in October. Actually, it's a little bit close to 1.1. However, it's still a challenging to pinpoint where B/B ratio will return to 1.1 in this quarter. Our B/B ratio has been uptrend since the first quarter, and we anticipate it will continue in the first quarter. For design in and design win figures in the U.S. are very encouraging. Over USD 700 million in design wins have been accrued since 2023 and over 50%-55% of this account from a new customer and new projects. This figure was secured at U.S. region revenue in 2025 and 2026. And so we have a good outlook for the U.S. region next year.
Also for the average selling price at the beginning of this year, we met some price suggestion in China to strengthen our competition and their feedback from cost customers are positive. And more and more customers are returning to Advantech to buy our products because [indiscernible] is peers work [indiscernible] is a core issue for local emerging peers. And for other regions, there's no plan to adjust SP. So we have no plan to adjust SP except we already take action in China region and for design in, design win that [indiscernible] in -- promising in the U.S. regions. And further the number four questions regarding the capacities. Advantech currently have a quantity three SMP [indiscernible], 11 in China and [indiscernible] Taiwan, and four in Japan, but in the third quarter at utilization rate in China was below 80% and Taiwan was above 100% and Japan also was 95%. For the fourth quarter, the utilization related in China were up to 82% Japan and Taiwan region will remain the same.
For the CapEx in 2024 to 2025, we are currently working on two main projects. The first is a North America head office in South California, which is expected to be completed in quarter 3 of 2026 and total construction fees is around USD 85 million. The second project is the second manufacturing center in [indiscernible] in Linkou, Taiwan, which is expected to be launched in quarter 2 of 2028. The total construction fee is around USD 100 million. And besides, just a few days ago, the Board of Directors also approved the new Japan [indiscernible] plant project. The total construction pace might be around as USD 33 million and expect to be complete -- the construction in the year 2027. Level, the total CapEx will be around USD 80 million from 2024 to 2025, including the construction fee for the three main buildings and some production and R&D equipment upgrade. So this is regarding the [indiscernible] fee regarding each region and also the CapEx brand. For the following question regarding the RPU and SPU, I will have to Miller to have some -- to share some insight for the -- for our investors.
Okay. Thank you, Eric. So I'll answer the following four questions from 2.1 to 2.4 [indiscernible]. 2.1 is regarding for the EIoT business decline. Yes, the main reason for the EIoT revenue decline this year is our customer overstock issue, especially from last year second half to this year. As you may know, our EIoT business model are mainly focused on the key account design-in model. So in major regions, like North America, Europe, China and Japan our key customer or big customer service market like medical equipment, industrial equipment, those customers are suffering the stock -- overstock issue. This is the main reason, okay?
Then about the recovery. As Eric mentioned earlier, the U.S.A. and Japan, we will foresee to recover in 2024 -- 2025 next year. But Europe still not so clear. We may say stay nature, continue to upward grow for Europe. For second -- first half of next year, we still steady growth, and we'll have a better gross momentum for second half of next year. This regarding for the Europe region.
Let me talk about the second question, 2.2, for China market and also the competition. Yes, we will continue to drive the cost down, cost optimization progress to offer a more competitive product for China. This is for sure. The second, to establish a local supporting team, local growth team, for China PD. As you may know that we have the team -- put the team in Quinsai nearby Shanghai, about 200 people team from product development and also the R&D development. So China, for China, not only for production, but also for the design, manufacturing and production and also services were all kind of our local growth team. So this is the second action that we will take that already in progress.
So continue to drive the cost effective optimization and also to establish the local growth team to support our China markets, to our credit the action where we take already. Then also for the 2.3 question regarding for the demand visibility from U.S.A. and also Europe. Yes, U.S.A. has a good visibility. The design win, design in pipeline is -- so that's also the reason we can foresee a very good growth momentum for 2025 and 2026. Europe, as I said, I can only say it will be better than this year, better 2025 or better than this year, but maybe only slightly better in the first half, then full recovery for second half. This is what I can answer now, but the design in pipeline visibility, okay? For sure that -- in Europe, currently, every product division and also our sector are working very hard to connect with our customers to push more sign and design win partner.
