Advantech Co., Ltd. (2395.TW) Q3 FY2025 Earnings Call Transcript & Summary

Good afternoon, everyone. Welcome to Advantech's 3Q 2025 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 2025 results as well as the outlook in the coming few quarters. With us on this call, we have the CFO and President of General Management, Eric Chen, President of Embedded Sector Miller Chang; and Senior IR Manager, Grace Liao. In today's call, we will have the prepared remarks from the management, followed by the Q&A session. Without ado, let me pass it to Grace for the briefing of the 3Q results first.

Thank you, Derek. Good morning, and good afternoon, ladies and gentlemen. Thank you for your time today. This is Grace Liao, the Senior IR Manager of Advantech. Regarding our third quarter 2025 financial results, third quarter revenue reached TWD 17.77 billion, increased 19% year-on-year and a flattish quarter-on-quarter. Gross margin rate reached 38.9%, slightly lower than guidance range due to material cost impact. Operating profit reached TWD 2.7 billion with OP rate reported 15.2%. Q3 non-op items gained TWD 568 million, mainly due to dividend income and disposal gain of investments. Third quarter effective tax rate reached 16.2%. Net income reached TWD 2.77 billion, increased 22% year-on-year. Earnings per share in third quarter '25 was TWD 3.20. In the right side, accumulated year to third quarter '25 performance. Year to third quarter sales revenue reached TWD 53 billion, increased 22% year-on-year. Gross margin rate was 39.8%. Operating expenses increased 11% year-on-year, which factor in AURES integration. However, expenses organically increased 5% year-on-year. Operating expenses remain strictly controlled. OP margin rate reached 16.5% moderately improved year-on-year basis. For the 3 quarters this year, net income reached TWD 7.49 billion, increased 18% year-on-year. First 3 quarters earnings per share reached TWD 8.67. For regional performance, in terms of the U.S. dollar, year to third quarter '25, revenue reached USD 1.7 billion, increased 25% year-on-year. For regional performance, most of the region reported double-digit increase only North Asia year-on-year flattish due to political uncertainty in Korea market. For the major 3 markets accounts for 68% revenue contribution. For North America year-on-year growth 23%, driven by semi equipment, robotics and medical equipment projects. For Europe, market increased 22% year-on-year due to medical equipment, transportation and gaming projects contribution. For China, market year-on-year increased 14% due to strong channel sales and automation and energy projects. For Taiwan, market year-on-year increased 24% due to strong optical and semi equipment projects and also transportation projects. For the sector performance for the first 3 quarters this year, all major sectors enjoyed double-digit year-on-year growth. For IoT automation, year-on-year increased 15%, driven by energy infrastructure budgets in North America and also China, and automation projects penetrate quite well in Europe and Taiwan markets. For Intelligence Systems year-on-year increased 34%, outperformed in semi equipment, video streaming and also robotic projects. For embedded sector year-on-year increased 11%. Strong demand in medical equipment, especially in North America, Japan, Europe, Middle East and Africa market. Automation doing quite well in North America and also China market. Gaming sector doing quite well in Europe. Last one, intelligent service sector year-on-year increased 58%. Organic is 24% year-on-year. Besides AURES synergy, strong organic growth in health care, hospitality, mobility inspection projects. For our balance sheet, cash and cash equivalents accounts for 21% of total assets, lower than the previous quarter due to cash dividend payment in third quarter this year. Inventory under control. Inventory turnover days is 93 days and the cash conversion cycle, CCC, is reported 84 days, which is greatly under 99 days, at the comfortable level for the management team. Overall, capital efficiency improved and our overall financial structure is quite healthy. This is my last page. So I'm handing over the time to President, Eric. Thank you.

