BizLink Holding Inc
TWSE:3665
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BizLink Holding Inc
Earnings Call Analysis
Q2-2024 Analysis
BizLink Holding Inc
Bizlink has demonstrated resilience in its recovery from the post-COVID overheating and subsequent destocking crisis. The management emphasized that the worst is over and they anticipate a gradual recovery bolstered by efficiency gains and favorable product mix, which are already enhancing gross margins. The company's sales have begun to rebound, indicating a recovery momentum driven by productivity improvements.
The earnings call highlighted key performance dynamics across various segments. Significant growth was noted in IT DataComm, which achieved a 15% quarter-over-quarter increase in the second quarter of 2024, reflecting strong demand in the high-performance computing (HPC) sector. On the other hand, the Automotive segment faced challenges with a 34% year-over-year sales decline, which the management attributed to ongoing industry down cycles and external economic pressures.
HPC is poised to be a major growth driver for Bizlink. The segment's sales mix has escalated from 4.7% in Q1 2019 to 15.5% in Q2 2024, a 7.5x increase. The guidance points to a 55%-60% year-over-year CapEx growth among U.S. cloud service providers (CSPs) for 2024, which is expected to directly fuel Bizlink's HPC sales. Major investments from CSPs into AI data center infrastructures are anticipated to provide significant opportunities for Bizlink's products.
Bizlink is preparing for its next growth phase with a strategic acquisition of Easys, worth EUR 51.5 million, expected to close by mid-September 2024. This acquisition is aimed at enhancing Bizlink’s capital equipment exposure during an anticipated multi-year upcycle in the semiconductor capital equipment market. The management underscored a focus on acquiring businesses that strengthen market capabilities and enhance profit generation.
The financial results showcased notable improvements, with a gross margin increase from 21.92% in Q2 2023 to 28.11% in Q2 2024. Operational expenditures have been effectively controlled, generating an operating margin of 11.42%. With a year-to-date earnings per share (EPS) increase of 44%, reaching TWD 9.69, it indicates a strong capacity for profitability despite various market pressures.
The call maintained a conservative outlook for the automotive segment, which has faced substantial pressure from high consumer price inflation and a slowdown in electric vehicle (EV) adoption due to subsidy withdrawals. Sales declines may stabilize by the second half of 2024, although the segment now represents a smaller footprint within Bizlink's portfolio. The company is actively pursuing transformation efforts within this segment to offset these challenges.
Bizlink continues to enhance its operational footprint in North America and Southeast Asia to meet rising local demand while reducing supply chain risks. The construction of new production facilities in Indonesia and Taiwan is expected to bolster local operations, likely producing operational benefits by late 2025. Additionally, the strategic focus on expanding into high-value markets aligns with ongoing trends in globalization and regional demand adjustments.
Bizlink remains committed to sustainability, as indicated by substantial reductions in greenhouse gas emissions and energy consumption. The company aims to increase green revenues, which now compose 17% of total sales, along with efforts to enhance corporate governance. Business transformation initiatives reflect a deepening commitment to environmental, social, and governance (ESG) benchmarks.
Despite navigating a challenging macroeconomic landscape, Bizlink has demonstrated financial stability propelled by ongoing operational improvements. Positive free cash flow for the seventh consecutive quarter supports their strategy of deleveraging and enables strategic capital deployment towards impactful growth initiatives. Management maintains that cash management enhancements will lead to further operational improvements and growth opportunities.
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Good afternoon, everyone. Welcome to Bizlink's Second Quarter 2024 Earnings English Conference Call. This is Mike Wang, Investor Relations Manager. I am joined by Roger Liang, our Chairman; Felix Teng, our CEO; Florian Hettich, our COO; and Charles Tsai, our CFO.
Our results were just released and are available on our IR website where you can download the latest earnings release material as well as access them from MOPS.
This 1-hour call will start with Felix providing the corporate highlights before switching to Charles to share our latest financials and then end with Florian giving our operational highlights. I will then open the floor for participants' Q&A before concluding today's call.
Before we continue, please kindly be reminded that today's discussions may contain qualitative forward-looking statements based on our current expectations, which are subject to significant risks and uncertainties and may cause actual results to differ materially from those contained in these qualitative forward-looking statements. We are not obligated to update these statements, which are to be used for information purposes only. We will not provide any quantitative forward-looking comments. Please refer to the safe harbor notice in our earnings deck for more details.