This is regarding for the third question. And also for the 2.4 HAI contribution. Yes. This is very big topic and also important topic for Advantech about the contribution for HAI currently. But we -- I remember that we have been delivered the -- currently the HAI revenue portion for this year is around 4%. 4% portion for Advantech total revenue, okay? Then we are also very aggressive to set a target to growth, to make 15% to 20% contribution, by this year 2025 and 2026, okay? This is a very positive growth momentum and also forecast. There are some reason, as you may know, the top chip company, they are all ready, whatever, from the GPU of stand-alone MPU processing or GPU-plus-MPU integrated solution, the chip company are ready. The operations are ready. The main demand market, for example, like our exciting market from medical imaging processing or machine [indiscernible], they are our existing market that adopt AI technology into our Edge computing. The growth momentum is very, very significant, okay, and also some new markets, like global AI/ML market also starting to adapt our HAI solution. So we are very positive and also set a very good growth target for our team product division and sales team for next year. And this is regarding for 2.4 question.
Yes, allow me to add some color for the 2.4. From my point of view, the advantage of HAI Advantech [indiscernible]. First, as premier with HAI computing ecosystems, we have a strong relationship with NVIDIA MD Intel, Qualcomm and even a new player such as [indiscernible], so these are [indiscernible] strength areas. And second is the rich portfolio for Edge products. We provide a broad range of and capability of Edge computing. So we hold strong positions in the web and master technology across various HAI [indiscernible] solutions. And it serves -- is the diverse AI computing technology, including arm-based, [indiscernible] space, inner space. And [indiscernible] for now is a good design service that we [indiscernible] the integration of client AI application and [indiscernible] I just want to add some occurrence for the HAI advantage from [indiscernible].
Okay. Then 3.1 question regarding for our wise IoT software platform, let me answer the question first. Yes, we -- we have a team -- software team very, very focused on the wise IoT software platform together to our product line to support our customers, especially focused on some domain market, like you mentioned, about intelligent factory and also intelligent energy management system, IEMS, okay? This -- for this year, their domain portion is still very small. Very small, less than 1% Advantech total revenue. The revenue portion is very small today. But the growth rate, the growth momentum, especially for this year is very, very good. I give you example, until -- year to quarter 3, okay? Our iFactory solution business we have achieved more than 60% growth and also for our IEMS solution business, we have more than 80% growth this year. Very, very good growth momentum, okay, even though, like, the revenue portion is still small, but we have quite good confidence. And this year, we show a very good growth momentum, okay?
And regarding for the priority, I have to say the first of their priority from a business point of view is breakeven, okay? They need to breakeven the business. That's the major focus. Then for sure, we will continue to develop more solutions business. And iFactory and so IEMS is the current focus, and we are continuing to develop to provide more super solution together with our hardware platform to promote our total solution to focus on the IoT solution business. This is their focus.
And now also from my point of view, I will also add some colors for this topic. Actually, we -- just as Miller mentioned, we foresee a more robust demand for IoT this year, and particularly for IEMS IFactory solution with customers and use cases are in China, Taiwan and [indiscernible] region. And revenue -- is a total revenue question for wise IoT, this is around USD 10 million, USD 10 million, yes. It accounts for less than 1% of our total revenue. But the value of our wise IoT platforms relied heavily on our hardware, which is installed in IFactory and -- facility and infrastructures. Therefore, in most cases, the software is not sold stand-alone, but bundled with our web platform.
Also the essential purpose of our software is not to generate a significant revenue, but to sell more Advantech products, even in the long run, we still foresee the software platform will contribute only a single digit of our total revenue. But right now, yes, as Miller mentioned, the first priority is to breakeven for the software [indiscernible].