Thank you, Grace. Good morning, and good afternoon, everyone. Thank you for joining the meeting today, and this is Eric. I want to share some comments on my share on our third quarter's results. In the third quarter, our top line performance exceeds expectations in U.S. dollar terms. However, our gross margin and operating profit were slightly below guidance due to increase in DDR4 component prices, which reduced our gross margin by around 1 percentage point in the quarter 3. Operating expense in the third quarter grew by 11% year-on-year, 0.7% quarter-over-quarter. This increase is primarily due to the consolidation of AURES and onetime relocation fee and decoration fee for our Japan Osaka office. If we include these fee factors, the organic growth rate for operating expenses will be 5% year-over-year. Regarding the regional performance, the U.S. and the European market shows significant rebound with growth rate of 23% and 22%, respectively. In the U.S., strong demand but not in the medical, video streaming and semiconductor sectors. In Europe, just as Grace mentioned, the demand was primarily driven by the transportation, automation and medical sector and the gaming sector as well. The Chinese market grew by 14%, driven by the factory automation and energy sectors. The Taiwan market grew by 24%. In contrast, Japan's market posted single-digit growth only, while Korean market declined 6%, largely due to political issue in the past few months. From a product perspective, the iSystem and iService sector performed well. ISystem benefiting from strong demand in video streaming, semiconductors and energy. The iService sector saw a remarkable 58% growth due to the AURES consolidation. Excluding AURES, the group growth was 23%. The other 2 sectors, including high automation and embedded design sectors, continue to perform on track. So this concludes my remark regarding the third quarter. Next page, yes. Now let's review the trend of our B/B ratio across different regions. As indicated on the page, the B/B ratio for the third quarter decreased from 1.08 in the second quarter to 1.01 only. In North America, the B/B ratio peaked at 1.19 in the second quarter, but softened to 0.88 in the third quarter due to the issue with design and project cycle. Europe is showing substantial strength with a B/B ratio of 1.10 despite the challenges posed by the summer vacation period. The Chinese market remained stable with moderate growth and the ratio has consistently been at or above 1.0 throughout Q1 to quarter 3. In the third quarter, the B/B ratio was 1.01. It is also worth noting that our shipment has consistently increased in the U.S. dollar terms since the first quarter of 2024. I saw a few questions regarding the B/B ratio, and I will explain in more details in the Q&A session, especially for the October B/B ratio. Next page. So as we look ahead to the fourth quarter, we expect our revenue to be between USD 550 million and USD 570 million based on an exchange rate of USD 1 to TWD 30.4. Regarding margins, we anticipate our fourth quarter gross margin will be between 38% and 40%. In addition, we procured the operating margin to be between 15% and 17%. This conclude my guidance for the first quarter. Thank you for your attention.

Thank you, Eric. So I will pass it on to Derrick.

Thanks, Grace and Eric, for the prepared remarks. Now we will start the Q&A session. And we have already gathered some questions from investors in advance. So management will go through them first, and then we will take the questions from the line. So the first question is regarding the preliminary colors into the 2026 outlook. So not sure whether or not management can share some views on this outlook into 2026?

Let me share my thought. Actually, we are currently in the target second stage for 2026. And the overall future -- figures for each product group and regions will be more precise by the end of November. Preliminary feedback from the U.S., chinese and EU business leaders indicates that the 3 major markets are positive on automation, medical and semiconductor sectors, and offset double-digit growth target for the next years. I met with our Europe business leader, Jash, who is very positive about the automation sector in Europe. So the corporate goal is also to achieve double-digit organic growth next year. So this is our goal to set a listed double-digit organic growth next year. As usual, we will provide official guidance unless every quarter.

Okay. Thanks, Eric. And then the second question is, how are the shipment and order momentum so far as we enter into 4Q 2025? And also, can we share some initial colors on the B/B ratio for each region?

Okay. The B/B ratio for quarter 3 remained stable. We have a B/B ratio of 1.01 as the bidding continued growth. For the entire fourth quarter, it's still too early to map the distinction. However, I will just give you an information. In October, the B/B ratio was very aggressive rebounding to 1.19. This increase was primarily driven by the end of summer vacation in Europe and the Chinese holidays lead to aggressive order placement. In October, the B/B ratio grew 1.23 for the EU, 1.20 for China and 1.19 for the U.S. as we received a lot of design order for the U.S. U.S. not perform -- our B/B ratio not performed quite well in the third quarter. But in October, it rebound to 1.19. This is regarding the B/B ratio. We just confirmed the figures in October. For the 4 quarters, it's still too early to make predictions. Thank you.

Okay. Thanks, Eric. And the third question is, as you observe any impact from the tariff recently? And also, do you have any major plans to mitigate the impact? And also what are your customers' feedbacks on those plans?

