Infineon Technologies AG (IFX) Earnings Call Transcript & Summary

Hello, and welcome to the Deutsche Bank's Depositary Receipts Virtual Investor Conference, DBVIC. I'm Zaf Aziz with Deutsche Bank team. I'm pleased to announce our next presentation will be from Infineon Technologies. Before I introduce our speaker, a few points to note. Please submit your questions in the questions box. All today's presentations are recorded and can be accessed by the Deutsche Bank website, adr.db.com. At this point, I'm pleased to welcome Infineon Technologies that trade on the XTRA is the symbol IFX and on the OTCQX under symbol IFNNY.

Yes. Good morning, everybody. Thank you very much for the kind introduction, and thank you very much for having me. My name is Daniel Györy, I am leading the Investor Relations team of Infineon here in Munich, Germany and our corporate headquarter. And yes, it's a pleasure to be able to speak to you today. I have prepared a little presentation about the company, about our current developments, and then for sure, there is also time for your questions. So I will try to keep my presentation brief for you to enable also have the possibility to ask questions. Let me start off by quickly introducing Infineon Technologies AG. We are a semiconductor company with a focus on IoT and Power Systems. So here on the slide, on the left-hand side, you see, for example, the applications we enable, for example, we enable green and efficient energy. As a side remark, efficient and green energy doesn't only mean that it's, to some extent, renewable and sustainable, but it also means that it's a very simple and cheap form of energy. So for example, in many regions in the world, including south of the United States, currently solar energy is by far the cheapest source of energy. Then we have mobility, which we enable in a clean and safe way that includes not only electrification of cars, but also more advanced ADAS and assistance systems, for example, level 2, level 3 ADAS systems, which allow you to virtually drive the car itself on the highway, for example, but also coming into inner cities at a certain point in time. And then there's also the IoT business. Which covers a lot of products that are used in your everyday life, which makes the life smart and more secure, for example, smart home components, but also robots, mowing robots or whatever you have in your modern house and home to make your lives easier. You can see on the left-hand lower side, a bit of an overview on our financials. So our revenue in the last year has been roughly EUR 15 billion we will end up at a similar number. This year, we guided currently for a slightly down revenue. So it will still be ballpark EUR 15 billion that makes us about the same size as, for example, Texas Instruments. And you can see from our history that the peak revenue value we have seen so far was in fiscal '23 of EUR 16.3 billion, that was the high time after the COVID shortages. So it was a bit of a high cycle period. Also the margins were at the upper end of our margin range with 27%. But still, this year, we are aiming at a mid-teens segment result margin, which is comparable to an adjusted EBIT, which is still a good number. For sure, we keep on working on improving the margin and considering that currently we are in a slow phase with regards to our semis. I also am very confident that the margin will pick up once we come back to a regime of growth. On the right-hand side, you see a bit of an overview of our segments. You can see that we have 4 segments. The bigger segment currently is the automotive segment, then we have 3 more segments. Green Industrial Power, which focuses on infrastructure topics and renewable energy. We have then the Power Systems and Sensor Systems business, which focuses on medium and lower voltage power applications, including, for example, data center applications where the most prominent application today would be AI data center. So whenever you lose systems like ChatGPT or Gemini, you will have huge data centers that do the computation for you. Those data centers need to be powered. And many of the semiconductors we provide are used for powering AI. Last but not least, our Connected Secure Systems business, which is having a chip card and security card business. So for example, in your passport, there are certain chips that enable safe and secure identification. We provide those chips also for the U.S. passport. And in our CSS business, we do also have microcontrollers for connectivity, for example, to enable smart home devices to be part of your home network or to connect [indiscernible]. From a product point of view, and that is the right-hand lower side, you can see that we have different parts in the portfolio. So the biggest, starting here from the lower end side is power semiconductors, which cover a wide range of semiconductors that are required to deal physical currents to convert electricity and to enable transportation. Then we have 30%, give or take, embedded control and connectivity, which includes microcontrollers and connectivity components which is pretty unique because it is a specific let's say, method of producing semiconductors. Interestingly enough, the same scale of our production processes that work for those called [indiscernible] sensors, the micro or mechanical -- electromechanical system, those same production processes are also valid for quantum computing, which is also a growth field we have identified. So Infineon provides actually to many producers or upcoming producers or quantum computers, we do provide the basic hardware components. And then we do have a small memory business, which