For the 2.2 questions regarding the MMA or the AURES. A merger with AURES will increase our top line by around 4%. The always revenue in 2026 is projected to around USD 80 million. So it will have increased our top line by around 4%. However, AURES' GP is below Advantech and its operating results were [indiscernible]. So it will bring a negative impact our consolidated GP and LP by around 0.2%, yes, only 0.2% [indiscernible] impact. And for AURES post-merger integration, we have appoint our SIoT VP MC Zhang as a CEO. A lot of integration tests are ongoing, including the new organization design, channel reinforcement, launching new sales incentive program and planned for below our two key strategic areas, including the first one is cross-selling synergies.
As you may know, AURES have strong sales presence in the retail sector in France, the U.K., Germany and the U.S., which complements Advantech retail sales network. We are many in Asia. The cross-selling synergy could exist for Advantech retailer products to be sold either through AURES and Advantech existing sales network. So this is why we do want to create a cross-selling synergy. And the second is regarding the project and operation synergies. Both [indiscernible] for POS and kiosk products and has established strength in the retail product sector is [indiscernible] a desire for POS and kiosk products can enrich Advantech product offering and design [indiscernible]. But on the other hand, AURES can also leverage Advantech core engineering capacity and manufacturing facilities to create additional synergies. This has a great chance to improve the gross margins also the OP margin as well. We have just started the first 90 days of the integration task. And the integration of the key test is on the right track. For example, right now, we can check and steady trace [indiscernible] speakers sales including booking number, shipment number and [indiscernible] in our business entering system, in our internal BI system. This will allow us to review their performance more effectively. This is regarding the GP and OP impact where around 0.2% in current situation. Yes.
So regarding for the 3.3 question that may answer it first, okay? It's about competition. Yes, there are always some our peer company. They're also competition, they show the growth and if they only focus on some individual market industry. For example, to focus on the medical market during the COVID period or also the material shortage, which can show the good growth momentum. Advantech, as you may know that we covered several vertical market, not only from some of the individual vertical market, especially we are lagging behind in some important market, like automation and also the industrial server, okay? Especially the automation industry. This is our traditional market, very important. And also industrial server, okay?
Then, of course, we realize the issue, we start to push the internal reorganization. So we call it a sector three [indiscernible] transformation. And originally, we have the business group, we had Industrial-IoT, Embedded-IoT, and Service-IoT. But now we made the decision to separate it, iSystem, iAutomation, embedded and iServices. The four sector will have the dedicated product sales force and also the focused leadership, okay, very important for our sector-driven transformation. We need to get back the leadership on our automation market and also the industrial server market.
Then more additionally is some new market initiative. We are in the Edge computing leader for many years and also AI -- the key technologies are already into the PC market and soon will enter our industrial market as well. So the new corporate vision and also a new theme for Advantech 2025 this year will be the Edge computing and Edge AI. This will be our full corporate vision and that are profitable invest more resources and also begin to drive the new direction. So competition is always there for Advantech, our product group and also sales team will go together as a sector to focus on the Target sector, whatever from the existing sector, as I say, from medical equipment, industrial equipment, to serve the market also some emerging market territory. We will put our resources on the new initial market and also the key technology for Edge AI. So this new initiative will support us to back to growth financial year 2025, okay? So this is the comment from me.
Thank you Miller. Maybe next from [indiscernible] from China. Yes. In China, we encounter a few local emerging player in competition. They have tried to gain the industrial market by providing [indiscernible] down price and consumer upgrade products. It did work in 2023. But as I note, their sales figures have declined a lot this year due to a quality issue. And many customers are retained to Advantech, who save more, reliable and who don't [indiscernible]. A lot of regions, the feedback from our sales has remained positive. We have no -- not lost any customers, key customers, even in a low season and a new design win and design in indicator shows promising signs these years, which will support our business growth in 2025 and 2026. Although we are in the recovery stage in China and an outlook of participants are still upcoming for the next 2 years. Yes. This is my comment.