I would like to remind everyone that today's call is being recorded. This recording and these prepared remarks will be uploaded onto our Investor Relations website within 24 hours after the conclusion of this call. We sincerely appreciate Yuanta Securities for hosting today's call.
With that, I will turn the call over to our CEO, Felix.
All right. Thank you, Mike. In terms of business diversification, the execution of our 4x4 strategy over the past few years have successfully led Bizlink out of the post-COVID overheating and subsequent destocking situation that many companies are still tackling. Our results show that the worst is over. Our gradual recovery will persist with productivities and efficiency gains, as well as favorable product mix, boosting our gross margins.
IT DataComm recorded its second straight QoQ growth, rising 13% QoQ in first quarter 2024 and 15% QoQ in the second quarter. As HPC continues to grow post our sales category reorganization. EV led our prior growth phase and HPC will lead our next one. Growth will accelerate as new data centers are built and filled in with AI reps. This shows our [Technical Difficulty] ability to adjust to market rate changes and strategic shifts by being able to identify, address and benefit from new growth drivers.
Industrial already toughened -- troughed and has since been bouncing along the bottom. It is looking to grow again, initially driven by Capital Equipment and by Tailor Made Products, as Factory Automations and Healthcare need more time to bottom.
Electrical Appliances grew to become bigger than Auto for the first time in recent history, given diverging business conditions as EA benefited from stronger demand. Auto remains under pressure as industry down cycle persisted. There are initial hints of a potential bottoming out appearing of that we are keeping our conservative view for now.
The global operating environment remains challenging with rising geopolitical and macroeconomic risk, but our strong institution will continue to show through.
Our QoQ sales growth, gross margin improvement, stringent operating expenditure and spending controls, debt payback, lowering of inventory and accounts receivable, and positive free cash flow are all evidence of this.
Our healthy cash balance give us more room to make high-impact strategic moves to allocate capital for various growth projects, engage in M&A, and to continue to deleverage while rewarding our long-term shareholders for placing their confidence in us.
We strongly view that the semi cap industry as being one of the key enablers to fulfill tomorrow's computing needs. HPC and Capital Equipment sales represented roughly a quarter of our second quarter 2024 sales.
We are therefore excited to announce that our Board of Directors have approved our latest deal to acquire Easys s. r. o for an enterprise value of EUR 51.5 million. This is roughly the same size as the enterprise value of our EA business when we acquired it in 2017. We anticipate signing the definitive purchase agreement to wholly own Easys before the middle of September 2024.
The semi cap industry is gearing up for the next up cycle. We are preparing to maximize our gains here to realize above industry growth over the next 3 to 4 years. Easys has a similar business model as Speedy Industrial, which we acquired in 2020 and had a similar enterprise value. We have been focusing on addressing the gross high-value a box build and system integration demand from our semiconductor production equipment customers since then. This latest acquisition will add to our Capital Equipment sales exposure ahead of the upcoming multi-year upcycle, which Florian will get into later in this call. We have issued a press release and file an announcement on MOPS to share initial information on this deal. More details will be provided by our IR team after both parties sign a formal agreement and we close this deal.
In terms of footprint diversification, the execution of our 4x4 strategy over the past few years also led to select market share gains as global supply chains decoupled and become more localized. This trend will not reverse and is in fact quickening as protectionist government policies emerge, which may mean high tariffs and export-import restrictions.
We continue to rationalize our footprint in 2 major regions. We are enhancing those in North America and in Southeast Asia both in terms of capacity and capabilities to fulfill more of our customers' demand.
Global brand-name customers are looking to their global suppliers to reduce their risk while servicing their need and to give more and higher value wallets share over the long-term.
Our 2 new sites, one in Batam, Indonesia, and one in Tainan, Taiwan, have since finished construction, we are in the process of moving equipment with pilot production to begin in early 2025, once all certifications and qualifications are passed.
We aim to tap into the strong local R&D talents and gain industrial sales exposure at our Tainan site and to tap into a growing regional economies and gain IT DataComm and industrial sales at our Batam site.
We are also aiming for greater site utilization and stronger localization of production at our Penang, Malaysia and at our Juarez, Mexico site to share resources and cost more evenly between more business. This effort will take time and we may see some initial benefits from as early as late next year. They have vital roles to play in our global footprints. This will provide our global customers with more robust production location options. It will also result in improved profitability at those 2 sites.
