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Good morning, everyone. Welcome to the conference call for analysts and investors for Infineon's 2019 fiscal third quarter results. Today's call will be hosted by Alexander Foltin, Corporate Vice President, Finance, Treasury and Investor Relations of Infineon Technologies. As a reminder, today's call is being recorded. This conference may contain forward-looking statements based on current expectations or beliefs as well as a number of assumptions about future events. We caution you that statements that are not historical facts are subject to factors and uncertainties, many of which are outside Infineon's control that could cause actual results to differ materially from those described or implied in such statements. Listeners are cautioned that Infineon's actual results could differ materially from the results anticipated or projected in any of these statements, and they should not put undue reliance on them. For a detailed discussion of important factors that could cause actual results to differ materially from the statements made on this conference call, please refer to our quarterly and annual reports available on our website. At this time, I would like to turn the conference over to Infineon. Please go ahead.
Good morning, and welcome, ladies and gentlemen, to the summer edition of our quarterly earnings release. Here with me present is the entire Infineon Management Board: Reinhard Ploss, CEO; Helmut Gassel, CMO; Jochen Hanebeck, COO; and Sven Schneider, CFO. Following our usual procedure, Reinhard will start with some remarks on group and division results, market developments and quarterly business highlights. Sven will then comment on key financials before Reinhard again will update you on our guidance. As practiced, since the beginning of this fiscal year, we will illustrate our introductory remarks with some slides that are being shown live and in sync with this call at infineon.com/slides. [Operator Instructions] A recording of this conference call, including the aforementioned slides and a copy of our 2019 fiscal third quarter earnings press release as well as our investor presentation are available on our website at infineon.com. Reinhard, please go ahead.
Thank you, Alexander, and good morning, everyone. Quite a lot of what we are going to discuss today will sound reminiscent of our last quarterly announcement at the beginning of May. The market environment remains challenging, cyclical pressure are persisting and we continue to steer our course through what feels like the bottom of an ordinary semi down cycle. We have closed our third fiscal quarter much in line with what we had projected. Our revenues came across the quarterly EUR 2 billion mark again and came in at EUR 2.015 billion. The increase of 2% quarter-over-quarter was supported a bit by the slightly stronger U.S. dollar. And at constant exchange rate, we would have seen an uptick of 1%. All 4 of our division saw slightly increasing revenues. Year-over-year, our revenues grew by 4% in euro terms and by 1% at a constant U.S. dollar exchange rate. The segment result for the June quarter amounted to EUR 317 million, corresponding to a segment result margin of 15.7%, a bit ahead of our guidance. A major reason for the decline compared to the previous quarter's figure of 16.7% is a cost related to underutilized capacities. Our book-to-bill ratio of 0.7 for the quarter is clear evidence of the ongoing slowdown. U.S.-China trade talks produced some hopeful news, but a clear resolution for a stable global trade framework has yet to be found. Lead times across application have further contracted. For inventories, both our own as well as those at distributors, we had predicted a peak in summer and we are indeed seeing first signs of that. At the same time, we see our assumption validated that broader recovery will be a theme for 2020 rather than for the second half this year. I will comment more on this at the end of my introduction, when I will also give you a short update of our planned acquisition of Cypress.But let's first come to the divisions. Automotive revenues were EUR 888 million in the June quarter, up 1% against the previous quarter. Compared to quarter 3 of last fiscal year, the increase was 6%, or assuming a constant U.S. dollar exchange rate, just under 4%. We continue to observe a bifurcation of demand, whereas classic automotive applications are declining, reflecting the lower number of cars produced. Power components for the electric drivetrain and sensors and microcontrollers for ADAS are remaining on a growth trajectory.The segment result of ATV came in at EUR 98 million, resulting in a segment result margin of 11% compared to EUR 112 million and the 12.8% of 1 quarter earlier. The decline is mainly due to underutilization charges. This result from our decision to lower production volumes in the light of elevated inventory levels throughout the supply chain. The book-to-bill ratio for the June quarter stood again at 0.8, a reflection of weak car production and sales, especially in China as well as ongoing macro uncertainties.Two weeks ago, the market researchers from IHS again, lowered their prediction for global light vehicle production for calendar year 2019 to now a decline of 3.7%. We had already built a slightly more conservative number in our own projections, affecting our business with traditional automotive applications such as engine management or body and safety functions. Wholesale car sales in China were again significantly down year-on-year in the June quarter, around 14% according to the China Association of Automobile Manufacturers. Within this period, the monthly decline was lower in June than in April and May. Retail sales even saw an increase in June. This was, however, likely driven by strong discounts on cars compliant with the China 5 emission standard before the introduction of China 6 in key cities as of 1st July 2019. There are no signs of a general recovery of the auto market in China for the time being. In contrast to this, the electrification of the drivetrain remains a strong structural driver in all major car markets, irrespectively of some