Infineon Technologies AG

XETRA:IFX

Q3-2025 Earnings Call

[Operator]

Good morning, and welcome to the conference call on the results of the third quarter of Fiscal 2025 of Infineon Technologies. I'm Kolu, and I am your operator. [Operator Instructions]

I'd like now to hand the floor to Florian Martens. Please go ahead, sir.

[Florian Martens, executive]

Thank you very much. Good morning, ladies and gentlemen, dear colleagues and coworkers. I would also like to welcome you to our conference call on the results of the third quarter of fiscal 2025. Participating at this conference, as usual, representing the Management Board of Infineon is Jochen Hanebeck, CEO; and Dr. Sven Schneider, CFO.

Dear listeners, as usual, Mr. Hanebeck will start by giving you an overview of the business performance of Infineon. After that, both members of the Management Board will be available to answer any questions you may have. Our conference call will end punctually at 8:45. Of course, our press team headed up by Andre Tauber and myself will be available to you after the press conference.

And now I'd like to hand over to Jochen Hanebeck.

[Jochen Hanebeck, executive]

Thank you, Florian. Hello, and welcome listeners. In the third quarter, in a very volatile environment, Infineon has again produced sound results. The semiconductor markets are recovering slowly from the long downturn of the cyclical correction, which affected the different end markets at different times. There are signs of an upward trend at last. This is reflected in our figures. The past quarter was the second in which we recorded sequential growth. Adjusted for currency effect, it is more than 9% in fact. And in the current fourth quarter, we expect a further increase in revenue. It's likely to be the first quarter for 2 years in which compared to the previous year's quarter, Infineon has grown even adjusted for currency effects.

The dynamics affected by the geopolitical and macroeconomic turbulences. Because of U.S. tariffs, customers are ordering at short notice. And so far, we are seeing that the inventories are being built up on a broad basis, which means that we are also encountering a headwind for our business development. And we're countering that with our cycle management. What's of decided important is that we are different from our competitors and create notes of added value of our customers. And there, the matching competence in different complementary product groups form the basis.

Measured by fiscal 2024, about 40% of our total revenue is due to power semiconductors. And here, our unbeatably broad offering of all 3 relevant technologies, silicon, silicon carbide and gallium nitride, we are in an excellent position. Another 30% of revenue is accounted for by analog semiconductors and sensors. This includes for example drivers, DC converters and smart power switches and a broad range of sensors and special memories. The remaining 30% of our products come in the product category of control and connectivity. This includes our microcontrollers for the field of application in automotive, security and industry and a broad range of wireless and wired products.

The latter is being strengthened by our purchase of the automotive Ethernet business of Marvell. I'll say more about the status of the takeover later on. Thanks to our complementing comprehensive product portfolio and the system competence with the newly appearing semiconductor application, we are creating considerable added value for our customers and for Infineon. We are seizing opportunities in strategically important growth fields, for example, in software-defined vehicles, power supply solutions for AI data centers and power infrastructures. And I'll give you some examples later on.

Let's first of all, as usual, look back at the development of business in the third quarter. There, Infineon achieved revenue of EUR 3.704 billion, which is about 3% more than in the previous quarter. And that despite a considerably negative currency effect. The average exchange rate of the U.S. dollar to the euro in the past quarter was 1.14. In the previous quarter, it had been 1.05. To put this in perspective, with a constant exchange rate, the increase in revenue would have been more than 9%.

The strong increase in sales and especially in the field of green energy power and Power & Sensor business reflects the fact that the customers have digested their excessive inventories. The segment result was EUR 668 million, and the segment result margin increased to 18% following 16.7% in the previous quarter. The improvement here were in particular to the growth in quantities and declining costs from capacity underutilization in production. These effects have more than compensated the unfavorable currency development.