Okay. Let me explain this question. The U.S. market represents 31% of our total revenue. In the first half of 2025, 93% of the product we sold to the U.S. were import from our plant in Taiwan, only 6% from China and 1% from Europe, 93% import from Taiwan, only 6% from China. As a result, the high tariff in China will not affect U.S. customers and their business. The majority of our U.S. customers need our products at our Taiwan production plant, which is currently under tariff exemption period. And the tariff rate for most of our product is full to the U.S. and remains 0 tariff rate. However, if Taiwan face high tariff, we will implement 3 key initiatives. I will explain. The first, expand our truck shipment service to our U.S. customers. I just gave you an example, one of our customers, key customers, very big customer, who previously maintained a single warehouse in the U.S. In the past, we shipped our product to their warehouse and then they distribute 40% of their customer outside of the U.S. Now we offer truck shipment service directly to their U.S.-based customers, enabling them to avoid high tariff imports by the U.S. government. So we delivered the end-to-end service to avoid high tariff imports by the U.S. government. And second, we will increase the local assembly service at our U.S. production site. We have strong capacity in the North America. We plan to ship the PCBA to the U.S. plant and complete the final assembly with high-end components such as CPU, hard drives and memory locally. This stretch will reduce the tariff impact since the import value of the PCBA is lower than that of the core assembly systems if the tariff is quite high. And third, adjust pricing based on our trading terms. Currently, 40% of U.S. orders are under as-was terms, which means customers are responsible for paying the tariff by themselves. For the remaining 60% of order, we will raise price to offset the tariff impact, especially on standard products. For key account and project-based business, only a small number of customers are likely to seek tariff for from Advantech. In such exceptional case, we might absorb 30% of tariff as a matter of principles, but subject to specific terms and conditions, including no postponements or adjustment to payment term or shipping schedule. So overall, the tariff impact on the U.S. market now is limited. However, we are concerned about the price increase may lead to a decline in demand, which should affect our business in 2026 is what we are afraid of. If the tariff is high, we will increase the price, then the market demand will decline. So this is my explanation for tariff and corresponding action for Advantech. Thank you.

Thank you, Eric. And then we will move on to the next one. It's regarding the component price hike. So how much was the impact from the increase in component prices on your gross margin in the third quarter? And do you have any plan to raise your ASP? And if yes, what's the estimated timing of that higher ASP in terms of the contribution to your revenue?

Okay. The increase in material costs, particularly for the key components such as DDR4 and SSD led to a decline of around 1 percentage point in our gross margin during the third quarter. If pricing continues to increase, the GP impact for the fourth quarter will be greater than in the third quarter. So this is for sure. Since we prioritize secure raw material supply ensuring on-time delivery to our customers, there's always a time gap between cost increase and the completion of the selling price adjustments. At the beginning of October, we officially issued a price adjustment notice to our customers and worldwide business leader, with increase of 4% of board products and 8% for system products. However, for specific projects with long-term agreement, price adjustments are still under ongoing negotiation with customers. We expect the price adjustment to positively impact new orders and standard products in the first quarter of 2026. For existing project orders and the margin recovery, it depends on the test of less pricing discussions. Take the U.S. sales team practice as an example, they try to collect a down payment and increase the selling price for most of the projects that will consume DDR4 or SSD. For existing projects order, as mentioned earlier, they will negotiate with customers to revise the future price. So we already made an official announcement for 4% board level price increase and 8% for system level price increase worldwide in October.

Thank you, Eric. And then the next one is still on this increasing component cost. So how is your inventory level for DDR4 right now? And do we have any issue securing them on the supply side right now?

Since the second quarter, we have proactively advanced procurement to align with customer demand and the market trend. However, due to a sharp increase in demand beyond our expectation over the past few months. Our replenishment has fallen short of demand. As a result, our inventory level remained low and the overall market continued to experience a tight supply-demand imbalance. Given that a major supplier had implemented strict spot pricing and allocation control, we must now ask customers to make advanced payments before we prepare materials. This step is intended to secure mutual commitment and ensure the timely available of materials. To date, although we have faced challenging procure memory and SSD components, we have not encountered any significant supply disruptions. We didn't encounter any significant supply disruption. This is very important. We anticipate this supply issue and unstable price into the middle of next year. So far, the inventory level is not so enough, but everything is still under our control. This is my answer.

Thanks, Eric. And then we got another one on this component supply issue. How is the transition for Advantech from DDR4 to DDR5 for your products so far? And is DDR5 also seeing a tightening supply right now?