short-term fluctuations induced by the phasing in and out of regulations and subsidy schemes. Infineon continues to successfully address this secular trend. With our industry-leading portfolio of power semiconductors, we can completely address customers' needs in terms of performance, quality and volume. Two recent developments testify to this. Volkswagen has chosen Infineon to become a partner in its strategic supply network FAST, which stands for Future Automotive Supply Tracks and serves to intensify the cooperation with the most important suppliers. With this competence in electromobility, Infineon contributes significantly to Volkswagen's modulars electric drive platform. Furthermore, Hyundai has selected Infineon's silicon carbide product for the main inverter of their upcoming generation of electric cars. Our trench-based device will have to increase power efficiency and therefore, extract higher mileage from a given battery capacity. Also, our automotive microcontroller family, AURIX, continues to see good traction. A leading European Tier 1 selected an AURIX 2G for its next-generation fail operational braking platform. Moreover, a major Japanese Tier 1 selected already the following third AURIX generation for its future engine management and xEV inverter, thereby confirming the versatility and long-term reliability road map of Infineon's automotive microcontrollers.Now to Industrial Power Control. The segment recorded revenues of EUR 357 million, an increase of 3% compared to the previous quarter. Wind and solar remained growth engines, whereas home appliances showed weaker-than-typical seasonality and industrial drives were essentially flat. Year-on-year revenue was up by 2%, illustrating the slow momentum and cautious sentiment in many industrial applications. The segment results for the third quarter was EUR 55 million, resulting in a segment result margin of 15.4% after 19.3% in the previous quarter. The decline was mainly driven by lower fab loading and to a lesser extent, charges related to new product ramps. The general demand pattern is consistent with previous quarters. High and medium power components are proving robust, low-power discretes as well as gate drivers remain soft. Overall, this resulted again in a book-to-bill ratio of 0.7 for the June quarter, unchanged from 1 quarter earlier. Order entry is stabilizing. Inventories levels are showing early signs of coming down from the elevated levels caused in part by lower utilization rates in our production. The business momentum across most industrial application is weakening as evidenced by manufacturing-related indicators. In this difficult environment, renewable energy is holding up very well. Wind and solar power remained on a significant growth path, uncertainty around China feed-in tariffs notwithstanding. Our differentiated high-power module address critical performance and quality requirements, and here, we even continue to be in allocation. Now to Power Management & Multimarket. The segment revenues came in at EUR 598 million, an uptick of 1% over the prior quarter, helped by demand for mobile phone components and the stronger U.S. dollar. Compared to the June quarter of last year, this constitutes an increase of 3% in euro terms and a decline of 2% at a constant U.S. dollar exchange rate. The segment result of PMM amounted to EUR 145 million, equal to a segment result margin of 24.2% after EUR 132 million and 22.3% in the previous quarter. The favorable currency development and some inventory-related effect drove the increase. In a challenging business environment, the market for most of our business lines is stabilizing on current level. Demand for MOSFET remained subdued, but shipments of components into the supply chain are currently below sell-through. Controller ICs and powers stages for servers are witnessing ongoing sluggishness, in line with the global server and data center market. In an overall difficult environment, demand for onboard charges for electric vehicles and components for 5G remain resilient.The picture for handset-related products are somewhat brighter driven by seasonality, market share gains in silicate microphones, the ramp of radar and time-of-flight components as well as a growing accessories market. The book-to-bill ratio for PMM stood at 0.5 for the June quarter, but this needs to be put into perspective. Given that more capacity has become available throughout the industry, customers are cleaning up their orders. Cancellations are affecting mainly delivery dates that are further out in the future. And despite that, the backlog of PMM remains equivalent to about 1 year of sales. Going forward, markets are expected to remain in their soft stage in the near term. Structural demand drivers, such as 5G, electric vehicles, battery-powered applications or e-scooters remain intact, but inventories will have to be worked down further before these lead to a stronger product pull at the supplier level. On the handset side, we see positive momentum for our innovative solutions going to both the smartphones as well as the accessories, such as our sealed dual-membrane silicon microphone with a superior signal-to-noise ratio. Let's now come to Digital Security Solutions, where we recorded a 2% sequential revenue increase to EUR 167 million. This was mainly driven by continued increasing demand for our payment solutions, SECORA Pay. Compared to the June quarter of last year, revenues declined by a rate of 5%. The book-to-bill ratio stood at 0.8, indicating an ongoing flattish business. The segment result came in at EUR 19 million corresponding to a segment result margin of 11.4% compared to 11.6% a quarter earlier. Going forward, our embedded security products experienced good traction, with project win in both consumer and enterprise device markets. We continue to see strong momentum in the area of security solutions for contactless debit and credit cards, including the fitting software.With this, I would now like to hand over to Sven, who will provide comments on our key financial figures for the quarter and also give you an update on where we stand with respect to financing the planned acquisition of Cypress.