is specialty memory focused for, for example, embedded applications for automotive applications like NOR flash. That is not the usual type of memory you would hear on the consumer side. for example, very famous is NAND Flash, which is used in solid-state disk drives or USB, hard drives. This is not a kind of commoditized memory we are doing. So that gives you a bit of an overview and just to help you again in understanding what Infineon is doing, we are a leading power semiconductor company. We are not doing, for example, advanced processing units like NVIDIA or Intel, but we do power components, sensors, microcontrollers and also analog devices and technology. And also, we are not focusing on commoditized memory products. Just to give you a glimpse. And To give you more details on that, let me jump to the next slide. So here, you see a market ranking which shows some of our primary areas of operation. So you can see that we are clear #1 in market leaders, which is a very important thing to be, if you want to be strong and very profitable, you need to be a leader in your respective markets. And for example, if you look at the power saving market, which includes discrete components, so that our basic chips but also modules, which are a combination of different chips. For example, you would use such a module in an electric car or in a solar inverter, those modules are an important part of our power business. And altogether in this market, we have a share of roughly 20%, close to 20%, 18% exactly. And that is twice as large as the second biggest competitor. Automotive semiconductors, again here in every car on average, you have between USD 700 and USD 1,300 of semiconductor content in each car. And Infineon is the clear market leader of this market. So we have around 13%, 14% of market share in automotive semiconductors. Again, significantly bigger than the next biggest competitor. And a special area of ours that we have also been extremely successful in the past is automotive MCUs. MCU stands for microcontroller unit. So that is the, so to say, a small brain, which is used in a car to steer certain applications and different from a central processing unit, a CPU. Microcontrollers are more optimized for a rugged and embedded environment, which means they are -- require less power, produce less heat. For sure, they do not have the same computing power for the respective applications, they are tailor-made and a very important part, for example, of motor cars. Now what is this market leadership based on? For example, on the microcontroller side, where we are, again, market leader. We do not do the production of the microcontrollers ourselves. This is a standard production process, which came can be done with the so-called foundry partners like TSMC, GlobalFoundries, and so on. And our know-how, our focus lies in providing the design of the chips and providing the required software and the ecosystem. For power semiconductors, that is a bit different. Here, Infineon is actually leading by far in the production know-how. Let me here again jump to the next slide. So if I have a closer look at our offering in the power semiconductor world, which we call power systems because it's actually much more than just a power semiconductors. You would see the power semiconductor here on the right-hand side as the power switch, but before that, you have actually also a driver, which is translating electric signals from a microcontroller, for example, into a signal that can be physically switched in order to enable current that drives something. So for example, there can be a washing machine, there can be a lawn mower, but it can also be for sure a car or an airplane or whatever you have that uses an electric motor to move something also in factories. And this is always the same construction, you have a microcontroller, which is giving the signal. You have a driver IC, which is translating the signal into a more tangible voltage and then you have a power switch, which is actually doing the physical switching of the currents in order to drive something. This is backed by our very broad and reliable sourcing of raw materials. All of that is produced by ourselves at word-scale fabs, we combine it with application understanding and a complete packaging know-how. It is very important to understand that given efficiency is key for power semiconductors. The production is very delicate. So there are different materials that come into play when we talk about semiconductors. This is not only classical silicon, which is basically 90% of all semiconductors are based on silicon, but there are more interesting materials that are coming up, so-called wide band gap materials, referring to the physical property of the so-called band gap and those materials include silicon carbide and gallium nitride both materials, which offer more advanced properties for power semiconductors. And Infineon is the only player in the world that actually has a full portfolio covering all 3 materials. Let me give you here a few examples. So for example, with regards to silicon carbide, we are the only player that is operating in a world -- large world-scale 300-millimeter plants in power semis. And we have achieved a new milestone of doing 20 micrometers thin power semiconductors. 