The transition for DDR4 is on progress, in line with our product road map. Of course, that path varies by application segment by different product group. At the beginning of this year, our product division had already started the transition. For standard products, the transition is going more smoothly. For telemed, our customer design products transition are mutually slower due to the way involved the qualification circles. We usually need the customer approval for primary component change for the telemed products. So this is what we -- our current stage. As for the question of DDR4, it's also in short supply, we are not sure whether it's a part of major supplier marketing strategy or reflect the real situation. For those questions, we have no comments on this part. Thank you.

Thanks, Eric. And then the next group of questions is regarding your regional and sector performances. And the one we get is, what's the growth that we are expecting to see from each regions, including North America, Europe and China and also their respective key growth drivers heading into 2026?

Thanks for the question. This is Miller speaking. About the region from three key main region, North America, Europe and China, we do expect to have a double-digit growth continuously in 2026, next year. About North America, as our direction aligned with the U.S. government, their strategy to focusing on automation, especially the semiconductor move back to U.S.A., medical, military sector, defense and also the professional audio/video sector. Those sectors will continue a strong growth. Then talk about the Europe, Europe is not a easy country to deal with, especially the cultural difference and also the Europe government, they emphasize the protection of the employee works right. However, we still see some sector with strong growth momentum such as automation, energy, oil and gas, agriculture, military, which are expected to maintain a strong growth momentum until 2026. When talk about China, I believe China situation is somehow unique. They are continuously developing their own technologies and component supply chains. Unfortunately, we established an R&D center at Kunshan nearby Shanghai in 2013, 12 years ago. Now most of the demand in China domestic market is supporting by our China team in Kunshan. So about the automation, semiconductor, medical and also transportation sector are projected a very strong growth in 2026. So this is the answer for the question.

Thanks, Miller. And then the next one is a bit similar, but maybe from the BU's perspective. So what's your view for each business unit demand outlook for 4Q? And how are we looking at 2026 in terms of the relatively strength and weakness among these different BUs?

Okay. From the sector point of view, I think the first 3 quarters and talk about the fourth quarter will be very similar as the first 3 quarters. From the strong sector, I believe because of the AI technology will continue to drive the growth of the industry. So such as automation sector, medical sector, especially the semiconductor equipment is a great example. This year is quite good. We will foresee the continued growth in the Q4 this year. But also the robotics sector, renewable energy sector, energy storage sector, health care, medical maintaining a very strong growth momentum. So moreover, our ruggedized edge computing system also has fully developed and continue to show a strong growth in the mining and also military defense sector. This is a positive side. Regarding for the weak sector due to the consumer capped spending as income drop, so that reflect some weak sectors, such as retail and also gaming sector in some regions.

Thanks, Miller. And then the next one is regarding the Edge AI revenue contribution for the third quarter and also maybe for the first 3 quarters of the year. And also any expectation for the outlook from this Edge AI business into 2026? And what's the margin that you are making from these Edge AI products versus your corporate average right now? And do we expect that to be higher or lower in the coming few years?

Okay. Let me answer the question. Edge AI products accounts for 9.4% of our total revenue in 2024. In the third quarter of this year, revenue accounts for 17% of around TWD 289 million, increased from 9.4% to 17% in the third quarter. Internally, we divide Edge AI products into product level and component level. Component level means purely buy and sell, such as GPU card. The Edge AI product growth rate was an impressive 156%, accounting for 90% of total Edge AI revenues. In contrast, the Edge AI component grew by 118% and accounts for only 10% of our total Edge AI revenues. Regarding the margin of Edge AI products, the Edge AI product in automation, iService is 4% above the corporate average. In IoT and energy, it is in line with its average. As for Edge AI component just buy and sell, the margin is below average. This is my answer regarding the Edge AI. For the 2026, we anticipate the Edge AI will have more penetration and account for at least 25% of our total revenue. In terms of margin contribution, it's still too early to make the predictions. But we expect if we can sell more Edge AI product, we will gain some gross margin benefit from it. This is my answer. Thank you.

Thanks, Eric. And then the next one is also regarding the Edge AI. So what are the main sectors where Edge AI is currently applied? And are there any new emerging Edge AI or robotics applications and also the contribution from ACE series in fiscal year 2025 and 2026?