Thank you, Reinhard, and good morning, everyone. Let me start with some more details on the margin development in Q3. The gross profit was EUR 735 million after EUR 749 million in the previous quarter. The gross margin declined from 37.8% to 36.5% driven mainly by underutilization charges due to lower fab loading. Excluding non-segment result effects, the adjusted gross margin stood at 37.2%. Research and development expenses and selling, general and administrative expenses came in at EUR 243 million and EUR 214 million, respectively. The net other operating income amounted to EUR 5 million. The non-segment result stood at minus EUR 34 million, predominantly related to amortization and other charges resulting from the International Rectifier acquisition. Of that amount, EUR 14 million hit our cost of goods sold, EUR 1 million R&D and EUR 13 million SG&A. A further EUR 6 million of other operating expenses are related to transaction expenses for the Cypress acquisition. Our investments into property, plant and equipment, intangible assets and capitalized development costs in the third quarter of the 2019 fiscal year amounted to EUR 344 million, essentially flat against EUR 349 million in the prior quarter. Depreciation and amortization, including non-segment results effects, went up slightly from EUR 233 million to EUR 238 million. Included in these figures are in each case, EUR 21 million related to the amortization and depreciation of fair value step-ups almost entirely from the purchase price allocation from International Rectifier. The portion of depreciation and amortization included in our segment result, therefore, moved from EUR 212 million to EUR 217 million. Before commenting further on our financial result, cash flow and liquidity position, let me briefly jump to the Cypress financing. After announcing the transaction at the beginning of June, we've already completed the first important refinancing steps. At the time of the signing, we had a fully committed acquisition facility in place provided by 3 underwriting banks. As you will recall, we intend to ultimately finance around 30% of the transaction value of EUR 9 billion with equity. The guiding principle behind this is our clear objective to remain an investment-grade company. In the meantime, we've already raised more than half of the total envisaged equity amount. On June 18, we successfully placed 112.8 million new shares by way of an accelerated book building and took in a little over EUR 1.5 billion. With this very important step, we achieved an early derisking and alleviated the overhang that have weighed on our stock. We are now in a position of greater flexibility with respect to timing and choice of instrument for the remaining equity needed. In any decision-making, we will carefully consider the interest of our shareholders and assess the level of closing certainty of the Cypress transaction. In addition to the share placement, we successfully syndicated the acquisition financing facility among a well-balanced consortium of 20 national and international banks. In other words, from a financing point of view, we are ready for Cypress closing at any time.Coming back to the financial result. Our financial result for the June quarter was minus EUR 31 million after minus EUR 9 million in the preceding quarter. It contains an expense of EUR 3 million related to the aforementioned acquisition financing facility. Furthermore, it's burdened by EUR 22 million that were incurred from an economic hedge we have put in place to protect us against adverse capital market movements in connection with a potential share placement. Now that we have completed the accelerated book building, we have unwound those hedge instruments. A different type of risk related to the Cypress financing is currency fluctuations. As the majority of the funding will come from euro sources but the purchase price will have to be paid in U.S. dollars, we decided to effectively lock in the euro-U.S. dollar exchange rate for the acquisition with deal-contingent instruments. These instruments qualify for hedge accounting, which means that the fair value changes are reflected directly in equity. In the quarter just ended, we recorded a negative EUR 95 million in other comprehensive income or OCI.Now to taxes. Income tax expense in the June quarter went down to EUR 28 million compared to EUR 46 million in the previous quarter. This results in an effective tax rate of around 11%. Our cash tax rate was 8%. Both rates were positively affected by a onetime true-up related to the 2018 U.S. tax reform. Throughout the 2019 fiscal year, we continue to expect a rate of around 15%.With respect to discontinued operations, we had recorded a loss of EUR 18 million in our second fiscal quarter, predominantly related to adjustments of provisions in connection with the ongoing Qimonda litigation. In the third quarter, there were no new developments and the result from discontinued operations was 0. Continuing with free cash flow from continuing operations, it improved from an outflow of EUR 137 million in the March quarter to an inflow of EUR 63 million in the June quarter. This figure includes a negative amount of EUR 12 million related to the Cypress acquisition and its financing. Our gross cash position as of June 30, 2019, amounted to EUR 3.4 billion, containing the proceeds from the equity raising. Considering financial debt of EUR 1.5 billion, our net cash position stood at EUR 1.9 billion. Our reported after tax return on capital employed stood at 12.4% in the June quarter. Excluding acquisition-related bookings, in particular goodwill, fair value step-ups, amortization and deferred tax effects, the adjusted return on capital employed stood at around 19%. I will now pass back to Reinhard again, who as usual, will comment on our outlook.