Okay. Thanks, Eric and Miller for the comprehensive answers. Now we will open up the line for questions. [Operator Instructions] So maybe the first one from me is that I think in the past few days, O-I has been on this U.S. election. And I think the next few hours probably we'll see the final outcome. So I was wondering what would be the implications for Advantech in terms of your operations in the near term, what are your strategies in the mid- to long term on the U.S. election?
Let me try to answer this question first. Maybe Miller can add some color [indiscernible]. The outcome of U.S. election result is still not clear at this moment. I tried to remark when trying our President at United States from 2017 to 2021 it [indiscernible] a tariff on China. We can work with our clients over concern about the impact of the tariff. We transferred everyone 100 products, 100 models. They were produced in China to Taiwan, and the overall product cost increased by around 6%. But most times, we're waiting to absorb this transfer date. So the impact on Advantech was [indiscernible] this has happened in 2017 to 2021. Besides, we also acquired a first sale rule to minimize the impact of our tariff on our clients. Yes. So for the election result, I'm not sure who will win this elections, but forecast appearance, we are well prepared for the proper transfer from Taiwan to -- from [indiscernible] China to Taiwan or either to Japan because we have a unified EMS system, also the back-end ERP system. So it will take around 1 quarter, then we can prepare. We can start a product transfer from China to Taiwan to Japan or even a third-party outsourced manufacturing in Malaysia. So this is my answer.
Which we foresee that U.S.A. is a big country, also the -- actually the big revenue contribution to Advantech. Then since 5 years before ago, that we start to establish the sales office in North America, U.S.A. And also, you also heard that we have the big investment plan in Dustin, South California. We are building a new headquarter and also simply [indiscernible], then to fulfill our customer requirement. There's some customers, they are asking for the build product in South America. That's the reason we have that best investment plan there to service our key customer for industry requirement. So yes, for U.S.A. that we will continue to invest our resources, our people, our facility, our services -- upgrade our services to support our customer well, okay? As we discussed about reformation for our U.S.A. our business team currently their business progress very positive, very positive. They are encaged with our key account customer very closely to get a new project pipeline. So that's the reason, yes, we continue to invest in resources there, then also we foresee that our feedback and gross momentum on U.S.A. next few years. That's the answer.
Okay. Thank you, Eric and Miller. So our next question is from [ Roshie Chadum ].
Team, thank you for this very insightful presentation followed by the Q&A session. My first question was on our order book. I'm just curious, how do we calculate this figure, which we share? Given some of our businesses directly with OEMs and some is with distributors or system integrators. That's first question. And the third question is, how much is the typical conversion time from order books to booking our revenues in terms of months?
Sorry, can you repeat me the first question?
Yes. First question was, how do -- how do you sort of get visibility to calculate the order book number? Because some of our business we directly work with our OEM customers who directly engaged with us in place orders, while a lot of our business will actually go through our distributor partners, right? Where our distributors will sort of just buy off the shelf and stock with them and then eventually supply to customers?
Let me try to answer these questions. In our systems, we have the order created is called the bookings because -- for example, we have the -- how many amount order we received to date is we call the booking. And also, we have invoice shipping by this month by today's is called a shipment. So the B/B ratio is the -- is the actual order create in our system -- back-end system in our ERP system. So we have a very precise figures for the -- how many order amount we received to date and how many invoiced we have shipped to date.
So this is regarding B/B ratio. And for the design in and design win figures because this is just in the early stage. We have a sales methodology. For example, we give the quotation to customers and the quotation would be at 25%. And for the pro forma invoice, the quotation rate will be 50% in the quarter and during the same quarter, quotation there would be 75%, some [indiscernible]. So our design in and design win indicators is a leading KPI of course to foresee how many projects -- how many key income projects status requirements of our leading indicators. So we come -- we have on our B/B ratio to our investor, but our design in and design win indicator is still for internal reference on me. So this is very precise figures, not just predictions. It's real precise.