Our latest M&A target is in Eastern Europe. They will add to our regional ability to fulfill semi cap demand there by adding box build and system integration solutions to our leading-edge high- vacuum, low-outgassing cable solutions.
We look to assure existing and future customers of our resilience and long-term viability despite various challenges by innovating and remaining competitive as their preferred long-term partners. We began to disclose quality regional sales mix from last quarter to give everyone an idea of how our regional footprint is changing over time.
Noteworthy ESG milestones, we recently released our seventh CSR report showing our deep multi-year commitment toward achieving greater sustainability despite our smaller market capitalization.
Our GHG greenhouse gas emission intensity has more than halved since its 2019 peak.
Our energy consumption intensity has fallen more than 26% since its 2018 peak.
Our water consumption intensity has also more than halved since its 2018 peak.
Our FTSE-Russell defined green revenues continue to increase, rising from 8% of total sales in 2019 to 17% in 2023, this ratio will continue to grow over time as we grow ourselves. Although the absolute value of our donations dropped our donation as a percentage of our net profit continue to rise and is slowing inching toward 1%.
Our efforts to achieve a zero-accident rate for our global staff to provide an optimal work environment began in 2019. Our incident rate since has more than halved. We have been rated by the TWSE in their annual corporate governance assessment for the past 9 years in their top 20% category or better, only missing their inaugural year back in 2014. We target to consistently rank in their top 5% category, which we have achieved 3 times.
We aim to publicly disclose more of our key corporate financial, and operational updates through our award-winning IR team every quarter.
Finally, we recently released the second version of our code of conduct and periodically offer relevant online learning courses and in-person training sessions to promote employee integrity and talent building.
In terms of corporate culture update, various group-wide efforts to update our brand image over the past year have resulted in the emergence of -- and rolling out of unified global corporate culture. We have revised our corporate slogan from Interconnect Made Easy to Where Possibilities Connect to better reflect Bizlink's updated purpose and mission. This will serve as a permanent expression of what Bizlinkers aspire to be a commitment to achieving connections to bring our customers' visions to life.
There are no material changes to our core value, integrity, customer orientations, innovation, teamwork, and sustainability, which was renamed from environment protections.
This core values make up our brand DNA, which we see as being customer-centric, being an impact maker, and relentlessly advancing in our effort.
We also introduce our leadership principles. The goal is to find new talent and cultivate them into tomorrow's leader to maximize long-term value of for all our shared stakeholders.
Our customer value proposition is 0 distance service in proactively enabling our customer future visions through our perpetual performance optimization.
Many follow-up efforts are planned in the coming year, including revamping our corporate website. We are eagerly looking forward to progressing along this roadmap.
Charles will now provide updates on our latest financial takeaways.
Okay, thank you Felix. Let's look at our income statement first. Our [ quarterly ] sales cap is slight QoQ incline as our business continued to slowly recover as we enter further into our next growth phase. As Felix mentioned earlier, the benefit from our ongoing efficiency and productivity improvement and increasingly favorable product mix are flowing into our P&L.
Our gross margin improved from 26.34% in the first quarter of 2024 and from 21.92% in the second quarter of 2023 to 28.11% in the second quarter of 2024, showing both quarter-on-quarter and year-on-year improvement.
Our persistent control in OpEx, which have averaged about TWD 2 billion since the first quarter of 2022 when we began consolidating INBG's financials led to operating margin to rise to 11.42%.
Non-OP was marginally positive while our tax rate fell to 32.69%. We achieved initial progress in optimizing our global tax structure.
We further lower our open foreign exchange position from last quarter. This will help us reduce the volatility in our net profit from rising geopolitical tension-induced foreign exchange impacts.
We saw ECB conversions into our common share toward the tail end of the second quarter of 2024, and we saw more quarter-to-date so far as announced on MOPS.
The second quarter 2024 EPS rose quarter-on-quarter and year-on-year to TWD 6.13 and is at the highest level since the fourth quarter of 2022 TWD 5.83, while the first half 2024 EPS is TWD 9.69, which is up 44% year-on-year.