Free cash flow in the third quarter rose to EUR 208 million, following EUR 174 million from the previous quarter. The difference is due to increased revenue with stronger margins, also income from the sale of our factory in Austin and lower investments. The results in the fourth quarter, Automotive achieved revenue of EUR 1.870 billion, which is a slight increase of 1% compared to the previous quarter. And the segment result margin of ATV was EUR 371 million, and the segment result margin was 19.8% after 20.7% in the previous quarter.

The slight decline is due to currency and product mix effects, and they overcompensated the positive effect from the lower cost of capacity underutilization. The global car sales in the June quarter showed healthy growth due mainly to the strong markets in the U.S.A. and China. There were problems of the possible tariff weakness in the U.S.A. and the negative news about the dropping of the scrappage incentives in China. That means that the further development of the Automotive to the end of the calendar year must be viewed cautiously.

Another point is that we can see the risk that some manufacturers are continuing to reduce their target inventories in semiconductors because of the considerable financial risk constraints. That means that there is risk that the inventories will drop to a subcritical level. In this environment, we are expanding. We are relying on our unique strengths in the semiconductor portfolio for automotive markets, and the take of the ethernet business from Marvell means that we can offer our customers even more comprehensive system solutions for software-defined vehicles.

We've already received the necessary authorities approvals for the transaction. And in a very short time, we expect closure of the transaction in near future and look forward to welcoming a few hundred ethernet experts from Marvell in the Infineon team. Together with them, we shall continue to develop further growth-orientated fields of application in physical AI, for example humanoid robots.

Some of the automotive design wins now. We're glad to inform you that the most advanced active suspension system has been achieved from the U.S. company, ClearMotion. It's a 48-volt high-end application using our AURIX microgrid combined with the OPTIREG switches. It's a mix, which is used in premium sports car manufacturer, including an innovative vehicle in China, such as the NIO ET9. In addition, we are using this active product in a new series of vehicles from a European premium auto manufacturer. The innovative vehicles will use a wide range of smart power supply components, including our PROFET power switches, which means that we'll have a total volume of the mid 3-digit millions.

Now in Green Industrial Power, the division achieved revenue of EUR 431 million, which is 9% more than the previous quarter. The segment result was EUR 61 million, and the segment result margin was 14.2%, following 9.6% in the previous quarter. Structural growth drivers are strengthened demand and opening additional business opportunities for us, especially in the field of the power infrastructure. In these final markets, inventories at our customers have continued to reach normal levels.

Now one highlight of the past quarter. We are delighted to announce that our power semiconductor modules together with a major power storage system in the biggest grid-forming project is being used in China. The project combines photovoltaic system with a storage capacity of about 400-megawatt hours and can supply about 270,000 homes with electricity with its unique expertise and highly reliable power semiconductor modules. Infineon is different from the competitors. And this is a prime example of how we've done it.

Power & Sensor Systems revenue in the third quarter rose to EUR 1.053 billion, which has increased by 8% over the previous quarter. The dynamic demand in power supply solution for data centers were the main reasons for this growth. Segment result was EUR 198 million, and segment result margin was 18.8% following 14.1% in the previous quarter. The increase is due to the large amounts sold and the lower cost of capacity underutilization, which more than compensated the negative currency effect.

Artificial intelligence remains a strong growth factor of Infineon. Expanding AI infrastructure and setting up AI data centers is proceeding with great momentum, and we expect that revenue from power supply solutions for AI data centers in this fiscal year will be EUR 600 million, which is more twice as much as last year. In the next year, we are likely to reach EUR 1 billion. The range of products is the broadest in the whole semiconductor industry. We introduced not just using for voltage transformation, but together leading with our customers to optimize the flow and current from the grid to the AI processor.

In May, we announced collaboration with NVIDIA. And together, we're developing the first 800-volt DC high-voltage supply structure for AI data centers. The new system architecture improves the power efficiency of power distribution in data centers, and makes it possible to convert the electricity direct on the AI chip, which means that we are taking account of the growing demands for AI data centers. No AI data centers have more than 100,000 individual AI chips, which means a need for efficient power supply is growing. In 2014, we expect that the AI centers will need more than 1 megawatt per IT rack.