Thank you, Sven. In the beginning, we already talked about the challenging business environment and the stabilizing situation in our markets. The inventory correction has started, but given the absence of macro improvement, it will take more time until [ reach ] levels return to their long-term averages. Visibility, therefore, is still limited. The decline of China industrial and automotive indicators appears to moderate, but we think it is too early to read a snapback story on that. In the current deceleration, our core power business remains resilient. There's good momentum for differentiated hub power components for electric drivetrain and a number of industrial applications like renewables.Now specifically to our guidance. We assume that September quarter will again be subseasonal, with quarter-over-quarter revenue growth of 1%, plus or minus 2 percentage points, based on the exchange rate of $1.15 for the U.S. dollar against the euro. Breaking it down by divisions. PMM is expected to grow slightly above group average. ATV should develop in line with it. For IPC and DSS, we expect a small sequential decline. At the midpoint of the guided revenue range, we expect a segment result margin of 14.5% of sales, incorporating increasing underutilization charges due to the lower production volumes. With these predictions of our fourth fiscal quarter, we are simultaneously confirming our full 2019 fiscal year guidance. As a reminder, we are expecting revenues to come in at EUR 8 billion, equivalent to an annual growth rate of a bit above 5% with a segmental -- with a segment result margin of 16%. Our guidance for investments, including capitalized development cost remain unchanged at around EUR 1.5 billion for the current fiscal year. Depreciation and amortization are expected to amount to around EUR 1 billion. Let me now update you on the status of our planned acquisition of Cypress. Sven has already talked about the financing. We continue to be fully convinced of this compelling strategic rationale of creating a leader in power system solutions, and we are pleased about the reception by the investment community improving even further. After the boards of both companies have approved the transaction, Cypress has now called for a shareholder vote by the end of August. In the meantime, we have begun to file for regulatory approvals. From our dialogue with the relevant authorities so far, we remain confident about a closing at the end of 2019 or the beginning of 2020. We are executing on closing the acquisition as planned, and we'll keep you updated about any significant new development. Ladies and gentlemen, let me resummarize the key points. Our June quarter has come in as we anticipated, even slightly better in terms of segment result. In a stabilizing market, we are confirming our full year guidance with another quarter of small positive revenue development ahead. We are balancing cycle management with enabling sustainable growth. By this, we will [ dump ] negative margin impacts and safeguard profitability. We have successfully taken first important steps for the Cypress financing and continue to work towards its closing. Ladies and gentlemen, this concludes our introductory remarks, and we are happy to take your questions now.
[Operator Instructions] We will take our first question from Sandeep Deshpande of JPMorgan.
Yes. Could you run a comment on what trends you're seeing in particularly, in the Automotive customer base, given that we've seen these cuts in estimates for production from auto companies? And in particular, you mentioned that you're seeing -- not seeing the same trends in auto electrification and some of your ADAS segments. What you're seeing in those segments.
Yes. Sandeep, thank you for your questions. I think as we have been one of the companies pretty much ahead of the rest guiding in a weaker -- or guiding the weaker environment, we stand basically firm on what we have said. In general, automotive markets are down. I think it is quite in line with the latest communications you heard in the market. Here, we definitely see that our product base, which is more along the number of cars, is very much in line with this, while the xEV is still pretty strong. We even have not clearly seen major effects from the change of incentives in China, but this is always very difficult to resolve precisely as production volumes and sellout are a little bit diverging. Nevertheless, we see a pretty firm development there, Helmut may give some flavor later. ADAS is also unchanged. People are -- or car companies are adding the features or people are buying these at once at a very constant rate, and we see continuous growth here. Of course, compared to the growth rates we have seen last years for EV, which was between 60-plus-percent and ADAS not as same level, these continue to be strong. Nevertheless, let me mention already at that point, this marks a little bit the challenge for Automotive. We communicated that we are seeing the necessity to continue to work on the profitability on the xEV products and solution, which is ongoing and where we are pretty much in plan. Nevertheless, we see additional headwind due to the fact that the conventional business has come down due to the number of cars sold more strongly, and this will take some more time on, I would say, achieving the target profitability on ATV. On overall, I think, Helmut, you may give some insights and detailed car numbers.
Yes. Sandeep, when it comes to car unit sales, as we had predicted earlier, we still see a low to mid-single-digit negative development overall, so something around minus 4% is what we're seeing. That being said, we do expect on a yearly basis, car sales in China to decline double digit, so beginning of double digit, of course. However, what we have seen and do see is continuous growth in xEV and ADAS. When you look at the total Automotive revenue development in Infineon, it is actually, I'd say, almost exclusively driven out of these 2 structural growth drivers. Business in classic Automotive is actually declining as compared to previous years. So that's also, as you recall earlier, a reason for the negative margin development as well. In June, we had a special effect in China, simply because there was, number one, as Reinhard mentioned, the China 6 standard coming into effect in 14 cities and provinces. This has driven some additional sales of China 5 vehicles, and the subsidies for electric vehicles have also declined quite substantially as of July. But still, the 6 biggest cities in China limit their licenses to non-new energy vehicles and there's still good momentum overall also for electric vehicles in China.