On product sales, looking at the second quarter 2024 first, IT DataComm sales rose by 15% quarter-on-quarter or 8% year-on-year and accounted for 23% of total sales.
HPC sales rose by 15% quarter-on-quarter or 32% year-on-year and accounted for 65% to 70% of segment.
Our Industrial sales were flat quarter-on-quarter and year-on-year and accounted for 40% of total sales.
Tailor-Made Product fell by 3% quarter-on-quarter or 16% year-on-year and accounted for 20% to 25% segment, while Capital Equipment rose by 14% quarter-on-quarter or 32% year-on-year and accounted for 15% to 20% of segment.
Auto sales fell by 19% quarter-on-quarter or 34% year-on-year and accounted for 18% of total sales.
Combined EV, Silicon, and Charging fell by 23% quarter-on-quarter or 38% year-on-year and accounted for 70% to 75% of segment.
Finally, EA sales rose by 26% quarter-on-quarter or 13% year-on-year, and also accounted for 18% of total sales.
IT DataComm and EA both reported their second straight quarter of quarter-on-quarter sales increase, while Industrial sales were roughly stable for the fifth straight quarter.
Stronger category within Industrial continue to offset weaker one with the first quarter and second quarter sales actually seeing minor quarter-on-quarter sales increases.
HPC has become our single largest category. It will stay this way for the foreseeable future, helping to drive not just sales, but profit growth.
EA grows to be larger than Auto for the first time in our recent history as Auto works through an industry down cycle.
By region, the key highlight remains Southeast Asia. The U.S. and China both improved while Europe stayed relatively weak.
All 4 product segments are tracking below original sales expectation as a lower for longer recovery persisted. This may continue into the second half of 2024. Overall destocking is near [ remain ], but restocking has been minimal and selected thus far. We remain conservative about underlying near-term global demand.
[ Excess ] is being slowly worked down via end-customer activity. Our pricing power remained intact as we continued to work closely work with our partners to get through this challenging time together. Fortunately, we're seeing pocket of optimism and growth. Their impact on our overall business outlook continues to gradually improve as we move deeper into the second half of 2024.
Looking at the first half of 2024 last, IT DataComm sales rose by 1% year-on-year and accounted for 22% of total sales.
HPC sales rose by 15% year-on-year and accounted for 65% to 70% of segment.
Industrial sales fell by 3% year-on-year and accounted for 41% total.
Tailor-Made Products rose by 15% year-on-year and accounted for 20% to 25% of segment, while Capital Equipment rose by 14% year-on-year and accounted for 15% to 20% of segment.
Auto sales fell by 25% year-on-year and accounted for 20% of total sales.
Combined EV, Silicon, and Charging fell by 28% year-on-year and accounted for 75 to 80% of segment.
EA sales rose by 12% year-on-year and accounted for 16% of total sales.
On balance sheet and cash flow, our cash balance remained elevated as we looked to more strategically deploy capital towards spending area with greater long-term potential. We currently plan to mainly fund our pending Easys M&A without significant external funding, showing our emerging capability to internally fund smaller acquisitions now.
Our account receivable, which we are closely monitoring, and our inventory both increased quarter-on-quarter as business improved.
Our free cash flow stayed positive for the seventh straight quarter, but with lower quarter-on-quarter as we increase our CapEx.
Our continued positive cash flow has allowed us to deleverage with our liability to asset ratio dropping from a peak of 64% in the second quarter of 2022. We expect this to drop to world historical level by the end of this year.
Our cash conversion cycle fell from the fourth quarter of 2022 to the first quarter of 2023 peaks of just over 130 days toward healthy levels. However, it will not fall back to prior lows, given rising local for local customer demand.
On a bigger picture, we're actively enhancing our cash management to free up even more cash to allocate for future growth, which will also help to reduce our reliance on bank loans. We seek to depend more on the cash generated from our operations and to grow high-value and validated area of our business to boost profit and free cash flow. It's a virtuous cycle and momentum is building up.
Our diversification effort has been successful. We are building on top of this solid foundation. The results of this are beginning to show up in our financial results.
Operational improvement along efficiency and productivity are ongoing, which Florian will go into next. It will take time to fully realize the expected benefit.
We're intently working to improve the durability and quality of our earning growth for all stakeholders to return sustainable gains to them over the long-term.
Our results show that we're maintaining business and financial stability despite fluctuations in our operating environment and that we're navigating through this time to become stronger.