Okay. Let me answer the question. Edge AI actually has been implemented into many vertical sectors from the existing service sectors such as medical equipment, industrial equipment. These two big vertical sectors contributed a very significant business results to Advantech as of date. So for Edge AI and robotics application, as an emerging sector, over the past 2 years, after we established a product division to dedicated robotics product and solution development and also marketing deployment, now we have more than 200 million projects in design pipeline. It is quite a good news from Advantech global sales and region. So about the Edge AI and robotic application, especially, we are very confident that it will contribute our business in coming years. Then about the ACE, application computing on edge, the product series, the product concept has been released in Q3 2025, actually just 1 quarter earlier. And we do expect some new products such as ACE RSeries for robotic market, ACE iSeries for industrial market. We will start to release the product to the market by middle of 2026. This is an update from the Edge AI and also robotic application business progress for you. Thank you.

Thank you, Eric and Miller. Now we have already answered most or all of the previously gathered questions from investors. Now we can take the questions from the line. If you have any questions, feel free to raise your hand. After your name is pronounced, please go ahead and ask your questions.

Derrick, we do see some investors raise hands online. So maybe we can take the questions.

Yes, sure. So the first question will be from Rohit Kadam. Please go ahead.

Thanks, Derrick. Thanks, Grace, and thank you, everyone, for this presentation. I have a couple of questions. First is on the U.S. B/B ratio, which dropped to 0.88. Now, are there parts of the U.S. industrial CapEx where there is some sort of a slowdown is what you're picking up? And also, is this because you think there was some pull forward of demand in the first half, which is now normalizing? That's my first question, please.

Let me answer the questions. Just as mentioned earlier, the U.S. B/B ratio in the second quarter was 1.19. But in the third quarter, it declined to 0.88. But in October, the B/B ratio rose to 1.19. So about our internal design indicators, we still have very positive pipeline. The designing and design win indicators shows Advantech USA already got a lot of pipeline -- design win pipeline on hand, and it will secure our business for the coming 2 to 3 years. So for the third quarter, I think the B/B ratio declined just for the design win cycle because in sometimes, we will slow down for the design order placement from the customers. This is my answer.

That's very clear. And the second question is, if you could just share the organic growth number in dollar terms for this quarter as well as for the 9 months of this year?

This year, this quarter?

This quarter.

Yes, this quarter and also for 9 months, that will be very helpful.

I think most of the revenue is organic growth. Only for Intelligent Service 58% due factoring AURES integration. However, Intelligent Service organic growth is 24% year-on-year basis. This is for the first 3 quarters.

He means YTM organic growth. AURES accounts for 4.7% of our consolidated revenue. So if we did drop AURES from our total gross, it would be 20.3%. It's our organic growth. This is the figure of our organic growth. Thank you.

Thank you. And then the next question is from William Yen.

Can you maybe just talk a little bit about the competitive environment within Mainland China, that would be great? I guess I've seen your margins be very strong over a number of years. And I'd just be interested in just sort of how you see that competitive threat within the Mainland evolving? And I guess what do you think what are the key success factors that allow you to keep those margins so high?

Regarding for the China market, yes, there's quite a big competition there because of the China local domestic peer company try to cut the cost to try to provide a very similar product to our customer. But however, our industry, our service market are quite concerned about the longevity of long-term services. So not only talk about the price, but also talk about the quality and also the long-term support services. That's the big reason that we can get back some business design, and design win in the past year and contribute the result from this year. Another important figure is that we did invest a lot of the resources in our China supporting team from the product services and also technical support as well. So that's the reason, the local competition is even higher. But however, our team is still quite strong to compete with our competitors and also get a big design win. That's the answer for your reference.

Let me add some color for how Advantech to protect our gross margins. Actually, we do very hard. Actually, in China, our selling price dropped about 2% compared with year 2022 or 2023 because China price competition is very, very hot recently. The reason we can strengthen our gross margin and keep at around 40% mainly from two factors. The first one is, we drive our operational efficiency very hard. In our production line, we adapt a lot of AI solution to compensate a lot of the labor investments. Also, our procurement team have a KPI for the cost savings. They do a lot of efforts to reduce our material price. Just for your information, most of our products -- take our product as an example, 90% of the product cost came from material costs. The labor and overhead only accounts for 10%. For the board level, the labor and overhead only account for 6% or 7% only. For the system product, it account for 10%. So how to secure the material price, also drive material cost saving is very key for Advantech to protect our margins. Also, just mentioned earlier, we have a very strong manufacturing capacity, both in Kunshan and Taiwan, both regions have a very good add to improve our production efficiencies. So this is the reason we can keep our margin at around 40% for a long run. This is my answer.