20-micrometer is a fraction of 1 millimeter and it's really, really thin. It is thinner than a human hair. And that brings us to very, very high efficiency in the power conversion, actually making us by far the leader and also looking even at a price performance ratio in a leader. And this is especially important for low voltage applications, for example, data center power conversion. Then silicon carbide is a material which is aimed at higher voltages. For example, it's used in solar inverters, but also in high-power industrial applications and high-end electric cars. For example, Teslas are powered by silicon carbide and also other brands like Korean manufacturers or Chinese manufacturers are using silicon carbide because of the highest efficiency for that kind of application. And here, Infineon is working on the most competitive 200-millimeter silicon carbide power fab, which is located from our point of view in Kulim, Malaysia. So here we concentrate all our silicon carbide know how and since we are a bit ahead in the technology, we use a trench architecture, which is building on our strong history and pedigree in power semis, but also are adding as we speak, super junction technology that's all very technical. I understand this, but it is important milestones or steps in order to achieve the best power semiconductors in order to retain this leadership. The same is true for gallium nitride. We are now the first player that has introduced a 300-millimeter gallium nitride wafer, which enables us to bring gallium nitride, which is actually a very good material for fast switching, that means very compact charging adapters and so on, and the usage of gallium nitride then enables higher efficiency at lowest form factor. And here, again, with the 300-millimeter scale, we enable in the future also the cost parity to silicon. So all of that is making us the leader in power semiconductors, also from a production point of view. Maybe just to give you a quick deep dive here on the 20-micrometer technology used in silicon and this is just a -- there are different examples, but this is just a showcase here. Infineon has achieved 20 micrometers in wafers again, discounts for higher efficiency also saving material. And we are, by far, leapfrogging this technology. So if you look at our competitors, if you look at Western competitors, most of them have reached around 40 micrometers thin wafers. And if you look at Chinese competitors, they are still operating at wafer thickness of 80 micrometers or above. Just to give you a rough feeling from a technology point of view, how Infineon is positioned. Yes, that was a bit of a showcase in the technology side. Let me once again present to you a bit our markets. So I introduced already the 4 segments we have on the left-hand side. On the right-hand side, maybe some more details on our applications. So for example, we have defined 5 primary growth drivers. That does not mean there is the only areas where we are growing. There are more areas, much more areas, many areas more. But I would say those 5 are maybe the most prominent ones. So one of that is e-mobility. That is not only electric vehicles but also all sorts of hybrids. So we're currently seeing a bit of a different momentum in different part of the world. The truth is also, for example, if we look at China and China now every other car is electrified. And I would say, if you are only focusing on combustion engine, the growth perspective in China, but also for the [ volt in total ] are very, very dire. So I think electromobility in many aspects is a true value add because it enables very reliable, very smoothly operating cars. And then again, Infineon is a key provider for technology around that. Then renewable energy, but also energy, transportation and storage. I think everybody of you knows solar. And again, in many parts of the world, solar is by far the cheapest source of energy today. But what is maybe even more important with regard to renewables is the possibility to save or store energy. And here, for example, energy storage systems, so-called ESS, are becoming more and more important and an energy storage system next to the battery requires a lot of sophisticated power semiconductors in order to do the conversion and also to do efficient charging and recharging of those battery units. Another key trend is the so-called software-defined vehicle. And it's very obvious that if you buy a car today, it looks very different from a car you used to buy 10 years ago. One could always state that today's cars are smartphones on wheels. Now honestly, I myself are a more classic car guy, but I think majority of customers really prefer fancy screens and a lot of functionalities and lights and whatever you have in a car. And what's still very compelling is also the drive assistance function. So if you have today a very modern car, it drives itself almost on the highway, and all of that requires a lot of semiconductors. Infineon is virtually addressing all automotive semiconductors except for cameras and high-performance units, and there is a vast portion of it. And newer cars will be more and more connected. And I think that's very important to understand. And here, we have a huge growth driver. In addition, we are going to extend this business. We have announced the acquisition of the Automotive Ethernet business of Marvell. It's a company, you might know. And we believe that this is a very good expansion of our MCU business, which we can make even stronger by enabling the connectivity part of that. So here, we are very proud that we have closed this deal, and we're looking forward to the closing for sure, subject to regulatory approvals and then the integration of this business to further boost our growth here. IoT. I already mentioned that is also a growth driver because more and more devices in the household are connected. This is happening almost every time. But if you think back 20, 30 years ago, if you had a shade or something, they very manual, you