Thank you, Helmut. And to conclude on this topic, we -- even so, we do not guide beyond the running quarter. We see the Automotive market on the cautious side.
We will take our next question from David Mulholland of UBS.
I just wondered if you could comment on the underutilization charges, how much that has actually been in the quarter and how much -- how that's been actually recognized by division. I assume it's mostly in Automotive and IPC, given margin trends, but would be very helpful if you can help us quantify that. And just one quick follow-up on Hyundai design win that you mentioned, and obviously good to see a SiC inverter win being named. But can you possibly comment on whether that's going to be used across all vehicles, just high end and whether -- what the timing of that ramp will be and whether that changes your view on the pace of silicon carbide development, given what you're now seeing.
So David, thank you for your questions. Let's start with the Hyundai design win. I think, Helmut, can you please comment on the silicon carbide topic?
Yes. So that's a design win of a specific new vehicle platform. We cannot comment on which platform or when it's actually starting to ramp. But yes, it is only one vehicle right now, so -- but of course we expect it to broaden over the time.
And generally, adoption of silicon carbide is a mixed bag. Definitely, we see companies continue to design in IGBTs as a very -- at a very high volume rate and the silicon carbide is decided on, I would say, selectively. Nevertheless, we see a certain ramp-up of the adoption of silicon carbide, I would say, use cases in the car industry but not with a very clear strategy behind, if it is high end or if it is broad market. But here, we have given a certain guidance some time ago that it will start at the higher-end cars. Maybe that is still true, but we believe that it is coming down and reaching the mid-level a little bit earlier than assumed before. We will continue to report on that as we move forward, but I think this is a topic which has to be watched out. Don't forget, the current revenue and the majority of the revenue stream in the next years is IGBT based. Now to underutilization charges, Jochen will answer that question.
Yes, David. Also from my side, so the underutilization, of course, we always have some structural underutilization, where the demand does not fit the capacity. But this year, compared to last year, of course, the underutilization goes up significantly to a low triple-digit million number. This is caused by the cycle. And here, we are running especially our factories in Kulim and Dresden at a level of 70% to 80% utilization, whereas other fabs like Villach and Regensburg are still filled up. And of course, we reduced our volumes, which we purchased at external subcontractors, significantly.
And can you comment on how that breaks down in terms of the impact by division? Is that more being felt in ATV and IPC versus PMM? Or how does this...
Yes. Correct. So it's mainly ATV, IPC where DSS is mainly outsourced. Anyway, the business is stable and PMM has a significantly higher outsourcing share. Yes, your assumption is correct.
We will take our next question from Jerome Ramel of Exane BNP Paribas.
Yes. Quick question for PMM, what was the split between power and wireless for fiscal Q3?
Thank you, Jerome. Helmut, do you have this number?
Sorry, I don't have the precise number on top -- but on the top of my head, I'd say it's split -- is roughly 75% power, 25% other wireless RFS business. Yes.
It is changing, Jerome, because moving forward, we announced that now wireless will be stronger, so we have -- I would say, we have seasonal differences on this. So it can range to a number below that and up a little bit more, but I think that is somehow the range.
And maybe a follow-up question on silicon carbide. What is your view on the total market, let's say, by 2024, 2025 in terms of penetration of silicon carbide? So you say that you start to see maybe silicon carbide getting to the midrange for vehicles, do you have a clear view of how these markets will be by, let's say, 2025?
It's a difficult question. I can check if we have the number. This topic of that there is a trend to range down to the mid-level is, I would say, many of these volume will have a start-up in this time frame. So it is not, I would say, a high volume run rate of these types of cars. And while here, if you look at, IHS is expecting to have 2.5 billion in 2024. I'm extremely cautious because at the end of the day, electromobility will, especially in the mid and lower and the more compact cars, if forced by the regulators, are subject to car cost. And we have reported about being part of the VW platform, which is also spreading out beyond VW, at least this is what is to be heard in the press. And I think based on that overall picture, we believe that IGBT will significantly dominate. So the absolute numbers, I'm cautious, but you can say it's a clear double-digit percentage of silicon carbide in the xEV drivetrain. But it's also adding that there's still a lot of other components with too much focus on the inverter only. You have to think about the charges, the DC-DC converters and the onboard charge, which is all in all, predominantly conventional.
We will take our next question from Amit Harchandani of Citigroup.