If I could just have one follow-up. You talked, I think, earlier about the services component to the people. Clients choose you because of the product quality as well as the after services. That services business, is that a separate revenue stream? Or is it essentially captured in the product revenue when you divide it not by geography but by products?

Actually, internally, we have a product group called Advantech Global Services. It's around 250 million Advantech service. Normally, we provide CTOS, we provide RM, we provide local assembly service and some project installation, such as voice IoT project installation and turn on some software figures to serve our industrial customers. So the margin is around 28% because most of the AGS, we treat the CPU memory and we treat the -- I'll just give you an example, for the IPC, we have chassis, we have motherboard. We also add on the memory CPU and peripherals. We separate the IPC as a different calculation factors for the CPU memory and hard drive. We will contribute as AGS revenue. And for the chassis, for the motherboard, we will belong to automation systems revenue. So this is a total different margin and total different BU, we have a different revenue target for both BU. This is my answer.

[Operator Instructions] Before we got the next one, maybe I can ask a couple of questions from my side. So the first one is regarding the component cost. It seems that there's been a lot of focus on this increasing DRAM price. So I'm not sure if Eric can share with us what's the DRAM as a percentage of your total component cost for this year or for the most recent quarter?

Sorry, I don't have the figures on hand, maybe I can provide more detail to you later because internally, we don't calculate list figures. So maybe we can try to figure out.

Okay. No problem. And then the next one is regarding your Edge AI business. It certainly has been growing pretty quick. But could you share with us or provide more information regarding what are the specific products or components that Advantech has been providing in this Edge AI space?

All right. I can give the answer about the Edge AI implementation from Advantech product point of view. Actually, there are 3 product segments. The first beginning is Edge AI platform designing business. That means the customer need AI acceleration module. For example, they come to Advantech, request based on their requirement to provide the AI acceleration module like GPU card, for example, or Edge AI acceleration module, for example. They buy it and plug into their existing system to upgrade their system with the AI computing power. This is the first of the number one design business model that currently Advantech is handling. Second is Edge AI system. For different diversified vertical market, for example, like medical, like industrial equipment in factory, the customer come to Advantech only to buy Edge AI system, ready-to-use system, they implement the AI solution into their based on our Edge AI system, then we provide the software stack together with our Edge AI system, inference system for their designing business. This is the second business model. The third one is the Edge AI server. Customers need to implement the large language module or a small language module based on the Edge AI system, okay? They don't like to leverage the cloud solution. They want to implement their own on-prem server system based on their application. So they come to Advantech to buy Edge AI server. And we also provide Edge AI stack, wide stack together with our hardware solution to our customers to implement their solution based on our Edge AI server. So three different kinds of product solution and offering that we currently support our customers for.

Thanks, Eric. So next, we got a question from Benny. Please go ahead.

I have a question. Regarding the U.S. market, for opportunities or a challenge, do you see from the manufacturing reshoring trend? I think that's my question.

Sorry, can you say that again, the manufacturing business, right? About the manufacturing?

Yes. Regarding the U.S. market, what opportunities or challenges do you see from the manufacturing reshoring trend?

Maybe U.S.A opportunities?

Maybe U.S.A., all right, okay. As I said earlier, the automation segment, especially focused on manufacture and factory buildup in U.S.A. market sector, which is a very significant increased requirement and demand to Advantech. So from exiting the IPC business model, also our Intelligent System, especially for the factory automation, machine automation, the demand increased to our product development team. So that's the reason our U.S.A. system got that inquiry. Also, they are under the designing process for our product division and also sales division brought together with our customers locally in U.S.A.

Okay. And then we got another question from Rohit Kadam again.

Just two quick questions. On the Edge AI piece, it seems very interesting. We are doing very well. Who would be our major competitors here? Would it be the same Taiwanese kind of bunch? Or are there some good European and American companies we compete with in Edge AI?