Another highlight is in our sensor portfolio in the automotive application. Our radar chips are being used increasingly in modern driver assistant systems, especially new central radar architecture in the car. This means that the radar data evaluated solely in the central unit and the high-frequency radar chip is linked via ethernet to the central computing unit. And you can see that new architecture has been introduced very successful in China. With our radar solutions, we're in a very good position to benefit from this development.

Now Connected Secure Systems. In the third quarter, the division achieved revenue of EUR 349 million, which is almost the same as the previous quarter. The segment result was EUR 39 million and the segment result margin was 11.2%, which was stably on the level of the previous quarter.

Macroeconomic uncertainties still depressing the mood in consumers and investors. The demand for our IoT and security solutions is moving sideways. Innovation in this environment remains the key to success, either by continuous improvements to our products or with completely new solutions. One example for continuously further developed products are our security controllers based on our Integrity Guard system -- security architecture used in electric passports, payment cards and smartphones.

Since the product was launched, we have supplied more than 10 billion of the security controllers in view of the rapid increase in the number of cyber attacks. The importance for security is growing. And we are providing the answer. For example, the innovativeness in future-oriented technologies are the security chips, which cannot be hacked even by quantum computers. Six months ago, I reported on that at this point. And now we've achieved the first major design win with OPTIGA security chips, which has a post-quantum cryptography to protect firmware, and it will be integrated in the next version of gaming consoles.

Now listeners. I come to the outlook. We see an increase in the demand for semiconductors due to the cyclical development. Inventories are being reduced to a healthy level and the indications of demand suggest a slight recovery, especially with industrial applications. Those consumers setting up the AI infrastructure will increase the demand for our power supply solutions for data centers. In the automotive sector, security or the visibility is not so clear. And we also see that macroeconomic and geopolitical uncertainties being more important than the recovery.

We've not seen the worst case scenario regarding tariffs. But the latest rumors in the U.S.A., Japan and the EU suggests that the tariffs will be higher compared to the existing ones. Negative consequences remain probable. So that is a brief summary of our forecast for the current fourth quarter of our fiscal year.

In view of the weaker U.S. dollar, we are adjusting our assumptions regarding exchange rates from 1.125 to 1.15. With the adjusted exchange rate, we expect revenue in the fourth quarter of about EUR 3.9 billion, which corresponds to a growth of about 5% compared to previous quarter, means the fourth quarter as usual will be the strongest quarter in the fiscal year.

As I mentioned in our last quarterly talk, the indirect effects of tariffs and trade conflicts are difficult to assess. Taking into consideration even so in our last forecast on revenue for the fourth quarter in May, we applied a general reduction of 10% and expect that the consequence of tariffs in the fourth quarter will be less pronounced than expected at that time. But at the same time, the development of business will still suffer from the negative currency effects.

Segment result margin is expected to be in the high teens in percentage terms. We assume that positive effect of the -- will be followed up by higher revenue and the cost of capacity underutilization. For fiscal 2025, we expect a revenue of EUR 14.6 billion, which is slightly lower than in the previous year. The percentage segment result margin known to be in the high teens now, previously it's at the mid-teens. The cost of capacity underutilization still plays a burden on the margin to the tune of about EUR 1 billion.

It is encouraging that our Step Up program for structure improvements is advancing more quickly than expected. Investments in fiscal 2025 has been due slightly to about EUR 2.2 billion, previously been spoken about EUR 2.3 billion. Expectation of our free cash flow is being increased as follows. The reported free cash flow will probably be about EUR 100 million higher and is likely to reach EUR 1 billion, this is likely better development of business.

Taking into account the expected closure of the acquisition of the ethernet business Marvell in the automotive sector and the payment of the purchase price of USD 2.5 billion, the free cash flow would then be about minus EUR 1.2 billion. The adjusted free cash flow, adjusted for investments in front-end business will be about EUR 1.7 billion compared to EUR 1.6 billion, which we expect. With that, we now come to the end of my remarks and together with Sven Schneider, I'd be happy to answer your questions.