Amit Harchandani from Citi. Two questions, if I may. My first question relates to the trend from the top line, particularly around inventory situation that you see across different end markets. I think you referred to it in case of PMM. So if you could give us a sense for dynamic between inventory versus end unit demand across your end markets and how do you see that shaping up, and what does that mean for your own days of inventory. And maybe you could comment on lead times over there as well. And secondly, if I may, on the margin side, could you maybe help us better understand pricing dynamics? There's obviously the annualized negotiation at the beginning of the year, and then I guess some commoditized portions have different puts and takes. If you could help us better understand how pricing was across segment in the June quarter and how do you see that shaping up.
Amit, thank you for your questions. I think both go to Helmut.
Yes. Amit, Helmut Gassel here. We had said earlier, actually last call, that we see a peak of inventory in the channel in the summertime, and we do see signs of that. Actually, the -- what we call weeks of sales in the channel have come down by roughly 1 week, a little bit more than 1 week. That was predominantly driven by an increase of sale out of that. If you look at that a little bit by region and/or by business, one can say that Automotive is still, I'd say, on the weaker side, meaning inventories are still, say, 5 to 6 weeks higher than what we see as a target for that channel. Whereas other businesses, in particular, PMM has really come down to an almost normal level. So that was predominantly driven by some strong sell-through. So PMM is starting to pick up out of the channel. If you look at it from a regional perspective, yes, China is still high but has come down quite significantly, again predominantly driven by the PMM side of the house. Whereas Americas and Japan are now actually increasing inventory to some degree, simply because Automotive has slowed down in those region in the channel. But all in all, as we have said, we have seen the peak. The inventories are starting to come down. When you then look into the inventories beyond that, meaning at our customer side, that's when the picture becomes pretty blurry. But usually, when we see pickup in the channel, we can also expect that to come out there, too. Second question, as to the pricing dynamics. I'd say, all in all, a quite normal development, meaning when the market is softer, pricing pressure increases. This first materializes in the multisource or let's say, commoditized part of the business, whereas in the differentiated business, pricing holds strong.
Our next question comes from Janardan Menon of Liberum.
I do want to follow up on the PMM side, a few points. One is you were sounding quite cautious on how demand from servers, PCs, et cetera, seems to be trending at this point on your order book. But some of the other companies like Intel, Samsung, et cetera, seem to have -- feel a little bit more positive on those end markets. I'm just wondering where the sort of divergence there could be coming. Or are you actually seeing any signs of improvement in some of those markets, given especially how important servers are for you from the old PMM business point of view? Also, if you could give us a little bit more color on the smartphone sensor trends right now, both in terms of radar as well as time-of-flight 3D sensing. What kind of design wins are you seeing there? And how do you see that trending through the second half of this year and into next year? That would be useful.
Yes. So Janardan, thank you for your question. I think for us, the picture for the servers is nothing where we can comment on Samsung's and Intel's view. We may have not the long-term contracts view on that side. So we are guided by the shorter-term demand we see from the manufacturing side over there. But here, I think we have a very reasonable inventory level. So clarity along the value chain should be given, I think. And also, the server business of PMM is not anymore so dominating PMM's revenue as before. It's just about 15%, while other application have gained a lot of share. So with this, we do -- would not see changes of servers to be extremely significant, but of course visible. The next topic is the smartphones. So 2 comments from my side, and then Helmut will follow up on the design wins. In general, what we see is after a long phase for radar and time-of-flight, where the people thought about the use cases: The topic of face recognition to unlock the phone; and to add further capabilities of 3D picturing and many other elements are kicking; and then 3, time-of-flight gains momentum in the industry. I would say a lot of people -- we have a lot of design wins, but this is overlaid by the success of the very phones, which is a little bit different. While radar is still more -- seems to be more uncertain compared to time-of-flight about the intended use case, even so, we see also there that we are seeing design wins but on a significantly lower level. Helmut, can you give more flavor on it?
I think we always said, this is more of a wildcard to Infineon. We have not fully included it in our business case. That is fundamentally still true, but we're a little bit more positive and optimistic as we see adoption of the use case, as Reinhard mentioned, particularly for the time-of-flight technology. As you know, we have won the LG ThinQ Q8 phone, and that was launched with our time-of-flight camera at Mobile World Congress earlier this year. But like always, this is individual projects and depends on individual success of the phones. So I'd say it's a business that's more difficult to predict, in particular when the number of phones are still rather small that is picking up on it. Yes, when it comes to radar, we can -- I'm free to talk about that. Google Pixel has actually adopted the technology. But the same as I said before, still remains true, we have to see how then this device is being adopted by the market overall, that's I think what we still say. We take it as an upside. We like what is coming. It has good momentum, but specific numbers are tough.
Yes. And to add a technical flavor, the people want to have a full display smartphone, which I would say is more difficult to have the radar, which is in the front and the user-facing side to be integrated. So let's see. We've got to stay tuned on this. But as Helmut said, it's an option and not a major -- I would say not yet planned growth driver for Infineon.