Our IR efforts are essentially helping us to communicate with the investor and analyst community Bizlink strategic directions, our various effort, and the important milestone that we achieve.
Our near-term outlook is optimistic about IT DataComm and expect Industrial to begin grows quarter-on-quarter again from the second half of 2024. EA's trends may persist and we're still cautious on Auto.
Florian will now provide update on our latest quarterly operational takeaways.
Thank you, Charles. So we will start our overview. Greetings, everyone. This is my second time being one of the speakers during our results call, and I will be sharing Bizlink's operational updates from now on. It has been an honor to become Bizlink's first Chief Operating Officer and this result call marks my 1-year anniversary in this position.
I want to share some progress with our ongoing efficiency and productivity efforts so far before going into 4 product segments and select categories. Recall that we mentioned the kicking off of excellence initiatives across sales, operations and finance over a year ago. And that we said we anticipated seeing impacts from this year onward.
We have worked on various cost of goods sold down focused efforts with our 2 business group sets and their respective business unit leaders to execute at select production sites. We have generally forward a twofold approach. First, striving for operations excellence and cost management, and second, preparing for and capturing new growth opportunities.
The result is that we are helping to shore up lower gross margin areas and raising the sales exposure to higher gross margin areas. We are not done yet and more benefits are incoming over the next few quarters as we progress along such efforts.
So let's have a view on the IT DataComm product segment. Our HPC sales are increasingly driving this segment. And while Peripherals was behind our pre-EV era growth phase, it has become a more minor business. We are showing our ability to successfully reinvent ourselves and repurpose resources to realize new multi-year opportunities. This transition is in full execution and we are looking to considerably gain from the coming wave of AI-driven CapEx spending from major HPC companies.
We are the most excited about our growing HPC business as we expect it to be one of our 2 major sales and profit drivers for the next 3 to 4 years.
Our first half 2024 HPC sales increased 15% year-over-year. Our HPC sales mix has risen from 4.7% of total sales in the first quarter 2019 to now 15.5% in the second quarter 2024, rising 7.5x during this period. And we expect this ratio to continue to increase.
Current third-party CapEx of the 4 U.S. CSPs is forecasted to grow up to 55% to 60% year-over-year in 2024 and then by another 10% to 15% year-over-year in 2025, which should have upside potential from our view.
Year-over-year growth in CSP CapEx is accelerating due to investments in next generation AI data center infrastructure and AI servers. Only these CSPs have that kind of capital and the government support and access to technically strong talent means that they will only get further ahead. This is where we are focused on.
We anticipate seeing much greater content exposure to GPU-based AI compute, which is expected to be visibly start to boost our HPC sales from 2025. This growth will likely persist for the next few years as most machine learning code needs to run with CUDA optimizations that only one company can support right now.
Bizlink is one of the very few qualified and recommended interconnect suppliers to design, manufacture, and supply customized high-speed data and high-power solution to this new platform.
We will also see continued growth from ASIC-based AI compute, especially from second half 2024, which is currently still driving our HPC business.
Our multi-year track record with major U.S. CSP customers, who have since rebranded themselves as AI service providers, global production footprint, R&D and automation know-how, and full data and power solutions portfolios are our key competitive advantages.
Active electrical cables will likely become the de facto high-speed data solution for large ethernet-based HPC clusters. Rising power needs for advanced computing platforms means more opportunities for Bizlink to supply our high-power cable and connector solutions.
We see additional long-term growth opportunities for our production in Southeast Asia with growing population and rising purchasing power there. These population will eventually graduate from needing basic cloud services to more advanced computing workloads. Many companies recently announced multi-billion-dollar multi-year data center spending plans there with them already having initiated their plans. There are also plans for $100 billion data centers.
Data sovereignty regulations also means that major European nations should see more similar announcement in the quarters to come.
We are also looking at our addressable areas beyond AI servers and racks into edge AI, where our decades long peripherals expertise can play an important role in offering standalone devices that do not need to constantly rely on cloud infrastructure.
Finally, we aim to add more Tier 1 U.S. and Tier 2 regional CSPs as well as known OEMs and system integrators as HPC customers from next year onwards.
Now coming to the Industrial Product segment. Sales stayed stable quarter-on-quarter for the fifth quarter straight as categories that are growing accounting for 45% to 50% of the segment are offset by those that remained weak account of 50% to 55 percent of total.