Also, we have a strong methodology to calculate how to define the B/B ratio, how to define the design in and design win. This is strong methodology. And for the design in and design win business normally the shipment will delay around 1 quarter or even 2 quarters. And the project normally were less than for 3 years. Yes. This is a normal case for the design in and design win business. I'm not sure I have answered your question.
No, I think that's -- thanks, Eric. I think that's very clear. I had a quick follow-up. Can I go ahead and ask that?
Yes.
I just wanted to get some sense of margins in different regions. So we know that China has been slightly challenged in terms of margins. But is it fair to say that U.S. will be the most profitable region, followed by Europe, and then China and other parts of Asia?
Yes. In China, actually, we have lowered our selling price around at 2%. Our legal book shows the China region declined 2% of our gross margin. But for the other region, the selling prices still remain the same. We also have cost reductions in our material side because along with the product cost, the material cost accounts for our product cost over 90%. The labor and overhead only accounts for 10%. So the material cost is quite important to Advantech. We have continued to drive the cost efficiency, also the material price cost reductions.
So this is the reason that we have a strong gross margin performance this year. Also, we consolidate all the plant in Taiwan. Just 3 months before we consolidated the Dongu plant into the Inco. Right now in Taiwan, we have only one manufacturing site in Inco. So this is the reason why we can maintain a very high gross margin even though we lower our selling price in China.
Thanks, Eric. So again, we are in the Q&A session right now. [Operator Instructions]
Let me try to explain regarding the sectioning because a lot of investors are very concerned about our strategy and path change for the set of driven. Let me try to expand. Firstly, we changed the name of IIoT, EIoT, and SIoT into iSystems, iAutomation, Embedded, iService sectors. So maybe start from next year, we will rework -- reverse our sales by top product to iSystems, iAutomation, and Embedded and iService sectors that are led by Linda. KC, our founder, also lead the iAutomation sector, me and MC respectively. Under the sector structure, each sector is compete with a dedicated product group, sales and marketing team on the headquarter side to support its development of product and solutions. Also on the region side, the sector [indiscernible], sales, [indiscernible], solution engineer and the marketing team also report to the sector. So this is regarding the first change.
The second change areas we established emerging business unit. In [indiscernible] side, we set up an EPO organization. This step include the HAI solar team, Advantech service costs, and maybe for the new emerging platform, new emerging technologies are designed for faster innovation and cooperation with sectors. This business unit will be into that and managed at the corporate level. And once that mature, we will dispatch them to the sector for day-to-day operation and management. So the second change area is we establish the emerging business in the [indiscernible] side. And the [indiscernible] change area is concerned about the common sales force, which include general account, e-commerce and channel. In the past, each sector build up and manage its own online channel sales in a different region. And in the future, we will set out a global channel and online teams in the headquarter.
In the region, we will consolidate each sector online and channel sales team as one team and a streamline approach will enhance automation and efficiency in our sales operations. So we will consult GA, general account, channel and e-commerce as one team. In headquarter side, we have [indiscernible] teams and region will consolidate to the one industry. So a lot of KPI and incentive structure are under design and discussion. So maybe -- in addition to current KPI of revenue profit and the revenue per head count, we will also establish the incentive program to boost current sector selling and increase client figures. So this is our second driven key changing areas and EPO and [indiscernible] remain the IIoT and SIoT, also the general sales sectors will consolidate, yes.
Thanks, Eric. So a final call for the questions on the line. Okay. It seems that there is no further questions. Eric and Miller would you like to make some closing remarks?
Okay? As mentioned, our B/B ratio continues to trend upwards quarter-by-quarter and our design win and design in figures are promising. Although we are see operating uncertainties related to the U.S. election results and geopolitical issues, we have confidence that we can achieve some strokes in our top line and bottom line few years. We gratefully appreciate your constant support to Advantech and thank you.
Thank you, Eric and Miller and everyone, for joining us today. We will wrap up the call here. Thank you. See you next quarter.
Thank you.
Thank you.