We will take our next question from Adithya Metuku of Bank of America.
I had 2 questions as well. Firstly, just on this silicon carbide design win. I just wondered if you could give us some color on -- or what's the dollar content? Would $1,000 per car be reasonable? Or would you think it could be higher than that? And secondly on just the Cypress deal, I just wondered if you could give us a bit more color on how exactly you intend to finance the rest of the equity component. And also just some color on which part of the semiconductor market do you think Cypress' MCU portfolio would help you the most, i.e., in Automotive, IoT. Any color here would be very helpful.
Yes. Adi, thank you for your questions. So please understand, this is still being possible to, I would say, relate the answers to specific design wins. We are not in a position to go into detail. When the design win base has become broader, we will be happy to comment on the comparison of silicon carbide design wins and IGBT design wins. So Helmut, you can add something to this.
Yes. I just wanted to add that when it comes to dollar content per vehicle that is coming with the silicon carbide inverter, same applies as we have said on before that you can roughly expect the current price of the IGBT -- the silicon carbide modules as compared to IGBT in the range of 2 to 3x the value. So that's -- it's a several hundred dollar value per vehicle content when it comes to silicon carbide inverter.
The financing, Sven will answer.
Yes. Adi, Sven here. So first of all, let me recap. We have done a big chunk of the equity with the EUR 1.55 billion equity increase at a very early stage, as I mentioned in my introductory remarks, and have syndicated the credit facility to 20 banks with tenders up to 5 years. So now we have a lot of flexibility, time-wise to really look at first, the development of the regulatory approval process, but we'll also carefully take the investor feedback into consideration and watch markets. So we are under no hurry here. And as I have mentioned in my previous calls, we have a huge universe of instruments on hand, which go from hybrid transactions, convertible transactions to full rights issues, and we will take the decision at the appropriate moment in time. Maybe if I just take the Cypress question, where is Cypress MCU helping most, this is industrial and IoT, to a smaller extent in Automotive, which is also reflected in the composition of the revenue synergies.
I think here, to add, there's a very clear focus for Infineon while we will gain a significant portion of the revenue stream. You know we are very good in drives for industrial applications, battery-powered application and many of those, which is significant revenue stream for Infineon, which we will complement and where we also will bring value in our application know-how and synergizing Cypress in order to have the right products, the right software support. Cypress today already -- has already a significant focus on automotive, where we will have lower value in the synergies.
[Operator Instructions] Our next question today comes from Johannes Schaller of Deutsche Bank.
Two questions, if I could. First of all, the [indiscernible].
Sorry. Johannes, we cannot hear you. You come in bits and pieces. So what we will do, we postpone, maybe you -- say it please, again?
[indiscernible]
Unfortunately, not understandable. It's very small bits and pieces which we get.
Yes. Johannes, your line is breaking up. Let's postpone it and have a call with the IR team in the afternoon, I suggest.
Or he dials in late -- or you dial in again.
We will take our next question from Achal Sultania of Crédit Suisse.
Can we talk about the pricing and margins in your EV business? I think my understanding was that EV has already been margin-dilutive, given significant investments. And now if we think about China cutting EV subsidy, like how are your talks progressing with the carmakers and the Tier 1 suppliers around how we should think about margins in the EV business going forward, if there's going to be such a big subsidy cut and then who takes the pain or the hit on margins in this scenario. Any color on that would be helpful.
Well, Achal, thank you for the question. But very clear, the topic of the subsidies is nothing which really affects our pricing. We have communicated that the pricing or the margins in the EV is not very strong, that we are working on improving this. There, we are well in plan, nevertheless, still a way to go as we have indicated at the -- some quarters ago already. But I think here we see a constant, I would say, fight of the industry to reduce the cost. But definitely, here, our solution is not to address this by pricing but by innovative solution, which is able to cut the system cost of the EV, which is much stronger than having a 1 or 2 percentage points price discussion on the IGBT or silicon carbide modules. So for us, this is still a margin strategy, and we will not compromise there just to get more business.
Okay. And then maybe a follow-up on -- in general at the group level, I think if I look at the September quarter guidance of 14.5% EBIT margins, that will be almost 500 basis points down year-on-year. So is it fair to assume that like a majority, probably like 75%, 80% of that headwind in margins is all underloading surcharges and then maybe the rest 15%, 20% probably is about higher depreciation? Is that rough math -- is that ballpark right?
So I think here, the underutilization, maybe Jochen can comment. Okay. Then I think Sven takes it. And the other point is, don't forget, we already said for EV or for Automotive that we have a structural issue from the, I would say, traditional products which have the target margin compared to the EV, which is off the target margin as just discussed. The other is managing the inventory. Maybe Sven can comment that.