Industrial sales may begin to grow quarter-over-quarter again from second half of 2024, but clearer signs of recovery may not occur until 2025 given especially the continued weakness in Europe.
This recovery will be driven by growth in our higher margin areas which will help us to realize more cash from our operations here.
We are expanding our market, product and regional exposure across this segment, leading to stable business for nearly a 1.5 year now.
We first noted in our second quarter 2023 results that Capital Equipment sales would slowly rise in the second half of 2023 before stabilizing first half in 2024 and then pick up again in the second half of 2024. We have kept this same outlook since then. Sales are up plus 4% H-over-H in second half 2023 and up 9% HoH in the first half 2024, which was stronger than expected.
Demand is noticeably beginning to rise as our semiconductor production equipment customers ship more tools to their foundry logic and eventually their memory customers who for the moment are mainly just upgrading existing equipment as per their service agreement with their semiconductor production equipment suppliers
Three quarters -- third quarter 2023 sales rose 11% quarter-over-quarter, stabilized from fourth quarter 2023 to first quarter 2024, and then rose 14% quarter-over-quarter in the second quarter of 2024 as our sales growth kept up to our key customers' sales growth. There is a good chance that our sales growth will catch up with our key customer sales growth over the next year, meaning an acceleration of second half 2024 as expected.
Demand for traditional wire harness and cable assemblies are up and high value box build and system integration demand is even stronger. The semi cap industry has exited its down cycle and is entering the initial stages of its next up cycle, which may last for the next 3 to 4 years. Benefiting our segment mix in a similar way that our HPC business is doing for IT DataComm.
Current third-party wave of cap equipment spending is forecasted to be flat year-over-year in 2024 at USD 100 billion, grow to $110 to $120 billion in 2025, grow again to USD 120 to USD 140 billion in 2026, before we will then see a slowdown to $120 to $130 billion in 2027.
The next up cycle will be started by HPC, before being further boosted by consumer electronics, including PCs and smartphones, and then later by industrial and finally by automotive. Many of the end applications for this industry do not need the latest EUV machines, meaning that existing manufacturing steps will still be used, and that the same manufacturing equipment surrounding the lithography machines will still be needed, with many of them coming from our key customers. They are gaining market share in their respective target process markets, and we are starting to see pockets of order backlog forming.
The trend for customers' demand at the high end of the spectrum for cleaner table and system solution is ongoing in Semi cap, for which sales is up by 35% year-over-year in the first half of 2024. This area has only seen custom and order activity pick up, and we anticipate this to last for the next few years, regardless of the geographical location.
Now, let's have a look at the Electrical Appliances product segment. This segment became larger than our Automotive segment for the first time in recent history. Last quarter, we mentioned we were in the process of adding new functionalities for appliances into their power supply interface.
This is a multi-year complex technological system product model that our teams designed from the ground up that is much smaller than our data comparative design from our competitor who is an expert in this field. We had no previous project experience to reference from, but we overcame all electrical and mechanical obstacles to become the major supplier for this product with a large customer. Our EA teams are very proud of this milestone, and it's just the beginning in their journey into becoming an innovation-led business. This is just 1 success story.
First half 2024 sales are up by low 10% year-over-year, driven mainly from the mass production and initial shipments of our new value-added systems level projects. We will be ramping up these projects throughout the second half of 2024.
Now having a look at the Automotive product, we began offering directional qualitative indicators of how we see our 4 segments perform in the upcoming quarter from the middle of last year. We initiated our automotive outlook as conservative and have stayed at conservative since then, making second quarter 2024 the fourth straight quarter of quarter-on-quarter sales declines.
Excessively high consumer price inflation and high interest rates have hurt both EV and non-EV business in the automotive industry. This is leading to overall higher channel inventory and subsequent price cuts to stimulate demand.
EV business are also being hurt by the recent stopping of EV subsidies in major European markets and similar moves away to be taken next year in U.S. Our Automotive business has been a casualty of these and industry dynamics.
While we see further weakness ahead, sales declines going forward may begin to become slightly more manageable from as early as second half of 2024.
Automotive become our smallest business this quarter, and its impact is smaller than it used to be. Automotive may start to look for a bottom and while we currently do not see major downside left, it may bounce along this bottom for some times after [ troughing ]. Forming an L-shaped trend similar to what our industrial business just went through.