[Operator]

[Operator Instructions]

The first question comes from Kristoff Wilmeyer from DPR.

[Unknown Analyst]

I have a question or rather a series of questions. Now I know this may be difficult to answer, but could you tell us how much the tariffs cost you in Q3 and perhaps also prospectively, what that situation will be like? Now the job cuts, it looks like you're making good progress here. 2,300 employees have been cut from last year, if I've understood your communication correctly. Does that bring an end to the downsizing or not?

[Jochen Hanebeck, executive]

Thank you very much, Mr. Wilmeyer for your questions. With respect to the tariffs, well, with respect to the direct effects on semiconductors, we can say that they're still minimal. Semiconductor tariffs are always calculated based on the front-end site or the wafer site, which would be dressed in, in the context of Infineon. Today, we only have tariffs on products where wafer manufacturing is conducted in China. And this, therefore, affects us to a very minor degree. As a result of that, these effects are negligible. The indirect impacts were set out in my presentation, I told you that it was very difficult to estimate them, but we see that the market is very nervous and I believe that you received reports about the automotive industry on a daily basis.

With respect to our job cuts, we're right on schedule. In the past, we said that we would reduce the workforce by 2,400 positions, and we would also shift positions from high-cost to low-cost countries. We're making very good progress in this program. On top of that, our head count is being reduced by the sale of factories, including the 1,000 employees at Austin, for example, that we sold to contract manufacture SkyWater. So in a nutshell, it's safe to say that in Europe, we're basically done.

We have reached agreements with all affected employees. And having said that, of course, this has been done in a socially acceptable manner without laying people off. And we also have termination agreements, which are by mutual consent if that actually applies. And that means that we can actually then put the pedal to the metal to prepare ourselves for the future.

[Operator]

Next question is from Joachim Hofer from Handelsblatt.

[Joachim Hofer]

I also have 2 questions. I would like to know how you are progressing with Step Up? You said that you're progressing faster than anticipated. Could you express that in figures? Second, you said that you have idle costs, underutilization. That is, are there areas in which you have bottlenecks where you are doing really well? And I have a third question. You talked about the sale of a factory in the United States. Do you also have plans to invest in sites and factory sites in the United States as well?

[Jochen Hanebeck, executive]

Thank you, Mr. Hofer. For the first part of your set of questions with respect to Step Up, I would like to hand over to my colleague, Sven Schneider, and then I will get back to you on the two other parts of your series of questions.

[Sven Schneider, executive]

Mr. Hofer, with the Step-Up program, we have communicated that a high triple-digit million euro amount in terms of saving effects are being targeted through to the first half of 2027. Your specific question was what happened in 2025 as opposed to the original plan. In summary, I can tell you that almost half of the savings potential has already been lifted in 2025. And this is slightly above the previous expectations. We would have estimated that we would have been at about 1/3, but we're now moving towards half.

In 2026, we will reach 2/3 and then from the first half of 2027 will be at completion.

[Jochen Hanebeck, executive]

Yes, exactly. We are very happy about the success rate of Step Up. With respect to the idle costs, as we said before, it's about EUR 1 billion in the profit and loss account, which is quite a lot. We also have bottlenecks in the area of AI, power supply solutions. Here, the customers are basically ripping the products out of our hands, and we're developing the most modern products for solar inverters, which achieved very high levels of performance. There, all our products are sold out. So we do have some bottlenecks, but we would like to have even more because we would prefer to work on bottlenecks than underutilization.

With respect to the United States, what I can tell you is that the semiconductor industry lives off of economies of scale. From a commercial point of view, it is not a lot of fun to buy -- excuse me, to build a series of small factories. That is why primarily we continue to channel our investments into the major sites that you're all familiar with. When it comes to local markets and meeting local demands, be it regulatory or in terms of tariffs, we will service these markets using contract manufacturers. In this vein, we are building out our network of contract manufacturers both in China and the United States of America with resolve so that we can service these markets in an economically feasible manner.