had to pull the shade up or down. Today, if you buy a new house or if you are checking into a hotel almost all the time the shades are automatic. This is a typical IoT function, which can be steered remotely. It requires also power and power semiconductor to drive the motor. So this is a typical IoT application probably nobody notices, but it's still there, and it's a huge growth driver for us. And last but not least, AI, data center business, very, very important. Today, we are not doing the CPUs or the graphic cards like NVIDIA. But since those graphic cards are very sophisticated chips, they require also sophisticated provision of power. And here, Infineon comes into play. And maybe just to show you one little slide on that one. This is a typical data center. So you have a lot of different components. You have switches, you have a compute tray. You have the GPU boards. And in each part of those boards, you need power conversion. Let me show you, this is an easier slide. So if you look at data center AI applications, you're starting from the grid, obviously. And then you have 3 stages of power conversion. So we are starting from grid voltage, it can be 110 volts, can be 200 volts in Europe or many parts of the world. And then you are transferring those 200 wallets AC into something mid-voltage like 50-volt DC. And then in the server, you're distributing this further by transforming it from 50 volts to 12 volts. And then most interesting, very close to the actual processor, you are reducing the voltage to around 1 volt, bringing it further down from 12 to 1 volt. And this requires a lot of semiconductors to do the actual transformation of the different currents. And since you are at about 1 voltage of core voltage, but the chip requires -- depending on the chip, it requires typical 700, 800, 900 watts. That means that's a lot of power that I would say, 2000 volts are an iron or an oven plate. So if you have 2 of those chips, it would be enough heat to boil your water or whatever you'd like. And this power needs to be provided and requires very high current, so it's very sophisticated power components that are required ultimately to provide us. I mean just to give you an example here as a deep dive, this is the product, how it looks like. So you have different, let's say, power stages that are handling the power conversion very close to the compute core. So this is sophisticated technology, and it's required to have the best and efficient way of providing power to a data center. For sure, we could deep dive into that. Maybe let me just as a quick remark tell you the presentation here, I'm showing is available on our website. This is -- I just changed here the title. So the full presentation, you will find as Q2 investor presentation on our website. All the slides, I show here are available. So whenever you feel you want to read something, you can look up the presentation on -- under infineon.com/investors. So yes, with that, I'd like to stop here and open the room up for questions. So if you have a question, feel free to type it into. I already see there are also some questions I will answer those now and for sure, I do hope we will have some more questions.

So the first question is how are you leveraging incentives from the EU, U.S. chipset? So, yes, for sure we are doing this. So this is actually quite a recent topic. We have, let's say, upgraded our facility in Germany, Dresden to a fourth module. And here, we are investing around EUR 4 billion to EUR 5 billion, and we have managed to get around EUR 1 billion of subsidies from the European Union on this one. And the final closing or confirmation for those subsidies just happened 2 weeks ago. So that was a lengthy discussion. it started 1 to 2 years ago, for sure. But the final confirmation has been arriving last week. So I'm happy to confirm that we have gained EUR 1 billion of subsidies here. The same is true for other parts of the world. Whenever there's a possibility, we do leverage those kind of incentives. We have not build a new plant in the U.S. recently. The reason for that is strong competition in the power semiconductor market. And for sure, in the United States, building a new fab is very, very expensive. So for sure, we look -- we were always looking at the global footprint of our company. But currently, we do have several back-end facilities that are facilities that are packaging, and we do have a lot of administration and R&D facilities in the U.S. So our U.S. headquarters is in San Jose. It used to be Cypress Corporation. So here, we do have our U.S. headquarter, but we do not have major U.S. production currently. And therefore, we cannot use those kind of incentives in the U.S. So then the next question is what were the drivers behind decrease in revenues in fiscal '24? And are you providing outlook for fiscal '25? Yes. First of all, we do provide an outlook for fiscal '25. Actually, we are the only company currently in our space that is actually providing an outlook for the fiscal year. The reason for that is that we are also required by German regulation to do it, but all the other players don't. So there is usually a guidance for the quarter and then there is a guidance for the fiscal year, which is, by the way, going from September to September. So we are currently in our third fiscal quarter, which is equal to a second calendar year quarter. Our outlook for the fiscal year '25 is to have revenue development slightly down versus prior year. This is new. The previous outlook was flat to slightly up. The reason for that change in the outlook is not that the underlying markets have diminished or deteriorated