Our major EV customer may benefit from the removal of EV subsidies. It is also encouraging to see that EV expansion plans from various automakers and their suppliers are being put on hold to allow time for supply demand to get back into balance.
Product and market development have thus far led to early gains with EV startups. We are also seeing progress in transportation and energy distribution for our Silicon business. There is low visibility heading into 2025, and customers are toning down their near-term expectations and delaying project timelines. But we still see long-term growth potential here.
Automotive customers within the Silicon business are looking for industry conditions to improve next year. There are no signs that point to this yet.
We are working on our transformation efforts in Automotive, and we anticipate this may take 2 years or more starting from early this year.
The segment is looking to undergo a similar process as our Electrical Appliances and our Industrial businesses by raising module and box build project exposure with some early success seen so far already.
Automotive is still one of our key segments, and while it is behind our last growth phase, this decision will be taken over by IT DataComm in the next one.
Now, let me turn the call over to Mike.
Thank you, Felix, Charles, and Florian. This concludes our prepared statement section. Now, let us begin the Q&A section. Please type in your questions, and then we will answer as many of them as possible in the time remaining.
Let me see. Looking at some of the questions that we see so far, there's quite a few about our HPC and sort of the AI part of the IT DataComm business for Bizlink. This question, I won't read through everything, but talks about what our competitive advantages are, what our business development efforts are. And so for this one, I would like to hand it over to Florian.
Yes, thanks. So HPC servers are getting thinner with more power consumption and higher data rates and more components are required to do more in that space to fit more of them into a single rack such as the [ NVL72 ]. This kind of rack density and compute performance is no simple technical feature and is resource intensive to achieve bleeding edge technological progress. This means familiarity with the technology, the design, the supply chain landscape, and the potential future trends to offer customers data and power solution customization options.
The function is more of the focus, and the technology requires engineered solutions which are not easy to make and are high-end cable systems. Customers value our expertise and our service in those fields of high spec requirements. This includes flat to round to flat data cables, high amperage power whips, 800 gigs per second active electrical data cables, various 48-volts busbar power connectors, 1.6T direct attach OSFT data cables, and many more.
Being able to produce such advanced products across more regions is a must-have given geopolitical concerns, supply chains interruptions, and end consumer requirements. Being able to follow our customers' and suppliers' technology cadence is also very important.
customer service is often overlooked and not considered as a competitive advantage as it is seen as a basic table stakes requirement, however as a relatively smaller global supplier compared to the Tier 1s, we are much more flexible and can put forward more resources sooner to build long-term business with our customers becoming their desired partner.
Our sales and field application engineer staff can go to the customer offices daily to support them, given our U.S. headquarters servicing them in multiple states, including California, Washington, and Texas, where we have full coverage. This leads to very short lead times, and our decades-long cable know-how leads to better solutions. We have created quick response teams to dedicate them to certain short or long-term projects as they arise and require this kind of VIP customer service.
The race for U.S. CSPs to become the first to become the largest is on and we can help to enable this. You do not get in line to get your place then others will do. Our solid track record and close relationship with our 2 U.S. CSP customers from even before this AI era means Bizlink is often one of the first to be considered for select project needs, which can be anywhere from very low volume to very high mix as CSPs have their own preference based on their infrastructure. We innovate with them to see what works best and establish ourselves as their trusted partners.
There are high power and high seed data solution development projects ongoing that may make it into the market later next year or the year after. We are also in customer acquisition mode, as we mentioned earlier. Last but not least, we now see the results of integration of HPC business of INBG and CTBG. The combined resources and know-how give us more opportunity to fulfill high-tech customer requirements.
Looking at the next set of questions, given that semi cap is a big area for us going forward, let me see, it talks about entry barriers technology and also business development for our semi cap. Again, that's within the capital commitments within our Industrial segments.
I'd like to hand this over much appreciated again, Florian.
Yes, thanks Mike. So we talked quite a bit about the HPC business in the prior question, so let's focus on the semi cap portion now. So Bizlink is more financially sound and has diversified businesses if compared to many of our competitors, and it takes many years to build this. This allows us to fully support our U.S. SPE customers longer. Small suppliers are often too risky to support their future growth aspirations, and our focus on corporate sustainability is important to many of our customers, which is increasingly sees strong ESG performance as a must have.