Okay. From the pure hardware product point of view, I think more than 50% of the competition is from Taiwan hardware supplier and vendor. That's for sure. Yes, you are right. However, I think the Edge AI, the real value is provided not only from the hardware point of view, but also from the software application layer point of view. So that's the reason because of different service sector -- vertical sector like medical, like robotics, like the retail market, that did require a different patience to implement it together with our Edge AI solution. That's the reason we are quite closely working with the individual sector, ISV both together to provide the hardware and software integrated solution to service our customers. I hope that answers your question.

Yes, I was just wondering to see if larger needs like say, the likes of Siemens, et cetera, would be a direct competitor in Edge AI? Or would they largely be a customer of yours?

Not really. They are, in some automation area. So as I said earlier, different service sector, we have a different competition. If we only compete with the product or the hardware product, the main competition is from Taiwan, for sure, yes.

Got it. That's very helpful. One last one from my side is the nonoperating income, which you mentioned dividend income. So which entity is this, which gives you the dividend, if you could just clarify?

Dividend income?

I think the typical nonoperating items, the typical income mainly came from the Asus and one of our subsidiary in Asymtek, I remember that English name, mainly from a these two companies.

We can take one last question.

Sure. So the last question will be from Gary.

So regarding Edge AI, I'm trying to understand whether currently, the demand that we're seeing are mostly replacement driven where those customers already bought industrial PC basically, now they want a PC with GPU? Or do you think the majority of new demand where they weren't using industrial PC at all?

Thanks for the question. As I said earlier, the existing vertical market subsector that we encounter, the medical equipment and also industrial equipment is originally our big service sector. They already have the system. Some of them only request Advantech to add on the GPU card to upgrade their system to have the AI computing power. That's for sure, big market. But for the new market, service sector, especially the AMR, robotic market, for example, customers request a lot of the new initiatives, especially from the AI robotics, the AI algorithm development deployment for the AMR robotic market. So that's the reason the inquiry is not from the generic traditional customer. It's from the new robot application developer. For example, Korea is a good example, some robotic company, they are only AI software company. They develop the AI mechanism and algorithm to support the mainstream robotic customer, their target customer. So they are not put their attention on the hardware development, but they put their focus on the software AI algorithm development and innovation to support the AI robotic market. So it depends. Our existing service market is quite a big portion to push the Edge AI solution growth, but also the new emerging territory and also emerging sector, we also put a lot of attention on that. Product team is very aggressively to put all our attention on both sides.

Understood. And a quick follow-up on that is, given we have seen an increase in Edge AI revenue, have we seen any impact on the revenue of the peripherals by industrial camera sensors as well as a software and cloud platform?

Yes, you are right that before time, yes, they only came to buy the ready-to-use system or the embedded platform for the designing for the Edge AI system, okay? But however, moving forward, there are more and more industrial per module requirement coming to Advantech. For example, we provide, we call it, building block solution for robotic application, not only the whole system but also the camera module, like 2D and 3D camera module to support the robotic application, also provide the wireless component to support the LiDAR nad IMU solution, for example, and also work with the region software ISV developer to provide the integrated solution. So the building block not only from the pure Edge AI power, but also including the component and also the software application. Yes, that's for sure.

Got it. Any chance to maybe quantify and perhaps how much revenue is from software and cloud platform as well? I remember you mentioned that number before.

I would say that pure hardware solution anyway could be very easy to accumulate, at least another 50% the total revenue will come from -- will be generated from the power module and also the component integration and also software value added.

For Edge AI projects?

Yes, for, Edge AI project, 50% is not only hardware, but also the component and also the software application integration services.

And traditionally, majority like 90% is just the hardware, the PC.

Yes, that's correct.

So right now, we don't have further questions on the line. I would like to hand it back to Eric to see if he would like to make some closing remarks.

Okay. Thank you for the questions and also for the patience. My ending comments, we anticipate 2-digit growth in 2026. As Edge AI application became more mature and are widely adapted by all customers across factory automation, health care, transportation and more. However, the shortage of key components became a critical short-term issue -- achieved short-term issues. But also, we see the opportunity to grow our presence by leveraging our position as a leading Edge AI computing company, also our stronger supply chain capabilities. We are committed to ensure reliable delivery to our customers and actively manage our ASP to safeguard our profitabilities. This is our long-term strategy to our customers. So this end up my comments, and have a good day.

Thank you, Eric. And also thank you, Miller and Grace for your sharing. Thank you, everyone, for joining us for the call. We will conclude the call here. See you next quarter.

Thank you.

Thank you.

Thank you. Bye-bye.