[Joachim Hofer]

May I ask a follow-up question. You don't really import a lot of your semiconductors into the United States? Is that correct? And if you do import into the United States, you import these products as part of finished products, is that correct?

[Jochen Hanebeck, executive]

Well, the share of revenue accounted for by the United States is at around 11%. Yes, my colleagues are nodding off on this, so that's good, that's correct. We also deliver assembled products to the United States. But once again, the decisive point is not whether we are a European company or a U.S. company in terms of tariffs, but rather where wafer manufacturing is located. If an American company has a factory in Germany, then it will be affected by tariffs just as we would be when delivering wafers from Dresden. So this is what the semiconductor industry looks like in these terms.

Second, it is quite important to see that we do deliver to the United States. And I'm talking here about volumes of fully assembled chips, which in turn, in Mexico, continue to be used in the automotive industry. They are then integrated further. So we can ship them in transit to Mexico without tariffs. Furthermore, it is our intention, should there be any tariff impacts or should there be direct tariffs on semiconductors, we intend to pass them through to the customers. This is a very complex equation, and that's why it's so difficult for us to give you more precise estimates. But we will do all we can to stave off any negative effects on the company, and of course, minimize them.

[Operator]

[Operator Instructions]

The next question comes from Hakan Ersen from Thomson Reuters.

[Hakan Ersen]

I have 2 questions. First of all, you said that based on constant exchange rates, the quarter-on-quarter growth would have been 9%. I would like to know what growth would have looked like compared to the previous year based on nonconstant currency exchange rates? Second, what is your forecast for revenue generated by products for AI data centers? You said EUR 600 million roughly in May. Is that figure still accurate? Or is there an update there?

[Jochen Hanebeck, executive]

Thank you very much for the questions. I will fill the second one, and Mr. Schneider will then answer the first one. You're absolutely right. The figures that we published related to the last fiscal year, we're talking about EUR 500 million in revenue. This year, we're at about EUR 600 million. Next year, we'll be at about EUR 1 billion. So this is a very, very dynamic business and it is safe to expect that as long as AI infrastructure continues to be expanded at the planned rate that this business will continue to be very pleasing for us. In the interim, Mr. Schneider can perhaps answer the first question, the year-over-year issue.

[Sven Schneider, executive]

Yes. We have the very same revenue in nominal terms, EUR 3,702 million compared to EUR 3,704 million adjusted for currency effects. A year ago, we assumed an exchange rate of 1.08, and now we're at 1.14. So we have a difference of EUR 0.05 to EUR 0.06. So we're talking about EUR 115 million to EUR 150 million that we lost due to currency effects. But like-for-like, we're talking about growth quarter-on-quarter.

[Operator]

Ladies and gentlemen, there don't appear to be any further questions at present. Therefore, I would like to hand the floor back to Mr. Hanebeck for his concluding remarks.

[Jochen Hanebeck, executive]

All right, ladies and gentlemen, then I'll sum up. Infineon has completed the third quarter of fiscal '25 right on plan in terms of revenue, probably at the upper end of the expected range despite the weaker dollar. The expansion of -- the reduction of the excessive inventories and talking about advance. We've been seeing headwinds because of the effects of tariffs and in particular in automotive industry, we are driving cautiously. The effects of these tariffs in the fourth quarter was less than expected, but it has reduced the -- being reduced by the unfortunate currency developments.

In this volatile environment, cycle management is being continued. And we expect in the current quarter, a further sequential growth in revenue. At the same time, we are seeing a strengthened, highly attractive growth markets in artificial intelligence, power infrastructure and software-defined vehicles, and Infineon with its product portfolio of power semiconductors, analog semiconductors and sensors and control and connectivity, Infineon is in excellent position to serve the markets and to advance innovation. Thank you for your interest, and see you next time.