The continued execution of our corporate strategy has led market share gains over the past few years, given rising local for local demand requests from our U.S. SPE customers. Our strong presence in Asia and our deep domain and landscape knowledge allows us to become their consultant in their effort to build an Asia based footprint. This means helping them to rationalize their supply chains, some of whom have production sites in Southeast Asia, allowing them to cut shipment costs and lead times, as well as to reduce supply chain risk as global supply chains continue to decouple and suffer from unexpected interruptions. We look to follow a similar strategy in our growing footprint in Europe over the next few years.
Convincing our SPE customers to just come to us to fulfill more and more of their highly customized, very short project lead times for general cables for their waiver service conditioning or cleaning processes tools, or high technical barriers for specialized cables for their Lithographies tools, box build, and system integration. Low volume demand means sustained wallet share sales and margin growth.
Added scale also means procurement cost advantages and room for efficiency and productivity improvements. Out of the global top 10 SPE companies, more than half of them are already our customers, and many of them have been customers for many years. We are known as a key supplier with strong track record. We have a few new potential customers, that are in various business development stage from scheduling to come to select production sites, to perform audits, to quoting prices for various projects. There may be some good news to share in the coming month, and we may see initial sales contributions from next year onwards.
Now back to you, Mike.
For the next question, let me read this, upside or downside potential for the revenue gross margin expansion of each segment.
I want to -- let me see, Charles, can you provide a bit of feedback on this one?
Yes. Thank you, Mike. Okay. Let's focus on the IT DataComm and Industrial segment for this question. As our sales exposure to HPC and to capital income increases, it is possible to see our gross margin further improve, assuming [ all else ] is equal. We talked about raising our sales exposure to projects with higher SPE in content and or higher gross margin during our prepared remarks. These 2 categories match this criteria. We have others, but these are the ones that we have chosen to share with everyone today, especially given their foreseeable high impact potential on our growth.
We are also continuing with our various efficiency and productivity improvement efforts, which many of you will notice help to improve our profitability this quarter despite USD sales being lower year-on-year, year-to-date. The key drag in these 2 segments are FA and Peripherals, given their continued demand weakness and their below corporate average gross margin. However, we're intently working on improving the profitability of both categories, and this involve a bit of business transformation. Including repositioning them to align with more favorable market and our product development to better future-proof their growth and their roles in Bizlink. We will share more about our effort in the coming quarter.
Now back to you, Mike.
And we have about 6 minutes left for this call. So for the last question, there's a question about our M&A. What would we want to achieve in the next 3 years, balance among our financials, what kind of business growth we're looking for.
So for the last one, I'd like to hand it over to our Chairman, Roger.
We seem to get this question every quarter, but I'm glad that there is continuing interest in this aspect of our corporate strategy, especially given our potential Easys acquisition. Last quarter, we introduced the concept of looking for the 3 C related to where we are in our corporate strategy when evaluating the potential [ aim ] in the target. These 3 C's are customer, capability, and capacity. Essentially, we try to answer this question, what this target can do for what set of customers [Indiscernible]. We are making interest in target within Industrial, those [ with ] footprint in North America, and all those that are [ financial ] capability.
We look to not just build scale, but also to improve profit and cash generation. Our last 2 M&As are Speedy and INBG, and the potential Easys acquisition [Indiscernible] this program. Our [ TMP] [Indiscernible], and it is a very tidy one, and a profitable operation with more upside potential. We have just seen our seventh quarter of positive free cash flow, and we look to continue this trend rate.
Generally speaking, we look to be able to increasingly do deals with minimal to no external funding for smaller deal, while still having ample buffer for working territories. But there is always the possibility that we see larger targets that need external funding. Our continuous strong cash generation will slowly be allocated across fewer spending areas as we deleverage to more comfortable level [ and ] our CapEx is up in the coming year or 2, giving us the ability to look at larger targets and to potentially consider higher dividend payout. We currently do not see such a target.
Thank you, Roger, Felix, Florian, and Charles. This concludes our Q&A section. A replay of the conference call today will be available on our IR website within 24 hours from now. If you have any further questions, please feel free to reach out to the Bizlink Investor Relations team. We thank you very much for joining today's call. You may now disconnect.