quite to the contrary, we see our underlying business coming in very well. I'll talk to this in a second, but we have seen headwinds from currency development. So the dollar has somewhat depreciated. And that means for us, since the majority of our revenues are coming in dollars, that means it's a slightly negative development, but we would have been able to absorb the negative currency development very well. But the main reason for us now to adjust the guidance is that we foresee a potential tariff impact. Let's be very clear. The current trade dispute is a challenging situation for business, which is for all global companies. I think the case. For sure we will cope with the situation. Currently, our customers have not given us any indication that there might be headwinds from the tariffs, but we consider it prudently to incorporate a certain headwind, and therefore, given the current data is not fully available, we have taken a guesstimate, and we have done a flat rate haircut on our second half year expectations by taking 10% of the fourth quarter revenues. And this leads us primarily to adjusting the revenue guidance slightly down. The gross margin is still supposed to come in around 40% because we are working on keeping the margins stable to the extent possible. Segment results, as said, comparable to the adjusted EBIT will be mid-teens. Free cash flow reported EUR 900 million, adjusted for major front-end acquisitions and buildings, EUR 1.6 billion. We still do invest to a certain extent because we believe there are very strong growth prospects in the coming years given the drivers I explained to you. So this is our guidance for fiscal '25. And then we are also asked about the revenue development, why did revenues decrease in fiscal '24? The reason is very simple. During COVID, which was already back in fiscal '20, we had a very strange development. I think you all remember the situation when we had the pandemic in 2020. So markets were collapsing and we were adjusting for capacities. But the recovery was very quick. So all of a sudden, everybody wanted semis end of 2020 and this went on for 3 years. So there was so much market development and so much enthusiasm that we -- for 3 years, we were in strict allocation. We did produce all we could, but we could not fully supply all the demand and everybody did order, our customers did order semis and they told us also they will order much more semis. But it turned out at a certain point in time, they have also been inventories increasing and this happened in fiscal year '23. So in a way, the number you're seeing for fiscal '23 is or was at that point in time, a bit overstated. So there was a lot of inventory filling up. And at the end of fiscal '23 or at the beginning of fiscal '24, we did go into an inventory correction. And this inventory correction did last up until, give or take now because now in the last 2 quarters, we have seen a very strong inventory correction, and this has finally normalized. So were it not for the tariff disputes. I think we would now come to -- back to a state of steady growth. And I also want to highlight this, our growth targets for the year end, Infineon is a very -- for given that we are a company of a significant size. We have a very strong growth trajectories of. So our average growth target is more than 10%, on average through the cycle. As said in the last 2, 3 years, we were in a very pronounced down cycle, which is kind of a special situation. You want to achieve an average segment result margin of 25%. I mentioned at the beginning. For us, in our markets, we have different factors like pricing, like volume growth and for sure, we do need a certain volume growth in order to be able to handle this. So all in all, we are confident that we can continue our growth trajectory. There is still one question. There's just one coming in. Our manufacturing footprint is fairly flexible, but we believe that the advantages of having a very strong manufacturing concentrated is outweighing also to have a very dispersed foot. And that's very important from a cost competition point of view. IP portfolio protection. Yes, we do have a very strong IP, but there is also a strong know-how in our production processes. So that is really important. All I mentioned at the beginning, the production processes, they are very, very sophisticated. Nobody else has the same amount of scale of production or ultimately of people. And I think we have reached the end of the time. Maybe one last question I can take here. The guidance for the full year on tariff seems quite high in terms of potential impact. Could you explain the reason for that? How do you see IFX being impacted if Section 323 tariffs are implemented? It's a brilliant question. The assumptions we have taken on tariffs are mostly on indirect effects we are expecting. Currently, even if there are 232 tariffs coming, we do think that the direct impact of those tariffs will be manageable because we do only export about 10% to 15% to the U.S. We have some oil production in the U.S. So the net exposure of export to the U.S. is limited. So we believe we can handle this. And as I said, for the indirect impact of the tariffs we have taken a guesstimate, which is the best thing we can do at this point in time, but we have included in our guidance that we find it prudent to do this for the time being because it derisks the potential or it derisks our guidance. So yes, I guess, we have reached end of the time. I'm not sure if there are any more questions now, but I think I did cover most. So thank you for having me. And with that, I will hand it back to Deutsche Bank. Thank you.