I think, Reinhard, you answered that already largely. So the structural components, especially in Automotive, will continue. So the lower profitable -- still lower profitable growing quicker than the other part of the business. And the rest of your assumption that the underloading cost will be a burden to Q4 is correct.
We will take our next question from Florian Treisch, Commerzbank.
Basically a follow-up when it comes to underutilization charges. But if I understand you correctly, Q4 underutilization charges will be higher than in Q3. Is it a fair assumption to assume that Q4 will be the low point or basically the peak of underutilization charges? Or do you expect an increasing negative effect also going into H1 2020? And then there's one question on the PMM margin. You mentioned that there's a positive effect from FX and inventory -- as well as inventory effects, can you quantify these 2 effects?
Yes. Mr. Treisch, thank you for your questions. Jochen will comment the underutilization effect, but please understand that we cannot give guidance for the further quarters, but I think we can give you a flavor there, with commenting on 3 and 4Q.
Yes. So you're right that Q4 is higher than Q3 in the underutilization charges. From today's perspective on inventory and end demand, I would expect that, that carries on at least into the first quarter and then we would reduce the underutilization charges. But that is then too early to say.
Okay. So -- and don't forget, we announced that the peak will be in summer, so we still will have to watch and see.
Peak on inventory.
Peak on inventory. Thank you, Jochen.
Our next question will come from Stephane Houri of ODDO BHF.
I have a question about your CapEx plan for the remainder of the year. You haven't changed it. So could you start to guide us for the CapEx plan for 2020 and tell us more about the ramp of the 300-millimeter plant? And how do we, in the current environment, not to create much overcapacity given the underutilization that you've been just talking about?
Stephane, thank you for the question. It goes to Jochen.
Yes. So in terms of CapEx plan, we are committed to our target operating model which we outlined at the Capital Markets Day last year in London. That means, this year, we are overshooting this target operating model. But as said already last time, we will compensate for this in the following next year. And therefore, we are compliant. From our point of view, this makes sense not to put the brakes on too much because still we will have the option then to increase revenue. But again, we are committed to our target operating model outlined there. With respect to Villach, the building is progressing on plan and we will finish the construction. When exactly we order then the equipment in order to get more capacity beyond Dresden, as obviously, the Dresden ramp-up has been slowed down, is a decision we do have to take only in the winter time frame. In terms of building, we go ahead.
Okay. Quick follow-up, if I may. On the Page 11 of your press release, you show interesting revenue by geography. And we see that revenues from China are going up actually, quite significantly on a sequential basis, but also on a year-on-year basis. So can you elaborate a bit on where is it coming from. Is it more Automotive, Industrial? And yes, more information would be helpful.
Yes. Helmut Gassel here. As I said before, it's predominantly driven out of the PMM business and from the channel, so it's not Automotive and the other businesses. So PMM and the channel in particular.
We will take our last question today from Sébastien Sztabowicz of Kepler Cheuvreux.
One question on silicon carbide. What is now the total system benefit of the silicon carbide technology as compared to the IGBT when you're including the cost component of the technology in the equation? And the second question is on power semis because it seems that ST Micro seems to be a little bit more ambitious or successful in power semis. Have you seen any change in the pricing competition in your market for IGBT specifically?
So thank you for the question, Sébastien. It is very difficult to answer this generally, about the silicon carbide. For instance, the renewables, when you think about solar inverters, the silicon carbide is significantly advantageous in overall system cost, and we see system cost reduction while the component cost goes up significantly. In the cars, it is a mixed bag. It is not as clear. We see a certain advantage due to the higher efficiency of silicon carbide. So many people have -- some estimations on additional, I would say, battery reach about 3%. Of course, in the city, it may be more. But there, the value is not so much in the system cost but in the system performance. In standard drives, we see not very big adoption rates, but silicon carbide can also be beneficial in larger power supplies and many other areas. In general, silicon carbide as a device, more -- I would say more expensive or significantly more expensive the -- while -- and therefore, the advantage is in saving on the passive components. So regarding competitors, we of course never communicate -- comment strategies from competitors. But I think here, the -- we see also continuous potential on the IGBT side. And we always stated we are strong in IGBTs, MOSFETs -- silicon carbide MOSFETs and diode, so we will always be able to choose the best solution for our customers. And we also can provide discrete components, bare dies and modules, which I think is a very good position in order to, I would say, fulfill the customers' wishes, which here is the major driver for making the choice.
That concludes today's question-and-answer session. I would now like to turn the conference back to Mr. Alexander Foltin for any additional or closing remarks.
Thank you very much all for your questions. Conclusion will be quick. We are concluding our fiscal third quarter conference call herewith. Further questions, please feel free to address them to us here in the IR team in Munich. Given that August has just started, we all wish you a fine summer break ahead. Concluding now, you may disconnect. Talk to you next time.
This concludes today's conference call. Thank you, everyone, for joining us. You may now disconnect.